Megan McArdle on Debt and Self-Restraint
Dec 7 2009

Megan McArdle, who writes the blog Asymmetrical Information at The Atlantic, talks with EconTalk host Russ Roberts about debt and the challenge of self-restraint. She discusses her recent Atlantic article on her experience at a Dave Ramsey personal finance seminar, how it affected her life, and the psychology of self-restraint. The conversation concludes with a discussion of debt and savings during the Great Depression and the current national debt of the United States.

Megan McArdle on Failure, Success, and the Up Side of Down
Megan McArdle of Bloomberg View and author of The Up Side of Down talks with EconTalk host Russ Roberts about her book. McArdle argues that failure is a crucial part of success in personal life and in the large economy....
David Owen on Parenting, Money, and the First National Bank of Dad
David Owen, author of The First National Bank of Dad, talks with EconTalk host Russ Roberts about how to educate our children about money and finance. Owen explains how he created his own savings accounts for his kids that gave...
Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Dec 7 2009 at 10:32am

I’m confused a bit on Dave Ramsey’s message:

a) It’s good to put money in the bank
b) It’s bad to take on debt

Aren’t those two things contradictory? Aren’t they just different sides of the same basic transaction, one person giving money to another, trusting that they’ll pay it back later with interest?

Isn’t it more sensible to talk about good debt vs bad debt instead eliminating all debt?

John Strong
Dec 7 2009 at 10:33am

In my religious education I was taught that “debt is presuming against the future.” Hmmmm.

Greg A.
Dec 7 2009 at 12:39pm

As always, I enjoyed the podcast. It made me think about my own finances – which is an achievement altogether.

But I’m still a bit confused:

For example, Megan borrowed $100,000 to attend the University of Chicago. For that, she received a degree from one of world’s greatest academic institutions. But in addition to that degree, she sharpened her worldview and gained a basket of skills held by very few in this world.

This is where things get strange: 1) She focuses on the money spent traveling to cancun – admittedly a mistake, but probably only 1-2% of her overall debt came from the vacation; and 2) She seems to value the MBA only in terms of the salary she received in the first 2-3 years after graduating.

I don’t know her personally. But if I had to guess, I would bet that the U of C MBA probably helped shape her worldviews and analytical skillset in a way that vastly exceeds her potential salary at a management consulting firm. It’s taken her longer to monetize those skills, but I’d bet that her U of C debt was well worth it in the long run.

So Dullgeek’s point is a good one – There is such a thing as “good debt.” And, I suspect that debt spent on education (particularly at the elite level like Harvard, Chicago, etc.) is a very good investment.

Dec 7 2009 at 1:56pm

The way that I see it debt is valuable for 2 thinks:

1. It allows one to consumption more when they are young. Like buying a home with a 30 year mortgage while you are young.

2. It allows fast growing businesses with good ideas to grow faster and displace older less efficient businesses.

On my first item I tell people that it is OK to have a car loan while you are under 30 years old and it is OK to have a home mortgage while you are 45 years old. If you are older than 45 you should have no debt.

On point 2, old slow growth companies like GE and GM with high debt have always driven me crazy. If old companies need to expand and cannot fund the growth from retained earnings they should issue new stock. If you are growing at under 10% per year and retained earning should do it. I do not buy stock in old companies if they have much debt. I do understand that the tax systems does favor debt over equity but I think the risk outweigh the tax advantage.

BTW I am 53 and have had no debt since I was about 38 and I have never borrowed to buy a car. Also I did not make much money before about age 45. In fact at 30 my income was very low just a little above minimum wage.

Lee Kelly
Dec 7 2009 at 4:19pm

But do I want the future me to be happy? I used to think so, but the future me seems like a selfish jerk.

arc of a diver
Dec 7 2009 at 6:20pm

Paging Robin Hanson… You are needed at Econtalk comments…Robin Hanson…

While I disagree with many details of how GMU economist Hanson speculates about the next 20-40 years of accelerating technological changes and labor, etc, I think it has been clear since the late 1990s that most people can no longer economically plan for their future in the way people did for much of the 20th century.

Take the guest, who I thought heard was 36 years old. Almost everyone her age assumes they will retire at around 65, yet that places them at the year 2040.

But 2040….? All bets are off with respect to the health and activities of said 65 year old and for many who will be much older then.

Russ Roberts has said a few times that he thinks growth will be strong, and I suspect he …er, suspects… that growth will be *very* strong in the 2020s, 2030s and the rest of this century. I’d argue it is likely to go way beyond the vanilla 2.5 percent GDP/capita growth, which, of course, would be mind-boggling to someone living in the early 1800s.

Dec 7 2009 at 7:07pm

I think the cash focus is an interesting use of the fundamental views over good and bad money that people hold.

People prefer to squirrel away their good money (cash) and prefer to spend their bad money (credit, and to slightly lesser extent debit).

If you switch your holdings primarily into good money, one will very easily and naturally end up squirreling a higher percentage of it than with the opposite mix.

Since, with credit, the starting percentage can be greater than 100% of income, the differences could be particularly dramatic.

Dec 7 2009 at 7:43pm

I thought that Megan actually called up Russ on something I always thought bordered on a strawman: ‘Keynes advocates long term Government spending.’

I am definitely no expert but what I have heard of Keynes is that ‘stimulus’ is a short term action in response to certain, relatively rare economic situations.

I realise Russ has a way of getting from A to B. The emergent aspects of Government. The difficulty in cutting spending. The “real,” underlying debate: more/less like France. But he does tend to present it as if Keynesians claim that Government spending is always good.

Dec 7 2009 at 8:48pm

Here is a question I find interesting.

Imagine a world where home loan credit isn’t available for some reason. It has taken a while for the market to have evolved into its current shape where banks will give cheap (relative to other types of debt), very long term loans. Its not hard to imagine a world where this failed to occur for some reason.

What would the housing market look like? Would we live in more basic houses? Would land be less valuable? Would housing account for a much lower percentage of our overall spending?

In many underdeveloped markets home loans for poor people are non existent or far shorter term.

Dec 7 2009 at 10:04pm

Netsp, there is no need to imagine – majority of the world population live in this kind of world 🙂

Dec 7 2009 at 10:18pm

I loved the podcast, but I find the discussion of the government debt to be incomplete. Federal debt is only about 18% of the total US debt market, which was valued at about $33 trillion dollars in 2008. It is hard to see how China, which only owns a fraction of the outstanding treasuries, really sets the interest rate . . . of course, at the margin things are a little different.

Furthermore, it is hard to see how an extra trillion is going to destabilize the economy and lead to a default on government debt. The Fed’s “Flow of Funds” report shows aggregate household wealth at $53 trillion in 2009. I don’t see how we’re really close to default. One needs to talk about the minuses AND the pluses.

Still, the tenor of the discussion was right on. You simply can’t eat like it’s Thanksgiving every day! No one meal will kill you, but it doesn’t end well . . .

Dec 7 2009 at 10:52pm

Another great episode Russ — thank you.

