I don’t remember much about the IQ test I took when I was 7 years old. But what I do remember is I was asked if I knew what the difference was between an optimist and a pessimist. I said I didn’t know what a pessimist was, but an optimist is an eye doctor.
Monday night’s Introduction to Economics was our last class of the semester. I don’t usually get much back-and-forth in my principles classes because I have so much to get through, but for some reason this semester was different. I think I have become better at handling questions, answering them in a way that invites others to give their opinions as well. And I think that the students in this class were just very inquisitive and outgoing.
At the end of class, one of my students asked if I thought that, as a whole, economists make better financial decisions than non-economists. I told her that I think that on some things they do, especially when it comes to smart long-run investing and retirement strategies. I have no empirical evidence for that, but from what I know about other economists I have encountered, I believe that to be true. But I also know economists, including myself, who have made some of the same mistakes that every other person makes: too many credit cards, not enough down on a house, interest-only and adjustable rate mortgages, etc. Many of them are very frugal and willing to shop around to save a buck, but a lot of them aren’t. And the ones that are frugal likely spend too much time trying to save money — when I went looking for a digital camera a few years ago, I went to a dozen different stores before finally going to Sam’s to buy one. I allocated an inefficient amount of my time to finding a better deal. So, no, we’re not all rational and we don’t all behave the way our textbooks tell us we should behave.
Personally, I don’t save enough. Years ago when I finally bought my two flat-screen televisions, I financed them. Granted, it was at 0% for 2 years, so it was a good deal. But a) if I had missed a payment I would have owed about $1,000 in back-interest, so I was taking a risk delaying the payment; and b) I was still buying something I didn’t exactly need at the time and probably shouldn’t have bought.
Ultimately I concluded that while I think we do make some smarter decisions than the general population, I think we probably suffer from the same mentality as the rest of our society in not saving enough. The national debt is set to reach 90% of GDP in the next 10 years. Heading into the most recent recession, saving rates were actually negative in this country. Is it irresponsible? Sure. But I don’t think that’s really the source of the problem.
Ultimately, I think the reason that Americans don’t save enough is because we’re optimists. We think there is always going to be a better tomorrow, so we don’t have to save now because eventually things will work out. As I said that in class, I saw nodding heads everywhere. I don’t think I’ve ever seen that much agreement on anything in a class. I think that attitude was a major factor behind the housing bubble: things will always get better.
The booming economies of the 80’s and 90’s have spoiled many of us, myself included. Our grandparents or great grandparents lived through the Great Depression and, as a result, they knew that there wasn’t always a better tomorrow. Sometimes you have to buckle down and make the hard sacrifices because you never know if tomorrow will be worse than today.
The Great Recession has been a wake-up call for families across America. We’re saving more now, which is undoubtedly a good thing. Sure, it’s taking us longer to get out of the recession because we’re not spending our money, but when we finally emerge from it we’ll be on better financial footing. Every President chastises Americans by saying that we don’t save enough, but then through their words and actions they basically say “But please don’t start saving on my watch, because if you do we’ll go into a recession and I’ll lose my job.” Well, at some point we have to start saving more and this recession was the catalyst for that.
Because of the state budget sitution, I’m not sure if I’m going to have a job at SCSU after 2010-11. I’m trying to save more now just in case. I probably should have been doing it before but, like everybody else, I was just assuming that things would improve. Now, like the rest of us, my eyes are wide open. It’s a rude awakening, but I’m better for it.