Archive for the ‘Social Commentary’ Category

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The Power of Conspicuous Consumption

September 8, 2009

The most obvious, and most common, way to think about spending money is that this is an individual decision. Within this broad framework individuals receive pay for the work they have done and then decide how much money should be spent on housing, on clothes, and on discretionary items. Some people spend carefully. Some spend less carefully. And some spend in ways that guarantee financial problems for themselves.

This simple and compact world view has been the basis of many editorials about thrift and forms the philosphical underpinning for many of the questions I get when I occasionally do media interviews on the subject. And this particular narrative does contain some truth.  No less than The Pope has repeatedly warned against the moral dangers of materialism.  And while thrift and materialism are not perfect opposites, my life experience suggests that those who spend their leisure hours emersed in activities other than shopping or plotting how to acquire their next posession are far more likely to handle their money responsibly — to spend and save in ways that are in line with their long-term economic well-being.  It doesn’t always work this way, but often it does.

But this view also has an important ommission that has practical implications for the way we think about spending decisions.  Consumption, and particularly conspicuous consumption, takes on added social meaning when an individual feels powerless relative to others in society.  A Hispanic woman, who speaks English with a Spanish accent, may believe that others who meet her for the first time will assume that she is poor and less educated. How might she compensate for this? She may choose to purchase a Louis Vuitton  handbag or drive a BMW even if she cannot really afford to do so. Expensive luxury brands tell the world “I am not as powerless as you think I am” and they appeal to some segments of the population who can least afford to purchase them.  Look in the mirror. Will people meeting you for the first time assume by your appearance and speech that you are likely to be reasonably successful at life? If the honest answer is “yes” it is easier for you to handle your money responsibly.

Is there evidence of this effect? Yes. A recently published paper,  Desire to Acquire: Powerlessness and Compensatory Consumption, provides some experimental evidence that feelings of powerlessness and the willingness to spend more money to compensate for that feeling are related. 

As we move forward with efforts to teach responsible spending and saving, to understand why some people are better at it than others, we need supplement the common moral narrative with the understanding that the psychological value of conspicuous consumption varies across individuals in accordance with their own self-perceptions of power and position. Lifting up those who feel powerless is more likely to change self-defeating spending behavior than recriminations that make them feel worse than they already do.

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American Optimists

November 21, 2008

My posting today is published by Forbes. Its title is “American Optimists” and it discusses why some of the successes our country has had in the past make it more difficult for us to save.

I thank Forbes for taking an interest in my writing.

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How the Government Discourages Savings

November 11, 2008

This post was picked up by Forbes and they have asked me to pull it from my own blog site, at least temporarily. You can follow this link to the published version at Forbes.com.

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They Let Him

November 5, 2008

Standing in line, waiting to cast a ballot, is the real 4th of July for me. It is the only time all year that I go out of my way to wait. My job is busy, but flexible. I could go vote at 10 AM or 2 PM, but instead get up and go early — exactly the time when there will be many other people there. I see friends, neighbors and new kids of old neighbors. There is free coffee, lots of signs and stickers, and a gym full of volunteers.  Everyone is happy. Voting before the election, which is easy to do in Charlottesville, has no appeal. Why vote in 2 minutes when you can spend 45 minutes celebrating the incredible reality of being an American?

And it is a reality that is easily lost in the somtimes bitter aftermath of an election. Each Summer I teach a group of senior executives from around the world. They come to Darden to learn new ways to think about their business. In addition to teaching, I eat dinner with them and talk to them in settings less formal than the classroom. I remember distinctly a conversation last summer with one participant, a senior executive of a major industrial company headquartered in the Middle East. When casual conversation turned to politics I offered the opinion that Barack Obama would win the election. He scoffed. “They won’t let him,” he replied. I pressed, “Who won’t let him?” He shrugged. Subsequent conversations with him laid bare the political reality that dominated his mental model of elections. He did not know who “they” were, only that “they” existed and always determined who was fit to be elected. And they would not like Barack Hussein Obama, and would not allow him to become President.

If you are happy this morning, rejoicing in the election of Mr. Obama, you do so with the knowledge that your vote changed history. That line outside your polling place mattered, and utimately is the only thing that matters when we chose our leaders. And, if you are upset this morning, distraught that a genuine American hero was sent home without the prize, remember that you can start today to work for a different political outcome. They cannot stop you. They don’t exist. They never made it to the shores of America.

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The Miami Mortgage Co.

