Sunday, August 14, 2011

Joe and Jane Six-Pack's future planning

It is fairly obvious that much of the audience here is skeptical about the long term prospects of our current economic and/or political systems.  The extent of the skepticism varies, but this is not the land of rose colored glasses: at least not on that subject.

Some of these issues are fairly obvious, in fact they are so obvious that some of them are so obvious that at least some of the issues are part of major political platforms.

Yet you hear people talk about how blind and oblivious the general public and/or their specific friends and associates are to planning for any of these issues.

My reaction would be: “What do you really expect?”  “Why would you think that people would have any interest in planning for a problem that concerns a minority of society, when you cannot get them to even pay the slightest attention to future planning for events that the vast majority of society agrees are extremely important issues?”  It is not as if we have this society of eager-beaver, ants-with-nose-to-grindstone, future planners out there.

Look at how people go about their financial planning.

Annamaria Lusardi, Dartmouth College and NBER, 26 February 2010. Hat tip Freakonomics.

The majority of Americans do not plan for predictable events such as retirement or children’s college education. Most importantly, people do not make provisions for unexpected events and emergencies, leaving themselves and the economy exposed to shocks…

In managing debt, Americans engage in behaviors that can generate large expenses, such as sizable interest payments and fees. Moreover, more than one in five Americans has used alternative (and often costly) borrowing methods (payday loans, advances on tax refunds, pawn shops, etc.) in the past five years.

While many believe they are pretty good at dealing with day-to-day financial matters, in actuality they engage in financial behaviors that generate expenses and fees: overdrawing checking accounts, making late credit card payments, or exceeding limits on credit card charges. Comparing terms of financial contracts and shopping around before making financial decisions are not at all common among the population.

She also brings up, but I think gets slightly wrong the following:

The most worrisome finding is that many people do not seem well informed and knowledgeable about their terms of borrowing; a sizable group does not know the terms of their mortgages or the interest rates they pay on their loans. Finally, the majority of Americans lack basic numeracy and knowledge of fundamental economic principles such as the workings of inflation, risk diversification, and the relationship between asset prices and interest rates.

What I think she has gotten slightly wrong, is that she states it as there being a lack of knowledge, where as I would say that we lack the knowledge because we have a lack of concern.

So Russell, you say, if people care so little about money, why do they argue about it so much?

To which I would answer: they care about how much money is coming in on a paycheck-to-paycheck basis, and they care about how much is going out on a paycheck-to-paycheck basis.  That’s about it.  If you offered people 50 year mortgages, so that they could eat into what little social security payments as they are still paying of their mortgage when they are 80 years old:  they would take them.   When they started offering lease arrangements, and longer term car payments, the size and costs of the vehicles increased.  Payday lending with its interest rates of 700%+ is pretty much proof that at least a sizeable group of people don’t even care about the interest rate if it is spread out in enough small payments.

So why would you expect people to worry about issues of resource depletion, fragile infrastructure or ecological concerns?  They don’t even want to be bothered problems that can be counted in discreet units and there is no argument about the future payoff.

Somewhere in her study she notes, that people who with better understanding of financial principals are more likely to invest, and less likely to go heavily in debt.  But I think the causality is backwards.  I think the people have an interest in looking to their financial future, so they learn about it.  Not that they learn about finance and thus have improved behavior.  The financial literates are a self selecting group.

Now in the case of worrying about the-end-of-the-world-as-we-know-it (EOTWAWKI) you have pretty much the same situation.  The people who are most attracted and receptive to the more dire warning also tend to be those with the least (at least emotionally) vested with the current status quo.   The degree that people are receptive to issues and the extent to which they will act on these issues is going to tend to be very much in line with where they stand within the structure of society. 

Let us look at two examples.  Glenn Beck devotees are disenchanted with the system because they feel that they are not within the power structure, but if you changed the rules of governess they would not have a problem with the system per se.    On the left , you have a variety of groups that are very much disenchanted with the economic structure of our society.  Although some of them are still looking for the revolution of the proletariat, they tend to focus on the ecological problems that are an outgrowth of our global economy: particularly if the issues can be associated with large corporations.  Both of these groups are concerned with a coming collapse; both groups think the other group is a bunch of idiots.

If you go down the various laundry list of disasters that are discussed, but usually not prepared for, by the general public, there is usually some sort of political clash that keeps it in the lime light.  If there is no obvious political spin, it is generally going to be ignore.  There is no money or patronage in the Yellowstone caldera.  Nuclear war, once the subject of many a disaster tome, is no longer such a key issue now that the Democrats have had their turn at playing with the military’s toys and there is no cold war defense build up to fund: So no books.

So people cannot be bothered to prepare for much of anything, and when they even bother to worry about it, it is usually fueled by politics as much as real underlying concerns.

So where does that leave us?
If you want somebody be worried about the future, bring up the concerns that (even it is arbitrary) best play to their political (or call it tribal) view of the world.

But unless they display rare amount of planning and preparing and saving now, don’t expect them to do much with their concerns.


PioneerPreppy said...

You hit the nail on the head with the statement about those most immersed in the system. Those people who are way in debt or getting some form of government check each month are in complete denial from what I have seen. Government workers are the worst they still loudly proclaim their benefits are guaranteed and fail to notice how many gov. entities have already defaulted or changed the game.

russell1200 said...

Government workers in the Carolinas don't have collective bargaining.

The State government, under the Democrats has tried to cheat on its promises from time to time, with the courts generally smacking them down.

In the odd flip that is NC politics, the State Government workers (but not teachers) and Republicans are often somewhat in sympathy with each other.

chemotherapy said...

Glenn Beck devotees are disenchanted with the system because they feel that they are not within the power structure, but if you changed the rules of governess they would not have a problem with the system per se.

russell1200 said...

C: Possibly even if you just changed the system of payouts. Many libertarians are a bit delusional as to how much government support they actually get.

Mind you, not that I am saying the other side is any better.