Brooks on Debt Culture

Kevin Drum recommends David Brooks' column on America's seduction by the culture of debt and then says "I doubt that I'd end up agreeing with Brooks 100% about how to address this problem." I actually tend to think that Brooks (and Drum) are overstating the problem somewhat, but Brooks' proposals seem like good ideas to me:

Foundations and churches could issue short-term loans to cut into the payday lenders’ business. Public and private programs could give the poor and middle class access to financial planners. Usury laws could be enforced and strengthened. Colleges could reduce credit card advertising on campus. KidSave accounts would encourage savings from a young age. The tax code should tax consumption, not income, and in the meantime, it should do more to encourage savings up and down the income ladder.

The idea of trying to establish some kind of non-predatory mechanism that would soak up some of the demand for "payday loans" seems especially promising to me.

UPDATE: Let's also put a bracket around "tax consumption, not income." There are a ton of different ways that could be done. Some of them are decent ideas, and others (things like the FairTax, for example) are very bad ideas and one doesn't really know what Brooks has in mind here. Needless to say, completely redoing the tax system would be a complicated undertaking on a very different scale than enhanced credit counseling.

Comments

i've often wondered why unions don't offer this (maybe they do and i don't know it) or, even more so, why they don't offer credit cards to their members that would be from consumer-friendly banks?

as for debt, it's only a problem if you can't service it: as a few million homeowners are discovering, then it's a nightmare....

Posted by howard | June 10, 2008 5:08 PM

People should familiarize themselves with the business first. A lower-cost payday loan is just charity, not a sustainable enterprise. There's a reason the credit is expensive.

Posted by Thomas | June 10, 2008 5:09 PM

Are you suggesting that churches act like Islamic banks which are prohibited by Sharia to charge any interest? Good havens!

Posted by gregor | June 10, 2008 5:10 PM

I guess I would also add the suggestion to add classes in basic money management or personal finance in schools.

Posted by Chris | June 10, 2008 5:15 PM

The tax code should tax consumption, not income, and in the meantime, it should do more to encourage savings up and down the income ladder.

The rich already save. How does he advocate a consumption tax? How will that be enacted? Does Brooks endorse a VAT? And on what would you pay the VAT? Housing? Clothing? What rate would you set the VAT?

Posted by Joe Klein's conscience | June 10, 2008 5:17 PM

Used responsibly, debt instruments are a product--why should I pay up front for a product I'm going to own and use for years, if (big if) the interest rate is less than my personal discout rate? Far from being a "debt culture," I see the vast majority of people keeping their heads above water and using flexible, rotating credit to flatten out their consumption curves. Instead of saving for a year for that new laptop then paying in cash, I pay a 10% premium to own it at the beginning of the year instead of the end

I'm just saying that the solution has to be replacing this stuff with a more equitable product, not just taking it away because some disadvantaged people are too irresponsible to enjoy the benefits of credit. I got no beef with more transparency though--an educated marketplace performs better

Posted by Jack | June 10, 2008 5:21 PM

How, exactly, do we encourage saving more than what is done with IRAs/401(k)'s? I'm seriously interested in this.

One thing I've always felt was ridiculous is that retirement savings are capped at the low IRA limit for people without access to a 401(k) plan. As a graduate student (in science, so I got paid) who also spent summers interning at a big lab (and got paid a lot more), I was limited to only the few thousand I could put in an IRA, since the University didn't allow student participation in the 401(k) and the lab didn't allow it for interns. I can imagine many people in a similar situation.

Posted by lfv | June 10, 2008 5:23 PM

I second Chris' comment above. Managing personal finance is getting more and more complex, it would be a good idea to have kids take a basic course on this while they are still in high school. It would also be a good answer to the question, "When am I going to use this?"

Posted by Just Another Greg | June 10, 2008 5:26 PM

Foundations and churches could issue short-term loans to cut into the payday lenders’ business.

In practice, this used to happen. In fact, it still does within the Jewish and Mormon communities, provided you live in an area with a bunch of rich Jews or rich Mormons, depending on your religion.

So, if you are a Jew living in NYC, e.g., there is a chance that you can get an interest free loan (you have to apply, of course) from the local Hebrew Free Loan Society. If you live in Tally, though, no such luck ...

