TO BENJAMIN FRANKLIN, the concept of thrift represented a forward-looking way of life in the New World. Franklin believed that by harnessing its twin virtues of industry and frugality, which he regarded as cornerstones of the American promise of opportunity, his fellow citizens could realize their full potential, achieve financial security, and pursue happiness in a way that hadn’t been possible under the rigid social order they left behind in Europe.
His views resonated through two centuries of the American experience, with the formation of credit unions in the early 1900s, savings bank programs in elementary schools, and even a National Thrift Week, which was officially observed until the 1960s. But Franklin’s idea of thrift fell on hard times in recent years, regarded as a fusty throwback in an era of easy credit and leveraged excess, where consumer borrowing and spending, not earnest saving and denial, were marketed as the road to fulfillment.
Barbara Dafoe Whitehead says it’s time to reclaim a prominent role for thrift. In the wake of an economic meltdown driven by reckless lending, borrowing, and investment schemes, she may be right. But the longtime social critic, known primarily for her writing on family structure and divorce, was sounding the call well before the recent economic collapse. Whitehead was the main author of a report issued a year ago — and several years in the making — by an eclectic mix of US thinkers and organizations that is sharply critical of financial institutions that are “dragging many American consumers into dissavings and over-indebtedness.”
The report, For a New Thrift: Confronting the Debt Culture, a project of the New York–based Institute for American Values in conjunction with several national policy organizations concerned with economic inequality and family financial health, says we have become a two-tiered society when it comes to personal finances. There are investment options and savings plans aplenty for higher-wage earners, but lower-wage earners, who often have no access to 401(k) plans or other employment-based savings, are increasingly serviced by a hodgepodge of highly profitable “anti-thrift” institutions, including payday lenders, high-interest subprime credit cards, and check-cashing outlets. The report has particularly harsh words for the public-sector promotion of anti-thrift practices through state lotteries and casinos. Forty-two states plus the District of Columbia are now funding public services by, in Whitehead’s words, “actively encouraging gambling — a belief in luck rather than industry and frugality — and targeting people in the lower half of the income distribution.”
Though economists say increased consumer spending is needed to pull the economy out of the recession, that is a tough sell to Americans who are already way over their heads in debt.
If Franklin preached a philosophy of frugality and careful management of resources, borrow and spend has become the ethos of our time. Revenue from payday lending (which Massachusetts and 12 other states forbid) has gone from $810 million in 1998 to $28 billion in 2006. Meanwhile, deregulation measures and favorable court rulings in the late 1970s and early 1980s have been a bonanza for credit card companies, which have increasingly targeted lower-income Americans with marginal credit history, who often pay only their minimum balance, if that, ensuring hefty profits from interest charges and late fees. (In a twist that George Orwell would appreciate, cardholders who pay the full balance each month are known in the industry as “deadbeats.”) The number of US households in the lowest-income quartile with credit cards jumped from 29 percent in 1989 to 43 percent by 2000, and overall credit card debt nearly tripled from $238 billion in 1989 to $692 billion in 2001, and reached nearly $1 trillion by 2007.
The rising debt load is by no means entirely the result of improvident spending. Higher education costs are rising so rapidly, for example, that student loan balances — considered to be “good debt” because there is a financial return on this borrowing over time — are becoming unsustainable for many Americans. The report says four out of 10 recent college graduates cite outstanding student debt as a reason for not pursuing graduate school.
The New Thrift report was followed this June by a book of essays, which Whitehead co-edited, called Franklin’s Thrift: The Lost History of an American Virtue. Along with the history it tells, the book, like last year’s report, calls for action to combat today’s “debt culture,” including stronger regulation of the credit card industry and other anti-thrift institutions, and greater promotion of pro-thrift institutions and savings plans. The biggest impact, say Whitehead and her colleagues, might come from a renewed embrace of the values underpinning Franklin’s creed, and that may already be happening as Americans come to terms with a suddenly changed economic reality. But Whitehead says big, government-led public campaigns similar to those that have helped drive down smoking rates and increase seatbelt use will be crucial if we are to steer the nation back onto the right path.
