Numberscruncher: Angels, Demons, and Debt

Tuesday, May 19th, 2009

Numberscruncher: Angels, Demons, and Debt

by Ann Logue

200548456-003 In the summer of 1998, Harper’s Magazine published one of its most talked-about stories, Vince Passaro’s narrative of how his family accumulated $63,000 in credit card debt. He and his wife had academic jobs bringing in a combined $100,000 per year as well as a rent-controlled apartment in New York City, but they also had three children in private school. Passaro attracted opprobrium back then, and the story remains one of the key works of the personal finance confessional genre.

Until Sunday, that is. Edmund Andrews, who covers economics for the New York Times, wrote a story for the magazine about how he dug more than $500,000 into debt because he wanted to buy a nice house for his new blended family, even though much of his $120,000 annual salary was claimed by his ex-wife for alimony and child support.Â

I’m the kind of person who clips coupons and rides the Megabus. While printing presses all over this great land were rolling out Edmund Andrews’s tale of woe, I was at the grocery store loading my cart with $0.88 packs of cream cheese and $2.00 boxes of raisin bran. Then I swung past the Junior League’s annual second-hand clothing sale, where I bought some shirts for my husband and me, just $3.00 each, some still with tags on them. I want to smack Passaro and Andrews around, then pack them into my nine-year old-car and show them what a thrift shop looks like. I want to teach them to make their own pizza dough and mend socks and use tie-dying to turn stained school uniform shirts into fun playclothes.

I have a teeny bit of sympathy for people like Passaro and Andrews, because I’m not a pure tightwad. I have a fancy watch, some nice jewelry, and a much-stamped passport. My husband and I have a good combined income; our thrift makes it go further, but it’s more a game than a matter of survival. It would be hard to be 48 years old, making $120,000 per year at a prestige job and living in a little rental apartment. It would be hard to work in academia and send your children to sub-standard schools. But neither is impossible, and both can be made to work.

Franco Modigliani won the Nobel Prize for his work on how savings affect financial markets. He said that people try to keep a set level of consumption over their lifetimes. When people start out, they spend far more money than they make: children have no income and live off their parents; people often borrow money to pay for college or start a business; and new workers need apartments, office clothes, and cars. Eventually, though, people start to make enough money that they make more money than they can spend, so they pay off their accumulated debts and save for the future. Finally, people retire and again spend more than they make, but they spend from their savings. If there is anything left over, it is given to the next generation.

Modigliani developed his life-cycle theory in 1954. Thanks in part of the rising costs of education and an expanded consumer market, many people take a longer time paying off debt than saving for retirement. Life expectancies are so much longer now than in 1954 that it takes a lot more money to save for retirement, and 2008’s stock market debacle didn’t help.

One solution for getting out of debt and accumulating savings could be a longer working career, which is great for people who have jobs that they love, not so good for people who have physically demanding or dreadfully dull jobs. Another, of course, would be to make thrift fashionable. It’s effective, and it can be fun if planned carefully. (What, like packing a picnic and going to see a free movie in the park isn’t fun? Of course it is!) Thrift is contagious: if you have your friends over for a potluck dinner instead of meeting them at a restaurant, everyone saves money. A shopping excursion with a friend can involve a trip to Nordstrom and a manicure at a fancy salon, or it can mean going to the thrift shop and getting the manicure at a utilitarian walk-up where no one speaks English. And, as much as I want people to buy books (seeing as I am a published author and all) , libraries are huge buyers. I won’t complain if you check mine out there.

I expect that Andrews will be skewered in letters to the editor and on discussion boards. There’s nothing good about borrowing far more money than you can afford to repay, even if someone offers it to you. But if we don’t talk about the effects of too much debt and how to avoid it, others will make the same mistakes in the future. I wonder if Andrews had read Passaro’s article back in 1998, or ever watched an episode of The Sopranos.

Tags: Annie Logue, Credit Cards, debt, economy, Edmund Andrews, Franco Modigliani, life-cycle savings, savings, thrift, VInce Passaro

This entry was posted on Tuesday, May 19th, 2009 at 1:30 pm and is filed under Current Events, Numberscruncher. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

steve

"There’s nothing good about borrowing far more money than you can afford to repay"

Yet our government continues to do so, at an accelerated pace. We're going increasingly fast down a very dangerous road. The previous administration started the downfall, and the current just keeps accelerating it.

Annie Logue

As Paul Harvey would say, and now, the rest of the story:

http://meganmcardle.theatlantic.com/archives/20...

Apparently, Andrews' new wife has a history of bankruptcy. I no longer have even a teeny bit of sympathy for him.

Ted

I was having a discussion last night with my wife about a Planet Money podcast we both heard last week about the credit card companies (http://tinyurl.com/qpjvul) and the way in which they create profiles of users in order to forecast how likely they are going to default on credit card debt. The podcast is pretty amusing, but we started talking about what life would be like if the limits on credit cards were capped at say $1000 to $2500. Very quickly, people would get on board with Ann's "Frugal Train," but it would also highlight how much we use credit to bridge the gap between low salaries and the imperatives of our consumer economy to spend, spend, spend. The effect of severely limiting credit would certainly put the brakes on the economy as the velocity of money slowed, but perhaps it would also push us to innovate in such a way that our consumption of overpriced "stuff" isn't the prime mover of the economy.

Vince Passaro

Dear Ms. Logue:

Just tonight, up late and restless, I have caught up with this posting on your blog. Like many, many readers, you did not, as far as I can tell, pay attention to what I actually wrote in my essay in Harper's all those years ago. First of all, I was not complaining: I absolutely took responsibility ass author of my situation, just as I was author of the essay, and I knew exactly what I was doing. As it happens, I am an expert shopper at thrift shops and rummages, can size a piece of clothing in seconds, and indeed was married in a suit that cost $3 and shoes that cost $1. As the article made clear, I did not get into debt buying shit. I got into debt living in a world where relatively simple things, or things once thought quite attainable, such as modest real estate and a decent education, in the city of my parents and the place I will forever call my home, had become unaffordable to all but the richest people. Basic middle class life: good schools, a car, an annual vacation, had been put out of reach of many dual career couples not just in NYC but all over the US. The whole economy, in fact, seemed to be running on credit: credit card solicitations numbered in the scores per year for every man woman and child in the nation. I predicted that one day everyone would be in debt up to their necks and since, indeed, when push comes to shove, one does not pay if one doesn't have the money, the whole sand castle would be washed out with the tide.

Have you read the papers lately?

Meanwhile, the tone of your post suggests that like many Americans you cannot separate money and thrift from the idea of personal morality. That people who are foolhardy with money are morally wanting, that they have, indeed, sinned. Your approach is that of rectitude preaching to the woefully fallen ("It would be hard to be 48 years old, making $120,000 per year [that was $100K by the way, not $120] at a prestige job and living in a little rental apartment. It would be hard to work in academia and send your children to sub-standard schools. But neither is impossible, and both can be made to work." Yeah? "sub-standard schools" cannot, in fact, be made to work, and this nation has fallen from the top to the bottom of the industrialized world in educational achievement over a mere three decades).

This whole approach to money goes with much of the American sense of christianity I'm afraid, inherited by many who probably no longer subscribe to other such utterly puritanical notions. As Jesus himself pointed out, repeatedly, money has nothing to do with morality or enlightenment, and in fact the best way to achieve either of those is to have no money at all. Perhaps we'll get there yet.