What is the difference between being unemployed and an informal sabbatical?
What is the difference between financial stress and financial peace of mind?
How do you start a business without burning up your time and energy looking for capital?
How is it that the United States is so rich but less happy than so many poorer countries?
We have a low savings rate. For millions of Americans the savings rate is negative. They use credits cards as their financial cushion. And then work two jobs or suffer hour long commutes to try to catch up as even this last buffer runs out.
The government helped us get there. Yes, there are a host of special government plans for us to use to save for retirement, college, and medical bills – too many plans, inconvenient and ever changing plans. But on the whole the government encourages spending over savings, debt over equity. The biggest slice of the federal budget is a giant excuse-not-to-save for the middle class. The biggest tax break for the middle class is for staying in debt. Meanwhile the government is digging itself into a deep hole of unsustainable debt.
And the High Priest of Economic Pseudoscience likes it that way.
Savings vs. Pseudoscience
It is the hallmark of the pseudoscientist and New Age con artist to latch onto the authority of cutting edge physics. Back in the day it was all about “vibrations.” Today it’s mainly quantum mechanics. See the quantum cartoon waves in the movie The Secret. John Maynard Keynes latched onto Einstein’s general theory of relativity for his The General Theory of Employment Interest and Money. Unlike The Secret, Keynes’ work is extremely difficult to read without extensive knowledge of the jargon and references he alludes to. This gives the work occult status to those who master it, who can relish their “knowledge” of the counter-intuitive, in particular the Paradox of Thrift.
Politicians find the teachings of Keynes to extremely convenient. Running a deficit is more fun than raising taxes or cutting spending, and hey it stimulates the economy. Whee! Liberals love it that Keynes gives an extra excuse for wealth redistribution and public works – do them or the economy goes into perpetual depression! (BTW, such rationalizations are unnecessary to be a liberal. Poverty stinks, and bridges are useful, for example. And besides, some of Keynes’ prescriptions were extremely regressive. Some liberals get it. Bill Clinton was less Keynesian than Reagan or either Bush.)
When the rest of the industrial world was shackled by socialism and/or recovering from carpet-bombing, the U.S. economy was mighty by comparison despite the gutting of our national savings by the Keynesians. Today, we are rapidly on the path to follow France, to become a bitter has-been superpower.
Debunking Keynes is the first step to reversing that trend, and moving from a debt to equity based society.
Freedom Requires Financial Responsibility
Power and responsibility must go hand in hand, otherwise there is moral hazard: waste and costs explode. Note how the costs of medicine and college tuition have exploded of late. Eventually the piper must name the tune. Decisions will pass to those writing the checks, whether they be insurance companies or federal bureaucrats. For the people to have power, the people must pay their own bills.
Granted, this is not an option for everyone. There will always be needy among us. But someone needs to be responsible. If we are to remain democratic, that someone needs to be the majority.
In other words, the middle class needs to save enough to handle routine emergencies. Insurance and government aid should be for the outlier cases if we are to be a free society. Conservatives and libertarians take note: getting the middle class to save again needs to be first order of business if you want to downscale social programs targeted at theoretically able. Otherwise, the news broadcasts will fill up with sad stories, and liberals will rightly take power from you. Order of operations is important.
Some conservatives do get it, and some of the existing savings programs are the result. But like many government programs, they are too complicated and inflexible.
Savings Made Simpler
We have too many government sponsored savings programs. For those who can hire an army of financial advisors, the maze of government programs is a fun exercise in loophole hunting. For ordinary Americans, the wide array of programs confuse. Worse yet, they divide money into multiple accounts. This increases the total needed in order to avoid penalties.
Worst of all, these programs are not appropriate. Young adulthood is not generally the time to save for retirement, despite the magic of compound interest. There are many more pressing reasons to save, reasons not properly accounted for in the standard government plans. (Either that, or the reasons are provided for under unobvious loopholes, such as tapping a retirement account to purchase a first home.) Here, we will propose a much simpler set of savings plans, plans easier for the middle class to use and harder for the rich to abuse.
This is the beginning. The financial markets themselves are a complicated jungle, dangerous for the naïve investor. With some changes in government policy we can simplify and make much safer. For example, were the government to stop inflating the currency, easy-to-understand interest bearing investments would become far safer. If we cracked down on maturity transformation and had a natural yield curve, local banks would offer decent retirement accounts. Dealing with Wall St. would once again be for the financially adventurous. All ye anti-corporate hippie environmentalists who want to buy local take note; this is a key to restoring a Main St. economy.