My wife and I have been following the Dave Ramsey “financial peace” program for going on 3 years now and it is very rewarding.

1. It provides complete control over your finances. We use both envelopes (I thought it was crazy at first) and sinking funds we call “freedom accounts” tracked in a spreadsheet (e.g., Christmas is all paid up through monthly savings transfered to a MM checking acct.)

2. My wife and I both earn about the same and find that the monthly budgeting process is an excellent communication and collaboration tool — we can talk about how we want to spend in advance (“in the circle of trust”) instead of at the point of sale with all the emotions therein. Obviously there are still differences of opinion sometimes on priorities but the process is such that we can be constructive in comming to an agreement.

All in all, it is a great program. On a macro scale, I often wonder how different America would be if a majority of folks adopted these simple but powerful tools for taking control of personal finances?

Dec 8 2009 at 6:09am

Really enjoyable podcast because the driver was Megan’s first-person experience and the fact that her intelligence and personality come across well live. The one topic I would love to see a good interview on is the whole savings/paradox of thrift issue. I spend a lot of time in Asia and China, where the savings rate is close to 50%. We all know what economy is doing the growing these days… Japan’s was just as high during its high-growth years.

So when economic pundits talk gloomily about the frightened American consumer, is the real issue one of transition, that is, the economic strains produced by a shift from consumption to spending on investment goods? What are the actual impacts of a shift toward greater saving? Who benefits and who loses, and when?

Finally, is there empirical evidence of a paradox of thrift? After all, we now know that many factors contributed to the great depression other than excessive savings–monetary policy and frightful regulatory policies, among others.

Dec 8 2009 at 11:51am

I find it odd whenever a guest blames the government for the Great Depression on account that the Fed wasn’t allowed to expand the money supply enough and was too “contractionary.”

First of all, the Fed IS the government. Secondly, “contractionary” to these people simply means that the Fed didn’t expand the money supply. To me, that means the government didn’t do anything monetarily (non-interventionist). How does that translate into “a contractionary monetary policy”? I would simply call that non-expansionary.

If freedom works, then a non-expanding money supply should work. It should make economic calculation easier for market players and recovery faster.

I understand why fiscal stimulus is basically nonsense, but I would like to hear a podcast that describes the theory behind why monetary policy shouldn’t also be considered nonsense, and why it should be considered any less interventionist than fiscal policy.

On the issue of money management, I find the focus on cash a bit odd. There are many purchases and assets people can hold that should be considered equal or more valuable than holding cash. Not all purchases depreciate significantly in value, and as Russ has said, a person who holds a lot of cash but little else and thinks himself wealthy is under a bit of a delusion. He only has the /potential/ to be wealthy.

Another commenter brought up the issue that putting your money in the bank is actually lending it to someone else (facilitating someone else’s debt). If debt was really bad, then hoarding money–not investing it–would be the positive alternative. I’m not so convinced that hoarding some money is a bad thing at all, since it insures a portion of your savings.

But I guess the modern economic argument is again that deflation is a horrible thing that must be avoided at all costs. Personally, I wouldn’t mind a bit of deflation right now. I think the people who were wise with their investing and savings habits should be rewarded for it. Inflation is just another form of bailout for the (formerly) rich.

Dec 8 2009 at 1:38pm

Mikeikon wrote:
“If freedom works, then a non-expanding money supply should work. It should make economic calculation easier for market players and recovery faster.”

This blog may help to answer some of your questions:

Also the econtalk podcast with George Selgin.

Greg Ransom
Dec 8 2009 at 2:57pm

Great conversation. I always enjoy when Russ talks with people from the “real world” about real world economic topics, e.g. like this one or his podcast with the car salesman.

Dec 8 2009 at 5:22pm

I enjoyed the podcast quite a bit. Megan is a great guest, and wholeheartedly agree with her views (re: Keynes and Friedman) in the last 20 minutes.

BUT the discussion of (or analogies about) weight loss and dieting infuriated me. Calories in, calories out as a hypothesis of weight loss is deeply flawed. A 100-calorie slice of bread (or serving of corn, potatoes, legumes) is worse for you than a 300-calorie piece of grilled chicken across any personal health factors you can consider. The key is how the foods you consume impact your metabolic pathways – a calorie of carbs is not the same as a calorie of protein or fat, and protein/fat are better; your body evolved for millions of years to eat fats and protein. Farming is evolutionarily very new – our metabolism has not caught up.

Russ, please have Arthur De Vany or Gary Taubes on the show – Art is a mathematician and Gary has the definitive book (what Nassim Taleb called, “true science”) on nutrition and history.

Dec 8 2009 at 5:45pm

Nice! A podcast inside my circle of influence.

Dec 8 2009 at 7:32pm

The Ramsey advise about the 15yr mortgage is completely silly and exposes how silly this kind of thinking is.

All of this depends on the interest rate of the debt. Not all debt is bad and in many cases paying down the debt as quickly as possible is the absolute wrong decision to make.

Consider right now you can get a fixed interest mortgage for around 5.7%, now a 15yr vs 30yr is a significant savings in interest, but its also a significantly higher payment! If you take the 30yr fixed you can invest the difference between the 15yr and 30yr payment in something which is likely to return you a higher return than 5.5%. Even a conservative stock/bond portfolio should net you a greater annualized return over a 30yr period.

Frankly better advise IMHO would be do not get a mortgage payment (including insurance and taxes) for any more than you would reasonably pay in rent for a similar dwellling. If your payments are exceeding what market rents are forget it, its a bad deal.

Another example is student loans, most subsidized student loans are ridiculously low interest. There is no logical reason to pay these down faster than the bare minimum.

Finally I am not so sure paying down debts starting with the smallest amount is such sound advise either. It seems like paying down debt starting with the highest interest rate makes far more sense. It may very well be that small sums are correlated with high interest (credit card debt f.ex) but this is not always the case.

Dec 8 2009 at 10:16pm

some nice micro-economics here….well done.

she was a great guest. speaking to her in 12 to 24 months would be great (if US hasnt defaulted yet, ay russ?!).

sort like that case stude quadrant boettke spoke about the other time…it’s worth tracking.

Raja Sekhar
Dec 9 2009 at 1:30am

Zzzz … below par for Econtalk. Not up to the usual high level of economics discourse, guest didn’t have any insights, and not interesting either.

So most/many people are not smart enough to manage their finances … what do I care? Most people cannot do nuclear physics either, do we create hand-holding pseudo-religions for them as well? (“Put all your up quarks in one envelope…”) Anyone holding cash to pay for their expenses is missing out on credit card arbitrage. Also tying up all your equity in a house is generally a terrible idea.