Whitehead is perhaps best known as the author of “Dan Quayle Was Right,” a provocative 1993 cover story in the Atlantic Monthly, which argued that the steep increase in single-parent households, from more women having children on their own and from divorce, was harmful to children. (The title was a reference to criticism offered by the then-vice president of the scripting of the television character Murphy Brown into single motherhood.) Whitehead’s work on family issues — to say nothing of the Atlantic title that joined her in common cause with the right-leaning Quayle — seems to carry more than a whiff of the heavy moralizing associated with the conservative movement. But the 64-year-old Whitehead is a lifelong Democratic voter, who says her focus on family issues is driven by the same interest as her new work on thrift: the shaky economic state of America’s middle class.
Whitehead, who co-directed the National Marriage Project at Rutgers University for 10 years, now runs the John Templeton Center for Thrift and Generosity at the Institute of American Values. I spoke with her in early June at her home in Amherst. What follows is an edited transcript of our conversation.
COMMONWEALTH: You write that “the American culture of thrift is at best on institutional life support and replaced by what amounts to industrial-scale loan sharking.” Those are strong words. What do you mean by that?
WHITEHEAD: Beginning in the 1970s and ’80s, we saw this dramatic change in the financial landscape and a growing cleavage between, let’s say, the institutions that serve the upper half and those that are targeted to the lower half of the income distribution ladder. I was impressed by the rapidity with which these institutions had arisen at the lower end, and how different they were from those that were more familiar to people who were older and educated — and who sort of took it for granted that there would be institutions where one would save and invest. These new institutions really do the opposite thing. They are a legal form of loan sharking that drags people into debt with business plans [intended] to keep them there.
CW: You say this has led to a two-tier financial system: an “investor class” of high-earners who save money and have retirement accounts, and what you call the “lottery class,” those who rely on payday lenders and check cashing outlets and who play state lotteries, hoping against long odds that good luck might put them on stable financial footing. But the lines between those in the investor class and lottery class, are they maybe a little too simple? Because there are plenty of people who are in the investor class who find themselves —
WHITEHEAD: In trouble?
CW: — swamped by debt and overleveraged. A New York Times writer who covers these issues and earns $120,000 a year recently wrote a piece for the Times Magazine describing how he ended up on the brink of foreclosure and how he was —
WHITEHEAD: Victimized or stupid.
CW: Right.
WHITEHEAD: I think he confesses to both. Well, in retrospect, perhaps you could say that the distinction is too sharply drawn, because it’s true that the investor class is hardly doing well at this moment. But it remains the case that for many people who are in the upper half — with college degrees, professional skills — they have access to the kinds of supportive investment and savings instruments that people who earn less money, are less well-educated, and have been struggling for a long time just simply do not have access to. So that when we rebound, I think that there will still be many people who never recover because they’ve been in debt all along. I think, in general, the economic cleavage still remains.
CW: We see all sorts of statistics showing that Americans are swimming in debt. Is this the result of irresponsibility or a degeneration of values? Rampant consumerism or the consequence of financial institutions aggressively lending money and extending credit beyond the ability of people to keep up?
WHITEHEAD: Well, it’s a little bit of all those things. People have a responsibility to use their resources wisely, and Americans have a long history of being wasteful with respect to their resources. Then there’s this kind of competing tendency to be thrifty and save. That’s sort of a standard pattern that waxes and wanes over time. But we are now in a consumer culture, which began in the early 20th century and has accelerated over time, so everybody is vulnerable to the appeals to get more, buy more, use more, throw away more. The new development that really has changed or intensified some of our debt problems and failure to be thrifty and save is this change in the regulatory climate in the country — the lifting of usury caps beginning in the ’80s, which we describe in the report, and the way that the credit card companies changed their business plan in order to target people who could pay [only the] minimum balance.
CW: There’s been a lot of attention paid to the subprime mortgage meltdown and the foreclosure crisis. But the credit card industry seems to have really laid the groundwork or formed the model for extending credit to people way beyond their ability to pay it back.
WHITEHEAD: The credit card industry was the great innovator in this “how to get people into debt and keep them there” trend. It was highly profitable. Once plastic became sort of the coin of the realm, literally, it changed not only the psychology of consumption but the way people consume, so that you could buy a lot more than you could afford.