November 3, 2008

Just to the left of a Skyline Chili poster, and just under a cardboard moose head, my office wall displays a simply-framed piece of paper. The header on the paper, typeset with a formal font and black ink, reads “The Miami Mortgage Co.” The handwritten contents of the note are reproduced below

The Miami Mortgage Co.

                                          Miamitown, Ohio  9/7  1921

This is to certify that Arthur Knose has purchased the John Fourger house at Harrison, Ohio for the sum of $1800.  Three hundred to be paid on delivery of the deed $1500 to be carried by the Company. $25 has been paid on this bill.

The Miami Savings and Loan Co.

Amos Pickens, Sec’y

Arthur Knose was my maternal grandfather, and this paper is part of the mortgage contract for the home he bought in the town where he raised his family and where I too spent my early years. The contract is simple, unambiguous in its terms, and the mortgage security it represented was no doubt held by The Miami Savings and Loan until the day my grandparents paid it in full.

There are new lessons to be learned from this old piece of paper.  The widespread practice of securitizing mortgage contracts has generated some important social benefits. It has allowed banks and credit unions to more easily manage risk and in so doing helped create a low mortgage rate environment. The American dream of home ownership has been helped in no small measure by securitization. But it has also had a potent downside. Securitization created anonomity between borrow and lender in the mortgage market. Amos, and his company, aren’t lending to Arthur anymore. Bank X orgininates the loan to Ron, packages it with other mortgages and sells it to who knows who in who knows where, who resells it to somebody living somewhere. Who’s on first?

This anonimity matters because it makes it nearly impossible to renegotiate the contract, even if it is clearly in everyone’s interest if that happens. No one wins when a home is foreclosed upon; not the bank, not the town in which the house is located, and certainly not the person from whom the house is taken. If my grandfather ran into hard times, he knew who held his mortgage and they knew him.  In all likelihood they could work out a deal. Everyone could be made better off through an understanding of the idiocyncracies of the particular situation and a little communication.  This ability to understand, and communicate effectively, on a one-on-one basis is lost in the current marketplace for mortgages.

The contract on my wall also has sub rosa moral quality to it. My grandfather would have known Amos. Arthur Knose would have rather been shot full of arrows than have not paid this debt. I can’t even imagine him uttering the word “brankruptcy,” let alone seeking shelter in it.  The social and moral contract would have been very real for him. Who would be hurt if you walked away from your mortgage? You don’t know and neither do I, but my grandfather knew. And this knowledge led to more stable financial relationships.

We should not return to the days when all lending institutions held all of their mortgages on their books. That would be both impractical and unwise. But, as the upcoming election fades in the rearview mirror and we begin to take a tough look at reforming many of these financial markets that have caused us so much distress of late, we should seeks to balance the good from the past with the realities of modern markets. One place to start would be to analyze the social welfare effects of a requirement that those financial institutions which originate mortgages hold some proportion of those mortgage assets on their books — not 100%, not 0%.  I don’t know the correct proportion to balance the advantages of securitization with the advantages of reduced anonomity. But it sounds like a solvable problem to me. It is also not the kind of regulation that would lead to the Potemkin battles between the left and the right. Much like Arthur Knose and Amos Pickens, there is a broad common ground here where we can all be made better off.

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Barack Obama for President

October 28, 2008

[The version of this blog post appearing on Forbes.com can be found here]

I’m a conservative. I’ve spent my money and my time in support of Republican candidates. I also support Barack Obama for president.

Modern conservatism is deeply rooted in ideas and political philosophy, in rational discourse and pragmatism. John Stuart Mill matters to conservatives. Friedrich Hayek and Milton Friedman matter as well. They matter not only because of their conclusions about the limited role of government power in a free society but because they were aggressive questioners, carefully dissecting problems to uncover potential solutions.

The American version of modern conservatism began as an intellectual revolt against the excesses of government emerging out of the New Deal era. The prevailing liberal view of the time was that government could engineer a more just and equitable society by elevating its role in the day-to-day activities of citizens. Proponents believed the benefits of collective decision making outweighed the increased restrictions on individuals’ liberties that such social engineering required.

The modern conservative movement, through rational discourse and appeals to empirical research in economics, pointed out that reducing these individual freedoms had negative consequences far in excess of the commonly held view. Yes, you could decrease poverty among low-wage workers by mandating a minimum wage, but you would also increase unemployment among the young and those of color. Yes, you could use the power of taxation to redistribute income, but this could dramatically shrink the wealth available to the entire society.

