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.