(In case you missed it, the blog discussion of the original article is here–KSH).
Here is one:
To the Editor:
It isn’t often that I agree with David Brooks, but “The Great Seduction” (column, June 10) was at least the beginning of a conversation in which America desperately needs to engage.
His litany of responsibility for our culture’s chronic indebtedness, however, barely hints at the extent to which the commodification of everything inhabits our lives in this free-market paradise.
Our entire economy is founded on mindless and infinite consumption ”” the more mindless the better. It’s the American credo: I consume, therefore I am. Why else do TV and radio (and, increasingly, the Internet) exist except to sell us more of anything and everything?
What does Mr. Brooks think will happen to this economy if Americans suddenly decide to embrace Ben Franklin’s virtues of hard work, temperance and particularly frugality, and stop roaming the malls? One thing for sure, with the way the free-market purists have turned everything from political representation to health care to spiritual redemption into mere vendibles, they won’t be pleased with him for pushing this particular line of inquiry.
Mr. Brooks could be expelled from Club Neocapitalism if he doesn’t watch out, and it will cost him a pretty penny to buy his way back in.
Stephen Lehman
I have been convinced for a long time that two of the best things we can teach our children and grandchildren is the real value of money and the real danger of indebtedness. These are truly counter-cultural ideas these days, but I believe they are rooted and grounded in biblical discipleship. Recently the Barna organization concluded that a mere 5% of American Christians tithe, and I suspect one of the reasons for this is that so many are bogged down financially — not just by mortgage and college fees, but by all sorts of other burdens that result from the consumption on a massive scale that we have come to take for granted.
Of course, the flip side of turning Western culture from being consumerist to being thrifty is that it would require a gargantuan roiling of the economy, but painful as it would be for every single one of us would it be a bad thing?
Stephen Lehman is of course incorrect.
RE: “What does Mr. Brooks think will happen to this economy if Americans suddenly decide to embrace Ben Franklin’s virtues of hard work, temperance and particularly frugality, and stop roaming the malls? One thing for sure, with the way the free-market purists have turned everything from political representation to health care to spiritual redemption into mere vendibles, they won’t be pleased with him for pushing this particular line of inquiry.”
I’m a free market purist and I’m perfectly fine with our society embracing the virtues of hard work, temperance and frugality. Lehman wishes to imply that it is the fault of the free market that it cannot bear those virtues.
But 1) the free market can bear perfectly well those virtues — as long as we could accompany those virtues into the bowels of the Blessed State and 2) there is nothing particularly “wrong” with the free market that would cause it to have a problem with such virtues — our markets would be enhanced rather.
The cynic in me says that what would happen would be that people would complain about those “rich” people who have “too much” in their savings and should be punished with a percentage tax on it.
Our excessive consumption habits are a spiritual problem. Blaming “free market” advocates for it sounds to me a bit like Adam’s saying, “The woman you gave me made me do it.” Nope, Adam did, of his own choice.
Sorry Kendall, but while I enjoyed the original article, this particular letter writer is spouting gibberish under a veneer of buzzwords, in addition to simply getting things wrong. First, Brooks didn’t start this conversation – he’s coming from an intellectual traditional (usually called neoconservative because the original proponents are former liberals, e.g., Irving Kristol, though neo-con has morphed into a label for those supporting war in Iraq) that has never been pure free market and consistently expresses concern for the moral impact of unbridled capitalism. Irving Kristol is himself the author of “Two Cheers for Capitalism” and he doesn’t think the free market is perfect (far from it), but it tends to beat the next-best alternative. Brooks is pushing a “line if inquiry” that’s been pushed for decades. Second, free market does not necessarily equal rampant consumerism; it simply means individuals are free to exchange with one another as they see fit, not as a political third party sees fit. In its best form, free market liberalism (or classical liberalism in the vein of early Mill, Locke, Montesquieu, Hayek, et al) treats individuals as rational beings capable of ordering their own lives and making their own choices – the fact the some individuals will make bad choices should not imply we infantilize them by taking choice away. Third, few “free-market purists” would characterize the US as a “free-market paradise” and in fact would lay some of the blame for enabling self-destructive behavior at the doorstep of non-market institutions that subsidize risk or non-virtuous behavior: the Federal Reserve, Fannie Mae, much of the welfare apparatus, lax bankruptcy and landlord-tenant laws, and on, and on. Fourth, our entire economy is NOT based on mindless and infinite consumption (whatever infinite consumption is) – consumer consumption drives a lot of the US economy, but certainly not all (government spending, investment, etc); and not all consumption is mindless. I spend time in Wegman’s, Costco, and CVS, doing what looks like “consumption,” but it is mindful: I am feeding my family. Fifth, while TV, radio, and internet can be sales channels, they are not uniquely so, and in fact there are choices that allow one to opt-out of being “pitched” by those selling something: commercial-free radio, cable television (and who watches commercials any more with TiVo??), etc. As for “The Internet” I don’t know many people who simply peruse the internet willy-nilly and buy random stuff because they see it. Most users go to a place for a purpose – news, music, pictures, networking, reading about religion, etc.
