ICYMI: We Are Buying More Than We Can Afford

A new WSJ piece describes the current financial landscape for a bunch of people, including myself! We are in tons of debt. Though being in debt is nothing new, the type of debt has changed quite a bit. 

Most of the debt normal Americans would take on in the past was attributed to housing. But since 2013, non-housing consumer debt shot up by $1 trillion, while housing debt only shot up by half of that. Total consumer debt is higher than it has ever been.

Like this article, most will point to the top 1 percent, the finance folks, as the culprits of why this is happening. This may surprise you, but… 

I agree!

Well, kind of. Though, money from financial services has flowed to the top of the socioeconomic ladder, it is hardly their fault. When the government is supposedly at the helm of the economy, it is helping steer the money in that direction. And, this is not due to “deregulation.” But, mainly due to moral hazard. 

No Risk, Tons of Reward

Let’s think about it for a second. 

By deregulating an industry, it opens the door for innovation, more competition, and better quality services. This is exactly what happened in the airline industry when it was deregulated in 1978. 

Moral hazard means that people are less likely to guard themselves against risks when they are protected from the consequences. For example, I would be much more likely to be more daring on the ski slopes if I have health insurance. Why? It’s because I know that if I break some bones, my insurance will cover it. 

The same thing has happened in the financial sector. The Financial Crisis of 2009 is a testament to how the government will act if the financial system is on the plank of the ship. That said, banks will lend out much more than they would if they knew they would have to bear all of the consequences. 

The moral hazard in the financial sector has also driven interest rates down. Low-interest rates increase the number of people wanting to take out loans. It also decreases the number of people wanting to save in less risky accounts. In a world of low-interest rates, millennials need to learn how to save more. 

The same thing can be said about the education system. For the past 40 years, at least, bank loans to pay for college were backed by the federal government. Remember moral hazard? Since 2009, the government has been the sole financier of college degrees. They have subsidized schools and students willy-nilly and have made it very easy to not have to pay back the student loans. So, universities can increase tuition (since the access to funds for students has increased the demand for a college education). And, students don’t have to try so hard in class or in finding a job comparable to the money spent on the degree. The new generation has no clue as to how to work and pay for college on their own.

Given our inclination to borrow more money with such low-interest rates, we tend to have more expensive tastes. A new couple doesn’t want the 1-bedroom, 900 square foot home. They want the three-bedroom, 1,400 square foot home. Moreover, zoning laws have mandated square footage necessary for building homes. So, governments are essentially forcing people into larger homes. Larger homes mean fewer homes are built because they take up more space. Fewer homes mean prices increase. 

How to fix all this?

I dunno. Sorry. But, we could start saving more, right? I mean, stop buying stuff you can’t afford. And, let’s shoot for policies that reduce the moral hazard. It seems the government safety net under these sectors is not so safe after all.

Do Financial Regulations Decrease Financial Literacy?

Ask the average person about her smartphone, and the odds are better than even that she’ll be able to recite the make, model, and salient features such as battery life and camera quality. She may even be in a position to rank the phone relative to other handsets and to make a recommendation as to whether it offers good value for money.

We’re Naturally Blind

In 12 Rules for Life, Jordan Peterson gets to a point that is paramount for healthy living:

“That’s how you deal with the overwhelming complexity of the world: you ignore it, while you concentrate minutely on your private concerns. You see things that facilitate your movement forward, toward your desired goals. You detect obstacles, when they pop up in your path. You’re blind to everything else (and there’s a lot of everything else—so you’re very blind). And it has to be that way, because there is much more of the world than there is of you. You must shepherd your limited resources carefully. Seeing is very difficult, so you must choose what to see, and let the rest go.”

New Payday Loan Rules: Well-Intentioned With Heavy Baggage

The Consumer Financial Protection Bureau’s (CFPB) payday lending rule goes into effect next week.

Getting Internet From the Tap

Recently, I dipped my toes into the net neutrality debate. I shared an article pointing out that a graph, tweeted out by a Representative of California arguing in favor of net neutrality, ironically, makes the argument against net neutrality. This graph highlighted the perspective of the average consumer, i.e.—under net neutrality, internet services actually become more expensive. Sharing this article put me directly in the line of fire by some very passionate netizens (net neutrality advocates).

George Stigler: Information is Power

It is July 4th weekend coming up. Woohoo! Some of you will be traveling and doing some mini vacations somewhere. I don’t know about my plans for the 4th just yet, but I know that I am going to try and head out somewhere. As long as I escape the nation’s capital on the nation’s birthday, I’m game.

Slow on the Move: Prices, Technology and Rent Control

Moving to a new city, particularly in your 20s or 30s, can be a defining moment in your life. Yet people in the U.S. are moving at historically low rates, and you don’t need to look far to see why.

The Economics of the “Return Trip Effect”

Have you ever walked to a particular location, say a friend’s house, and found that the walk actually was a lot farther than you had expected, making it quite the unpleasant walk? But, you found that on the way back the walk seemed to go by much more quickly? There’s a scientific name term for this. It’s called the “return trip effect” (RTE).

Net Neutrality Is Back Again

The battle of who owns the internet is back at the forefront as the Ajit Pai, chairman of the Federal Communications Commission (FCC), has sparked the fire with a new bill changing the rules.

Barbers: Automation vs Occupational Licensing

We continue to be on guard for industries in which workers are likely to be replaced by machines and automation. Food service and accommodations, transportation, and retail are all expected to be taken over by automated processes. Employment numbers in the manufacturing sector continue to dwindle as machines take on the bulk of the work.