Americans are progressively growing broke because the greater percentage of their monies are spent on "Consumer Oriented items" versus "Income Generated items".
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Why Americans Are Going Broke
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Why is it assumed that the poor and middle class are likely to spend the rebates?
Because, under normal circumstances, they are the ones who have less disposable income. If you are on the lower end of the curve, you are more likely to need the money for immediate expenses. So that's why it is best to put it in hands of people who have very little.
Why wouldn't they save it or put it toward a debt?
If they are smart, they would. The problem for most who are seriously in debt is that $600 or so doesn't amount to much. If there's a small debt they can pay off, they should pay it down. If they're able to squeak by month to month, saving it for an unexpected expense might be more valuable for them
So what can consumers do in a world designed, as you say, to encourage them to overspend?
Using techniques from behavioral economics, it helps if you can make saving automatic. You can make it even more invisible by timing the start of your savings to your annual cost-of-living increase so you don't experience the savings as a loss … I also recommend automatic monthly bill payments. Split your paycheck into two with some going into a bill-paying account in which you have no ATM access, and the rest should go into another account that would house your disposable income.
What would you propose the government do to help reverse the trend in consumer debt?
One of the most important things is to promote savings … and obviously we need reasonable limits on credit.
So the government should actually set limits on how much you can borrow, depending on your income?
Yes. There was a time when if a banker gave someone a loan and the person failed to pay it back, the banker felt some responsibility because he had made a bad assessment. That ethics in banking obviously is gone. The subprime mortgage crisis is the most obvious example of that. Plus, there's a tremendous amount of adding on fees, hiking interest rates, etc. There needs to be more information for consumers and better financial education.
If consumers actually saved money and paid off their debt, could it hurt the U.S. economy?
One reason we have all these problems is that we are supposed to. It drives our economy. If everyone had no debt and was into saving, then our economy—as it is designed today—would not be performing as well as it should, according to economists. But I think we have to ask: would we as citizens be happier? I argue that we would.
© 2008
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