Post
by voguy » 05-05-2016 07:05 PM
It is ironic that as financial products have become increasingly sophisticated, theoretically giving individuals more options to smooth out the bumps in their lives, something like the opposite seems to have happened, at least for many. Indeed, Annamaria Lusardi and her colleagues found that, in general, the more sophisticated a country’s credit and financial markets, the worse the problem of financial insecurity for its citizens. Why? Lusardi argues that as the financial world has grown more complex, our knowledge of finances has not kept pace. Basically, a good many Americans are “financially illiterate,” and this illiteracy correlates highly with financial distress. A 2011 study she and a colleague conducted measuring knowledge of fundamental financial principles (compound interest, risk diversification, and the effects of inflation) found that 65 percent of Americans ages 25 to 65 were financial illiterates.
Choice, often in the face of ignorance, is certainly part of the story. Take me. I plead guilty. I am a financial illiterate, or worse—an ignoramus. I don’t offer that as an excuse, just as a fact. I made choices without thinking through the financial implications—in part because I didn’t know about those implications, and in part because I assumed I would always overcome any adversity, should it arrive. I chose to become a writer, which is a financially perilous profession, rather than do something more lucrative. I chose to live in New York rather than in a place with a lower cost of living. I chose to have two children. I chose to write long books that required years of work, even though my advances would be stretched to the breaking point and, it turned out, beyond. We all make those sorts of choices, and they obviously affect, even determine, our bottom line. But, without getting too metaphysical about it, these are the choices that define who we are. We don’t make them with our financial well-being in mind, though maybe we should. We make them with our lives in mind. The alternative is to be another person.
But even having made those choices, which involved revolving credit, for the better part of my life I was not drowning in debt (maybe treading in it … okay, barely treading). Until about five years ago, when I stopped using my credit cards altogether and started paying them off little by little with the help of a financial counselor, I’d always managed to pay at least the monthly minimum and sometimes more. I didn’t have savings, but not because I thought I could rely forever on credit instead or because I chose to spend my money extravagantly rather than salt it away. In retrospect, of course, my problem was simple: too little income, too many expenses. Credit enabled me to forestall this problem for a time—and also to make it progressively worse—but the root of the problem was deeper.
I never figured that I wouldn’t earn enough. Few of us do. I thought I’d done most of the right things. I went to college; got a graduate degree; taught for a while; got a book contract; moved to a small, inexpensive, rent-controlled apartment in Little Italy to write; got married; and bumped along until I landed a job on television (those of you with elephant memories may remember that for three years, I was one of the replacements for Gene Siskel and Roger Ebert on the PBS movie-review show Sneak Previews). Then my wife and I bought a small co‑op apartment in Brooklyn, which we could afford, and had our two daughters. My wife continued to work, and we managed to scrape by, though child care and then private schools crimped our finances. No, we didn’t have to send our girls to private schools. We could have sent them to the public school in our neighborhood, except that it wasn’t very good, and we resolved to sacrifice our own comforts to give our daughters theirs. Some economists attribute the need for credit and the drive to spend with the “keeping up with the Joneses” syndrome, which is so prevalent in America. I never wanted to keep up with the Joneses. But, like many Americans, I wanted my children to keep up with the Joneses’ children, because I knew how easily my girls could be marginalized in a society where nearly all the rewards go to a small, well-educated elite. (All right, I wanted them to be winners.)
Still, we moved to the tip of Long Island, in East Hampton, where we wouldn’t have to pay that exorbitant private-school tuition and where my wife could eventually quit her job as a film executive to be with the children, the loss of her income offset a little by not having to pay for child care. (When people look at me admiringly after I tell them I live in the Hamptons, I always add, “We live there full-time like the poor people, not only in the summer like the rich people.”) We rented a house and made a go of it. After Martin Scorsese bought the movie rights to my biography of the gossip columnist Walter Winchell, we even managed to put together a down payment to buy the house we’d been renting.