Conservatives used to ask the tough questions and did not accept simplistic solutions. That is why it is deeply disappointing to me, both personally and professionally, that John McCain has run a campaign that is so antithetical to rational discourse about public policy. His campaign has been about glib answers to complex problems. His choice for vice president was political malpractice.

He has catered to a wing of the Republican Party that believes everything will be all right–if only the government gets out of the way. No matter the problem, that is the only acceptable solution. To suggest that research about or thoughtful analysis of a situation might, in some cases, point in a different direction is apostasy.

For these Republicans, simply the act of doing policy analysis must mean that you are a liberal. They know that real Republicans, and real men, don’t need to think things through. I do not respect these people. They have dragged a proud movement that had much to offer our country down into the mud of ignorance.

And yet the reason I now support Obama is only partially due to McCain’s decision to embrace this base form of populism. It also stems from a growing respect for Obama’s thoughtfulness, which reveals itself when he’s faced with difficult questions. I do not agree with all elements of Obama’s tax policy, but I certainly get the impression he has thought about it a whole lot more than McCain.

In a world that will certainly throw many unexpected, unknowable problems at the next president, I don’t really care if I agree with all of their policy decisions. I want a smart, thoughtful person who can adapt his ideas to the facts on the ground. I don’t want someone who retreats to ideology because he cannot–or is not inclined to–think through the complexities of the problem at hand. Barack Obama is not afraid to talk about complicated solutions to complicated problems. He is a skilled critical thinker. John McCain, unfortunately, has not left the same impression on me.

I also believe that Obama will not end up being the orthodox liberal many have warned against or hoped for. He is not from Cambridge, Mass. He is from Illinois. His economic advisers, both formal and some informal, are from the University of Chicago, a school known for its free market philosophy; he also taught there.

The institutions with which you associate, after all, do affect your thinking. That life experience, combined with his inquisitive mind, will lead him out of the liberal underbrush when the House of Representatives inevitably proposes some hard-left legislation. I genuinely believe the people who are likely to be most disappointed with Obama are the far left wing of the Democratic Party.

I will not celebrate when Obama is elected president next Tuesday, but I will smile a little–and hope that my beliefs about him are correct.

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The Politics of 401(k)’s

October 14, 2008

The winds of political populism are never far from the surface of American politics. They can come from the right (Huckabee) or the left (Edwards). I believe they will increase in the coming years. My immediate concern is that, in a country that does little to create incentives to save, populist politicians could easily make the problem worse.

To the extent that Americans do save they often do so through employer-sponsored retirement plans, 401(k)’s and other tax shelters similar to these vehicles. These plans are a huge political target, and would be easy to exploit in order to foment class warfare and generate some extra revenue for the Treasury.  To the aspiring populist politician I offer the following language that you can use at your next campaign stop in Toledo.

My fellow Americans, our country is facing many problems. We desperately need to make strategic investments in energy, in education, in health care [short dramatic pause] to make sure the American worker remains the most competitive and productive in world. We owe it to our children to make sure we stand up to the tough decisions now so that they aren’t faced with insurmountable problems later.

My friends, some Americans have benefited more from the gifts of this country than others. Some are able to retire comfortably at an early age because they worked for large corporations and had access to generous retirement plans. We gave them a break when they put money in these plans, they did not pay taxes on it, and they are now living better off than many of us.  Fairness dictates that those who benefited from this loophole in the tax system pay their fair share.

Today I am proposing that anyone who has accumulated more than one million dollars in a 401(k) plan be subject to a one time 10% windfall retirement tax on that money.  They have benefited from the system. Now it is time for them to support the country that allowed them to accumulate this wealth.  To the 95% of Americans who don’t have this much money in these tax loophole accounts I will never propose additional taxes on your money. You will need that to secure your own retirement.

Not only do I think the kind of language I’ve written above is plausible in coming years, I think it is likely.

How do we avert this? Perhaps we cannot. But getting more people involved in tax-deferred savings plans would help. The more people you have involved, the more obvious it is to a broader cross-section of the electorate that any type of windfall tax on this money would be unfair. Expanding access to small businesses would move us in the right direction, as would the ability to divert tax refunds directly into tax-deferred savings accounts. Mr. Obama’s recent proposal (yesterday) to allow tax-penalty-free withdraws from these accounts would not help. Not only would it encourage people to draw down their retirement savings, it would make that money seem less like retirement savings and more like ordinary income. To the extent that the public views it as ordinary income it makes it far psychologically easier to believe taxing these “rich” people is fair. Even the threat of this kind of populist-inspired taxation is a serious disincentive to savings.

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