The myth of living 'beyond our means'
The average American household has taken on more debt than it can safely manage, but our we really living beyond our means? Commentator Robert Reich says we need to also take note of declining incomes.
Robert Reich (Robert Reich)
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TEXT OF COMMENTARY
Scott Jagow: I'm sure you've heard the argument Americans have been living beyond their means, and now, we're gonna pay for it. Commentator Robert Reich doesn't exactly buy it.
Robert Reich: The "living beyond our means" argument, with its thinly-veiled suggestion of moral terpitude, is technically correct. Over the last 15 years, average household debt has soared to record levels, and the typical American family has taken on more of debt than it can safely manage. That became crystal clear when the housing bubble burst and home prices fell, eliminating easy home equity loans and refinancings.
But this story leaves out one very important fact: Since the year 2000, median family income, adjusted for inflation, has been dropping. One of the main reasons the typical family has taken on more debt has been to maintain its living standards in the face of these declining real incomes.
I mean, it's not as if the typical family suddenly went on a spending binge -- buying yachts and fancy cars and taking ocean cruises. No, the typical family just tried to keep going as it had before. But with real incomes dropping, and the costs of necessities like gas, heating oil, food, health insurance, and even college tuitions all soaring, the only way to keep going as before was to borrow more. You might see this as a moral failure, but I think it's more accurate to view it as an ongoing struggle to stay afloat when the boat's sinking.
The "living beyond our means" argument suggests that the answer over the long term is for American families to become more responsible and not spend more than they earn. Well, that may be necessary, but it's hardly sufficient.
The real answer over the long term is to restore middle-class earnings so families don't have to go deep into debt to maintain what was a middle-class standard of living. And that requires, among other things, affordable health insurance, tax credits for college tuition, good schools, and an energy policy that's less dependent on oil -- the price of which is going to continue to rise as demand rises in China and India and elsewhere.
In other words, the way to make sure Americans don't live beyond their means is to give them back their means.
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From St. Louis, MO, 01/24/2009
The decline of the Middle Class in America is due to the billions of dollars spent on the finance of war in
Iraq and other nations, the loss of
productive capacity and the export of
jobs overseas, uncontrolled fuel costs,
and an administration in Washington that
doesn't care about the Middle Class. And, if these problems are not addressed
we will see a global depression far worse than in the years from 1929-1942.
From Toledo, OH, 12/09/2008
I hear so many opinions about people living beyond their means. Some may be, but the vast majority of economic pain is due to a crooked monetary system that expects consumer spending to prop up our economy instead of production. Many well meaning older folks can't see this, stemming from their rightfully frugal upbringing, but their are plenty of rich folks out their turning up their noses at the middle class too. The middle class is being destroyed in this nation. The middle class is being quickly eliminated. And to make matters worse, they are being told to suck it up and tighten their belts even more. After all, how dare they ask for a vacation once a year, or to eat out once in a while, or to afford to get sick in the "ricest country" in the world. These days, the middle class can expect these Rush Limbaugh Style Ultra Capitalist Elites to scoff at them as they struggle to survive. I'm not talking about the fools who overspent on their mortgages, but about decent hard working americans who live in a fast paced mandatory two income household just to be able to pay for the basics of life. And while they labor and toil and strive and heaven help them, go to McDonald's once in a while because they are so overworked and exhausted in this Puritanistic Anti-human vacume we call America, those who have yet to be hit by the economy,or have had better fortune, turn up their moralistic noses at them and claim they are to blame for their own dilema, as though they all fit the same mold: Lazy, shiftless, overspending, vacation wanting rabble who don't really have a right to anything, including sending their children to school,or living in a decent home. Funny though, most families I know who are struggling today don't have any luxuries, big homes or any extravagent things. They are victims of a cold and cruel Ultra Capitalist Greed factory that has churned out the product of consumerism and debt, the only product this factory knows how to maufacture. Thomas Jefferson once said that if the bankers ever get control of our money system, that our children's children would wake up as slaves in the land their forefathers faught and died for. That prophetic statement is now coming to pass. Until we take back our government, make it work for the people intead of against them, demand protection for American workers, put them first, and stop trying to lower our nation's standard of living to that of the most humble Chinese peasant, we are all going to suffer. I take great offense to those who demand that the middle class continue to lower its expectations and living standard while they sit on their marble commodes and give tidbits of wisdom that no one can truly benefit from. What goes around comes around. If the middle class is allowed to perish, so will those in the upper class who depend on them for their own livelihood. Social responsiblity goes both ways, not just for the consumer, but also for the government. And by the way, the private sector can't be expected to produce enough good hearted philanthropists to save us, we need more government involvement to level the playing field. Europe is vastly ahead of us as are most of the socialist democracies around the world. The only idiots who can't see that are the ultra rich, and those that think they will somehow become wealthy if they just keep running on the treadmill fast enough.
