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Why Americans Are Going Broke
The new economic stimulus plan encourages consumers to spend money-but isn't that what got so many into trouble in the first place?
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Times are bleak for the U.S. consumer. The average household owes 20 percent more than it makes each year. The personal savings rate is in negative territory. Record numbers of Americans are losing their homes to foreclosure, and millions more are struggling to keep up with their monthly bills and obligations. And the nation's economy isn't in much better shape. The Treasury Department has estimated that, with the added costs of the economic stimulus plan passed by the House of Representatives this week in an effort to avoid a recession, the federal deficit could rise to as much as $400 billion this year.
The plan does promise some relief for struggling Americans: a rebate for taxpayers. The government is counting on recipients not to save it or put it toward debt but to do what they've done best over the past 30 years: spend it. Never mind that overspending is what's put many in the financial predicament they now find themselves in. NEWSWEEK's Jennifer Barrett spoke with Stuart Vyse, author of the new book "Going Broke: Why Americans Can't Hold on to Their Money" (Oxford University Press), about the wisdom of such a stimulus plan and why it's getting harder for so many Americans to stay afloat. Excerpts:
NEWSWEEK: You say the common assumptions about why Americans can't hold onto their money are insufficient. Why?
Stuart Vyse: The most common assumption is that people are irresponsible and that they are not wise about their money. It's basically victim blaming … an attempt to shift the blame onto individual consumers. The other point of view on this issue is that it is primarily the fault of predatory lending practices--the "evil" credit-card companies. I'd say there's some truth to both views, but it's not that simple.
What other explanations should we consider?
One of the most important factors is the easy availability of universal credit, plus the fact that the marketplace [is open to us during] every waking moment. Because purchases can be completed so quickly, they're very unlikely to be interrupted by a prudent thought. A third reason why people are going broke is the basic insecurity of our economy. If you have a consumer society where no one is saving—where no one is encouraged to save—and millions are in debt [and then] you hit them with a jolt to their income, they're instantly going to be in trouble.
The House and Senate have passed economic stimulus packages that include rebates to taxpayers, which the government is encouraging them to spend. That seems like an irresponsible message for taxpayers who have debt or no savings.
A number of financial advisers would certainly agree that it would be much wiser to save the rebate to protect against a future [emergency] or to pay down debt—neither of which is going to do what the stimulus package is designed to do. Individual consumers are basically being asked to do something that is probably not prudent for themselves for the sake of the larger "economy."
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