Opinion

The pernicious ideology of personal finance scolds

Here's the dark side to all those calls to save, save, save...

Are you saving enough for retirement? Probably not, if you listen to the personal finance advisers out there.

These are people who perform middle-class morality by scolding people for not saving enough money. And sure, cutting debt and avoiding high-interest loans is all well and good. But the ideology of saving scolds goes a lot further than that. Their radically individualist views are not just incoherent, but ideologically pernicious.

First of all, I have yet to see it demonstrated that significantly increasing the savings rate is actually mechanically possible. Consider the radical saving scold Mr. Money Mustache, who suggests a savings rate of 50 percent is a great target.

And when it comes to one person, it might well be. But when it comes to everyone as a whole, it isn't so simple. Personal consumption currently amounts to nearly three-quarters of the economy, while the savings rate is about 5 percent. What would happen if that rate were jacked up to 50 percent overnight? The country would fall into an instant depression.

The reason, roughly speaking, is that money goes in circles: My spending is your income, and your spending is my income, as Paul Krugman likes to say. If we both deeply slash our spending at the same time, all we'll do is reduce our individual incomes.

Now, clearly that two-sentence model is too simple (in particular, it lacks investment), and people dispute at what point the paradox of thrift may take hold. (And yes, The Week runs these type of articles as well.) But my point is that saving scolds do not even consider the idea that their schemes can't be widely adopted. Instead, the focus is always on the individual, and any potential fallacies of composition are ignored. The flip side of that focus is that people who haven't saved enough only have themselves to blame — a point that's particularly unjustifiable in the case of the poor.

These pitfalls are not surprising, given the libertarian-flecked ideology of personal finance. Through its bleary lens, money is sui generis — something that exists apart from human society and actions. The scold focus is solely on accumulating a big enough money pile for oneself, never on the broader economic ecosystem that supports that wealth.

This individual-only focus propagates the idea, as Greece's new finance minister Yanis Varoufakis has written, "that wealth is privately produced and then appropriated by a quasi-illegitimate state, through taxation." This is false: "precisely the opposite applies: wealth is collectively produced and then privately appropriated through social relations of production and property rights."

After all, as Steve Randy Waldman has written, saved money is absolutely useless unless someone does the hard work of pushing the economic machine through time. Unless someone is around in the future to redeem your old money for goods and services, all that savings is for naught.

That leads me to the final major problem with the personal finance industry: corruption. As Helaine Olen points out in her book Pound Foolish, it is rife with scam artists. Instead of helping people with simple, reasonable advice, many personal finance advisers are excellent salesmen who profit by hawking unnecessary DVD sets, tote bags, wallets, and other such crap.

This is a structural problem with putting individuals in charge of their own retirement. Olen notes that people often pay shockingly little attention to their finances — not opening their 401(k) statements, paying bills only at the last minute, and so forth. I think you can chalk this up largely to decision fatigue. As Noah Smith once wrote about hanging out in a Tokyo park where just about everything was private and priced:

Does all this private property make me feel free? Absolutely not! Quite the opposite — the lack of a "commons" makes me feel constrained. It forces me to expend a constant stream of mental effort, calculating whether it's worth it to spend $4 to sit and rest for 10 minutes, whether it's worth $2 to get a drink. [Noahpinion]

And as I can personally testify, the personal investment experience is a particularly terrible and intimidating one, especially if you come from anywhere close to poverty. As a result, people procrastinate. So it's not remotely surprising that the most successful personal finance advisers are those best at projecting a soothing, confident affect, or that most successful mutual fund managers are ones who offer "bad investment products to a middle-class mass market based on their ability to swindle people," in the words of Matt Yglesias.

All this adds up to a classically American failure of excessive individualism. We have a social insurance-style retirement program (Social Security) that has been an extreme success. But instead of building it out as needed, we constructed a tottering edifice of complex tax benefits and other schemes to try and force everyone to deal with their own retirement.

The 401(k) experiment was a colossal failure. But until we can learn the unavoidable truth that all retirees, without exception, live off the currently-working, the simplest solution to retirement will remain forever out of reach.

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