Forgive Us Our Debts

I've gotten more personal email about my article on Dave Ramsey than any other piece I've written for the magazine, and several of you have asked me to blog about it here.  I chose to write about him for a few reasons.  First, I find him totally fascinating.  Second, I got to go to Detroit.  And third, we're in the middle of a vast national conversation about debt, and Dave Ramsey represents one of the most extreme views on the subject.

For those of you who don't know of Dave Ramsey (though I'm fairly sure a number of my readers are followers), he's an evangelical personal finance guru who has a syndicated radio show and a television program on Fox Business.  Ramsey's program has a few basic pillars:

• Cut up all your credit cards and promise never to use them again
• Do not borrow money for any purpose whatsoever, with two exceptions:
• You may take out a 15-year fixed rate mortgage where the payment is no more than 25% of your take home pay
• You may take out a bridge loan to cover the underwater portion of a car, boat, or other asset loan, if you are selling the asset in order to get out from under the payment
• Sit down at the beginning of every month and do a written budget in which you allocate every dollar you expect to earn
• Take cash out of the bank and use it to pay for your non-automatic purchases:  eating out, groceries, gas, parking, clothing, etc.
• Pay off all of your debt as quickly as possible
  
• Give ten percent of your income to charity
• Save fifteen percent of your income
• Don't declare bankruptcy unless they bailiffs are actually on their way to your house to evict you, seize your furniture, and put your family on the street
  

There are various wrinkles for people with irregular income and so forth; there is investment advice, some of it good and some of it not--but that's the core of it.  And Peter and I tried the program in preparation for writing the article.

What did we think?  Well, that's in the article.  But the upshot is, we're sticking with the program, though the part where we pay off all our outstanding debt is on hold while we save for our wedding.  I'd never done a detailed budget before, much less written it down, and forced myself to stick to it by doling out all the payments in cash.

It sounds unbearably tedious.  But it's actually incredibly freeing.  I have never before felt like I had total control over my money.  And given all the economic gyrations, it would be awfully nice to know that I was on the road to a paid off house, and could cut my expenses to the bare bones if needed.

But it's odd.  And it's really hard to do in a society where lots of people are willing to take on lots of debt, because their debt-laden lifestyle sets the standards for yours.  It's hard enough when everyone has nicer stuff.  But as I note in the article, in the case of housing, it actually makes it hard for people to, say, secure a home in a decent school district, if other people with similar incomes are willing to leverage themselves to the hilt in order to bid on that home.

A society run by Ramseyites would be a very different society.  It would have very high savings rates--in excess of 15% of national income.  Some goods, like cars, might be more expensive, because financing substantially smooths demand and allows larger manufacturing runs.  People would probably live in smaller homes.  Younger people would live poorer, and probably stay at home longer.

Would it be a better world?  I thought about this recently, reading this Felix Salmon post:

Ezra Klein, on what he considers a vicious cycle in credit cards:

The problem is that the people who migrate toward debit cards are the people who have enough money not to need much credit and are responsible enough to not want it. The good risks, in other words. The people left in the credit card market will be disproportionately bad risks, which means rates will go up and standards will tighten, which will in turn drive more people out of the market, starting the cycle over again.

I'm not convinced that this is a bad thing. Credit cards are useful payment devices, but atrocious borrowing devices. (Steve Waldman has a great post explaining the distinction further.) We want to move to a world where people use charge cards for transactional purposes, and personal loans for credit purposes. The way we're going to get there is, essentially, by taxing the stuff we want less of -- and that means increasing the interest rates and annual fees on credit cards.

This is a pretty common sentiment.  In fact, I don't think personal loans are a very good substitute for the kinds of emergencies that frequently beset the people who this would most effect--if your car breaks down and you can't get to work, you don't really want to wait until the bank approves your personal loan to get the car fixed.  But there are a lot of people who think we could make the poor better off by essentially denying them access to credit, because credit extended to the poor carries high interest rates to cover the default risk, and many people get themselves into big trouble with it.

The problem is, there are two sets of outcomes.  There are people who are made better off by payday loans or credit cards, because they get the car fixed and don't lose their job. Then there's a group, which seems to be smaller but significant, who end up much worse off.

Personally, I look forward to the day when I have no debt.  Would we all be better off if we decided to go that way?  Probably.  But would we be better off if we legislated that outcome?  I'm skeptical.