We're All Spent and It's Not Our Fault

The documentary Spent: Looking for Change was released last week and has already been viewed more than seven million times. The film, produced by Davis Guggenheim (of An Inconvenient Truth and Waiting for Superman fame) profiles four families who, through a combination of bad luck and costly decisions, can't get out from under financially. Full disclosure: I appear in the film briefly as a talking head.

As you watch the film, it's hard not to put yourself in the subjects' shoes. If I were a nurse with an MBA and $100,000 in the bank, as Tiffany is in the film, and my mother became ill with cancer, wouldn't I consider quitting my job to care for her? Wouldn't I take out loans to go to college, as Debbie did, not realizing that that student debt would cripple my ability to start a business three years later? The people in the film are all middle class. They did everything right. And still, they remain stuck.

The problem of financial insecurity is growing more and more widespread; it's creeping steadily into the middle class. The reason seven million people watched Spent in the first week after its release is that it hits very close to home. If we're not living in a precarious financial situation ourselves, we know someone who is. We can no longer distance ourselves from them -- one piece of bad luck and it could be us.

The context in which we make financial decisions has changed. During the same period that the cost of using a bank increased and demand for alternative financial services grew, conditions for American workers declined. The old adage, "a rising tide lifts all boats," doesn't hold true for most Americans today. Despite decades of increased productivity, the typical American family has experienced a steady decline in inflation-adjusted income. Minimum wage workers are older and more educated than they used to be. Fifteen percent of Americans had poor credit scores (300-599) prior to the recession. By 2010, more than 25% were in this category.

Demand for check cashing services and payday loans -- the alternative financial services highlighted in the film -- is rising not because payday lenders and check cashers prey upon or harass the poor (although some do), but because an increasing number of people are unable to make ends meet. Historically, the use of payday loans and loan sharks has surged at exactly the moments when income inequality has peaked.

Policy makers and consumer advocates focus almost entirely on the suppliers of alternative financial services. That focus has been misplaced. We also need to focus on the causes of the growth in demand for such loans such as declining real wages, the 40-year retraction of the welfare state and growing tolerance for inequality.

The welfare state has been dismantled, leaving a much greater number of Americans without a safety net. And the further the public sector retreats from the provision of social services, the more the finance industry steps in to "help us" get what we need to get by.

Across the board, people are substituting credit for income, a strategy that's completely unsustainable. Starting around 2000, many households began to use credit cards to cover basic expenses after first liquidating their savings and draining equity from their homes.

The social contract of yore has been replaced by what Andrew Ross calls a "creditocracy" -- a situation that emerges when the cost of goods, regardless of how staple, has to be debt-financed and when indebtedness becomes the precondition for meeting basic needs. In 2006, one out of three families reported using credit cards to pay for basic necessities such as rent or mortgage, groceries, utilities or insurance. Forty percent of American families spend more than they earn. This state of affairs seems shocking, and it should. But it's nothing new -- think feudalism, indentured servitude and slavery.

The level of insecurity so many people feel about their own futures and their children's futures changes behavior in ways that tear at the very fabric of our society. When people feel safe, they take productive risks -- they invest in their futures, they encourage their children to get advanced degrees, they start businesses. They trust that if they work hard enough they can have a family and devote themselves to raising that family rather than working two jobs just to put food on the table. Our culture no longer supports this kind of risk-taking, and it's time we did something about it.