Sadly, I think this near-paranoid screed misses Broooks’ key point – the countervailing social, political, religious, etc, forces that in the past helped curb self-destructive behavior have not worked. But Brooks doesn’t simply make this an economic problem (too much free market) but correctly sees it as a complex moral problem.
If Americans started practicing frugality, a number of things would happen.
1. As everyone paid off debt, without taking on new debt, interest rates would fall because financial institutions would have too much idle capital.
2. If everyone stopped borrowing, financial institutions would have to lay off loan officers, increasing unemployment.
3. If everyone reduced consumption to what they had the cash to purchase retailers, wholesalers, transporters and producers would cut back production and lay off workers, increasing unemployment.
4. If everyone started saving for “rainy days”, retirement and large purchases, then financial institutions would have more cash (and fewer borrowers) and would have to lower interest rates. (Which in turn would mean that savers got less return on their money.)
5. As consumption fell, sales tax revenues would decline, leading to cuts in state and local government spending for police, roads, etc. — leading to more unemployment.
6. As unemployment rose, income tax revenues would decline, leading to cuts in federal government spending for military, law enforcement, etc. — leading to more unemployment.
Whether we like it or not, we have based our economy on consumption and borrowing for consumption. And the withdrawal symptoms from this addiction would be quite painful.
And, incidentally, we are seeing something like this. As the cost of energy rises and credit becomes more restricted, we find people forced to choose between buying gasoline and putting food on the table. Gasoline consumption is falling — and with that the revenue from gasoline taxes, meaning less money for road maintenance. And people are trying to get rid of their SUVs for more economical vehicles, resulting in the closing of a number of auto plants and thousands of auto workers.
No. no. no. The issue is simple — enormous hoarding and stinginess at the top and not enough “trickling” down below.
Ken (#5) – Individual frugality that is irrational or imprudent is no virtue, and debt is a tool, one that can be used wisely or unwisely. I submit there will always be a new supply of people who have the potential use debt wisely: new homeowners, and students financing their education. If one can afford payments and has a need for a home, trying to save enough to pay cash is irrational: you will delay the use of the asset, forego the tax benefits of shielding income, forego building equity, and still pay to live somewhere in the meantime (and likely face the transaction costs of moving several times). I 100% agree there are people who have no business buying a home, or who buy beyond their needs and/or means; all the same, there are people who are capable of managing their financial affairs competently. Same goes for student loans.
Also, let’s not assume consumers are the only one who employ debt – businesses small and large do it every day, on a massive scale, because it is rational and can be done prudently.
#5 “Individual frugality that is irrational or imprudent is no virtue, and debt is a tool.”
This is beyond doubt. However there is a difference between going into debt for consumption (which includes buying a car or even a home) and going into debt for production.
I have paid off my car and my home, and a rental home. I intend to pay for my kids’ college educations in cash. However I think it would be reasonable to purchase a car on credit in order to get a job, if the car loan could be easily paid off if one lost the job. Ergo, before I could buy cars outright, I bought second hand, inexpensive cars on a 3 year car loan. I still buy second hand cars, though my next car may be more expensive, as I am considering the virtues of an electric vehicle (If I can get it second hand, I will). New cars, BMW sand Hummers are for wealthy folk who presumably don’t need car loans to buy them. (I’m not one of them).
