Elizabeth Warren had been quietly and steadily releasing thorough and thoughtful left-leaning economic policy proposals for months. Then, last week, she made perhaps the biggest splash of her campaign by proposing a massive program of student debt forgiveness. (By some estimates, student loan debt in the United States now tops $1.5 trillion.) The moral admonishment began immediately. “Elizabeth Warren’s plan to cancel student loan debt would be a slap in the face to all those who struggled to pay off their loans,” proclaimed the conservative Washington Examiner.
Twitter rushed in to roast the formulation. “Jonas Salk’s vaccine for the Polio was slap in the face to all those who already contracted it,” read the typical response.
This morning, however, a different sort of debt scolding appeared in the Examiner’ more prestigious neighbor, The Washington Post. Michelle Singletary, the paper’s personal finance columnist and a fixture on NPR, used her space to declare that “you don’t deserve a summer vacation if you’re a financial hot mess.” Bold, italics, underline: hers.
Saved up some cash for a cruise but still carrying a credit card balance? Singletary will not “give you a high-five.” Why not “have a picnic at a community lake” instead? She consults Christopher Elliott, a “travel expert,” on tips for a successful staycation, the corny neologism for pretending that a long weekend around the house is the same as really taking a holiday. “Think of all the time you’re saving by not having to go to the airport or spend hours or days sitting in a car,” Elliott enthuses. “There’s no ‘Are we there yet?’ because you’re already there.” Did you know your city—should you have the fortune to live in a city—probably has a tourist bureau? You could “search for free events, concerts, movies or other things you can do on the cheap.”
In other words, a little self-denial goes a long way. Surely your kids won’t notice the despair behind your rictus of ersatz happiness as you pretend that the same movie and McDonald’s as every other weekend is better than having to schlep twelve hours to the beach.
The personal finance advice racket, from Singletary to Suze Orman to the preachers of the so-called Prosperity Gospel, casts household finance as a morality play.
The personal finance advice racket, from Singletary to Suze Orman to the preachers of the so-called Prosperity Gospel, casts household finance as a morality play. Indebtedness is moral failure; austerity is godly restraint; savings is salvation; investment approaches holiness. It treats personal finance in the classic form of the redemption narrative. People and families are forever getting into debt because they worshipped the false idol of the jet ski and the giant TV. The finance guru sits them down with the family budget and cuts out lattes, expensive cell phones, and new clothes. They don’t go on trips and they switch to the cheaper grocery store. They consolidate their credit cards and make One Simple Monthly Payment. They claw their way back to decent monthly zero-balances, but they maintain their abstemious lives. They begin investing for retirement, god willing and if the Fed don’t rise. At 75, they can begin enjoying what life they have left.
There are certainly people who get into ruinous consumer debt, living beyond their means in a farrago of conspicuous consumption. It’s easy to sneer at spendthrifts who made their own mess buying luxury goods and now struggle beneath the weight of the monthly vig to whatever Visa loan-shark they signed up with. And that easy sneering is why when Michele Singletary, for example, tells you not to take a vacation unless you’ve already banked your retirement and paid for your kids’ tuition, she specifically tells you not to take the “summer trip to Walt Disney World with your children,” rather than the summer trip to the Smithsonian.
People do not just use debt to finance posh lifestyles. Debt finances home improvement, medical expenses, sudden loss of income. Last year my water heater blew up, flooding my basement and leaving me without hot water. Cleanup and replacement cost several thousand dollars, which I paid for with a credit card. I am fortunately in a comfortable enough financial position to have paid it off over just a couple of months. The interest was just part of what—if I were a business—I would call my cost of capital.
Now I don’t want to make an overly facile comparison here. There are differences between corporate and household debt, and there are differences between paying off an expense over a couple of months or a span of many years. You can write off mortgage loan interest (although the Trump tax bill made this harder to do), but that’s an exception. Unlike a corporation, you can’t use the majority of your interest expenses as a tax shield.
Many consumer lenders would rather sell your debt to third-party debt collectors for pennies on the dollar than offer favorable restructuring to borrowers.
And unless you are very wealthy, your creditors are unlikely to rush to restructure your loans when the cost of debt service—interest—grows unmanageable for your cash flows. Many consumer lenders would rather sell your debt to third-party debt collectors for pennies on the dollar than offer favorable restructuring to borrowers.
Debt simply works differently as apparent wealth scales up. The economist John Maynard Keynes famously cited “the old saying”: “Owe your banker £1000 and you are at his mercy; owe him £1 million and the position is reversed.” Corporate borrowing is a business arrangement, no inherently more or less moral or ethical than any other. It is a way to bridge funding shortfalls, raise money for capital investment, or—as mentioned—reduce tax burdens and increase profitability, or at least the appearance of profitability. Lending institutions have all sorts of Rube Goldberg mechanisms for treating future interest payments as realized revenues and leveraging them on the financial markets. They did (and are again doing) the same thing with personal debts and mortgages, bundling borrower debt obligations and selling them as investment vehicles.
It is only for you, the individual borrower, that there is a moral element at work. No one tells the CEO that he can’t build a new building until the company has paid off its loans. The idea is absurd.
Vacation, or loan principal? It is a false choice.
Vacation, or loan principal? It is a false choice. Leisure is an essential human activity—and in any case, forcing a dour austerity on your own children because mom and dad are still paying off the new roof, the orthodontist, and grandma’s funeral isn’t exactly morally exemplary. I take no issue with the idea that a family should prioritize its spending and consider its future needs, but casting these choices as a matter of deserving is cruel and silly.
There is nothing good or bad, in itself, about the mere fact of indebtedness. Debt is just access to capital, and in a society and economy in which wages—and therefore purchasing power from earned income—have stagnated for four decades, it is entirely reasonable to turn to other sources of capital. This is not necessarily desirable; wage stagnation despite ever-increasing productivity is a function of capital hoarding by the very rich people and financial institutions who control lending to begin with. But borrowing is older than money itself, and nothing about it is inherently wrong.
So my advice to you, if you are in debt, even if you are struggling with the costs of your debt, is go right ahead and put a bit of money aside so that you can take your kids to the shore, or into the city so they can see a play and visit a museum. Don’t have kids? Do it for yourself. It will make you happy, and it will be good for whatever local economy you decide to visit. And be generous to your waiters. They’re paying down their loans and trying to take a vacation too.