How to Put the Brakes on Consumers' Debt
I've been asked my opinion of this recent article on Dave Ramsey by Helaine Olen. As longtime readers probably know, I went on the Dave Ramsey plan for an Atlantic article in 2009. Since then, my husband and I have attacked our debt, with the exception of small student loans that for tedious reasons couldn't be paid off early. Our cars are debt-free, we're paying down our house early, and we're currently doing a fairly major home project for cash. Because Olen doesn't like Ramsey, and I clearly do, this naturally led a few folks to ask me what I thought.
I should start by pointing out that I've met (and like) Olen. But we differ greatly in our perspectives on the personal-finance industry; she views personal-finance advice as a mostly useless distraction from macroeconomic trends such as stagnant real wages and the disappearance of defined-benefit pensions. I view solid personal finance as more vital than ever in an era of economic insecurity.
My basic opinion of the piece is that this is a conflict between what Walter Russell Mead calls the blue social model and the red-state world where Ramsey lives and finds most of his listeners. We can quibble about this or that -- is Ramsey's estimate of stock market returns too rosy? Should he be more open to bankruptcy? But what it boils down to is that Olen thinks that rising economic insecurity calls for a massive expansion of the blue social model, while Ramsey thinks it calls for getting more entrepreneurial and adjusting your lifestyle to meet reduced income expectations. How well you think this works is probably closely connected to where you live.
Nowhere is this clearer than on the question of education. Early on in the piece, Olen recounts an episode when a listener asks about stopping his debt-repayment plan in order to send his kid to a $42,000-a-year college. Olen seems to find this odd; after all, the cost of college has risen dramatically over the last 25 years. This is true, but I'm not sure why it's relevant: $42,000 a year is not even the average cost of tuition, much less the minimum decent standard you can get away with. What it will not do is send you to a fancy Northeastern private college. Ramsey's advice is absolutely correct: A middle-age couple with heavy debt need to get themselves stable, not shell out more than $150,000 in college tuition.
But for blue-state professionals, that's something close to suggesting that they should abandon their kids in the street (or have them take out $150,000 in student loans, which is not much better). The social norm is that you send your kid to the best college he or she can get into, by any means necessary. In a red state, if your kids are planning to stay in your area, then it's probably not that much of a sacrifice to send them to the local state school -- in Biloxi, a degree from Ole Miss is probably more valuable than a degree from Harvard. But especially in the Northeast, mobility is the default assumption; you want your kids to go to the school that will give them the best array of jobs and places to live, not one that will position them to come back and take their place in your community. This may mean considerable personal sacrifice -- even when I was going through Penn, 20 years' worth of tuition inflation ago, I knew a surprising number of kids whose educations were being financed by mortgages. If you start off with this norm, then what has happened to tuition over the last 25 years is something like watching the price of a basic food budget octuple in real terms, leaving millions of families mired deeply in debt just to pay for some hamburger and rice. If that had happened to the price of food, even the staunchest Republican might be looking for some relief beyond better budgeting skills.
Educational expenses loom very large in Olen's piece; she emphasizes it over and over, along with medical debt.* And in blue states, that is exactly how a lot of parents feel.
Most of the parents I know in New York, Washington, Boston, San Francisco and Los Angeles feel caught in a terrible bind. Competition for slots in private schools, or good school districts, is incredibly fierce. As the bidding wars escalate, some parents start doing things that are . . . well, unwise. They borrow up to the tippy-top dollar that a bank will let them have. And then maybe they stop the 401(k) contributions, or ratchet them back to the minimum. Parents who don't want to do this feel that it is grossly unfair that they should have to choose between financial responsibility and their children. But in the blue megalopolises, where land is scarce and the 1 percent are over-represented, the difference between a house in an excellent district and one with mediocre schools is measured in the hundreds of thousands of dollars. Unless you are well into the six figures of family income, you have to make some very hard choices.
If you're in the blue states, it's easy to see why you think that help can only come from the government. Blue-state professionals are caught in the brutal math of a collective action problem. If the government forced everyone to save 15 percent of their income -- or taxed away their income and provided a generous pension, or made employers contribute a generous amount to a conservatively invested guaranteed pension and maybe some disability insurance and a generous unemployment cushion in case they lose their job -- then those people would still be caught in an all-out bidding war with every other desperate, hypereducated parent in the metropolitan area. But at least the government would have removed the temptation to shortchange their own safety net in order to give their children a shot at the good life.
But this really isn't the problem in most of the country -- the parts where most of Ramsey's listeners reside. In most places, one of two things is true: It is reasonable for someone with a pretty basic income to get their way into a good school district if they're frugal and disciplined, or there is no "better" school district to get yourself into. In my mother's hometown, 45 minutes from Rochester, New York, there's a high school. That's where your kids are going. Buy a house wherever you want, because as long as you live in Newark, New York, it doesn't matter.
