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Institutionalizing savings

When contemplating the massive pile of debt Americans have racked up in recent years, it's easy to assign blame to individuals, impulsive and weak and blind to the virtues of savings. They are clearly aided in their imprudence by the consumerist culture, which assails them with ads and marketing ploys and seeks to persuade them (or at least reinforce the idea) that they are what they buy and their freedom is realized in the ability to spend -- that spending itself is the supreme achievement in society and the act for which we will secure the greatest recognition. It's tempting to assume people should simply show more impulse control and make better decisions.

But "For a New Thrift," a think-tank report cited in this BusinessWeek article about the allegedly imminent "New Age of Frugality," raises the important point that our tendency to save is dependent on the institutions around us. Human nature is inherently foolish, which is why we design social institutions to guide our behavior into constructive channels. This is particularly true about capital accumulation. Once, the legal framework prohibited much predatory lending, but as these laws were relaxed, the usury business thrived and gained for itself a veneer of respectability. The authors of the report argue that state-run lotteries abetted this, and helped vindicate the anti-thrift logic at work in payday-loan centers. As a result, society has split into two groups. The first is those who save responsibly, aided by investment institutions they have ready access to, whether through employer-based retirement savings programs or neighborhood banks or internet usage, and have the social capital to understand how to do it. The others are those who live from paycheck to paycheck, view the lottery as something other than a total sucker bet reserved only for chumps, and typically fall into revolving debt traps through lack of resources, financial savvy, and non-usurious alternatives. From the report:

The lottery class, on the other hand, lacks such ready access to pro-thrift institutional disciplines. Many members of the lottery class are not working in jobs that offer benefits such as 401(k)s, profit sharing, or retirement plans. (In 2004, 70 million of America’s 153 million wage earners worked for employers without a retirement plan.Nor are people in the lower half of the income distribution pursued by investment firms, tax accountants, or major banks. Instead, they are targets of payday lenders, subprime mortgage brokers, credit card issuers, tax refund lenders, and their friendly state lotteries. Their extra dollars do not find a convenient or automatic pathway into a savings account. Instead, they are drained off into high interest payments on predatory loans or used to support a daily lottery habit. Nor do they get tax-avoidance advice or tax advantages in return for their investments. More likely, they give up some of their tax refund dollars to franchise tax preparers in exchange for fast cash. And the leading public anti-thrift, the state lottery, imposes what amounts to an excise tax on them as well. In this way, millions of working Americans who might, under more favorable institutional circumstances, join the class of savers and investors, are now being recruited into a burgeoning population of debtors and bettors.

This seems worth remembering when considering the circumstances that poor people confront and the choices they make that seem so dubious to us, watching from outside, safe and coddled in a host of institutions geared toward preserving our privilege.

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