CW: You’ve written that, historically, being in over your head or carrying a lot of debt had a stigma attached to it. Was there a need to kind of recalibrate the way that people saw themselves or saw others in order for the new debt culture to flourish?
WHITEHEAD: With these new institutions, there were marketing plans and institutional cultures that reduced the social stigma people traditionally have carried with a lot of debt. Even as we recovered in the post–World War II period and that generation began to acquire refrigerators and tract houses and some of the consumer goods, the fear of debt remained very strong, and it was both personal and social. What the anti-thrift institutions did was work very hard to say, “It’s normal. It’s okay. Everybody should be leveraged a little bit. All you have to do is pay the minimum balance.” So the barriers to acquiring a lot of personal consumer debt steadily went down. The inhibition that people felt about overspending was gradually eroded, institutionally and culturally.
CW: You wrote the chapter on Franklin in the book that you co-edited. I was struck by what a central figure he is in the conception of this idea of thrift, or at least the American conception of it. Not only that, but you connect that very much to what we think of as the American Dream. You write that Franklin is really the author of the American Dream in the same way that Jefferson is the author of the Declaration of Independence and Madison, the Constitution.
WHITEHEAD: The first thing that was quite clear to me was that his notion of thrift was much broader and more philosophically grounded than a 21st-century American might think when hearing about thrift. For us, thrift really conjures up rather distasteful images of, you know, Scrooges and penny-pinchers and people who were stingy and dour and not fun to be around — an unattractive feature of capitalism, I think, for many people. Thrift was a 19th-century virtue that most people thought we’d gone beyond.
CW: And that conception has it all wrong?
WHITEHEAD: It has it all wrong. Franklin didn’t use the word “thrift” ever, really. He referred to “industry and frugality.” Those were the two big cornerstones of what I would call, really, his social philosophy as much as an economic philosophy. It was entirely connected to his vision of what American society should and could be. For Franklin, it was a society made up almost entirely of working people from the “middling classes.” “Middle class” wasn’t really a phrase that came into vogue until later. The middling folk were the people that Franklin came from himself, very much part of the New England world that he knew, and really what represented his vision of how this new land could be a very different kind of society than the Old World in Europe.
CW: This was very much tied, in his view, to the emerging American promise of social mobility, this concept of the American Dream?
WHITEHEAD: Exactly. We think of the founders’ contribution as having to do with political freedom, but there was this whole conception of economic freedom and the promise that if people did work hard and used their resources productively and wisely, they could be liberated from some of the onerous burdens that were imposed on people who were poor.
CW: When you talk about his vision of thrift as a liberating way of life, there’s an irony there, since, as you say, we’ve come to view thrift as a very constricting sort of philosophy of self-deprivation. Franklin didn’t view industry and frugality as virtues for their own ends but as a means toward having the wherewithal or the freedom from worries about the next meal to engage in higher-level pursuits. We seem to have that turned upside down because we now equate pleasure and enjoying oneself with —
WHITEHEAD: Spending and consumption. What we think today is the exact opposite of what Franklin proposed as a good life. Franklin exemplified it to a high degree. He was a man who enjoyed his pleasures and his luxuries — good wines with dinner and things like that. Franklin believed that if you work like a dog, you can eventually live like a gentleman. Thrift also is connected to the notion of social “thriving,” which means that everybody should be able to do well and those who do do well have an obligation to help others do the same. Everybody’s familiar with Franklin founding libraries and societies where people could self-educate. He also had a fund that I mentioned [in the book] for people to borrow money for productive purposes.
CW: In the earlier part of this century, this idea of thrift and some of the institutions that really supported it were alive and well in the country. What was it in the Progressive Era that developed and was so supportive of that?
WHITEHEAD: One of the things about looking at the history of thrift and anti-thrift institutions is there’s sort of this depressing pattern of repeating history. In the 1910s and 1920s, as we shifted from a farm and factory society to one that was more urban and industrialized and relied more on individual wages, people needed to be able to get credit. They were renters in cities, and so just as now we have seen the rise of payday lending and other institutions that are designed to get people in debt and keep them there for profit, so too, in the early part of the Progressive Era, we saw the rise of loan sharking — something called chattel lending, where lenders offered money based on your household goods. And installment buying came in at that period of time, too, so there was this idea of consumer credit.