From MA, 10/21/2008
There goes Robert Reich again. Even Reich admits in his first sentence that the premise that middle class Americans have been living beyond their means is "technically correct". He even acknowledges that the consumer has been loading up on credit card and house equity debt to help fund consumption.
He then goes on to argue that the means have been taken away from them with rising health insurance, rising college tuition and rising petroleum based energy costs. All this falls under his premise middle class incomes are losing ground to inflation.
But hasn't overall inflation been low? Energy prices have only spiked in the last couple of years.
No one forced middle and working class families to purchase sub 20mpg minivans and SUVs. We might have safe 40mpg family cars if consumers voted for fuel efficiency with their dollars.
And I guess it's no surprise that Reich, an academic would reward the hyper-inflationary tuition increases of
profligate colleges and universities with tuition tax credits.
Reich has conveniently chosen to ignore consumers buying a product they get free from the tap, paying for TV while mostly watching the channels they can get free over the air, cell phones for teens and even tweens, perpetual serial car leasing over occasional car purchase, middle class lust for big energy guzzling, high property taxed houses with their big prices.
Finally, as long as middle class Americans choose to import cheap Chinese made goods and buy them in droves at low wage Wal*Mart why should we expect rising wages?
From Rockville, MD, 10/20/2008
What many who have responded to this piece seem to be ignoring is the very fact that middle class incomes have gone down!!!! My take home pay has decreased in due in part to the increases in healthcare premiums. I live in the same 2 bedroom bungalow and drive vehicles that are over 10 years old (both of them). I am finding it harder and hader to pay for gas, groceries and keep the lights and heat on. I bring my lunch every day, cook at home and have no fear of leftovers. I just want to pay my bills and save a bit but I also want to tax code to be fair!!! I am outraged that I pay a rate between 30 and 35% while hedge fund managers and other wall street execs. pay a rate between 15 and 20%. I'm not crying out for help or socialism just a fair distribution of the cost of government. Why is that so wrong!
From Oakland, CA, 10/17/2008
I find many of these comments very interesting, and I tend to feel pulled toward the middle of the debate... on the one hand, I do feel that a culture of consumer excess has taken a negative toll on how individuals and families manage their money, and on the other hand I have been thinking a lot about exactly the point Reich brings up, which is falling incomes and a rising cost of living. The national conversation about the economic crisis needs to become more holistic. For example, this same "culture of consumer excess" that has gotten people into credit trouble has also fueled profit for the companies that make all the stuff those people have been buying. If people really shouldn't be buying so much stuff, then a lot of corporations really shouldn't be making so much money either... consumer spending is what, 2/3 of our economy? If fundamental re-evaluations of our economy are necessary, and I think they may be, we need to remember that its all connected. The CEO of Wal-Mart wouldn't have what he has if it weren't for all the people that put shopping carts full of stuff they don't need and can't afford on their credit cards.
From CO, 10/17/2008
Although it would be theoretically possible for people to live so carefully that they would never fall into debt, its pretty difficult in modern America, at least if you have children and watch TV. I think a big part of the problem is the average consumer of debt doesn't actually understand the risk. If credit cards were harder to get (can't borrow more than you have in the bank?) or some such thing, then maybe the average consumer would be better off. I basically agree with the criticism that if you cannot afford to pay for it now, then you cannot afford it, but I think it very unrealistic to expect the average person to live by that rule. After all, most of us would agree that Social Security is a very good idea, because it helps people who can't seem to prepare for retirement survive old age. We may not like paying Social Security taxes, but it's very good for our society to protect people in that way.
No, I do not mean outlaw all credit cards and replace with debit. I mean that if you have $3K in your IRA, then you are eligible at most a $3K credit card limit. If you have more, you can borrow a bit more, but the ratio would
fall, somebody with a $100K 403b might be able to charge $10K total, on all cards.