Dec 9 2009 at 2:41am

Russ, I think you are absolutely wrong about the dialectical idea of whether the U.S. should be “more like France” or “less like France.” Or that it is about “more freedom” or “less freedom.” Even from a libertarian perspective it creates a fatal flaw in my mind. There were more than two options when it came to the deregulation of the energy industry. Although it was painted as “deregulation,” the rules involved in privatization of the energy industry were written by politicians with donors and interests in the marketization of this public utility. Not surprisingly this “deregulation” lead to rules and favors being done for private parties of interest. Is this more or less free than a government monopoly? It seems to me that it is hard to say and that that is not the most relevent interest.

Secondly, I think this “France” terminology is pandering, at least a little, to a certain mind-set and demographic that I find irritating to hear from someone I respect as much as you. I find France to be an arbitrary and dissatisfying point of reference. France has a slightly lower top income tax rate for corporations than us… so does that mean lowering our corporate income tax rate makes us more “french?” It might be slightly more satisfying from an intellectual standpoint to say do we want to be more like North Korea or Hong Kong? but even this I find awkward and silly. Similarly “Freedom” is loaded terminology. Who would be against freedom? I personally have a serious problem with our current system, and even the concept, of “correctional institutions” (prisons). But even I would not say that the best solution is to just release all the prisoners. It increases freedom right?

Third, I don’t fully understand the off handed dismissal of ideas such as, and related to, the paradox of thrift. Starting with something that economists always praise about the benefits of capitalism are the variety of products it provides. If someone points out a seemingly ridiculous product such as baconaise or blueberry waffle corn dogs many economists are quick to point out the benefit and joy that creates for people in that segment of the population, whether we are in that segment or are repulsed by it, it provides greater “freedom” to the consumer. If people cut back on their consumption and save more, the market starts to loose these (dare I say) marginal products. No problem for those not inclined to such products but bad for those who enjoy those products, or work producing, distributing, marketing, or transporting those products. Again, no problem for free-marketeers because those dollars will be directed towards another type of food, people have to eat after all. Now if this spending is just redirected towards another segment of the economy, the economy will adjust. Baconaise will go out of business and an organic Bacon flavored mayonnaise will take its place. If, however, people decide to lose some weight or switch to a lower priced alternative then the incomes of those producing, distributing, marketing, or transporting those products will diminish or dissipate. If people spend less as a total, then there will be less money to be made. Even if there is extra savings to go towards investment, what will there be to invest in? Even in my perfect world where that money would probably go towards more health food, music venues… and to be honest breweries, that wouldn’t matter because as a whole spending would diminish. If people stop buying baconaise and start going to see more live music the economic effect will only be off-set if they spend the same amount on live music. Otherwise either less people get jobs or the same amount get jobs at a lower pay. In both cases the GDP would decrease or stagnate and economists would go on TV to freak us out.

Finally… I hope I’ve made it clear that I don’t have a preference for people to eat baconaise, buy shoddy products that they can’t afford, or do any one of the many things that I’d prefer people don’t do. I just don’t see how people could drastically save more, or behave more responsible in the current economic system without people losing jobs, losing pay, or other painful consequences. If someone could explain the flaw of paradox of thrift in this broader context I’d appreciate it. And again, not to repeat myself, I don’t have a problem with people saving more and buying less unnecessary goods on credit… I just don’t understand how the economy as a whole would benefit from those actions under the current system.

Dec 9 2009 at 2:45am

That’s because despite the country’s notorious materialism, there has always been a countervailing stream of sound economic values. The early settlers believed in Calvinist restraint. The pioneers volunteered for brutal hardship during their treks out west.

Dec 9 2009 at 6:27am


I agree with you on the more like France point. I think that this is the debate that concerns Libertarians, so that is the debate they want to have. They see most things in those terms and sometimes they think that everyone sees things in those terms but are avoiding the “real” underlying issue.

Personally I see many of the politically charged private vs public debates as a fight between socialists & corporatists or corporatist vs corporatist, with no liberal position available.

I also find the Russ’ France vs Freedom terminology really disappointing. Just as, if not more disappointing then intelligent leftists using “social justice” as an argument. If it had been there the first episode I listened to, I probably would have just stopped listening. Also his strawman version of “stimulus”.

Mort Dubois
Dec 9 2009 at 8:58am

Question: has there ever, anywhere, been a democratic government that over the long or medium term had a declining share of government spending relative to GDP? And or/declining level of public debt to GDP? I wonder whether it’s actually possible to do this. (Leaving aside whether it’s a good idea or not.)


Russ Roberts
Dec 9 2009 at 9:23am

France is a metaphor. Maybe it’s not a good one. Maybe Europe would be better. Or maybe not. But the idea is that there are economists and citizens who want a larger role for government–more regulation, a higher rate of government spending, a bigger welfare state (particularly in health care), and a narrower distribution of outcomes. They also want a less representative form of government or maybe saying it better, more ad hoc control of things in the hands of experts and less in the hands of the people. More top-down, less bottom up.

France is my way of capturing those urges in one word. Happy to hear of other ways of capturing those ideas.

Dec 9 2009 at 11:02am

The conversation started with the need for discipline — which is the heart of the Dave Ramsey program — in personal finances. Then moved on to the need for discipline in weight control — which is what all successful diets require — and time management. And finally we heard about the need for discipline in government spending — which is absent.

Great podcast, Russ.

Dec 9 2009 at 12:44pm

Raja Sekhar writes:
Also tying up all your equity in a house is generally a terrible idea.

I have heard this a few times but never a compelling argument as to why.

If the price isn’t overvalued ( like in the last 8yrs or so) what the problem? It is not like you are saving money by renting and you have to live somewhere

I guess you could argue with renting you are not required to maintain or repair the property but how much can that really add up to.

The way I see it is property generally holds its value relative to inflation (its a hedge). In addition payments are not inflation adjusted (but rents tend to rise annually). There are also tax advantages to home ownership such as mortgage interest deduction. Consider your landlord is taking the deduction, you are making the same payment to your landlord but had you owned you could deduct the interest.

Dec 9 2009 at 1:28pm

Isn’t monetary policy just another way of shifting purchasing power from some individuals to others? In what sense should this benefit the economy? I would think that the reason why spending decreases in a recession is that people feel that things have become too expensive (the inflation during the boom), and so they hold on to the rest of their savings. Wouldn’t spending then pick up as soon as prices began falling with deflation? It seems stupid to have government rob individuals of their purchasing power and give it to someone else to avoid deflation in such a situation. I’d think that would make individuals even more scared and reluctant to take risks.

Also, I’d be interested to hear a discussion about how new money from the Fed enters the market. I understand that it enters as credit in the form of loans, which means the borrowers eventually have to pay the bank back. Are there ramifications to this in an economy that is already in debt up to its eyeballs, or am I missing something?

Dec 9 2009 at 1:33pm


I believe the idea is to avoid a deflationary spiral. As I understand it deflation creates the expectation in consumers that prices will continue to fall, so spending drops off (if you expect the price tomorrow to be lower you wont spend today).

The less spending their is, the more prices come down, lower profit margins means layoffs, less people spending because they have no jobs, prices have to come down more… it feeds off itself. This may not be exactly right I am pretty sure its the gist of it though.

