Avoid Consumerism by Paying Cash and Blame it on the Credit Pushers
We have become a nation of spenders and debtors rather than a nation of savers. One recent study found that 20 percent of Americans had no net worth beyond consumer goods. If you ignored real estate, the number jumped to 55 percent. Basically, most Americans have nothing other than the home they live in and the stuff they put in it.
Sure, all of us, including Ken Schoenfeld, have free will. We’re not being forced to spend and consume rather than scrimp and save. However, for more than fifty years we have been encouraged to consume rather than save, not just by those who are selling us things but by our national leaders.
Prior to the 1930s the dominant capitalist economic theory was that espoused by Adam Smith. In a nutshell (the only way anyone can understand economic theory), Smith preached that it was savings that led a country into prosperity. In fact, he believed the instinct to save was rooted in human nature. But Smith’s “thrift philosophy” was called into question by the Great Depression.
FDR and his New Dealers, desperate to get the country going again, adopted a different theory, one associated with John Maynard Keynes. He believed that it was consumption (spending), not thrift (savings), that led a country to prosperity. This fit in well with the New Dealers’ understandable desire to do something, anything, to get the country back on its feet. Government began spending rather than saving.
While the American response to the Great Depression was to shift economic theories within a democratic framework, the German, Italian, and Japanese response was to turn toward fascism. Among its many other monumental impacts on history, World War II gave the U.S. government something to spend its money on.
The American economy boomed both during and after World War II. Even though savings were down, the economy was growing as never before. John Maynard Keynes had displaced Adam Smith.
Savings was no longer considered human nature. Instead a new “life cycle theory” of savings, developed by Franco Modigliani, was adopted. It said that people saved when they had surplus money and a specific reason to save. In other words, when they’d already bought the house, the car, and the dishwasher; had put the kids through college; and had gone to Europe; then in middle age they’d start saving for their own retirement. Until then they should just spend and borrow and spend some more.
As you can imagine, it didn’t take much arm-twisting to get people behind these new theories. Consumerism was not only fun but patriotic. Advertising became an industry. Phrases like conspicuous consumption and planned obsolescence entered the vocabulary. We fell into an apparently endless cycle of borrowing and buying, linking our national and individual self-images to our level of luxury.
At first it was the families with televisions that had status. Then it was a new car. Then there were all those new kitchen appliances. Then color televisions, followed by stereo systems, VCRs, answering machines, personal computers, cellular phones…and whatever comes next. This all- consuming frenzy reached its apex during the 1980s, when spending more than you earned was enshrined as both a national policy (Reaganomics) and a lifestyle (yuppies).
Incredibly powerful advertising—of both products and policy—promoted the joys of consumption. Consumer and commercial credit was readily available for everyone either through credit cards that just appeared in your mailbox or junk bonds. The national psyche was obsessed with self- indulgence and immediate gratification. It all actually seemed to make sense. It was part and parcel of the American way.
Real estate was soaring in value. By borrowing as much as possible and buying a home as soon as possible, you could jump on the bandwagon. Buy a starter home or condo and hold it three years. Then sell it for a profit and buy another, more expansive home. Hold that until the kids were out of the house, then sell it and buy a luxury apartment in Aspen overlooking the ski slopes.
Inflation was high, so credit card buying looked like a brilliant idea. After all, incomes were rising, weren’t they? Why wait until you could afford to pay cash for that trip to Ireland? By that time you could be too old to hike up Croagh Patrick. Charge it instead. If you were brought up using a food processor rather than a grater, and if the only time you ever saw a service van was when it arrived with a new stove, it seemed only right to buy appliances right away—even if you had to charge them. And when new, more sophisticated or stylish appliances (or cars, or furniture, or clothes, or anything) came along, you bought them on credit, even if you weren’t even finished paying for the one you just replaced.
The problem is you were living beyond your means. We all were, both individually and as a nation. But that only became clear when we had, without recognizing it, crossed over into the new economic world.
Suddenly we are in a world where real estate values are flat, not rising like a rocket; a world where inflation is low, not high; a world where incomes are shrinking or disappearing altogether, not climbing. In this world the “life cycle theory” of savings no longer works. Today you’re putting your kids through college at an age when your parents were saving for retirement. Your income is at its most precarious at an age when your parents’ income was its highest and most secure. And you can’t rely on your home to bail you out, as they could. When it was time for them to sell, there were only a few houses out there, but millions of baby boomers in the market to buy. When it comes time for you to sell there will be millions of boomer-owned houses on the market and only that handful of Gen Xers looking to buy.
What’s the solution? Simple. Pay cash.