But the problem with finances is that life doesn’t cooperate. In our case—and I have a feeling in the case of just about every American—there were unforeseen circumstances. I couldn’t sell our co‑op in the city, because the co‑op board kept rejecting the buyers, which meant I had to carry two mortgages for years. The housing market in New York soured, and I eventually sold the apartment for a steep loss, because I had no choice. I suppose I could have slashed the price sooner to bring in more would-be buyers—in retrospect, that would have been the wisest choice—but I wanted to cover what I owed the bank. I lost my television job because, I was told, I wasn’t frivolous enough for the medium, which was probably true. (Or at least I felt better thinking it was true.) I still had my books, but they took longer to write than I had calculated, and cutting corners to turn them out faster, I knew, would be cutting off my career. (I tell the M.F.A. writing students whom I now teach, part-time, that anyone can write a book quickly: Just write a bad book.) The girls grew up, but my wife had been out of the workforce so long that she couldn’t get back into her old career, and her skills as a film executive limited her options. In any case, with my antediluvian masculine pride at stake, I told her that I could provide for us without her help—another instance of hiding my financial impotence, even from my wife. I kept the books; I kept her in the dark.
And then, on top of it all, came the biggest shock, though one not unanticipated: college. Because I made too much money for the girls to get more than meager scholarships, but too little money to afford to pay for their educations in full, and because—another choice—we believed they had earned the right to attend good universities, universities of their choice, we found ourselves in a financial vortex. (I am not saying that universities are extortionists, but … universities are extortionists. One daughter’s college told me that because I could pay my mortgage, I could afford her tuition.) In the end, my parents wound up covering most of the cost of the girls’ educations. We couldn’t have done it any other way. Although I don’t have any regrets about that choice—one daughter went to Stanford, was a Rhodes Scholar, and is now at Harvard Medical School; the other went to Emory, joined WorldTeach and then AmeriCorps, got a master’s degree from the University of Texas, and became a licensed clinical social worker specializing in traumatized children—paying that tariff meant there would be no inheritance when my parents passed on. It meant that we had depleted not only our own small savings, but my parents’ as well.
There was worse to come. Because I lived largely off the advances my publisher paid me when I commenced research on a book, the bulk of my earnings were lumped into a single year, even though the advance had to be amortized to last the years it would take to write the book. That meant I was hit by a huge tax bill that first year that I could not pay in full without cannibalizing what I needed to finish the book. When I began writing a biography of Walt Disney, as my two daughters headed toward college, I decided to pay whatever portion of my taxes I could, then pay the remainder, albeit with penalties added, when the book was published and I received my final payment. The problem is that the penalty meter keeps running, which means that the arrears continue to grow, which means that I continue to have to pay them—I cannot, as it happens, pay them in full. I suppose that was a choice, too: pay my taxes in full, or hold back enough to write the book and pay my mortgage and buy groceries. I did the latter.
And so the hole was dug. And it was deep. And we may never claw our way out of it.
Perhaps none of this would have happened if my income had steadily grown the way incomes used to grow in America. It didn’t, and they don’t. There was a good year here or there—another television job, a new book contract, that movie sale. But mostly my wages remained steady, which meant that, when adjusted for inflation, their buying power dipped. For magazine pieces, I was making exactly what I had made 20 years earlier. And I wasn’t alone. Real hourly wages—that is, wage rates adjusted for inflation—peaked in 1972; since then, the average hourly wage has essentially been flat. (These figures do not include the value of benefits, which has increased.)
Looking at annual inflation-adjusted household incomes, which factor in the number of hours worked by wage earners and also include the incomes of salaried employees, doesn’t reveal a much brighter picture. Though household incomes rose dramatically from 1967 to 2014 for the top quintile, and more dramatically still for the top 5 percent, incomes in the bottom three quintiles rose much more gradually: only 23.2 percent for the middle quintile, 13.1 percent for the second-lowest quintile, and 17.8 percent for the bottom quintile. That is over a period of 47 years! But even that minor growth is somewhat misleading. The peak years for income in the bottom three quintiles were 1999 and 2000; incomes have declined overall since then—down 6.9 percent for the middle quintile, 10.8 percent for the second-lowest quintile, and 17.1 percent for the lowest quintile. The erosion of wages is something over which none of us has any control. The only thing one can do is work more hours to try to compensate. I long since made that adjustment. I work seven days a week, from morning to night. There is no other way.