Dec 9 2009 at 3:01pm

Daniel Hannan quoting Irish Finance Minister Brian Lenihan.

“Some have argued we should continue to borrow and wait for the economy to grow again before tackling the budget deficit. There are three reasons why this is not a viable proposition.

“First … large deficits, left unchecked, can lead to a dangerous spiral of mounting debt …

“Second … If lenders were to lose faith in our ability to restore order to the public finances, the consequences for our economic wellbeing would be profound.

“Third, only decisive action will restore confidence.

“In our everyday lives we do not borrow to pay for our household bills. We cut back and seek to live within our means. The same strictures apply at national level. Borrowing hundreds of millions a week to pay for day to day spending is just not on. Stabilising the deficit is the next key milestone in our plan to deliver economic recovery for this country.”

Lenihan then announced a 7% cut in his total budget.

[quotation closed for clarity–Econlib Ed.]

Dec 9 2009 at 6:44pm

France is (or sounds) like a bad metaphor because it plays to American biases.

Also, you are still framing the debate on your terms. More vs less freedom is a version of that. No socialist would frame the debate this way. They would say they are trying to achieve more equality, not less liberty.

Economists wanting government discretionary powers usually want something like more stability, not more government intervention.

It sometimes seems like libertarians are accusing everyone else of just lying, masking their true intentions of increased government & decreased freedom with statements about whatever it is they pretend they care about.

Eric H
Dec 9 2009 at 8:01pm

Another great one Russ.

The riffs on disorganized piles of books and papers was a relief to hear. Now if I can only convince my wife that my piles of books and papers are a feature, and not a bug!

Charles Brown
Dec 9 2009 at 10:26pm

Russ, I enjoy the podcast, and I enjoyed the conversation with Megan.

After listening to the podcast for the past year, it seems to me that economists tend to overlook the “perspective of the whole”, or what I call the corrupt nexus; the nexus of economic determinism and political corruption.

I heard Megan express frustration at the lack of economic substance in the current political discussion, and I wonder if “economics” is as influential as you all seem to think. Does it really have anything to do with what happens in our capitalist economic structure, other than to serve as political props? Aren’t the economists themselves wrapped-up in this phenomenon?

Buck Rogers
Dec 10 2009 at 12:57am

This interview was interesting because of the contrast between the rational (econ thinkers) and practical (Dave Ramsey). When 90% of credit card holders revolve credit during the year and 50% every month, could one actually advise the average guy to use a credit card for free float?

When the average guy starts spending less than he makes and commits to knocking out debt, he needs the positive feedback. Simply paying down the debt with the highest interest rate makes sense, but the point is positive reinforcement of new habits.

Also, the average guy uses debt to live beyond his paycheck, not for leveraging financial returns.

Stan R
Dec 10 2009 at 4:25am

AHBritton, I was also discouraged by the dismissal of the paradox of thrift, particularly since it was explained on a previous show. In part, I think the difficulty stems from all the different ways money is perceived and used. The frame of “commodity money” seems to haunt analysis of money flow in economics. I hope my attempt to describe “money as signal” helps some people try a new frame of thinking.

As paraphrased by the summary, Megan McArdle says, “The money wasn’t going anywhere; banks weren’t doing anything with it.”

Right! That’s what happens with banks during a recession. The drop in spending is actually a drop in faith in future earnings. This drops aggregate demand. The drop in demand is a drop in information about where to best invest. Individuals aren’t signaling to businesses, and businesses aren’t signaling to banks. Reasonable redirection of money cannot occur without signals to indicate where to direct it, and businesses ready to take and make good use of it.

McArdle’s further claim, “the mechanisms by which people translate savings into investment were broken,” is also incorrect. First, as shown above, the bank isn’t “broken,” or doing anything wrong in a paradox of thrift situation.

Second, people do not “translate” savings into investment via savings accounts, although it may seem that way if the money is followed without an eye to the surrounding context that makes it flow. Banks are financial service providers that depend on market signals to help them decide upon reasonable investments. What happens when banks lose those signals? They freeze until they begin receiving signals again.

Thus, investment goods haven’t been overlooked, as McArdle says. Investing in investment goods for the production of goods that no one is willing to buy is not a reasonable investment. She’s actually begging the question and doesn’t realize it (nor does Russ).

Money as a signal cannot be understood while haunted by the ghost of commodity, i.e. “savings nuts for the winter is good; saving money for the winter is good.”

Obviously, as we get into the nitty gritty of reality, I will readily admit that the above can be seen as all very oversimplified, but I hope it’s enough to allow at least some understanding of how I frame what the paradox of thrift is, and how and why it occurs.

Overall, judging by the comments, I’m in the minority (but not alone) for wondering this: why Megan McArdle? She’s not a psychologist, and doesn’t seem to know much about the field, nor does she seem to have any insights into economics. The brief discussion of behavioral economics and hedonic psychology was, at best, confused.

Nonetheless, looking forward to the next podcast, and I appreciate the efforts of Russ Roberts and staff.

Dec 10 2009 at 2:06pm


I had to laugh when you brought up your Time Management course at Olin…so many years ago…because the only thing I could remember from your class was indeed “to touch each piece of paper only once.”

Yes, I’ve carried that with me. In fact, that’s really the only thing at all that I remembered from the class. Then I had to laugh again because that’s the only thing you brought up from that class. Was there anything else worth remembering???? [suppose I should look through the files where I still keep most of my Wash U notes]

In any event, no, I’m not able to touch each piece of paper only once. But I don’t touch a piece of paper more than twice….kind of a (1) sort and (2) take action routine. Yes, it works for me, and, yes, I’ve got a clean desk (most of the time).

Dec 10 2009 at 7:09pm

Regarding intertemporal choice and hyperbolic discounting, I’m confident that regular listeners to Econtalk would very much enjoy these lectures by David Laibson of Harvard University. These three lectures were given at the London School of Economics as part of Lionel Robbins Memorial Lectures. Laibson is insightful, clear, and funny. In fact, Laibson would make a great Econtalk guest.

Find the Laibson lectures here:

BTW, Mankiw states that Laibson is one of his most popular guest speakers (

Dec 11 2009 at 3:52am

Amusing note about “legal tender”, it’s only for the payment of debts. The only way you can force someone to accept cash is to first owe them a debt!

Dec 12 2009 at 9:25am

Raja Sekhar writes:
Also tying up all your equity in a house is generally a terrible idea.

I have heard this a few times but never a compelling argument as to why.

If the price isn’t overvalued ( like in the last 8yrs or so) what the problem? It is not like you are saving money by renting and you have to live somewhere

I guess you could argue with renting you are not required to maintain or repair the property but how much can that really add up to.

The way I see it is property generally holds its value relative to inflation (its a hedge). In addition payments are not inflation adjusted (but rents tend to rise annually). There are also tax advantages to home ownership such as mortgage interest deduction. Consider your landlord is taking the deduction, you are making the same payment to your landlord but had you owned you could deduct the interest.”