Progressive reformers decided they would change the institutional culture in two ways. One was to actually create a personal consumer lending business by raising the interest rate that banks could charge on small, unsecured consumer loans. Up until that time banks were reluctant to give people small loans because it was a big hassle and there were limits on their interest. It was just not profitable. These new loans were profitable for the banks but charged far lower interest than the loan sharks. The other was the development of a new institution called the credit union, which began in New England. They were nonprofit, they were member-owned, and the whole purpose was to create — mainly for workers — an ownership stake in an institution where they could both save and lend to each other. The credit union movement was financed and began in Massachusetts. Edward Filene, the department store baron, saw these models in Europe and imported them.
CW: The democratization of credit seems like it’s a social good — people being able to finance things.
WHITEHEAD: The democratization of credit was a very good thing and still is.
CW: So where’s the rub?
WHITEHEAD: Where it begins to break down is when it becomes the producer of huge, unsupportable debt burdens for people. And secondly, when the democratization of credit is used for consumer goods that would fall into the category of what I would call “bad debt.” Debt can be a very good thing. It helps people. Economists tell us it smooths out consumption over a lifetime, so young people can go into debt for college education or their first home, or even for a car that will get them to work. And that’s actually beneficial.
CW: There’s sort of a return on that debt.
WHITEHEAD: There’s a return on that down the road. The problem comes when democratization of credit begins to lead to the propagation of over-indebtedness for large numbers of Americans, including students who now carry — in some cases — really unsupportable levels of debt that will keep them struggling for a decade or more after they leave school. I think we’ve crossed the boundary between good and bad debt.
CW: You and your colleagues were working on this well before the big economic collapse. One thing that you say is that thrift has generally had a hard time getting traction as an idea during booms. Now, obviously, the good times have come to an end, so —
WHITEHEAD: There’s a reappraisal of thrift going on. We began four or five years ago, very much pre-meltdown. It was during the boom years and everybody thought this was the nuttiest idea they had ever heard of. “You’re looking at what? Thrift?!” I told one colleague what I was working on and he had one word for it: “Weird.” He just thought it was strange and antiquarian at such a time.
CW: The book describes how there was even an official National Thrift Week from the early part of the 20th century until the 1960s. And schools had regular savings programs to instill these ideas and practices in kids.
WHITEHEAD: I actually manned a little sixth-grade school savings bank myself.
CW: Is that right?
WHITEHEAD: Franklin Elementary School [in Appleton, Wisconsin].
CW: Of all places. So that is where it all started.
WHITEHEAD: [Laughs] Yeah, maybe. This is a character virtue or value — people practice thrift — but that value had been institutionalized in some very key institutions throughout American history that have now kind of gone by the wayside. They were essential to building a strong, broad, and thriving middle class in the mid-20th century. Much of my interest in this project — and in most everything I have ever done, including my earlier life doing family work — was the sources of inequality. What are they? How are they affecting our effort to see ourselves as the middle-class society?
CW: So you see this emergence of the anti-thrift sector as a threat to both people in the middle class and —
WHITEHEAD: To those who aspire to the middle class. I delved a little bit into the history of middle class beginning in the 18th century. Especially in the 19th and 20th centuries, it was partly the growth of institutions that were targeted to help build a base of economic security under the middle class. It was labor unions, of course; it was long-lasting marriages; it was savings banks and building-and-loans, as in It’s a Wonderful Life; it was life insurance programs for working people; the GI Bill; defined benefit pension programs, which are now a thing of the past. Absent public and private institutions that support them, the middle class is a lot shakier and more vulnerable than many middle-class people themselves even believe. I’ve been interested in the erosion of those public and private institutions that have helped people climb into the middle class and then helped those who were in there stay there. So in the broadest possible way, I think this is part of that story, not the whole story.
CW: So a lot of the debt that we hear about, related to medical costs and other things, it’s certainly not all due to profligate spending.
WHITEHEAD: No, it’s not. The safety net is weakening.
CW: The book talks about the idea of so-called opt-out savings plans, in which the default is that employees will have a small percentage of their salary directed into a savings or investment account unless they take action to opt out of this. Libertarians would say, “Oh, that’s very paternalistic. People make their own beds and they lie in them.”