From Fishers, IN, 10/17/2008
It's kind of silly to blame individuals for over use of credit. It is true that we have lived beyond our means and that in doing so we have compounded our problems, but blaming 200 million individuals for a global problem will never yield any useful answers, except perhaps answers that provide a systemic means of changing that behavior. (I'm not arguing against forcing individual responsibility, however, which may be part of a systemic answer.)
I believe that the real reason why median wages have been following is that globalization has reduced barriors to international labor competition. U.S. policies have favored direct and open competition. These policies have reduced the natural, market based leverage of American workers. Easy credit has both masked and compounded the problem, by allowing our account deficit to grow out of control and the dollar to remain relatively strong. With a strong dollar, it is very difficult for American workers to compete with workers from developing economies.
It didn't gain much traction at the time, but I always liked Warren Buffet's solution to the problem, published in 2003:
http://money.cnn.com/magazines/fortune/fortune_archive/2003/11/10/352872/index.htm
From Phoenix, AZ, 10/17/2008
Nobody has the right to a cell phone, cable, eating out, or vacations. If you need to "dip into a credit card" (I assume you carry a balance), it means you can't afford it now (what makes you think you can afford it later?) Regardless, it doesn't matter what you consider "necessary" or "frivoulous" in your budget. But if you can't pay for it, you can't buy it! Why is that the government's or banks' or Wall Street's responsibility? Is that so hard for people to understand? Yes America is the world's richest country-- because of people who worked for the American Dream, not just sit there thinking they deserve it. As for cell phones. CTIA (a wireless phone trade group) says 80% of teens and 84% of US households don't have cell phones. I wouldn't call the other 16% 'troglodytes'. They might just be poor... and smart enough not to buy things they can't afford.
From Scotts Valley, CA, 10/17/2008
Over the past year listening to stories of people suffering and losing their homes and the horrible economic statistics that keep getting worse, I have given a lot of thought to this issue. I have always considered myself lucky to be a child of children of the depression who passed that depression era frugality on rather than tried to 'protect' the children from ever knowing denial or want. So now that I am in my early retirement years I am still able to keep my focus on what I want vs what I actually need. I need food, clean water and shelter. It helps me to be happy when I have to make choices. One of the comments I keep hearing is that Americans are facing a future in which their children will not have a better lifestyle. I would argue that we haven't had a better life style than our parents since that first post World War II generation. If one looks to studies on happiness we can see that all our material wealth has not made us happy. What I haven't been hearing much in the mainstream media is just how families that perceive themselves as having cut back to the bone can find more resouces. "We almost never go out to eat and then just fast food." But we don't hear "We are learning to cook from scratch and are developing meals that our family working together can put on the table in 30 minutes from walking in the door." There are some interesting resources now in our internet community for those who are learning for the first time in many generations to be frugal. And learning that it can be more than a tiresome sacrifice. There is a definite note of joy and fun in most of the frugal sites I explore as people regain a sense of control over the financial aspects of their lives. A Focus on Frugality theme would be an intersting one for Marketplace Money to explore. Now that we are heading into one of our traditional big spending seasons it would also be very timely. Can frugality put more joy into your holiday celebrations in a culture where we have been trained up to think that money buys happiness? for anyone reading this clear through to the end try googling 'frugality'. And check out 'festival of frugality' where each week a different person from the frugality community posts their current favorite frugality sites and blogs.
From Los Angeles, CA, 10/17/2008
I take offense to the comments made presuming that the middle class has lost sight of want vs. need. When we bought our home seven years ago with the help of a down payment from family, we bought what we could afford a 1400 square foot house in a working class mostly immigrant neighborhood. The schools aren’t great but perhaps a good, violent-free education is a luxury. My car is a hand-me-down. My husband’s was bought used from a friend several years ago and the payments are long since paid off. We don't have cable. We don't subscribe to newspapers or magazines. We pay a lot for health insurance. For a family of three our health insurance is half of our mortgage payment. And this for the largest deductibles offered. Yes we have a telephone, cell phones and high speed internet. In order to not live beyond my means do I have to become a troglodyte? Perhaps I don't need to send my child to pre-school. Perhaps I don't need to be a stay at home mom and the bit of extra money we could earn could help us from dipping into credit card use. I don't shop at Whole Foods although I'd like to feed my family more organic products. Yes we do eat out every couple of weeks - burger joints and sandwich shops. Our vacations? Trips to see family whose cost is usually defrayed by the family we’re visiting. I guess we don't "need" the family dog.
