I’d wager there are not many more devoted fans of this paper’s personal finance writer, Michelle Singletary, than yours truly. She’s a walking, talking, vigilant consumer protection bureau, although, to be clear, she doesn’t let you off the hook either. I don’t just read her. I read her to my kids.
But there is something about which we disagree, and that’s debt. She thinks it stinks. Wants to smack debt around. If debt was crossing the street, she’d run it over. In case you’re not catching what I’m pitching, her last article was called: “Yes, All Debt is Bad Debt.”
I disagree, and Michelle graciously agreed to mix it up with me. I’ll start.
JB: Thanks so much for joining me, Michelle. I don’t typically get such star power up here in my column, so I’m a little nervous.
I think there’s great debt, good debt and bad debt. Great debt boosts your earning power such that you can pay it back and have money left over afterward to safely take on some good debt, by which I mean debt that raises your living standards, if not your earning power.
A student loan can be (that’s “can be,” not “is”) great debt. A home loan can be good debt. I’ll get back to bad debt, but forgoing borrowing for school or to buy a new home, which itself could be a neighborhood with better schools, more opportunity and upward mobility, because “all debt is bad debt” would be a terrible mistake, wouldn’t it?!
MS: I’m honored that you’re a fan. Your passion for addressing economic inequality is something I’ve admired for quite some time.
So it is with great respect that I have to disagree with you about personalizing debt. And here’s why.
There is a lot of research on behavior economics that seeks to provide psychological insight into how people handle financial decisions. People don’t make rational decisions about their finances.
In theory, certain loans make sense. Without mortgages, most Americans couldn’t afford to purchase a home, which for many households ends up being their biggest asset. I recognize that business loans have helped people follow their passions and create small businesses. But what we need in America is not more cheerleading of debt but more caution.
For the past several years, I’ve been the head of a ministry at my church that I began to help people manage their money. Most come in with debt that they took on thinking it was great and good. They were told that a mortgage is good debt. Unfortunately, all they heard was the “good” part.
I’ve worked with people with entrepreneurial aspirations who were told that a business loan was a great way to build wealth. Instead, the loans created a burden they couldn’t carry.
I’ve counseled people — many nearing or in retirement — still carrying student loans. They were told the debt was a “good” investment. They only heard the investment part. Even if they are managing the monthly payments, research shows the burden is preventing people from getting married, starting a family or buying a home. Even some seniors are seeing their Social Security benefits garnished to pay for student loans they took out for themselves, adult children or grandchildren.
When I speak about debt with a deep hatred, I’m purposely targeting the folks prone to irrational financial optimism.
I’m trying to help them put on the brakes. I’m dark about debt because if I’m not — if I’m painting it as great or good — those to whom it isn’t will hear only what they want to hear.
By not referring to debt as great, good or even bad and labeling it all just debt, my goal is to change behavior. I’m merely appealing to people’s emotional side.
If you hate debt, as I do, you’ll approach it with trepidation. You’ll be careful not to take on too much because you loathe it. And if you disdain debt, you’ll do what you can to get rid of it as soon as you can.
JB: That’s clarifying. People are going to take on debt, regardless of what you and I tell them. So, if you can get them to “approach it with trepidation,” they’ll be more careful. Makes sense.
An interesting aspect of our argument is the difference between personal debt and national debt. You think a lot about the former, I think a lot about the latter. And it is very clear that many nations really hurt their citizens by turning to “austerity policies,” reducing borrowing when their private sectors were still struggling to grow.
Even former president Barack Obama used to get this wrong. Back in 2010, he said that “small businesses and families are tightening their belts. Their government should, too.” In fact, the opposite is true, as has been understood since the days of Keynes. When, in recession or weak recovery, the private sector is going full Singletary, and reducing borrowing and spending, if the government joins them, the recession will be needlessly and painfully extended.
Of course, the opposite is true in strong recoveries, which is when you want to reduce your levels of public debt (see my screed on optimal fiscal policy).
Bottom line, whether you’re a country or a person, it’s essential to distinguish between useful and reckless debt. For that, we need a debt serenity prayer: “Keynes, give us the wisdom to tell the difference!”
You get the last word.
MS: I love the idea of applying a serenity prayer to debt.
So let’s do apply this to our debt debate.
I encourage people to learn to accept that yes, because of your economic circumstances, your children may not be able to attend a select college if it means taking on massive debt.
And have the courage to reject that your only choice to achieve financial greatness is to take on debt you may not be able to afford. This may mean your child starts off at community college or commutes rather than borrows for room and board, which in my mind is the same as taking out a loan to pay for rent. We would NEVER tell people to borrow to pay their rent.
Have the courage to live below your means while so many others are living large using borrowed funds.
Embrace the wisdom that there has never been good or bad debt. Debt can be a tool, but handled badly it will wreck your future.
Jared, I understand your concern that without debt there may not be investment and growth on a macroeconomic level.
But I’m more concerned with individuals on a micro level. You and I both agree that people should have choices and opportunities to improve their economic status. But the reliance on debt to achieve that goal has just gotten to be too much for far too many people.
So, on this issue, we have to agree to disagree. I still stand firm that there is no great, good or bad debt. There’s only debt.