And still it isn’t enough.
In a 2010 report titled “Middle Class in America,” the U.S. Commerce Department defined that class less by its position on the economic scale than by its aspirations: homeownership, a car for each adult, health security, a college education for each child, retirement security, and a family vacation each year. By that standard, my wife and I do not live anywhere near a middle-class life, even though I earn what would generally be considered a middle-class income or better. A 2014 analysis by USA Today concluded that the American dream, defined by factors that generally corresponded to the Commerce Department’s middle-class benchmarks, would require an income of just more than $130,000 a year for an average family of four. Median family income in 2014 was roughly half that.
In my house, we have learned to live a no-frills existence. We halved our mortgage payments through a loan-modification program. We drive a 1997 Toyota Avalon with 160,000 miles that I got from my father when he died. We haven’t taken a vacation in 10 years. We have no credit cards, only a debit card. We have no retirement savings, because we emptied a small 401(k) to pay for our younger daughter’s wedding. We eat out maybe once every two or three months. Though I was a film critic for many years, I seldom go to the movies now. We shop sales. We forgo house and car repairs until they are absolutely necessary. We count pennies.
I don’t ask for or expect any sympathy. I am responsible for my quagmire—no one else. I didn’t get gulled into overextending myself by unscrupulous credit merchants. Basically, I screwed up, royally. I lived beyond my means, primarily because my means kept dwindling. I didn’t take the actions I should have taken, like selling my house and downsizing, though selling might not have covered what I owed on my mortgage. And let me be clear that I am not crying over my plight. I have it a lot better than many, probably most, Americans—which is my point. Maybe we all screwed up. Maybe the 47 percent of American adults who would have trouble with a $400 emergency should have done things differently and more rationally. Maybe we all lived more grandly than we should have. But I doubt that brushstroke should be applied so broadly. Many middle-class wage earners are victims of the economy, and, perhaps, of that great, glowing, irresistible American promise that has been drummed into our heads since birth: Just work hard and you can have it all.
If there is any good news, it is that even as wages have stagnated, a lot of things, especially durable goods like TVs and computers, have been getting steadily cheaper. So, by and large, has clothing (though prices have risen modestly in recent years). Housing costs, as measured by the price per square foot of a median-priced and median-sized home, have been stable, even accounting for huge variations from one real-estate market to another. But some things, like health care and higher education, cost more—a lot more. And, of course, these are hardly trivial items. Life happens, and it happens to cost a lot—sometimes more than we can pay.
Yet even that is not the whole story. Life happens, yes, but **** happens, too—those unexpected expenses that are an unavoidable feature of life. Four-hundred-dollar emergencies are not mere hypotheticals, nor are $2,000 emergencies, nor are … well, pick a number. The fact is that emergencies always arise; they are an intrinsic part of our existence. Financial advisers suggest that we save at least 10 to 15 percent of our income for retirement and against such eventualities. But the primary reason many of us can’t save for a rainy day is that we live in an ongoing storm. Every day, it seems, there is some new, unanticipated expense—a stove that won’t light, a car that won’t start, a dog that limps, a faucet that leaks. And those are only the small things. In a survey of American finances published last year by Pew, 60 percent of respondents said they had suffered some sort of “economic shock” in the past 12 months—a drop in income, a hospital visit, the loss of a spouse, a major repair. More than half struggled to make ends meet after their most expensive economic emergency. Even 34 percent of the respondents who made more than $100,000 a year said they felt strain as a result of an economic shock. Again, I know. After the job loss, the co‑op board’s rejections, the tax penalties, there was one more wallop: A publisher with whom I had signed a book contract, and from whom I had received an advance, sued me to have the advance returned after I missed a deadline. (Book deadlines are commonly missed and routinely extended.)