I’m going to assume Raja was thinking of the simplest thing wrong with “tying up ALL of your equity in a home” and that is how illiquid you’ve just made yourself by pursuing such a strategy. I’m assuming this is what he meant.

Also your point about mortgage interest deduction is inapplicable to equity. In other words, holding all of your equity in your home is not tax advantaged. Only the interest paid on the home loan is tax advantaged. You can have zero equity in your home and still benefit from the mortgage interest deduction.

Oh and Mr. Roberts, Megan McArdle? Really? IMHO, that’s a disappointing choice for your valuable program.

Dec 12 2009 at 10:06am


Actually, I was thinking about my statement above that “holding all of your equity in your home is not tax advantaged’ and realized I should have said, “not tax-advantaged in the way you were thinking”. There may be tax advantage when you cash out the equity through a sale as in many cases you’ll get to avoid capital gains tax on any profit from the sale.

Juan C. de Cardenas
Dec 13 2009 at 4:17am

Not only the tax advantage disappears when you pay off your mortgage but given the fondness of local governments for property taxes you may even find out that the tax liabilities may put an end to your dream of having a place to live without having to pay anything other than whatever maintenance your house need. I know of some old retired people on fixed income that had to sale their paid off house because of the property taxes.
Commenting on the podcast itself I found Dave Ramsey system something like the AlAnon approach for alcoholics. It is appropriate for persons who cannot control their spending but unnecessarily harsh for a normal person. I have no problem living within my means and if I, for instance, have saved $20k towards a new car and they offer me a choice of an interest free loan after I have negotiated the price of the car to the level I think is fair it would be silly of me not to take the loan and keep my money in a CD. This is not really debt because I have assets in excess of the principal of the loan and don’t have to pay interest on it.
Otherwise I agree that it is better not to have any debt because you cannot control or predict your future and that “time allocation” thing more often than not ends up not working out as you thought and sometimes ends up in an outright disaster, not to mention all the money lost to interest in the meantime.

Dec 13 2009 at 6:27am

Roberts suggests, and McArdle acquiesces, that a US sovereign debt default is now thinkable. But since it’s denominated in the product of the Fed’s printing presses it’s not really conceivable. They know this, so what were they thinking?

Russ Roberts
Dec 13 2009 at 8:33pm


It was a time management *seminar* not a course. Glad you remembered something from it. 🙂


If you inflate your way out of a deficit it is at least a partial default. It’s really a matter of degree and semantics.

Dec 14 2009 at 12:52pm

Enjoyable podcast.

I enjoy Ramsey’s shows and mostly agree with his advice, though not all. I think his biggest value is providing honest feedback to people who really need it. Very respectfully, he tells people that they need to start acting like adults. That’s something that a lot of people need to hear in our society.

Beautiful line from Russ: “destroying the natural incentives we have to act like adults.”

1. I like the connection of self control in personal finance and diet. I think that’s the same “muscle” in the brain. I’ve written on both subjects and have found good success with controlling both in my life (though using very different methods than Ramsey – e.g. I have credit cards, but have never paid a dime of interest). Dr. Laura, another-Ramsey-like feedback provider, told an overweight caller once a long time ago that she needed to take ownership of the food she put in her mouth. Nobody else will. That stuck with me and was a big part of my motivation to manage my weight better (which I’ve been doing successfully for nine years now).

It all comes down to tough choices. We need to make them sometimes.

2. McArdle said that Friedman was both right and wrong about a lot of things. I’d love to hear more about what Friedman was wrong about.

3. I didn’t care for the flippant dismissal of what works and what doesn’t work in regards to self control. I believe McArdle said something like, “any forcing system that makes me {do this} won’t work.” By not dismissing certain methods outright, I’ve been able to adopt things that work for me from various sources. I don’t expect what works for me to work for everybody, but I don’t really know until I try.

Dec 14 2009 at 8:10pm

I’m not sure we have natural incentives to act like adults. I think most of our “natural” incentives are to act very un adult like. We must train ourselves to act like adults.

I do think we need to learn about the difference between private debt and govt debt. Its quite different. Forcing our govt to treat its spending the same as we treat ours is quite unnecessary much of the time.

Dec 15 2009 at 8:27am

I agree that the system is not unique. I developed my own method years ago and have been living by it since the mid 1990s. I’m not at all an organized person but I’ve been able to live by my system.

I agree with the guest that the totaling receipts is mind numbing. Also, the system allows you to spend the money you earned with a clear conscience. And if you’re at the end of the month (I based it on a first and 15th period) and you have money left over in your “envelope”, that’s pretty fun! It’s like saying “here’s $30 go have a nice dinner.” In Canada they’ve been shaving small amounts off income tax which amounts to $10-$20 extra a month. If you don’t follow a budget, that’s small potatoes and the money is almost invisible to you. But if you keep on a budget, that’s like someone coming and putting $20 in your pocket. You know it’s there. You know what to do with it.

Anyway, I detailed my system here. I don’t use an envelope system but I use an excel spreadsheet with balances that decline as you spend. With the internet and being able to check your balances online and being able to use ATM/debit cards at point of sale it’s very very easy to know on a daily basis how much you have left.

Every morning during your coffee at work, just fire up your spreadsheet, check your balances/withdrawals/credit card purchases, log it in your spreadsheet, recognize how much you have left until next pay period, and you act accordingly.

Dec 17 2009 at 7:13am

Interesting podcast. I’m one of the “nutcases” Megan talks about: we write down everything we buy, and have done so for about 10 years, ever since we read Your Money or Your Life by Joe Dominguez. You can read a review of the book here: The review contains the steps of the program, so you can see if the book is of interest.

We pay cash as much as possible (we live in the UK). When we switched from credit cards to cash, we found that our spending dropped by about 20% almost immediately (this seems to be a common experience). My husband’s work colleagues continue to pile on debt, despite the news stories that the UK government is bankrupt (he works for a university). We are mystified by this behaviour.

There are risks with debt, largely of an all-or-nothing nature. If you lose your job, become ill and can’t work, etc., unless you have saved lots of money in advance, you can’t service your debt, and become vulnerable to bankruptcy, homelessness and so on. The bank loaning you this money does not subject itself to the same kind of risks, so the relationship is asymmetrical. All the schemes based on the “benefits” of debt and leverage are based on ideas that were developed for use by businesses; families and individuals necessarily operate on a different basis, with substantially higher risks.

Personally, we do not live in fear of losing jobs or reduced credit limits or illness because of our perspective on debt. We do not feel “deprived” because of our choices; we feel liberated from having debt hanging over us, limiting our freedom. I became ill with cancer 2 1/2 years ago. What could have been a financial disaster, were we dependent on my income to service debt, became only a medical issue, which thankfully I survived. I still do not work at a job, because my time is better spent working in my community.

Dec 26 2009 at 5:34pm

On the food topic I recommend a podcast with Michael Pollan!

