Solve the costs first

Perhaps the proper definition of frivolous spending should not be based on price or culture, but should include some provision for a cost-benefit analysis:

The debt of the typical American family earning about $45,000 a year rose 33.1 percent from 2001 to 2004, after adjusting for inflation, according to a study based on data compiled from the Federal Reserve Board’s most recent Survey of Consumer Finances. The Fed report, released in February, gave raw numbers on debt levels. The new study analyzed the data more closely to determine the sources of debt. It was conducted by the Center for American Progress, a Washington think tank that describes itself as progressive and is run by former Clinton White House chief of staff John D. Podesta.

Real wages, after adjusting for inflation, have been flat since 2001, according to the study, while the cost of big-ticket items for which families pay the most rose. In the past five years, the costs of medical care, housing, food, cars and household operations rose 11.2 percent, the study said. Many families are trying to make up the difference by borrowing, according to Christian E. Weller, author of the report and a senior economist at the center.

“Very little can be explained by frivolous consumer spending,” Weller said. His views were echoed in a news conference by Elizabeth Warren, a law professor at Harvard University who analyzed the sources of debt that emerge in bankruptcy filings and reviewed the results of Weller’s study.

That’s a lot of build up to show that for me to deliver the punchline. Maybe Mr. Weller and Dr. Warren should’ve talked before the press conference, since they clearly didn’t. Rule number one when dealing with an accomplice is surely “get your stories straight”:

Many families, particularly middle-income households, aren’t acknowledging that declining incomes mean they must radically adjust their standards of living, according to Weller and Warren. Warren suggested that families that can no longer realistically afford their single-family houses should move to condominiums, consider limiting their families to a single automobile, get second jobs to pay off debt, or move to less expensive school districts that may not have the highest test scores but where children perform acceptably well.

Ah, yes. The same way we’re perpetually struggling to get ahead financially the way our parents did because everything is just so much more expensive. We ignore that we now consider an 1,800 square feet home unacceptable, even though we grew up in a home with only 800 square feet and no central air conditioning. When expectations and demands grow ahead of income, something will go wrong. How is debt a surprise?

Of all the examples attributed to Dr. Warren, none clearly indicate anything other than the average American family’s view of reality is askew. Exactly the same way Congress is driving us to bankruptcy, a family that sees its excess spending problem as most immediately solved by more debt should not be surprised by the trouble it encounters. When I spent myself into credit card debt in college because I needed to have the things I didn’t need, and couldn’t afford, I paid for it throughout my twenties with fewer luxury items. When all the cool kids in my income bracket had cell phones, I didn’t. When they had BMWs, I had a Volkswagen. When they lived in the hip, urban part of Northern Virginia, I lived in the lower middle-class neighborhood. Eventually I paid those debts off, which would allow me to catch up materially. I haven’t done it, which was a useful lesson. And I got it without waiting for someone to rescue me from myself.

More thoughts at Cafe Hayek