The American Way: Wealth or Debts?

Did you read David Brooks' The Great Seduction? His NY Times column asserts that this country has gone astray over the last 30 years:

The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The institutions that encourage debt and living for the moment have been strengthened.

A column Ben Franklin might have admired, it created quite a stir.

On the Posner-Becker blog, Richard Posner says Brooks has it wrong. Saving and wealthbuilding are no longer necessary or desirable in our age of technology. Debt is actually good for us:

[I]t increases the incentive to work hard by making it at easier for people to obtain the goods and services they want by borrowing the money they need to pay for them, yet at the same time increasing the risk of bankruptcy should they slack off on their work and so let their income fall.

Really? Did Tiger Woods limp around Torrey Pines last week because he desperately needed the money?

Gary Becker also writes approvingly of debt. He sees borrowing as modern life's method of risk management. College debt he likes especially because it allows everybody to get a college education. Starting adult life in debt is good and natural, Becker suggests:

The debt of college students does not simply pay for tuition, but also helps cover living expenses while in school. College students earn little then and in the first decade or so after they enter the labor force, while they earn much more when they are older. For this reason, the most forward looking and least impulsive college educated individuals want to borrow, not save, when they are young in order to raise their consumption . . . .

Do his year's college graduates really think debt is so cool? In The Wall Street Journal Terri Cullen points out that many will have trouble finding jobs lucrative enough to pay off their loans, much less permit added borrowing to "smooth consumption."

Cullen cites a study showing the following levels of average debt among 2006 grads:

Student loans: over $21,000
Credit card debt: about $2,200 (about $5,800 for grad students)

As for medical school, new doctors start with a debt burden averaging around $120,000.

Way back in the 20th century, when Posner and Becker finished their higher education, I wonder what their debt burden was?

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Wealth building vs. living deep in debt: the choice Americans make, obviously, will determine the future market for trust and investment services.

If Posner and Becker are right, credit card companies will continue to make heaps more money than trust companies.

Loan sharking, anyone?