Social Security, Student Loans and the Paradox of Thrift

A Contradiction at the Heart of Our Economy

      We have a deep contradiction at the heart of our economy and our society. Our economy cannot grow or provide jobs for people unless most of us spend more than we can afford and unless most of us fail to save adequately for retirement. Put simply, we have a choice as a society between high unemployment and poverty in old age. Why is this so?

Why We Must Spend

      Consumer spending is a large portion of economic activity in the United States. Although there is disagreement among economists over the exact percentage, everyone understands that consumer spending is important and that if it is not robust, our economy will suffer. If consumer spending is strong, businesses become optimistic, and they hire workers. If consumer spending is weak, businesses become pessimistic and lay off workers.

     Thus, in order for our economy to be healthy, we must spend, and this season is the time when we spend the most. A great deal of advertising effort goes into persuading us to spend, and we have become used to the idea that we can use credit cards to spread the cost over several months. We run up debts during the holidays and the interest on our debts adds to the cost of the gifts that we give. Holiday giving is not the only time we spend, of course. We buy cars. We furnish our houses. We acquire electronic gadgets, and we take expensive vacations. All of these contribute to the economic health of our economy and persuade businesses to create jobs.

We are Unprepared for Retirement

       But what about our individual economic health? It is well known that most Americans are woefully unprepared for retirement. Most of us don’t save enough to build healthy nest eggs, and many of us are facing difficult times in old age. So, while our economy is healthy, many among us are not healthy economically because we do not save enough.  We could save more and spend less, but if all or even most of us did that, consumer spending would decline dramatically, and we might well face a big recession. That contradiction between individual thrift and societal well-being is called “the Paradox of Thrift,” and it tells us that if we all saved as we should, our economy would suffer. Many people would lose their jobs and become unable to save just because they and everyone else had tried to save.  So, we have to keep on spending.

Spending is Threatened by Our Aging Society

       Unfortunately, healthy consumer spending is threatened by demographic trends. Our society is getting older as the baby boomers retire, and many of them are not prepared for retirement. They don’t have enough saved. People who don’t have much money can’t spend much. So, as the baby boomers retire, we can expect consumer spending to decline. We will be able to maintain consumer spending to some degree by loosening credit requirements and allowing people to finance their purchases with credit cards even though we know perfectly well that they will probably never be able to pay their debts. However, we saw in 2008 that this is not really a good idea. How can we balance the health of our economy with the need to provide for a comfortable retirement? How can we have sufficient consumer spending without impoverishing our senior citizens or our workers?

How Can We Maintain the Spending That We Need? 

      There are a couple of things that we can do, and we must do them together. First, we can strengthen and expand Social Security into a real, national pension system that provides people with a reasonable standard of living in old age.  If we do that, our seniors will be able to live comfortably and spend money. They will not buy the things that young people buy, but they will take their grandchildren on vacations and buy new cars.

      However, expanding Social Security will require working people to save more than they are saving now, and that will have a negative effect on consumer spending. We can minimize that effect if we finance the expansion of Social Security by raising the maximum income on which Social Security taxes are paid. This will concentrate the effect at higher income levels where people already save a higher portion of their income than poorer people do.

     Second, we can reduce the interest rates on student loans. This will have the effect of reducing the sizes of the monthly payments that recent graduates have to make, and that will free up more of their money to be spent. They will be able to buy houses and furnish them. They will be able to replace their cars.  They will be able to increase their spending on holiday gifts.

We Should Act in Our Own Interest

      I am not advocating these changes for humanitarian reasons, although I could do so. I am not suggesting that we expand Social Security because old people deserve a comfortable retirement, nor am I not saying that we should reduce the interest rates on student loans because the current rates place an unfair hardship on recent graduates. I am saying that we should do these things for a purely selfish reason, which is that if we do not do them, our economy will suffer, and all of us will suffer with it.

