Barbara Whitehead has written a wonderful essay in The Public Interest called A Nation in Debt which depicts the creation of a new American class system with only two classes: The Investor Class and The Lottery Class.
The investor class, with ample access to institutions that foster wealth-building discipline, is served by a bevy of insurance agents, tax lawyers, stockbrokers, tax accountants, deferred compensation experts and investment bankers. They are likely to work in organizations with 401(k) plans, profit-sharing, Keogh plans, deferred income compensation and retirement savings programs. The lottery class, on the other hand, works in jobs that offer few pro-thrift benefits. As of 2004, seventy million of America’s 153 million wage earners worked for employers without a retirement plan. Rather than being courted by investment firms, they are targets of modern-day, made-to-look-respectable loan sharks. Tens of millions of working Americans who might join the class of savers and investors under more favorable circumstances are being recruited into a burgeoning population of debtors and bettors.
The lottery class is the target of three major instutions: Credit card lenders, Payday lenders and State Lotteries. A country created on the idea of thrift, enshrined in the sayings of Benjamin Franklin, has now created a society of anti-thrift, in which 70 million wage earners are encouraged to go deep into debt, pay usurious interest rates for short term loans and bet their future on a state lottery ticket. As you can see by the chart at the top, lottery ticket purchases skew totally towards the lowest income cohort. This lottery haul is close to $60 billion a year. Payday lenders service about 15 million Americans a month at an annual interest rate of between 300-400 percent. And then there are the credit card companies, who were just doing their part to “democratize credit.”
This democratization of credit, however, led to the widespread propagation of debt. Between 1989 and 2001, credit card debt almost tripled, from $238 billion to $692 billion. By fall of 2007, the amount of revolving consumer credit had reached $937.5 billion, a 7 percent increase over the previous year.
These companies in the sub-prime credit market collected $17.1 billion in late fees last year. Clearly, the current credit crisis is demonstrating this is unsustainable. Back in January, I wrote about the problem of America’s negative savings rate and remarked about John Kenneth Galbraith’s concern about the consumption culture we were creating.
Galbraith’s assertion that the perfection of modern advertising in creating desire for products we didn’t know we needed puts the modern American member of the middle class in the position of the gerbil on the tread wheel: running faster and faster, but making no progress in relation to his neighbors.
Barbara Whitehead has some good ideas for reform in her article, including usury laws and lottery reform. But until we address our current addiction to spending more than we can afford–driven by relentless brilliant advertising–we aren’t going to get to the root of the problem. My first suggestion is to make only 50% of a company’s advertising and marketing expenses deductible for tax purposes, in the same way that only 50% of business entertainment expenses are deductible.
8 responses so far ↓
Jonathan Putnam // June 10, 2008 at 10:18 am |
I’ve always liked the idea of a tax on advertising. Something low, like one percent, would still provide a pot of money that could be used to help public television and other citizen media outlets. A portion of the proceeds could also be used for consumer counseling.
Sofia Kim // June 10, 2008 at 10:44 am |
Credit card debt is on its all time high with today’s economy. Hopefully people can obtain the help they need to get out of debt. Thanks for the article!
Morgan Warstler // June 10, 2008 at 11:49 am |
Well in one fell swoop you just killed the magazine and newspaper publishing business, the Internet, and television.
Any other big ideas before lunch?
Note: it was when the States got into the lottery business that they decided to go after the sweepstakes business – which drove nails into the coffins of the magazines because they all used Publisher’s Clearinghouse to gain new subs.
Patrick Freeman // June 10, 2008 at 12:08 pm |
Beyond simple and not-so simple economics, there is something utterly immoral about states sponsoring lotteries, while knowing full well that those most enticed are those least able to afford the costs. I find it utterly despicable that any state would sponsor lotteries or that states, even Baptist-ridden states like Mississippi, would tolerate casino gambling, all in the name of avoiding having their residents pay for what they get. I’m no huge fan of taxes (unless they’re assessed against Morgan) but I am willing to pay for the services rendered by my state.
Even the reasons states sponsor lotteries are suspect and usually not based on reality. My own state, New Mexico, sold the idea of lotteries on providing college scholarships to deserving young New Mexicans. Of course, administrative costs, and competition from Indian-run casinos mean that the numbers of scholarships are far smaller than originally promised.
I enjoy a good poker game with friends as much as anyone, but I have serious reservations about the economic and moral underpinnings of state-run gambling.
Dan // June 10, 2008 at 12:55 pm |
Our state is now going meta-lottery; our legislators want to lease the state lottery to a private contractor (that can only end well) in exchange for a fat one-time payoff which our current crop of politicians can use to spread around a lot of pork (probably mostly highway projects) in their home districts to keep themselves in office.
The future will be screwed but they’ll be retired by then and working as lobbyists. For the highway construction industry.
I wonder what the next crop of politicians will dream up to ram terrible shortsighted revenue ideas even further up the state’s alimentary canal.
Gentrification Indicators // June 10, 2008 at 4:29 pm |
[...] meant anything to me more than a small nod to the march of American progress (such as it is) but Jon Taplin pointed out this excellent article on the growing polarization between two classes in this country – The [...]
Alex Telthorst // June 10, 2008 at 4:47 pm |
I think my main issue with this is that these businesses are doing two things: 1) Making a conscious choice to take advantage of people making poor decisions. 2) Not offering to do any educating to improve their customers situations (similar to drug companies who work on management therapies instead of cures – It’s the old, cure the disease, lose a customer thinking that makes people hate capitalism).
It seems to me that a good solution could come out of the credit counseling non-profit sector: If a non-profit offered cheaper payday loan-type services in a retail setting to people who were willing to talk with a counselor about their situation, where their current short-term situation could be addressed with bridge financing if they agreed to a relationship with a longer-term financial counselor working with them to make effective change. I think that people would use it. In my experience, it been the combination of lack of education and the shame surrounding the situation that leads people to use these services.
Perhaps I need to pitch this to some of the folks @ http://Kiva.com hmmmmm……
scotchcart // June 11, 2008 at 1:04 am |
I agree with you about the bifurcation of classes. In HRM it is called the primary and secondary labor markets. Regretfully in the last 20 years, the secondary labor market has grown to included trades and professions that used to be in the primary market.
I think your figures simply indicate the despair in the large secondary labor market. What is the correlation, for example, between the 50%+ of Americans struggling and suffering (Gallup) and gambling?
So where do we go on this?
a) All indications is that the system is about to shift again. People controlling the primary labor markets are not doing a good job and their personal behavior has been dissolute (Enron etc). The emergence of large economies elsewhere will tip the balance. So people making their living in the economy that sells dodgy services directly or indirectly should be up-skilling.
b) Social media provides the opportunity to reorganize to give people more control over their lives.
I’ve moved from a place where consumer choice is a matter of finding the consumer product to the UK where you have 50 choices of baked beans (all frankly as disgusting as the last). It takes an afternoon in the supermarket to find a low sugar cereal. The same exhausting process applies to telephones and professional services. So I know consumerism is an art form. It has to be learned consciously and applied with vigor.
Social media will help.
It will also help organize other sectors. I am looking forward to teaching our children to be discriminating. Beginning with the schools and teachers (and parents!). I’ve taught in cultures where students won’t accept a lottery. If you set the work and they do it and it is too hard for them, you are at fault. In psych theory there is a VIE model. In terms of lotteries: Value of outcome x probability of winning x ability to buy the ticket. The US system assumes the variability is in the third. Other cultures it is assumed to be in the second. And wo betide the supplier who does not deliver on the second.