The Profligate vs. the Prudent

Mon, 07 Apr 2008 20:10:28 +0000

I agree with much of Stan's post on the vanishing role of personal responsibility. But there are people out there, maybe you know some, who have been trying to behave responsibly with their finances. They didn't enter into a mortgage contract for a house they couldn't afford. They didn't speculate wildly to buy financial assets based on dubious promises. What has been their experience?

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I think it has been twofold:

1) When they try to save, they face intense competition from people in other countries to get a decent return on their savings. There has been a global savings glut for a number of years--the payoff to saving for the future is being held down by global factors.

2) When they look to spend their money, prices are being increased by the behavior of debt-crazed people in this country. Their neighbors' willingness to borrow to the hilt to live beyond their means keeps prices high for everyone.

That's a tough spot--squeezed on the saving side and the spending side. So where does it end?

As they say, it's not the speed that kills, it's the sudden stops. We are in the midst of that deceleration now. As that process unfolds and after, we would expect those who have not been imprudent to be in a position to pay less for what they consume and to be able to pick up the assets from their profligate neighbors at a sweet price.

But now the government intervenes, providing assistance to those who have been borrowing beyond their means. They do so at the expense of the prudent, directly via taxes to fund the bailouts and indirectly by propping up the prices of the goods that the profligate have purchased.

The guiding principle for any government intervention should be that the prudent come out ahead of the profligate--that the government's actions serve to make the profligates understand that they should have been behaving prudently all along. These interventions don't have that feel to them.