Similarly it is reasonable to buy a home on credit in order to have a place to stay, if again the home could be easily paid off if one needed to move. Ergo, save up for a large down payment, and try to pay it off early. Then, if you need to move, you have real equity.
In the same vein, it is reasonable to take out a student loan in order to get an education that will increase your earning power. But again, the size of the loan needs to be consistent with one’s ability to pay it off. Ergo, go to the State University (my kids do). Go from home if you can. Get as many APs or online courses in as you can to reduce the time in college. Work off your core requirements first, so you don’t end up spending for ever in college, and if you are going to take on debt, then major in something that can help you repay that debt.
English Literature, and Art History majors should be for folks who are rich and can afford to spend thousands on an investment they will never use. They should not be done on loan. Folks who take on debt to get an education should major in nursing, business, engineering, education etc. and plan on paying it back.
As to saving being damaging to the economy, rather than the reverse, our nation was built by folks who saved more than they consumed. Those savings are not hoarding. On the contrary, they are used for real investment and for charity. I tithe. In addition, I spend some 20 grand a year on non-tax preferred items such as interventions for community kids with learning disorders etc.
Once prices come down some, I plan to buy businesses with my savings, and to build them. I will work these businesses in my “retirement” from my day job. A tree farm, perhaps. Or possibly a laundromat. These businesses will provide employment for others, and taxes for the state.
That is what people used to do with savings. They did not simply buy flashy and stupid toys for themselves. Nor did they buy stocks with the expectation that they could then retire into a “rentier class” akin to the old English aristocracy, where they could live on interest income, travel and never work again. This fixation we have on stock income magically making everybody wealthy is madness. Averaged over the centuries stocks and bonds have never produced more than two percent a year. The best retirement portfolio is being debt free, with several income generating businesses to sustain you, (or to have a “quiver full” of children who will do the same!).
Well, when one has been busy draining traditional Judeo-Christian values out of the culture, one may find it hard to pump a little morality back in. I like Brooks, but I think Digby Baltzell was on to this decades ago. Also, Brooks seems always seems to get some details wrong. In his book “Bobos in Paradise”, he remarkably described the “bobos” as apolitical. And in this article, he says, in essence, that the religious right has not been focused on financial morality issues. But Focus on the Family has been one of the leading opponents of legalized gambling, and anyone who has not seen a fair amount of evangelical Christian literature on handling finances and not borrowing too much has not been paying attention (which would include most of the media). Rather, I think there is a little Christian industry of it.
Thanks, Kendall, for another sociological post. It is not irrelevant to how the episcopal church got to where it is.
I cross-posted with #8. I think #8 is largely right; a little too hard on the public stock markets, but being the owner of a business is the way to make money. Hey, don’t forget that some of the early private equity guys got props in Matthew 25:14–30. It can be done right.
#10.
The trouble with the “public stock markets” is several fold:
First, the major way that stocks produce income is by price increases after sale of stock. (Dividend paying stocks, which are the macro equivalent of investing in a small business are increasingly rare).
Since it is not possible to sell a stock unless somebody else buys it, it is arithmetically not possible for _everybody_ or even _most people_ to make a profit in the stock market. For every stock winner, there must be a stock loser, or else a huge productivity gain. Productivity gains usually average about 2% year which is why the historic stock market increases at about 2% a year (check tables beginning in 1850 to present). Not too bad for those with a greater than 20-40 year timeline (eg business), but no match for inflation.
The reason that the stock market took off in the 1980s was because that was when 401k were invented, and the US population were sold the idea that everybody could make money in stocks and that this would somehow be tax-FREE too! In point of fact 401ks and IRAs are not tax free, but only tax deferred, meaning if taxes increase in the future, you are screwed. Further, the idea that the stock market is a road to wealth is absurd. The stock market went nowhere for more than 10 years in the 1970s, went nowhere for 20 years in the 1930s, and has gone nowhere for the past 10 years.
Since the boomers will be retiring they will need to start selling stocks. Instead of a large generation buying stocks (responsible for the stock bull market of the 1980s to 1990s, there will need to be an equally prolonged stock bear market between now and about 2020, when the lot of us start shuffling off our mortal coil (to the immense relief and cheering of subsequent generations).
