May 21, 2008

On the Golden Path to Debt

Justin Katz

Related to Andrew's "Finance and Demography" post, I've been wondering, lately, how much economic growth of late has relied on increasing debt. Sure, production expands the economy, but somehow it has to correspond with consumption, no?

In particular, I'm thinking of Spenlger's line: "The financial markets, in turn, found ways to persuade Americans to borrow more and more money." It brings to mind Michele Singletary's suggestion that people make a comparison of their spending on and off credit cards:

I'm reasonably sure that many people do not make the same purchases when they pay with plastic. This isn't just a feeling or anecdotal evidence. Researchers have found that people's willingness to purchase more products or services increases with the use of plastic.

In their groundbreaking research, Drazen Prelec and Duncan Simester of the Sloan School of Management at MIT found that study subjects paid more when instructed to use a credit card rather than cash. In fact, they found that people were willing to pay up to 100 percent more with plastic. ...

"This customer behavior is at odds with standard economic theory, which argues that the method of payment should have no effect on spending, so consumers seem to be indulging in 'irrational' behavior,' " Davies says in a research article, "The Realities of Spending."

Davies explains that credit cards boost spending because of the psychophysics of how our brains work.

When one's spending fits within a tight budget, like mine, some of the "psychophysic" tendencies run into other limits (although I'm sure I slip more often than I would with cash). And it's nice to get those periodic checks for things that we'd be buying at BJs anyway. Still, that money isn't just a gift without cost; it's just that the cautious consumers are overbalanced by the not-so-cautious.