The red-blue divide in personal finance
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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.