Rob C
Dec 30 2009 at 10:27pm

Great Pod cast…

Been a listener for the last two years and this one really got me interested in the D.Ramsey program, I found a church that offers the program and signed up to go through a 13 week program starting in two weeks, class is 3 hrs per week. Bummer is it cost me $95 to sign up for the materials… so far Im in the hole, didnt come out of an envelope so I didnt miss it much thogh…

Comments are closed.


About this week's guest:

About ideas and people mentioned in this podcast:Books:


Web Pages:

Podcasts and Blogs:



Podcast Episode Highlights
0:36Intro. [Recording date: November 30, 2009.] Debt: personal and national. Personal; Russ's Dad's reaction to the crisis was that "debt is a bad thing." As an economist, laugh: that's what allows businesses to thrive and buy houses. Recent piece on Dave Ramsey--maybe he's onto something. McArdle: MBA from U. of Chicago between 1999-2001, cost about $100,000 when you factor in living expenses, etc. Expected first job to pay $125,000 a year, so expected to pay it off pretty quickly. Business school students, law students tend to live a lot better than most graduate students do; vow of poverty. Cancun over spring break; bought a car because it was cold. Lived well over income, associated at Merrill Lynch one summer; had debt and also credit card debt--signing bonus coming, job all lined up; but 2001, focused on tech, but tech going out of business; had to wait for job to start. Eventually fired all members of the associate class; had miserable next few years. Got job at The Economist, paid $40,000 a year--less than a third of expected; living in Manhattan; had about $250 a month for everything--food, transportation, clothes. Sold--totaled the car--but a pain to have in Manhattan anyway; went to pay off debt. Took years, living home with parents, to pay off the debt. Did you think about not paying it? Can't. Student loan debt is not subject to bankruptcy discharge unless you are permanently disabled. Like with tax debts--only dischargeable under certain limited conditions. Family always paid debt. Living weirdly poor life, income that by most American standards would be adequate, but it was all going to pay debt; freelancing to get cash in. Got raises; eventually stabilized. No more vacations in Cancun; no vacation, no new clothes--women's clothes are not made to last 5-10 years, staining, stretching. Parents gave gifts as payments toward student loan. Consolidated other debts to the point where it almost made no sense to pay off last of student loan because at an interest rate of 2.025% it's free money because inflation is usually higher than that. Painful process. Debt magnifies our fortunes. When things are going well, debt allows us to live even better, but when things are going badly, debt can become catastrophic.
7:49Great behavioral challenge for those who live through mostly good times to remember that lesson. Dad born in 1930, natural suspicion of debt, the stock market--those experiences shape you. Most people in McArdle's age group never go through those experiences. Business school students have access to economics, e.g., consumption smoothing. Really common. Laurence Kotlikoff, Milton Friedman: no money now, but making an investment in education so it's okay to transfer consumption from the future to here; take a few thousand dollars from lavish salary. Kotlikoff wrote in; plan response in next issue of The Atlantic,--this is indeed not what he said. Grossly abusing the theory of the permanent income hypothesis and consumption theory. In the hands of someone who already wants to do something, a little bit of knowledge is a dangerous thing. Smoothing is soothing. Justifies a lot of misbehavior. Arrived at age of 36 with not much debt--car loan, student loan. No credit card debt. Dave Ramsey counsels those people. Not entirely aimed at those who have taken the wrong lesson from easy credit; but those who find it hard to stay on a budget, save, to not use debt, to finance everything with cash. Minister to them, but not evangelical; though till recently main distribution network was churches. Thirteen week course. Also military bases, version in high schools. Coming out of evangelical community, going wider. More and more people are listening.
12:27Cross-over hit. What's his message? You shouldn't borrow money for anything. Went to see him in Detroit. Fiance put up with hours of watching Ramsey's show on Fox Business Network, going to Detroit, writing article. Not prepared for how religious the overtones were. Where in Detroit? At an ice skating rink in Plymouth, MI, not a church--too big to fit group in a church. Core message: he built up a leveraged real estate network in the 1980s and then lost it all at the end of the decade. In his darkest hour, he came upon a Bible verse: the borrower is a slave to the lender. Decided in that moment to never borrow money again. Wonder how China feels about that message. Could just as easily have come across Polonius's advice to Laertes: Neither a borrower nor a lender be. Common thread in Western civilization that borrowing is a little bit risky. He sets up baby steps. Amazing to see how many people live paycheck to paycheck, even among those who make more than $100,000 a year. Below that level, it's a majority. Got not money and a lot of debt; build your way up through these baby steps to where you have no debt and a lot of money. Baby step zero: get current if you are in trouble. First baby step is you save up $1000 in an emergency fund, and then start paying down your debt as fast as you can. Use a common technique called a "snowball," where you pay the minimums on everything except your smallest debt, which you pay off as fast as possible; then you take the payments from that an roll it over into the next debt; and so on. Then: save a 3-6 month emergency fund; then start putting 15% in your 401K, then put money aside for kids for college; then your house. He will allow two kinds of loans: if you have a big fancy car and the asset is worth less than the loan, then you are allowed to sell that asset and take out a bridge loan for the deficit. The other kind you can take on is a mortgage, but only a 15-year fixed rate mortgage where the payment is less than 25% of your income. Normal way people buy houses, that would be a very conservative mortgage. In your 30s and 40s, you'd be free and clear; can start giving your money away, playing and going on vacations, put it to work generating more money. Financial freedom.
17:41Your own experiment? Don't forget the envelopes. He recommends cutting off your credit cards. Didn't actually do that because needed for work travel; but don't use the credit cards unless going on a work trip. Instead, pay cash for as much as possible. Sounds crazy for someone making more than $1000 a month. He argues that when you are actually paying cash, it hurts, because you are seeing the money leave your wallet. You can physically see your budget dwindling. Can pay rent automatically through bank or write a check, but other expenses like gas, groceries, eating out, health care, clothes pay cash. At beginning of the month, write a written budget with all the income you expect to have coming in; give every dollar a name. Use a computer program that allocates it automatically; put the rest in savings, wedding to pay for. Then take out gigantic wad of cash, could be $1000. Create a category and put an amount. For a couple, you can't change it unless you both agree--though could take baby to emergency room. Sounds incredibly annoying. Organizer--envelopes--through membership at his website, and label the envelopes, so you always know how much you've spent. Russ: hasn't balanced checkbook since 1983; McArdle doesn't, but watches online bank account. Hard part is sticking to it. Had a month where they didn't stick it; traveling 3 out of 4 weekends. Hope Dave isn't listening. He says that the first 3 months of budgeting you'll be terrible at it. First, very hard to spend cash. Not just handing over your ATM card--have to look at the envelope and say you allocated yourself $100 "blow money"; do you really want to spend $5 of that $100 on a latte? Not really; there might be something really great you want later and can't have it. Had money left over in each envelope because every time one got low, panic and say "We're eating pasta." Sounds annoying, sounded like it took up a lot of time and it would be terrible. McArdle not an organized person; but if you want to budget, it makes budgeting really easy. Never have to track it or do anything. Have the cash in the envelope. If there's none in the envelope, can't spend it. Lax about writing down how much is being spent because there's never that much in an envelope--can always just count the money and see how much is left if worried. How many envelopes? Ten. Do you carry them around with you? No, hidden; but carry it to go grocery shopping, and to do a bunch of errands.