Anybody who depends on their 401k, their IRA, their variable rate annuity etc. is a fool. Later generations will point to them in horror and say in tones of disgust “Well, they were SPECULATING in the stock market, the greedy pigs, and they got what they deserve.” Actually it will not be quite what we deserve, because we were, as a generation, instructed to place our monies in the stock market, and we were told that this was “investing” not “speculating” and that this was “responsibly” preparing for retirement. However, whatever the guise in which we were sold this ponzi scheme it is speculating, and it will fail.
The societal problem with the 401k is that it diverts money from building up real business’, produces a sense of false wealth, and places large amounts of money in the hands of investment bankers sitting in offices in NYC. I think most sensible people looking around their home towns, can think of a dozen businesses more likely to succeed, then a guy in a suit, sitting in a sky scraper 500 miles away. This produces poor investments, which cannot produce revenue if judged on their merits and cash flow considerations (eg witness the tech bubble with folks “investing” in anything that had “dot com ” behind it.
The moral problem is that 401k encourage people to sit around in condos in Florida worrying about their “investments” rather than to stay home, mind their grandchildren, and involve themselves in their community (something that business folk who have to deal with the community on a daily basis) tend to be forced to do.
I seem to be talking to myself. This is not unusual 😉 However to expand a little on what I have said, I do not think many people appreciate how dramatically public stock markets have changed since the advent of the mutual fund/401k/IRA.
It used to be that brokers were moderately paid, middle class folk who worked with large businesses. Did Ford Motor company need a few million to build a plant in the Midwest? The broker would line up investers. The companies they worked with were in general known quantities. Sometimes they would get hot tips on saucy new startups with a can’t fail great idea. However this did not happen often, and anyway, there was only a limited amount of money available, mostly from highly conservative banks, and from wealthy people, both of which groups wished to know where precisely their money was invested.
The advent of the mutual fund, meant that ordinary folk who could only invest a small amount at a time could participate in this. This changed the nature of investing, and that change dramatically increased with tax-deferred accounts that practically required the majority of US citizens to invest in the stock market.
But the fact that there was now a huge pool of money to invest with, didn’t mean that there was an equally huge number of great companies with serious business proposals to invest in. Some of those increased funds went to make brokers multimillionaires. Most of it got frittered away in unnecessary projects. “Here is ten million dollars that we can get cheaply, let us get all new equipment for our plants, maybe we’ll get more custom” or else it went to poorly thought out new “businesses”.
If I as a private citizen wish to set up a company (as I once thought to do) tutoring children and remediating learning disorders I know that if I used my own money for it, it would fail. The reason it would fail is because I know my population. The parents here just will not pay for anything they think “ought to be free and provided by the school”. They would feel cheated by this. Thus, no company like it could be profitable. The work can only be done as a ministry.
But a broker on Wall Street does not know what is obvious to myself. If I were to set up as a public company, issue stock, pay myself a salary, and set up a nice little IPO flashing my (not unimpressive) CV, I have no doubt that I could raise enough money to rent a store front, buy materials, and keep myself in a salary for a while. I would need to show, not so much cash flow, but growth. This could be done by setting up a second (equally bancrupt) storefront in the next town. This was basically the strategy of “Pet.com” There was never any revenue, and yet it raised millions based on nothing but an idea. When it went bancrupt, most people did not even know. (How many of you know the names, let alone the cash receipts, of the companies that your mutual funds invest in?)
Similarly, I would like (like a million others) to get into the solar business. If I could find a hard working contractor, with good experience in electrical work and wind power, I would be interested in partnering with such a person, paying for training, and setting up a business refitting homes for both passive solar and active solar power. (Actually, I’m waiting a few years for the market to sort itself out, as well as looking for a contractor).
But I can assess that contractor. I can look at his work here in the Midwest, and I can get references from him from people whom I know personally. If he were a partner, I would wish to know him personally before I became his business partner. By contrast, any fool, even with little or no verifiable experience could set up a company and call it “Sun Energy” or whatever, and get gazillions from Wall Street for a company that would likely go broke. Most start ups, after all, do go broke. But I, (and you) here in our home towns, are better able to assess people. Is this a hard working person? Is he honest? Does he do what he says he will do? What experience has he had, really? These are the questions that determine whether a company will succeed or fail, and a Wall Street broker can ask none of these questions. All he can do is think “Gosh, I have all this money, and people expect me to make more money with it. What sounds good? Computers? Internet? Commodities? Solar? Let me throw the money there.”