*

In general, though, I find all of these comments about "the debt culture" to be disingenuous. Is the issue really that people are living too high on the hog or that society expects people to have this gadget and that gadget in order to even stay connected enough to stay in the rat race -- and then people simply don't have enough money (thanks to stagnant wages) to afford it all.

*

Also, why doesn't the free market step up and offer more personal loans like they used to, instead of foisting people into credit card debt for purchases for which personal loans used to be available (similarly, how many people who "can't afford their mortgage" could have afforded a regular mortgage but got sucked into an ARM?) -- preditory lending is indeed a big issue that does need to be addressed.

Posted by DAS | June 10, 2008 5:30 PM

I notice that while Brooks laments the debt culture, he never once mentions the names of the two biggest debtors in history: his beloved Ronald Reagan, who transformed the US from a creditor to debtor nation, and of course, his dimwitted CEO President GWB, who raised the national debt from $3.5T to $10T without breaking a sweat. Of course, if he did that he'd have to get into the issue of that supply side economics, which has proven to be complete hooey, though not enough to be disowned by guys like Brooks, John McCain, and the rest of the Republican Party.

Posted by smith | June 10, 2008 5:34 PM

One of the things I liked about Brook's column was that he (somewhat) avoided some of his/conservative's typical moralizing about the issue. So often personal finance is treated like a moral problem when really people are getting chewed up by the predatory economy built by Brook's ilk. So it was nice to see him actually propose some institutional changes.

Posted by Loneoak | June 10, 2008 5:35 PM

As a former Teamster, I can attest that they do have union credit cards and union auto insurance. Just so you know. No payday loans though. One would hope that the union would bargain enough pay and benes that you don't need payday loans.

Why someone would use a payday loan, I don't know.

Posted by freddiemac | June 10, 2008 6:02 PM

One thing Brooks doesn't blame (it would be too much in the way of moralizing, I guess) is our consumer culture: Many of us want the best new thing and are willing to pay for it. Certainly that's what Madison Avenue is telling to think. Consider one of the most common things people go into debt for--a car. The most common length for a lease is three years. Not that everyone leases, but a lot of people do sell their cars after three or four years. That's only a third of the lifespan of the average car, I'd guess. And what's the main motivation? Getting something new. Now, cars are big purchases, but if you add up all the smaller ones (a new music player or laptop or mobile phone, new clothing, or whatever, to replace perfectly serviceable items) they add up, too.

Posted by RSA | June 10, 2008 6:10 PM

If somebody could provide credit card services, or banking services, or insurance, or telecom services that didn't exploit you at every turn, they'd get my business.

Who could stand behind such businesses and make them work honestly for customers? Jimmy Carter? Oprah? Keith Olbermann? Stephen Colbert?

I'd sign up for an Oprah or Colbert card.

Posted by ferd | June 10, 2008 6:11 PM

Wait a second--you think taxing consumption (massively regressive) instead of income (potentially progressive) is a good idea?

Oh my god--PETEY WAS RIGHT!

Posted by Marc | June 10, 2008 6:35 PM

Consumption tax? Did you and Kevin read the same book as Mike Huckabee?

Posted by djw | June 10, 2008 6:36 PM

RE: Payday loans and predatory lending in poor neighborhoods.

This is a serious problem. The poor don't have reasonable access to banking services and so they get screwed over by predatory semi-banking services that set up shop in their neighborhoods when legit banks won't. Thus you have payday loans, check cashing outlets, buy here/pay here car sales centers, and so on, but no ordinary banks.

Supposedly the poor are a bad risk for banks and yet there is an entire (and very profitable) sector of the economy taking advantage of these people. In fact, it's been found that the problem is two-fold:

1) People who grow up poor and in inner cities are not comfortable inside a traditional bank. A payday loan counter in a convenience store or a Western Union office is more familiar and therefore less threatening.

2) Banks and other creditors do not have access to good credit risk information on the poor largely because the poor do not take out traditional installment loans and thus do not have the kind of credit report that is readily available on pretty much all members of the middle class.

There is a movement afoot to correct problem number two--to capture the data about who is and who is not a good credit risk among the non-home-owning poor. It turns out that it is possible to collect good data about rental behavior and that this translates fairly well into general credit-worthiness. As this dataset grows, you might actually see banks starting to be more friendly toward poor neighborhoods because they'll have more confidence about who is and is not a good risk.

