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."
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.