WHITEHEAD: We know through anecdotal evidence and reporting that a lot of people just did crazy things, partly because the incentives were there to do them and the obstacles to not doing them were lowered. My thought about the importance of governmental regulation and institutional guidance is that if you want a lot of people to do the right thing, you really can’t just expect people to straighten up and fly right. The numbers don’t work out. Some people will, because they have that internal fortitude and discipline, but if you want more people to thrive, then you’ve got to give them incentives and opportunities and a pathway to do what will be easier for them than just gritting their teeth. We also have to re-regulate a lot of the financial institutions and re-regulate them with an eye to bringing people in, to democratizing not just credit but also saving and investing. Because if we really are in a regime now where we’re not going to bring back defined benefit pensions and we’re not going to bring back labor unions in a big way and people are more on their own, then we have to find ways to democratize the whole enterprise of saving and investing.
CW: What do you make of some of the recent federal moves to rein in the more reckless forms of lending and extending of credit?
WHITEHEAD: It’s good that we’re beginning to look at private student loans and changing the rules governing them. Some of the credit card legislation, I think, restricts the use of the marketing of credit cards to students on campus. We have to be careful, too, to be sure that we don’t only worry about college students, though, because there are a large number — a majority — of young people who don’t go to college. Young people may take this as an important early life lesson, and surely they will not be able to go out and buy houses the way people did just five or six years ago. So there will be a kind of necessary discipline that is imposed both by the changing regulatory climate and by the experience. My prediction is there will be a change and it will be in the direction of greater thrift, prudence, and conservation of resources, which is part of the thrift ethic.
CW: You mention conservation of resources. Is it helpful to the thrift effort that everything now happening in the economy is taking place at the same time as all the attention to environmental issues and climate change?
WHITEHEAD: Conservation and wise use of resources is sort of the operative definition — the big definition — of thrift. And so it is very much part of how environmentalists saw themselves as thrifty people. Their whole ethic was conserving and reusing and not wasting and seeing things as not to be thrown away, trying to renew the resources. The whole parks-and-recreation ethos and Teddy Roosevelt — all that grew out of the thrift movement in the Progressive Era and in the ’20s. So it connects with “green” very much. Change comes in part through social movements, and the environmental or conservation movement or green movement is the biggest thrift movement currently under way. So that, I think, has great potential.
CW: What do you think is the potential for a public campaign around thrift? You’ve written that we should be pursuing that, just as we’ve been able to drive down smoking rates and drunk driving, and increase seat belt use through those sorts of campaigns. Is that really practical?
WHITEHEAD: Well, historical evidence is pretty clear that if you want to mobilize the society to do something patriotic and good and beneficial for the community, it really helps to have big public campaigns to say, “This is important and good.” We have to believe that this is a patriotic thing to do. The case for thrift historically has been made over and over again in our history in light of new conditions, so it isn’t just pulling the same old dusty nostrums out of some treasure chest. That, in a sense, is what we are trying to do. People are receptive to the idea of changing their ways, thinking seriously about savings, and building a nest egg in a way that they weren’t in 2006 and 2007, when we were diligently making our case for thrift. The word “thrift” is not a bad word anymore. It’s come back into common usage. The consumer culture’s picked up on thrift. They’re not dumb. They know that you can market thrift as well as you can market, you know, extravagance. So that’s a beginning. I think in some ways there has also been such a massive failure that I think people are looking for a different way to lead their lives. Maybe it would be okay not to give our kids everything. Maybe birthday parties could just be birthday parties again instead of these extravaganzas where you spend a lot of money. This could be a moment in time, but Obama himself has told people that the era of free spending and extravagance is over and we’re not going to go back to it for a very long time.
CW: What’s at stake for the country?
WHITEHEAD: We can’t be a hugely overextended, over-indebted country and continue to do well and especially sponsor the next generation into good, thriving, successful, prosperous lives. Our children and grandchildren are not on a great pathway right now, and they’re going to face difficulties all along the life course because of what’s happened right now, and so I think we should focus on young people to the degree that we can help them to make it. We have to have a sustainable middle class. That’s what I come down to. And we can’t live the way we’ve lived over the past 20 years and have a self-sustaining and broad middle class.