by Chris Bodenner
Responding to my post on the relative nature of economic distress, a reader writes:
Here's the thing about wealth and poverty: declines are what kills you. I don't care how wealthy you are or how poor you are, to have your wealth decline is painful. All of us make plans for our lives based on assumptions about our future prosperity based on our current prosperity. If I make $100K/year this year and make $100K for the next 10 years, I can plan out my life around that. But if this year I make $100K and next year I make $50K, then I suddenly have to change my lifestyle in pretty dramatic ways. ... I'll still be better off than a lot of people in the world even if I'm bankrupt but it will sure feel awful to me.
A 50% drop in income is an extreme example, naturally. I had written that a 12% wage decrease counted as disposable income (for most people, not all). By disposable income I don't mean pocket money, but frivolous consumption: a Lexus over an Accord, an extra bedroom in the McMansion, a TV in the kid's room, bling.
I get the broader point the reader is making -- while wealth is relative between groups, it's also relative within an individual's life -- but I disagree with his conclusion. He concludes that any decline is painful, while I think most declines don't have to be -- and some could even be healthy. In other words, a modest drop in wealth forces one to examine the wastefulness or frivolity in one's life, reevaluate one's priorities, and cut back on what isn't necessary. (I speak from personal experience.) Not only will one value greater what he or she does have, any eventual increase in wealth will be valued that much more. Obviously any sudden shocks to one's income can be devastating, no matter what your station. But a little austerity can be a good thing.
Of course, because Americans are notorious for living beyond their means, no matter what income level, even the slightest loss of money can be jarring. But our cancerous credit culture is partly a sign of our Baby-Boom success; those who lived during the Great Depression were far more likely to save for a rainy day, regardless of their post-war wealth. If America today valued long- and short-term savings, and eschewed debt, most could weather unforeseen jolts.