The Downton Abbey Solution

In recent decades, the top 0.1 percent of our people have come to own an ever increasing share of the wealth and income in our country, and in this way  our income distribution has come to resemble more and more the distribution that characterized the Gilded Age just before World War I. If we are going to permit the emergence of a society like that of the Gilded Age, perhaps, we should consider adopting some of that era’s social practices, especially those that dealt with the problem of unemployment. We can see those practices in an early episode of the television series Downton Abbey. In that episode, Matthew, a distant middle class relative who has become the heir to Downton Abbey, has trouble adjusting to aristocratic life. Specifically, he is annoyed at the attentions of his valet who insists on helping him to dress. Matthew wants to get rid of the valet because he can dress himself perfectly well, but when he expresses this to the Earl, he answers, “Would you really deprive a man of his livelihood because you can dress yourself?”

The point is that those who can afford to employ servants have an obligation to do so in order to provide jobs for people. This version of noblesse oblige is, in the Earl’s view, the only real justification for the existence of a wealthy, privileged class, and in fact, the wealthy class in Britain performed this role admirably.  In 1900, domestic service was Britain’s largest class of employment and included approximately 1.5 million people. (Today, only about 65,000 people are in domestic service in Britain on a much larger population base.)

Many features of the lives of the wealthy revolved around the fact that they employed large staffs of servants. For example, wealthy people changed their clothes often. They had morning clothes and evening clothes, and they engaged in activities like tennis or fox hunting that required special outfits.  In those days, there were no wash-and-wear fabrics. So, all that clothing had to be cared for by servants including washing maids, valets and lady’s maids. Wealthy people traveled by horse and by horse-drawn vehicles, too, and a staff was required to care for the horses and to drive the carriages. When automobiles arrived, they were driven by chauffeurs.  Meals were elaborate and they were served elaborately. So, kitchen staff was needed as well as a staff to serve at the dining table. Individuals did not choose this way of living. They followed a tradition that obliged them to maintain a certain style, and that style required a large staff of servants. In effect, their social position required them to employ those staffs, and more than a million people in Britain depended on the livelihoods that were thus created.

Our distribution of wealth may soon resemble that of early twentieth century Britain, and perhaps we should also learn something from its social rules. Perhaps we should begin to view our “top 0. 1%” as people who have an obligation to create employment. Here are some suggestions for rules for the top 0.1% updated to fit our twenty-first century world. 

1.       No person in the top 0.1% should drive his or her own car, and when such people arrive in public places driving themselves, they should be widely booed, and their social solecism should be reported in the press. Their friends should refuse to associate with them, and they should be refused admission to the trendiest clubs.

2.       No person in the top 0.1% should be able to cook. Anyone who can cook should be regarded as a low class person unworthy of participation in exclusive social events and should be barred from exclusive resorts and hotels. It should be clear that respectable people employ cooks and kitchen maids.

3.       Outdoor barbecues are a special case and require a separate cook. Clearly, barbecuing is beneath the dignity of a professional cook, and no such person would consent to work in a house that did not employ a specialized person for outdoor grilling. 

4.       No person in the top 0.1% should be seen carrying packages. Such people should carry purses, canes and gloves to indicate that they do not need to carry their own packages, and the men should remove their hats indoors to further encumber their hands. When such people shop, they should be accompanied by servants who carry their packages for them. It goes without saying that carrying packages is beneath the dignity of a chauffeur. 

5.       It should be considered unacceptable for a person in the top 0.1% to answer the door or the telephone in his or her house. Respectable people employ butlers for that purpose, and people in the top 0.1% who insist on answering their own doors or telephones should be shunned socially. 

6.       No parent in the top 0.1% should ever be seen in a public place with his or her children unless the children’s nanny is also present. Clearly, the responsibility to care for children precludes a nanny from functioning as a chauffeur, and carrying packages is beneath a nanny’s dignity. Thus, a woman who goes shopping with her children will need at least three servants to accompany her. 

7.       Only a nanny may take children to school, and since she cannot function as a chauffeur, she and the children must be driven by the family’s chauffeur. (It goes without saying that such people never take buses or subways.)  If the children have books, notebooks or other materials to take to school with them, a third servant must accompany them to carry these things for them. If a child arrived at school without being properly attended, other children of the top 0.1% would know immediately that he or she was not a member of their social class and would shun and bully the child.

I could go on, but you get the idea. If we are going to allow a very high concentration of wealth, it should carry with it a responsibility to use at least part of it to employ a large number of servants so that the wealth may be redistributed through regular, market mechanisms.