David Brooks and the 'Seduction of Debt'
In a recent New York Times column, David Brooks argued that while the United States was founded on values that “inhibited luxury and self-indulgence”, in modern times much of that legacy “has been shredded” by “institutions that encourage debt and living for the moment.” In Brooks’s opinion decadence is the rule today amidst the “trampling of decent norms about how to use and harness money.”
Brooks would like to see a renewed culture of thrift, and while that’s perhaps admirable on its face, it presumes that Americans don’t save. And there lies the first contradiction in Brooks’s thesis. Federal Reserve studies showing total U.S. household wealth of $55 trillion suggest that Brooks is incorrect in his basic assumptions about U.S. profligacy. Indeed, without savings there can be no wealth.
More realistically, Americans are not only great savers, but they’ve been successful investors too. The capital gains that have often been the reward for past parsimony doubtless lead to some of the decadence that Brooks decries, but they certainly aren’t indicative of a nation that has embraced spending over saving.
That Americans are also bombarded with saving opportunities in the mail, on television and in countless financial publications similarly doesn’t speak to a profligate nation. If Americans didn’t save there would be no reason to shower them with ads touting same, not to mention that financial services firms such as Merrill Lynch and Citigroup would have no reason to employ tens of thousands of investment professionals.
Naturally Brooks bemoans what he deems “soaring” credit card debt, but in so doing, he ignores the anecdotal. It’s unlikely that he would lend money to those lacking the ability to pay it back, and with credit-card companies under the thumb of investors (more on that later) seeking high returns, it’s folly to assume that they blindly lend without developing a strong sense first of the potential debtor’s wherewithal to make payments. Simply put, it’s precisely because Americans are so financially sound that lenders are so eager to lend them money.
Brooks notes that “fifty-six percent of students in their final year of college carry four or more credit cards,” and while that’s an excitable revelation at first glance, it ignores the obvious. No doubt college students take on a lot of debt, but by virtue of a college degree that correlates well with future financial success, lenders once again deem this class of borrowers worthy when it comes to paying back that which is owed.
Furthermore, Brooks doesn’t distinguish between college-age debts of the spring-break trip variety versus liabilities incurred that will pay off in the future. Sure enough, many college students borrow in the present to pay for presentable work clothes, computer technology and geographical relocation that will over time make any initial pain that results from high monthly payments seem miniscule by comparison.
Perhaps due to his own success as an intellect and a saver, Brooks decries lottery products which according to him are referred to by some as “a tax on stupidity.” It says here that lotteries are unfortunate for re-orienting potential savings into government consumption, but it should also be said that those at the bottom of the economic scale are very much a moving target. In short, there are future billionaires among today’s lottery-ticket purchasers.
When we consider the “Payday” lenders that Brooks denigrates, it would be more realistic to say that they’re merely a facilitator of “high yield” financing for those who can’t access traditional lines of credit. That Brooks thinks churches should do what Payday lenders do is an arrogant comment which presumes lending is easy. Furthermore, far from predators, Payday lenders proliferate thanks to them filling a previously unmet market need.
Most bothersome about Brooks’s column, however, was his comment about hedge-fund managers. After correctly lauding Bill Gates for his success in silly terms (Gates is good for creating a “socially useful product”), Brooks asked, “what message do the compensation packages that hedge fund managers get send across the country?”
First off, it should be said that no one forces individuals and institutions to invest in hedge funds. That investment experts choose to do so anyway strongly suggests that hedge funds offer enormous value to investors. Engaging in great simplification, hedge-fund managers offer investors total returns in any kind of market; something very useful considering that the S&P 500 has been flat for the last nine years.
But since Brooks seems to view success through the prism of that which is “socially useful,” it should be said that hedge funds bless the economy whether they’re long or short. Their investment success aids the economy when they’re long for them properly moving capital to its highest and most profitable use. Similarly, they aid the economy when they’re short for successfully betting against a certain company or sector. Indeed, their being short speeds the process whereby the markets acknowledge that capital is being misused, and as such, is redeployed elsewhere to some sector/company that will utilize it more efficiently.
And when we consider the twenty percent of Americans that apparently fall into the stupid category, many are shareholders in pension funds; those funds often the vehicle through which the masses achieve market exposure, including to hedge funds. Hedge-fund managers only earn large pay packages after they’ve created enormous returns for their shareholders. Brooks presumably ignored that reality while slandering the industry’s greatest successes.
Brooks is certainly correct in arguing that the “tax code should tax consumption” over income, but as most commentators have done in recent years, he ignores one major reason consumption is so high: the weak dollar. Americans in general have had large incentives to consume rather than save money due to the latter. If/when the dollar’s value is strengthened and made stable, Brooks can rest assured that Americans of all stripes will soon enough rediscover their interest in the stock market.
Brooks ultimately bases his debt-seduction argument on the mythical notion that Americans don’t save; a notion certainly belied by all the wealth in this country and all the debt that Americans are allowed to incur. In his defense, however, there is a savings problem, but right now that problem results from a weak dollar that he failed to mention