With respect to number 1, I think someone needs to design a new kind of bank for the inner city. At first this would probably need to be done through some kind of charitable foundation, but the fact that there is non-profit support should be well hidden from the customers. What I envision is micro-credit and also micro-saving/checking for the American poor. I think a business like this could easily be profitable, but probably only in the long run.

Posted by Rob Mac | June 10, 2008 6:55 PM

freddiemac, thank you for that piece of information: do many unions provide those?

Posted by howard | June 10, 2008 7:09 PM

Why someone would use a payday loan, I don't know.

Posted by DAS | June 10, 2008 7:26 PM

You, Drum, and Brooks deserve one another.

Bobo is a disingenuous, psuedo sophistcated asshole covering for the excesses of Bush's horrendous policies.

Blame the victim, Bobo.

Posted by Econobuzz | June 10, 2008 7:29 PM

Brooks: "There are dozens of things that could be done. But the most important is to shift values..."

I'm uneasy with the conflating of too much debt with an absence of values. Brooks conveniently avoids the high number of credit card debtors whose bills soared due to job loss, medical expenses, or some other hardship. It's not all black and white.

Posted by Lisa | June 10, 2008 7:35 PM

The wife and I are looking at buying a first house in the next year or so and have been watching those shows that follow people buying houses.

A couple of things are really striking:

(1) The real estate agents are always pushing people to buy in the top of (or just over) their price range. If mortgage brokers are pushing things too, then I imagine a lot of people end up with houses they can't afford.

(2) People buy houses like clothes. They want what's in fashion today and talk about cosmetic issues as things that they need to fix.

(3) There's granite countertops, stainless steel appliances (oooh! shiny!) and hard wood floors on everything.

There's also this show called "My House is Worth What?" where realtors tell people about the "equity" they've built (sometimes in only 4 months) that they can pull out in the form of a HELOC to put more fancy granite in.

The home-improvement networks obviously have a POV and lifestyle that they want to push, but it's not sustainable or good for the country.

Posted by ben | June 10, 2008 7:39 PM

I think that Brooks' column was missing the point. Yeah, I reckon there's a problem with debt in this country, but a great big part of that problem comes simply from poverty. If you're poor, you have less financial flexibility and so are more likely to use bad financial services like payday loans and credit cards to keep your standard of living afloat. People might be getting burned by high credit card interest rates, but the real problem (I think) is not lack of consumer virtue but low wages. Raise the wages, less debt.

Posted by Brendan Mackie | June 10, 2008 7:40 PM

I think that Brooks' column was missing the point. Yeah, I reckon there's a problem with debt in this country, but a great big part of that problem comes simply from poverty. If you're poor, you have less financial flexibility and so are more likely to use unwise financial services to keep your standard of living afloat. People might be getting burned by high credit card interest rates, but the real problem (I think) is not lack of consumer virtue but low wages. Raise the wages, lower debt. And what's that with swiping at state lotteries? That was just weird. But maybe he's right about that one.

Posted by Brendan Mackie | June 10, 2008 7:40 PM

i've often wondered why unions don't offer this (maybe they do and i don't know it)

Um, interesting idea, a union of people to extend and receive credit. I wonder what one should call it? :)

Seriously, this is one thing that we are close to having. Credit union membership rules have been eased so it is easier than ever to find one which you eligible for.

I would even go so far as to create a federal program so that each state (& DC, etc) would create a chartered credit union where any resident would be eligible.

Posted by Kolohe | June 10, 2008 8:21 PM

The world's economy is built on the US buying stuff. The US consumer is the squirrel in the cage that keeps the whole thing running.

I wonder what would happen if one of the presidential candidates campaigned on 'stop buying so much crap'? I think it would scare a lot of people, here and overseas.

Posted by Nat | June 10, 2008 9:29 PM

howard,

I dunno, the only union I joined was Teamsters (not voluntarily). I only vaguely recall the credit card, I think maybe it was a MasterCard. It wasn't as good as my Visa rewards. The auto insurance was interesting, they would defer payments if your union went on strike. That was the benefit, and I don't remember what insurance agency it was through.

Posted by freddiemac | June 10, 2008 10:08 PM

I haven't been able to listen to Brooks & Drum since they performed at GWB election events and allowed him to use their songs as campaign themes in both 2000 and 2004. I knew they were Nashville schlock anyway, but that was too much to stomach.

Posted by Ben | June 10, 2008 11:03 PM

These strike me as mostly terrible ideas, at least insofar as many of these are actually ideas, so let's break them down one by one:

Foundations and churches could issue short-term loans to cut into the payday lenders’ business.