This again, is why 401ks will fail (once the run up in price simply due to pressure from a generation wishing to buy stock reverses). The underlying companies are worth less than a similar (smaller) company set up with private monies, carefully saved and husbanded by private citizens.
Shakespeare once told us to not only not borrow but not lend “for borrowing blunts husbandry”. Our 401ks have borrowed money that we expect them to pay us back for our retirement, but they are poor husbands of this. Our governement has borrowed money that we expect them to pay us back in Social Security. I think we would have done better if we were “neither a borrower nor a lender”.
Shari
I might add, that I think the church is somewhat to blame for this situation. To be thrifty and a member of a mainline church, is to be contiually called upon to be charitable. (I actually agree this is right and proper, and is the proper prophylactic to greed). However to be irresponsible (financially or sexually) is invariably excused. It shouldn’t be excused. Excessive frugality can lead to greed, but excessive consumption is nothing more than envy. The church should condemn both.
You can, of course, avoid many of the pitfalls you lay out by sticking to Value funds. These look for dividend income as a large (often primary) source of return, with price increase from growth being of much lesser importance. Others look for companies that are undervalued because they aren’t trandy, though they still kick off a good bit of cash.
Not all mutual funds are aggressive growth funds providing start up monies.
Clueless, you might be right, but I think you underweight the value of the markets and underweight the importance of diversification. And real investing is hard work. Ultimately, I think the most important thing is to save something to invest somehow in the first place. Of course, as Christians, we know it does not really matter which of us is right about investing. It’s all His. He just invested some with me and you for a while. And that is why spending beyond our means and borrowing any more than needed is not good, just to return to the point (I think) Brooks intended to make)
#14 I do not pretend to be able to give specific advice other than in a macro fashion. However as to “value funds” , these are funds which have a price to earnings ratio below a certain value. During the tech bubble we were told that funds were “undervalued” when their P/E was below 40. Now we are told that they are “undervalued” when their P/E drops below 20.
However, I point out that during the long 70s bear market, P/E fell from 20 to 5. (It would have been even worse during the 30s bear market, however they didn’t measure it back then).
Thus, it is not reasonable to determine if a fund is “undervalued” or “overvalued” based on its price to earnings. It’s price may be low because it is a dud. What is Bear Steins P/E? What was it the week before it crashed? Does that mean that Bear Steins is a “buy”? I don’t think so.
The best way to determine if a stock (which represents a company) is low or high is to have an intimate understanding of the company. That’s something you can do if you live in the companies home town. You can chat with your neighbor who can tell you the new and great things that the company is doing. Similarly, if you notice that all of a sudden all the kids are wearing Hush Puppies, well that would be a good time to buy their stock assuming it has not already spiked up.
Mutual funds, however, simply produce numbers (as far as I can see out of thin air) and say “A P/E of less than 20 means it is undervalued. If the stock market as a whole falls, then they say “Well a P/E of less than 15 means that it is undervalued”. If the stock rises then they say “A P/E of less than 30 means that it is undervalued”.
This is nonsense. The company is the same, whether its P/E is rising or falling. The fundamentals are what is important and that is not something your broker can tell you, unless he has inside information. I know a large hospital chain that has an excellent P/E but which may well fail in 5 years due to obvious stupid mistakes and huge leverage, that it appears to have no interest in fixing. It is considered a “value stock”. It provides a dividend, and will likely continue to do so until it goes bancrupt. Thankfully it will go bancrupt without me. I am more confident about my current hospital chain.
There’s a LOT more than just P/E. At least if the folks are worth their fee. This is what I do for a living, I know firsthand that our Value fund looks at a minimum of 15 measurements for their first screen to narrow down which stocks to look at more closely, to pass through other tests so that might be considered for purchase. Investing is a lot of work, if done right. But it reaps rewards if you put in the effort.