David Brooks’ column today is filled with some depressing financial facts:
Between 1989 and 2001, credit-card debt nearly tripled, soaring from $238 billion to $692 billion. By last year, it was up to $937 billion, the report said.
State governments aggressively hawk their lottery products, which some people call a tax on stupidity. Twenty percent of Americans are frequent players, spending about $60 billion a year. The spending is starkly regressive. A household with income under $13,000 spends, on average, $645 a year on lottery tickets, about 9 percent of all income.
Fifty-six percent of students in their final year of college carry four or more credit cards.
What’s interesting to me is the way credit cards take advantage of some innate flaws in the brain. When we buy something with cash, the purchase involves an actual loss – our wallet is literally lighter. Credit cards, however, make the transaction abstract, so that we don’t really feel the downside of spending money. Brain imaging experiments suggest that paying with credit cards actually reduces activity in the insula, a brain region associated with negative feelings. As George Loewenstein, a neuroeconomist at Carnegie-Mellon says, “The nature of credit cards ensures that your brain is anaesthetized against the pain of payment.” Spending money doesn’t feel bad, so you spend more money.
Consider this experiment: Drazen Prelec and Duncan Simester, two business professors at MIT, organized a real life, sealed-bid auction for tickets to a Boston Celtics game. Half the participants in the auction were informed that they had to pay with cash; the other half had to pay with a credit card. Prelec and Simester then averaged the bids for the two different groups. Lo and behold, the average credit card bid was twice as high as the average cash bid. When people used their Visa or Mastercard, their bids were much more reckless. They could no longer constrain their desire, and so they spent way beyond their means. (Prelec and Simester entitled their paper: “Always Leave Home Without It”.)
This is what’s happened to the American consumer over the past few decades. We’ve spent our way into a deep financial hole. At this point, the credit card companies need us to keep on spending, which is why they sent out 5.3 billion solicitations in 2007. That means the average American adult got fifteen credit card offers in the mail.