24:13Usual suggestion on budgeting is to save receipts and at the end of the day, weekend, or month, make sure you are staying on track. Envelopes brutal. But won't add up receipts. Feature and bug: when walking to the meeting and see some really attractive latte, clothes; if you don't have the envelope with you, you can't have it. Can't borrow from different envelopes. Could, and have transferred money, shopping for gift for Peter, needed dress; took parking money, decided not to drive that month, and spent it on a dress. Sales clerk had clearly never done a cash transaction--dress was on discount but most items several hundred dollars; took her a while to figure out how to open the register. It's called legal tender--it can be exchanged for stuff. Become less prevalent. Surprised by how easy it was and how great you feel. Brainwashed cult member. You feel authorized to spend what you have, not a guilty feeling. Don't have to answer for how it's spent to self or to Peter. Every dollar you are spending is a dollar you are allowed to spend, that it's okay to spend, and what you are not spending is in the bank, doing it's thing. Key is being intentional about your money. Yes, you don't buy the camera you wanted; but have done it; bought a large television by accident--didn't realize how big a 50" television was going to be; love it. A little high from having a new toy; but having this sense of freedom around your money is much more valuable. Priceless. This is not an ad for the Dave Ramsey system; we don't know how Megan will turn out or others. Dave Ramsey didn't invent this; McArdle's grandmother said that was how she used to manage her money when first married. Backlash against new math or reading. Other footnote: McArdle not a religious person. Agnotheist; low but non-zero chance of there being a God; boyfriend raised as evangelical. Religious message is definitely there but the core principles aren't about religion.
30:34General issue of self-control. Used to teach time management; seminar to first year MBAs on how to manage your time, your life, how to control paper in your life. Stopped doing it--couldn't live by the principles. Those who can't do, teach; but awkward. Principles undoubtedly correct. We know that to get thinner we should eat less and exercise more, but hard to follow through. Fourth slice of pumpkin pie hard to resist. Thoughts: appetite, self-control; and systems--mechanisms we use to restrain ourselves and think more long run than short run? Food: briefly tried to become a model; good at being tall. But not photogenic and not good at standing still. Met many models; they have really weird ways to stay thin. Different color for every day of the week, blue day, purple day; had come to believe that chemical properties mattered; but really only eating blueberries on Monday, not taking in many calories. Another girl would eat nothing between midnight Sunday and midnight Friday and then gorge all weekend. Set up forcing systems, make it easy to commit. If people can't stick to it, the problem is the system, not the people. True of all the weight loss programs, home organization schemes; and also true of managing your money. Friend who is really organized, writes down everything she spends. Have to set up mechanisms that force you to do what you want to do anyway. Russ's brother appears to be a very different person on time management. Why so successful? Tricks people use on themselves. Said it was easy to be organized; have a rule: Touch each paper once and only once. Great rule. Make piles on desk, start going through them. Couldn't get through them; had a bunch of piles same as before. Have a piece of paper, put it down on your desk, look at it every once in a while, maybe respond, maybe not, depending on mood. Houses different; probably each married a wife like himself. Maybe we just don't want to do it. Think that we don't. Marrying someone who is way neater than self. Usually it's the wife who is cleaner. Clutter, books on desk. Makes vaguely unhappy. When he sees something messy, he has to fix it; for McArdle, interruption to fix, takes mind off what I'm doing to deal with little things. Don't actually want to lose weight--just want to be thinner. Ended up deciding in which ways to set up forcing systems. Want to get bills paid on time, so set it up for bank to pay them automatically. Want to save money, so budget. But for other things we don't do it because we don't want to pay the price. Psychology literature: we want the goal, and later in life you regret it. Other way: like to remember the fun. Cancun experience: extravagant vacation produces a lifetime of memories to enjoy; ice cream not so much, fat, unhealthy person.
40:31Behavioral economics literature argue this proves that people are not rational and don't behave in their own self-interest; therefore we need to do something about it. Dave Ramsey effect, time management courses--inspiring, have benefits--private, voluntary self-restraints we potentially take on ourselves. Brother has certain rules about where he puts junk food in his house: after he takes some out of the bag he puts the bag far away, raises the cost to himself of going back to it. Some argue we need to have stronger rules: Sunstein and Thaler or forcing people to do what's right. Kahneman, Tversky, Camerer: gaps in rationality. But a lot of libertarian paternalism--nudging people or straight out coercing them. Rely on time-inconsistency, notion that what feels good now won't feel good later, so we should change this. In some cases, true. Going bankrupt is traumatic. But gaining ten pounds? Like saying, I would like someone to give me a lot of money--which is true, but "me now" and "me then" and me now is always going to wish me then did something different. Not actually sure this is a valid distinction, especially when the problems are small. Being 20 pounds overweight is not a personal trauma like losing both legs in a car accident. With saving arguably different because always temptation to free-ride, people who are really destitute spending it all now and relying on handouts. Privileging desires of future you. Pumpkin pie is really delicious. Life is uncertain, you can die in the meantime; postponing gratification for more satisfying benefits later is a good thing but as a general rule not always true. Society razor-woman--very thin--suggested wonderful spa where you could lose 30 pounds; eats half a chocolate every day. Future you has to keep dieting. Most people's weight fluctuates in a 20-30 pound band. Misquote of Mencken, defined Puritanism as the haunting fear that someone, somewhere is having a good time. Definitely a Puritan streak in America. Permanent income hypothesis in our bones. Since our standard of living is constantly rising, spending today is not the worst attitude, but fighting against that is part of our bones, suffer now. Anatole France quote: If only the hangover would precede the inebriation, then drunkenness would be considered a virtue.
47:27Rational economics creates such a straw man. Most of us understand that we eat too much on Thanksgiving. We like it. Interview on McArdle blog with Dan Ariely: use a smaller plate on Thanksgiving. That's the great antidote to rational economic man? Smaller plate not so helpful. Little tricks to lose weight. Surplus of 50 calories a day is enough to make you gave several pounds a year. Our appetites have to be calibrating pretty closely, because otherwise we would all be grotesquely obese. Fifty calories is not even half a chocolate--a few nuts. Tricks work at the time. Soup bowl that can be stealthily refilled from the bottom, eat a gallon of soup. You can fool people in the short term. In American consciousness, there has always been this warring. Half the articles start off with this era when America was thrifty. Balderdash. People came here to escape their debts in Europe. We have a much more open attitude toward debt. Bankruptcy laws newly draconian. Nothing like Chapter 7 anywhere. Two attitudes toward debt. Also had panics; children of those panics do behave differently. National savings rate, can actually see it. As the baby boom generation starts to retire, the national savings rate starts to plummet. Grandfather born in 1916, growing up during the depression, squirreled money away, $5000 inside a teapot. Russ's great uncle had cash, kept in paper bags; did not trust the banks, lived through Great Depression; vaults pretty safe but he kept it in a paper bag. Benjamin Ross, Diary of the Great Depression. Banks in Youngstown, OH; market in passbooks at banks. The banks were closed, terrifying time. People didn't get 100 cents on the dollar, obsessed. Many didn't even trust bonds; just trusted U.S. Treasuries. All everyone wants to have now is Treasury Bonds, paying the U.S. government to take their money because they are so afraid of storing money elsewhere. Might be wrong. Not as unimaginable now that the U.S. government might default on its sovereign debt.