First of all, payday lending is not and has never been the issue in our current financial conundrum, it's long term debt (ie, mortgage loans). Secondly, the idea that churches and foundations could in any meaningful way function as lending agencies is ludicrous and out of touch. How many such organizations out there have any experience or knowledge of consumer credit? Does Brooks think credit analysts will work for free, just because their employer happens to be called "First Church of Christ" or some such thing?

Let's also not overlook the potential for abuse, here. I donate money to the First Church of Christ to avoid paying taxes on it; the First Church of Christ lends most of that money back to me, and neither I nor they have any pretensions that I'll repay.

More importantly, though, the lack of knowledge and expertise on the part of these would-be lenders means that rather than alleviate debt problems, what we're likely to have is a bunch of not-for-profit organizations that can't pay their bills because they frittered away their endowments making bad loans.

Public and private programs could give the poor and middle class access to financial planners.

We already do that. They're called public libraries. Or does Brooks once again anticipate that CFA's and CFP's are going to decide to work for free? Sorry, but I don't see why I or anyone else should have to pay for other people to get financial advice that they could just as easily get, to borrow a line from Good Will Hunting, "for a $1.50 in late fees at the public library."

Usury laws could be enforced and strengthened.

This is nothing more than a price ceiling on credit. I'll spare everyone the Econ 101 lesson and just say 'pass.'

Colleges could reduce credit card advertising on campus.

I'm no legal scholar, but would this not be a first amendment violation, at least as it applies to private colleges, if one were to legislatively restrict when/how credit card companies can advertise? Public universities are probably a different story, I'll grant. But in any case, people who want credit cards aren't going to have a difficult time getting them. CC companies have learned to use the U.S. Postal Service fairly effectively, as my garbage can will attest.

KidSave accounts would encourage savings from a young age.

Yes, they would. And they do. And most banks already offer deposit products aimed at minors. What does Brooks want to do here, mandate that every kid start one?

The tax code should tax consumption, not income, and in the meantime, it should do more to encourage savings up and down the income ladder.

Well that's one decent idea. 1-6 isn't going to get you in any Major League lineups, but I guess it's good enough for the NYT editorial page!

Posted by Jeff | June 10, 2008 11:05 PM

Supposedly the poor are a bad risk for banks and yet there is an entire (and very profitable) sector of the economy taking advantage of these people. In fact, it's been found that the problem is two-fold:

Bad credit risks can still be profitable if you jack up the interest on the people who do pay enough to make up for those who don't pay. When you give a high-risk loan, the interest is higher to make up for the risk.

That the poor are a bad risk is not inconsistent with a thriving credit market for the poor. However, it does mean that it is difficult to make a profit or even to break even when charging middle-class home loan levels of interest.

Posted by Glaivester | June 10, 2008 11:18 PM

Brooks captures the conservative position nicely: debt is a moral failure of the individual debtor. The erosion of virtue happened mostly in the passive voice, with state lotteries bearing coequal responsibility with payday lenders.

It certainly has nothing to do with conservatives' ongoing war against the middle class.

Posted by Aatos | June 10, 2008 11:45 PM

"In general, though, I find all of these comments about "the debt culture" to be disingenuous. Is the issue really that people are living too high on the hog or that society expects people to have this gadget and that gadget in order to even stay connected enough to stay in the rat race -- and then people simply don't have enough money (thanks to stagnant wages) to afford it all."

I think this is the source of the problem. One key to a solution would be to have the government and the media to stop lying about the real state of the American economy. The fact is that real wages have been mostly stagnant for decades now, and the cost of living in the past few years has been going up sharply. Just about everything has been done to reduce awareness of this.

Consider taking out a loan to go to college. If the economy has been expanding all of your life, and will be expanding in the future, this makes sense. You will recoup what you are paying in interest with the higher earnings you get with the college degree. Now change the situation so that the economy stagnates or even contracts once you graduate. The last thing you want is to have debt in this instance. The same applies to buying a house and hoping to resell it at some future date.

I also suspect that many of the people in over their heads with debt both consciously and unconsciously think that the government is going to bail them out, either through inflation or directly using taxes collected from the savers. In this case, taking out large amounts of personal debt is rational. And they may be right.

Posted by Ed | June 11, 2008 3:07 AM