Opinion

Felix Salmon

The red-blue divide in personal finance

By Felix Salmon
October 30, 2013

Helaine Olen has a fantastic piece on Dave Ramsey in Pacific Standard, giving a very clear view of what he does and where his program falls short. I recently wrote about Ramsey’s investment advice for Money — the blog post is here — and the Money headline was “Save like Dave… Just don’t invest like him”. So there’s a disconnect between my view of Ramsey and Olen’s: while I think his saving and debt-reduction advice is sensible and valuable, she thinks it falls short in many key ways.

Olen’s main point is undeniably true: that when enormous numbers of Americans find themselves in financial difficulties, the problem is probably more systemic than it is one of a failure of self-discipline. Ramsey used to be a real estate speculator, and he thinks of debt and leverage as being pretty much the same thing — something to be avoided. Ramsey ended up moving into a much less capital-intensive industry, and made his fortune in media, rather than in property; he’s had much more success without debt than he had with it. But the people who pay hundreds of dollars for Ramsey’s advice aren’t using debt as leverage: they just don’t have enough money to make ends meet, and therefore need to borrow the difference. Here’s Olen:

Adjusted for inflation, median household income in America fell by seven percent between 1999 and 2010. At the same time, the costs of child rearing, health care, education, and housing continued their decades-long climb. In 2012 alone, the average family’s medical bills went up by 7.2 percent. And the deflated housing bubble hasn’t stop rents from climbing…

Economic volatility is an overwhelming fact for millions of Americans; willpower is finite; and gazelle intensity takes its toll. “Ramsey never talks about the cost of [his strategies],” Barrett-Fox continues. “He does not have good advice for people who have low incomes and are against the wall. If they lose a job, he doesn’t really have anything for those folks.”

Olen says that the self-help industry “leads people to believe that they are to blame for failures that are more truthfully the result of political, economic, and social trends”, and that “larger forces overwhelm” the best efforts of many people who try to take responsibility for their own finances.

Olen is right about all of this, but I’m more sympathetic to Ramsey than she is. For one thing, depressing stories about stagnating wages and the pincered lower-middle class, while important from a policy perspective, don’t actually do anything for the individuals being pinched. And if you don’t have any means of paying back the money that you’re borrowing, then it’s not a good idea to borrow money. Your reasons for going into debt might be perfectly understandable, but even Elizabeth Warren wouldn’t recommend you actually do so. And once you’re in debt, you need some kind of plan to get out of it.

That plan might be bankruptcy — but most of the time, it won’t be. Olen is quite right that bankruptcy should be on the menu of options for everybody struggling with a large debt load, and that Ramsey’s absolutism on the subject — he is opposed in all circumstances — is unhelpful.

But here’s the thing: Ramsey is a devout Christian, talking to an extremely conservative (and Conservative) audience. Most self-help operations, Dave Ramsey’s very much included, work by reinforcing the priors of their audience. Ramsey’s message, based in the Bible and self-reliance, is a familiar one, especially in the red states. Ramsey’s followers are attuned to his message precisely because, on some level, he’s telling them something they already know.

That explains Ramsey’s stance on bankruptcy: he doesn’t want to be counterintuitive in any way. Financial sophisticates understand the utility of bankruptcy — but Ramsey, pretty much by definition, is not addressing financial sophisticates. Successful personal-finance gurus tend to be strict authority figures, and they’re not going to say anything which might be considered to be enabling, or to suggest that debt can ever be simply written off at a low cost. Ramsey’s stern statement that bankruptcy is not an option is easy to understand, and helps to keep his followers on his well-trodden path out of debt. Gurus don’t like giving options: they like hard-and-fast rules. And if you’re following Ramsey’s rules, you’re not going to file for bankruptcy.

In many ways, Ramsey is the counter-Olen. While Olen, writing for a lefty west-coast magazine, blames society for the woes of the poor and indebted, Ramsey, addressing a much more conservative audience, preaches the do-it-yourself gospel. In a way, it’s impressive that they agree as much as they do. Olen, for instance, does concede that paying off your smallest debt balances first does seem to work well in practice, even if it doesn’t necessarily make sense on a mathematical level. (Again, Ramsey is here pushing his followers in the direction which feels most natural to them, to the benefit of them both.)

And if America is going to become a more financially healthy country, it is going to have to address its money problems on both the individual and the policy level. The Pew Charitable Trusts have just released a huge report on payday lending, with some very sensible ideas about how it should be regulated nationwide. That’s a great policy recommendation, and I daresay Dave Ramsey might even approve of it. But at the same time, the discipline of the Ramsey method really does work on an individual level. So let’s not snipe too much at his gospel. His investment advice is bad, and his saving-and-paying-down-debt advice can be simplistic. But on net, Ramsey is improving the plight of millions of America’s households. Which has got to be a good thing.