I’m tired of being invisible. There are plenty of families like ours who dream of new cars and vacations but we forgo those for choices we deem necessary. How is that middle class standard of living, as one commentator put it, “out of whack”?
From Lincoln, NE, 10/16/2008
Usually Mr. Reich offers a convincing commentary; however, this piece logically flawed and politically skewed. Although not explicitly stated, Mr. Reich implies that government is the answer to the "myth of living beyond our means." I'm not convinced. If Americans took the "necessary" action (as Mr. Reich suggests) of becoming more personally responsible over the long term, wouldn't we be in a much better position to handle rising costs and downturns in the economy? Then we wouln't have to rely so much on the government to help us keep up with the Jones'. It might be wise to reduce our standard of living for a time and save some of our means for a back-up boat; then we won't need the government to keep us afloat.
From Duluth, MN, 10/15/2008
This commentary moved me. We're struggling and yet can't quite see where the extravagances are in our lives. We hardly eat out, we thrift lots of our clothes, we didn't "vacate" this year and still we find ourselves a little behind. Not a lot, not the $20K that lots of Americans are, but enough.
I suppose I could pull my kid from Y swim lessons and gymnastics, but if I can't provide my children with a bit of enrichment, then do I really live in the richest nation in the world?
Thanks for making me feel a bit less down on myself about this topic.
From Plano, TX, 10/15/2008
Of course we should aspire to giving Americans back their means but I think Robert seriously downplayed the lack of personal fiscal responsibility within our society. I see too many people living in massive houses and driving financed BMWs that they cannot really afford. The combination of endless consumer marketing and free & easy credit has turned the average American into a reckless spender, who wants everything now. Growing up in England 15 years ago everyone I knew paid cash for cars, furniture etc. Sadly it seems that England has also fallen prey to the same disease as America. This financial crisis is a wake up call for us all. The lesson learned should be restraint & financial responsibility, not "I need a pay raise".
From tulsa, OK, 10/15/2008
thank you Robert. I go to work, with all these mothers who have 2 or 3 jobs, grandmothers who bail out/live with their kids and/or their own parents, people who drive old cars, eat frozen dinners for lunch, cant afford movies, vacations, live in run down apartments full of crime and drugs, etc, who pour all their money into their kids. some of these people even have degrees.
and here comes these moral crusaders telling everyone the problem is that the 'ordinary people are spending more than their income'.
i would say that any one of my coworkers knows more about balancing a budget than most harvard MBAs. i would put any one of these single mothers up against any wall street CEO, big shot banker, or congressmen, and have a competition to see who can manage risk better, and make expenditures meet income.
i can smell a reality tv show here.
From Jersey City, NJ, 10/15/2008
An American middle-class standard of living is, by any definition, a very resource-intensive (and wasteful) standard of living. When stories like these mention the 'growing appetite' of China and India for the world's resources, they usually neglect to mention the outsize American appetite for those same resources relative to our population. We have been bingeing since the end of WWII, and it's high time we learned about moderation -- from countries like China and India, for example.
From Columbus, GA, 10/15/2008
Rbt Reich's comments on the myth of the middle class living beyond their means is right on! He is one of the few who traces the current crisis to the inequalities between the superrich and the poor. As he points out the middle class have lost purchasing power and the poor even more. I believe the Great Depression was also caused by similar inequalities that had been allowed to grow. As Keynes, and Marx before him noted capitalism's crises often derive from over production and low wages combined. Fordism tried to correct that problem. Now in a very real sense, we have overproduced credit, not just goods, and underproduced good wages. The idea that the middle class has overspent is blaming the victim of easy credit. So long as it was just some homeowners losing their homes, the rich bankers saw no problems, when the depression hits, then they want govt. bailouts.
From Centennial, CO, 10/15/2008
Unfortunately, once again Robert looks at the world through socialist-colored glasses. The real issue is that the "middle class standard of living" has become so out of whack, that we struggle to determine the difference between necessity and luxury. When did the middle class "need" cell phones, or cable television, or 2-3 vacations away from home a year? The middle class has lost site of what is a want and what is a need. We need to adjust our standard of living to reign in our spending. No more eating out 4 nights a week with the family. We might just have to brown-bag our lunches for a while, until we are able to reset our priorities.
From NY, 10/15/2008
good comments
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