The blue-state concerns often get mapped onto red-state situations that really aren't the same. For example:
Some people I've met have gotten out of major debt and stayed out, but often they have some kind of leg up: an inheritance, or six-figure household income. Many remain in debt, just less of it than before. Others claw their way out and then find themselves in arrears again, like Tamara, a Florida mom of five children under the age of 14 I chatted with earlier this year. Tamara, who asked that I not use her last name, said it's the cost of fairly basic extracurricular activities for her kids that's driven her back into the red. "It's not that we are buying them designer clothes," she says. "It's that we want them to do sports."
To be sure, I speak as a blue stater who has no children. But I don't think it's crazy to say that it's one thing to make financial sacrifices to educate your children, and quite another to go into debt so that they can play Little League. Which is exactly what Ramsey tells his listeners: He himself refused to let his son play on an expensive travel hockey team, even though he could certainly have afforded it.
Of course, people everywhere worry about the cost of getting their children educated and giving them a good start. But this cost does not loom nearly so large in the budgets of families outside of a handful of major metropolitan areas. For much of the country, massive auto loans are a bigger problem than student-loan debt; indeed, the amount of student-loan debt only passed the amount of auto debt in 2010.
Even this seems likely to be an artifact of the recession, when private-loan standards tightened and a lot of people headed back to school to wait out the recession.
To a blue-state professional, the amount of income that others divert into automobiles can be shocking. Don't get me wrong: I drive a perfectly nice car. But it's seven years old and has 18,000 miles on it, and I'm hoping to get another 10 or 15 years out of it. You won't catch me trading it in for a new car with a $600-a-month payment. For a lot of blue staters, especially journalists and academics, their peer group actually encourages spending very little on cars; it would be faintly embarrassing to turn up to a professional event in a Porsche. A Mini or a Prius is about the most you can comfortably spend without feeling the need to explain yourself to your colleagues, and only because they're so fuel-efficient. This cultural norm is probably strategic, though not, at this point, consciously so: It frees you to spend another $100,000 on a beat-up house in a slightly better school district.
On the other hand, there's a reason my car has 18,000 miles on it, which is that I almost never drive it more than a few miles at a stretch. In wide-open red-state spaces, a car is often more of a second home. And just as you hear blue staters talking themselves into gutting the 401(k) to get their kids a better shot at Harvard, you hear red-state drivers talking themselves into more car than their budget can justify. "We really need something safe," says Mom, as if a three-year-old minivan were likely to spontaneously combust on the way to soccer practice. What she really wants is a nice new car with a lot of features. And you can understand why, when she may spend four or five hours a day shuttling around in the thing.
This is the actual behavior that Ramsey is trying to stop: the consumption cascades that push people into living on the brink of economic insecurity, always one job loss or illness away from tipping over the edge. And his method works, by the simple expedient of getting you to live within your means. If Mom has to save up the money for the shiny new car before she buys it, she may quickly decide that the price, in forgone dinners out or clothes for the kids, isn't worth it, and she'd much rather have a solid used car at half the price.
I think Olen is right that it works less well if you are an upper-middle-class professional caught up in the blue-state house-price lottery -- as I noted in my original article, there's a reason that Ramsey's core audience is evangelicals: His method is easier to follow if you believe in something even more sublime than a Harvard education. I also think that she's right that it won't really work for people with little to no income. And his advice definitely won't work if, like the woman with five kids in sports leagues, you ignore it. But this seems like an excessively stringent test, like saying that the Patient Protection and Affordable Care Act will be a failure unless it cures every cancer patient and Alzheimer's patient in the country.
Most people will in fact be much better off if they follow Ramsey's advice to get out of debt, live within their means, and save for retirement and emergencies. Will they all get fantastically rich? No, though they will be more prosperous than their neighbors. Will they be better off than they might be if our political system were more like, say, Denmark's? Some undoubtedly would, and others undoubtedly won't, and how many there would be of each is a fascinating and unresolvable question. But we don't live in Denmark, and we aren't going there anytime soon. Dave Ramsey delivers some pretty solid advice for the here and now.
* At one point, she states that "According to work published by a group of professors at Harvard University, including now-Senator Elizabeth Warren, bills related to medical care have long been the primary driver of bankruptcies," which is not true. Even if you hold those studies in higher regard than I do, they do not say that medical bills are the primary driver of bankruptcy; they say that illness is a contributing factor in the majority of bankruptcies, which is a very different statement, because major illness usually involves income loss. To be sure, some of the study's authors have been sort of strenuously implying that medical bills are the problem to the popular press. But if you read the studies, they do not really support such a statement.
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