Comments
6 comments so far | RSS Comments RSS

We could borrow from the Old Testament and declare a Jubilee. That resets all debts and property transfers. The Old Testament is full of this kind of stuff. There are also more frequent resets. Under Old Testament law, debt, slavery and property transfers could be enforced for more than seven years.

Posted by Kaleberg | Report as abusive
 

Very good article that you wrote for Money, Felix.

Posted by realist50 | Report as abusive
 

“Adjusted for inflation, median household income in America fell by seven percent between 1999 and 2010. At the same time, the costs of child rearing, health care, education, and housing continued their decades-long climb. In 2012 alone, the average family’s medical bills went up by 7.2 percent. And the deflated housing bubble hasn’t stop rents from climbing…”

And here Olen betrays her commitment to liberal axioms just as silly as those Ramsey holds to.

A) You don’t get to talk about both inflation adjusted income and “rising costs”…particularly when the costs of goods whose costs are rising are not the same as they were in the past.
B) Regardless…college education, homes, medical care…all those things are vastly better than they were in 1990. Yes if you keep demanding better and better versions of stuff it will cost more.
C) Inflation adjusted median income is a TERRIBLE measure of people’s actual income. The inflation adjustments do an incredibly poor job of measuring increases in incomes because they are too tied to dollars and not tied enough to what a dollar amount is actually trade-able for. Inflation adjusted median income would have you believe that a 1990 portable walkman has roughly the same utility as today’s camera/phone/videogame-console/internet portal/supercomputer. Which is frankly absurd. Outside of consumer electronics the differences are not quite as stark, but most things people buy are vastly better than they were in 1990. IN many cases they are also cheaper, but then people just buy upscale versions, and the inflation adjustment treats that upscale version as though it is the same thing.

The truth is actual incomes are up HUGELY since 1990 by any sane measure, and claiming they are stagnant (which is practically part of the national catechism is absurd and insulting to anyone who remembers what 1990 was like).

Stop being slaves to measures that are easily calculated. They only tell you part of the story.

Posted by QCIC | Report as abusive
 

D) I forgot to point out the stupidity of “the deflated housing bubble hasn’t stop rents from climbing”. Ummm that is exactly what you would expect after a housing bubble. Why do you find it surprising? Either stupidity, or you don;’t really find it surprising but just love lining up rhetorical points regardless of merit.

Posted by QCIC | Report as abusive
 

QCIC, your point C: there are hedonic adjustments made to take into account the differences in utility gained from camera/phone/videogame-console/internet portal/supercomputer vs. walkman when estimating inflation. So comparing adjusted median incomes from different periods works fine.

I’d also take issue with the value of college education being better now than the 1990′s, or course that’s simply an opinion.

Posted by KevyD | Report as abusive
 

Ramsey unapologetically argues that the poor and the indebted are “weak-willed, self-indulgent, and stupid”. He claims that income inequality is a myth – even though the proof is in the proverbial pudding, backed by significant research. Should we not forget that it was that data, when made public, that spawned the Occupy movement? Here is first-hand evidence that corporations, CEOs and the 1% need to respond to the public. Though the Occupy movements failed to affect change (because of corruption so deep, and assumptions about the 99% so egregious) it made one message clear: people are watching. And, with the use of technology, their views, actions and thoughts go viral. It also made clear that instead of listening, the wealthy were more intent on arguing about their right to wealth instead of how we could bridge the ever-expanding gap.

I’m not suggesting that there be a lack of accountability. Individuals need to practice self-restraint and frugality in their individual lives. But, as long as big money preys on small money, with empty promises of a changing economic landscape that will make their debt manageable after a time, small money will continue to accumulate, and the economic inequality will continue to grow, creating an arcane class system we pity in other countries. Bruce Piasecki says in his book Doing More with Less, “The physical push for doing more with less is born from corporate discipline and personal choice, more than from any kind of government policy.” The public will learn from corporations, but the corporations need to respond to the public, not fight against it. Once there is some harmony there, policies will change.

Anyone who has ever read Doing More With Less would understand that economic inequality and the wealth distribution issue is systemic, and is not – as Ramsey suggests – the result of one’s personality traits. What Piasecki suggests, is Social Response Capitalism. He argues that the poor in fact, do so much with so little. The answer is not simply “self-control of our wallets.” It is about being competitively and creatively frugal, living with less, and redefining the economic infrastructure by responding to societal issues, opinion and financial constraints. Blaming individuals for this mess is ignorant. To solve the problems that prevent financial health you need a bigger view and to employ Piasecki’s “art of competitive frugality”. http://www.doingmorewithlessbook.com
Listen to it here: http://www.amazon.com/Doing-More-Less-Th e-Wealth/dp/B00AETP4TY

Posted by anon1000 | Report as abusive
 

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