54:06Philosophical question: Deirdre McCloskey working on role of rhetoric and ideas in economic outcomes and growth and other economic results. Great Depression changed a generation's ideas about debt. Out of that time grew an economic theory of Keynes's. Keynes's economic theory is that spending holds the economy up; deficit spending is good. How much of that philosophical view is inside folks without thinking about it. Journalists: spending holds up the economy; without spending, people are hoarding their money right now, saving 3-5% bursting into the positive range, though awful measure. Trend is clearly that people are saving more than before, and some view it as alarming. Attitudes toward debt come from rhetoric and inchoate ideas about the words that we absorb. So many people took the wrong lessons out of the Great Depression. Liberals started announcing Milton Friedman was wrong, Keynes was right. Doesn't make any sense. They were not some kind of mirror image of each other. They could both be wrong. Both were wrong about a bunch of things, both right about a bunch of things. What Keynes describes about the liquidity trap, the paradox of thrift, is when you go to a restaurant and you decide to stop going to a restaurant because there is a recession. Well, that money is someone else's income, so they have less income, and it reverberates throughout the economy. That's the idea. What it leaves out is investment goods. Depends on where the savings go. In December through March [2008-2009] you did see people saving a lot more. The money wasn't going anywhere; banks weren't doing anything with it. The mechanisms by which people translate savings into investment were broken. No IPOs happening, no new bond issues, so any money put into the bank was money pulled out of the economy. Interesting empirical question: not totally true, but effect along those lines. People forget how much the government and the Fed were doing to keep the Great Depression going. Terrible contraction, but Fed egged it on with contractionary money supply, staying on the gold standard, raising interest rates. Not a proponent of Amity Shlaes's Forgotten Man, blaming whole Great Depression on activist government by FDR and Hoover. Some of the things FDR did were necessary: FDIC, shutting down the panic so that the banking system could operate to translate savings into investment. But you do see it. But a lot of things were totally insane. No one will invest in a factory if you will take over all their profits and hand them to labor. Totally insane things had a negative effect. People edit that out. Government getting right in there and doing things. Early to tell.
1:00:03Friedman and Keynes. Podcast with Amity Shlaes. Not mutually exclusive. Role for government in coming years really is a debate between Friedman, Hayek, Keynes, in the sense that: shall we be more or less like France? Not worse wine, cheese, and art, but a question of a larger role for the state in allocating goods, creating safety net, destroying the natural incentives we have to act like adults. Want us to move away from that world. A lot of people disagree. All the arguments--a lot of that is window dressing. More freedom and less freedom, more centralized and less centralized control. No Keynes scholar, but Keynesian theory doesn't tell you a lot about the level of spending by the government. What it tells you is cyclically that the government should be operating counter-cyclically. It doesn't tell you that the average level of government spending should be high. What's odd is that appropriating Keynes to say that what we need to do to have a permanent increase in the share of GDP that government takes up is 20-30%--which is ultimately the debate we are having--is bizarre. Some of the advocates of stimulus spending have in mind a larger Federal budget down the road, and whether that's by inertia or other justification not so important to them. Sneaky. When pushing Friedman, pushing freer markets, monetary policy. Proponents of Keynesian view also pretty honest about what they want. Idea that we shouldn't gum up the current health care system with government involvement kind of funny, because the government is really kind of involved in the current health care system. National debates marred by misdirection, sleight of hand. Both groups of people, left and right, serious economic analysts, using same set of data to argue about two separate things. Arguing with each other as if the other person as if the other person is arguing about the same thing. Paul Krugman is arguing about deficits and how big they can get; says he is talking about deficit in the sense of a decyclical deficit; thinks Keynesian stimulus is a good idea; national debt expected to double by 2019. But others talking about the structural deficit: huge long-term gap after 2019. If the government can't permanently get its fiscal house in order. Real problem is that it doesn't stop in 2019. Selling a free lunch. He could be right! Open minded. Economists confused what Keynes said. Cannot keep output permanently above trend. Trend growth in the United States is 3%. Big problem with our debt and huge political problem because so much owed to other countries. Inflation: will it come or not? Hard to say.
1:08:43Evidently we've been issuing a lot of short-term debt, to take advantage of the low interest rates short term debt has. As a result, rolling that debt over this year is going to be rather tricky. Recent account: might end up having to borrow $3 trillion this year--$2 trillion to pay off the short term debt that is coming due and another trillion of expenditures above income receipts--tax receipts. Might be tricky. Edmund Andrews article, NY Times. Mirrors how residential mortgages used to work: people just rolled them over. Whole system came unstuck. Federal Reserve is buying so much of this debt it's hard to say what the real price is. Short term, people don't worry about default risk in the next three months. If aliens invade and destroy the United States, bigger worries; but in the longer term, where we are, plan to convert national debt to long term debt--like rolling your credit card debt into your house. Tricky. On the one hand, more security on your future interest rates, but on the other hand it's harder to get people interested because they have less flexibility. When we start moving all of this debt into longer term securities, where are the interest rates going to be? Hard. Bequeathing this problem to our children. Congress needs to have a lot of different envelopes and use cash. They write out a budget and don't stick to it. Future liabilities of the government like Social Security and Medicare: those are campaign promises they are not going to keep. They can change the law. That is not the problem. The law as written is not sustainable. The law as written is not sustainable. The fight is over how to change it, mix of benefit cuts, means testing--they'll figure something out, but it may not be what anyone desires. What people underweight, apologists for social security--oh, we only need 3% of GDP, which is a very large number every year, especially after tax; the government doesn't pay taxes--but people plan their lives around these things. Some people are just busy and assume social security will be there for them. Others, no clarity. Health insurance for people over 65 weren't working. The longer you leave the more people will be worse off. Flip side: most people under 40 assume they won't get a penny. They will get a penny. Many people go the other way. Fidelity 401K account: you can't tell it to assume you won't get Social Security. Hard to do the kind of planning because the automated tools, as opposed to a financial planner, no way to assume it away. No way to assume your Roth IRA might get taxed. Odds of those remaining untaxed are low. Crucial problem we have right now, Bob Higgs's story: regime uncertainty. Constant fluctuations in the rules of the game make it hard to plan for the future. Flight away from credit and to cash. People realize they have to be careful.