In effect, economics comes down to a great Bruce Eric Kaplan New Yorker cartoon that was captioned: “We thought it was a rough patch, but it turned out to be our life.”
Our life. And for many of us—we silent sufferers who cannot speak about our financial tribulations—it is our lives, not just our bank accounts, that are at risk. The American Psychological Association conducts a yearly survey on stress in the United States. The 2014 survey—in which 54 percent of Americans said they had just enough or not enough money each month to meet their expenses—found money to be the country’s No. 1 stressor. Seventy-two percent of adults reported feeling stressed about money at least some of the time, and nearly a quarter rated their stress “extreme.” Like financial fragility itself, that stress cut across income levels and age cohorts. Not surprisingly, too much stress is bad for one’s health—as, of course, is too little money. Thirty-two percent of the survey respondents said they couldn’t afford to live a healthy lifestyle, and 21 percent said they were so financially strapped that they had forgone a doctor’s visit, or considered doing so, in the previous year.
But financial fragility’s most insidious effects extend beyond physical health, to our larger sense of well-being. “Financial insecurity is associated with depression, anxiety, and a loss of personal control that leads to marital difficulties,” says Brad Klontz, the financial psychologist. I know about that, too. Money may change everything, as Cyndi Lauper sang. But lack of money definitely ruins everything. Financial impotence casts a pall of misery. It keeps you up at night and makes you not want to get up in the morning. It forces you to recede from the world. It eats at your sense of self-worth, your confidence, your energy, and, worst of all, your hope. It is ruinous to relationships, turning spouses against each other in tirades of calumny and recrimination, and even children against parents, though thankfully that is one thing that never happened to me. The rest, however, did happen and still does. I consider myself pretty tough and resilient. What of those who aren’t? To fail—which, by many economic standards, a very large number of Americans do—may constitute our great secret national pain, one that is deep and abiding. We are impotent.
And while the affliction is primarily individual and largely hidden from public view, it has perhaps begun to diminish our national spirit. People want to feel, need to feel, that they are advancing in this world. It is what sustains them. They need to feel that their lives will improve, and, even more, that the lives of their children will be better than theirs, just as they believed that their own lives would be better than their parents’. But people increasingly do not feel that way. A 2014 New York Times poll found that only 64 percent of Americans said they believed in the American dream—the lowest figure in nearly two decades. I suspect our sense of impotence in the face of financial difficulty is not only a source of disillusionment, but also a source of the anger that now infects our national politics, an anger that gets displaced onto undocumented immigrants or Chinese trade or President Obama precisely because we are unable or unwilling to articulate its true source. As the Harvard economist Benjamin M. Friedman wrote in his 2005 book, The Moral Consequences of Economic Growth, “Merely being rich is no bar to a society’s retreat into rigidity and intolerance once enough of its citizens lose the sense that they are getting ahead.” We seem to be at the beginning of just such a retreat today—at the point where simmering financial impotence explodes into political rage.
Many Americans still remain optimistic—at least publicly. In a 2014 Pew survey revealing that 55 percent of Americans spend as much as they make each month, or more, nearly the exact same percentage say they have favorable financial circumstances, which may just mean some of them are too frightened to admit they don’t. Or perhaps they are just too financially illiterate to understand the severity of their predicament. Many of the scholars I have talked with are optimistic too. “People have this ingenuity to solve so many problems,” Annamaria Lusardi told me. “I think we are finally getting it that the brain does not work around money naturally,” Brad Klontz said, believing that Americans are realizing they have to take more control of their financial lives.
But optimism won’t negate the fact that wages continue to stagnate; that the personal savings rate remains low; and that a middle-class life seems increasingly hard to maintain. (A pre-recession survey by the Consumer Federation of America and the Financial Planning Association found that 21 percent of Americans felt the “most practical” way for them to get several hundred thousand dollars was to win the lottery.) I try to hang on to hope myself while still being a realist. Yet hope doesn’t come easily anymore, even in a nation of dreamers and strivers and idealists. What so many of us have been suffering for so many years may just seem like a rough patch. But it is far more likely to be our lives.
"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them." - Thomas Jefferson
