A Return to Thrift

By Geoff Colvin
Tuesday, October 21, 2008

Sometimes it takes a near-death experience to change bad behavior. Think of your friend who quit smoking after a coronary incident. Or look at how banks are reducing their dependency on debt after watching rivals go belly-up. On Wall Street, this process of reducing debt relative to equity is called deleveraging. Main Street should be deleveraging, too.

Deleveraging is different for people than it is for companies, however. Big institutions are selling assets to pay down debt, but most people can do little if any of that. Their largest asset is probably their home, which they don't want to sell because they need a place to live, and in today's environment may be worth less than the mortgage balance. So for most people, the only way to pay down debt is to cut back on spending, or to use a quaintly antique term for it, be thrifty.

To realize how far we have gotten away from thrift, consider how those in the Greatest Generation financed the big purchases of their lives and how little cash the Facebook generation puts down for homes and cars or how comfortable they are with credit card debt. The present crisis could be the ideal moment to make thrift cool again -- because debt has rarely been in worse repute.

Debt got us into this mess. Blaming subprime lenders has become popular, and in some cases they were deceptive, but most borrowers knew perfectly well what they could afford. Millions joined in the debt mania, and now we're paying the price. Maybe American culture is ready to turn a corner.

It's an idea that's gaining momentum. The Thrift Project, a research effort by several think tanks, has produced a recent report ("For a New Thrift: Confronting the Debt Culture"), a book and a traveling exhibit. Ronald T. Wilcox, a professor at the University of Virginia's Darden Business School, has written a book called "Whatever Happened to Thrift?: Why Americans Don't Save and What to Do About It." The common message: America's debt addiction is seriously bad for the country, and solving the problem requires action on many fronts.

The researchers with the Thrift Project say we need to change our institutions. Most big banks are no longer very friendly toward small savers or aren't even present in less than affluent neighborhoods. Meanwhile, state lotteries are depressingly effective at getting poor people to put their scarce dollars into essentially negative-interest "investments." Wilcox says we can use findings from behavioral finance to entice people to save more -- for example, by changing the default choice in 401(k) plans so that employees have to opt out rather than opt in. From that perspective, Democratic presidential candidate Sen. Barack Obama's proposal to let workers break into their 401(k)s is a step in the wrong direction.

But it will take more than white papers and wonkery to change social norms. So what societal forces could be harnessed to make economizing admirable? A couple seem promising. One is environmentalism: The mantra of "reduce, reuse, recycle" is also a formula for saving money because wasting resources not only is personally profligate but also harms everyone by hurting the planet. In Hollywood, a Prius is far hipper than a Hummer. Another force might be retirement anxiety: If you don't save enough to pay all your own bills, then you're forcing your kids and mine to pay them, and that's not right.

It's far from certain that focusing on any of this would work. The famous Harvard University sociologist (and former Fortune magazine staff member) Daniel Bell contended in "The Cultural Contradictions of Capitalism" that something like the current mess was predictable; capitalism depends on diligent hard work but also on the promotion of hedonism and self-gratification to keep people spending, which eventually must corrode the ethic of self-sacrifice. The story, he felt, cannot end happily.

I'm not ready to give up on thrift just yet because I suspect Americans are finally ready to embrace thrift today for a better tomorrow. If we do, and even if that causes a temporary hit to economic growth, I'm certain that we will be happier, saner, calmer and ultimately much better off.

Geoffrey Colvin is a senior editor at large for Fortune magazine.

© 2008 The Washington Post Company