March 25, 2009 Volume 2 Issue 7
. . . an e-conversation with the Faculty of Gordon College . . .
By Bruce Webb
Baby Boomers and subsequent generations have lived during an amazing period in economic history. Income per person in the U.S. was just over $11,000 in 1950; by 2007 this number grew an astounding 245% to about $38,500 (adjusted for inflation). Consumer goods--including many items not yet dreamed of in 1950--have multiplied beyond what our forebears could have imagined. We became accustomed to buying what we wanted when we wanted it.
Now, those good economic days have turned to hard times. Stocks and home prices are falling, and unemployment is rising rapidly, with still higher levels to come.
Those who lived through the Great Depression were profoundly changed by their experience. Circumstances forced them to learn some important lessons about thrift and debt, and about life’s priorities. While it is unlikely today’s economic plight will match the length and severity of the 1930s, we would do well to consider what lessons we can learn now, and how we might change from these experiences.
First, we can learn that putting faith in a stock portfolio or home equity is flimsy at best. Wealth can be gained today and lost tomorrow. In “good times” many of us came to believe that stock prices and home values would only increase. How wrong we were! So, this is a good time to reconsider our priorities and rediscover the joys derived from family and friends, or the simple pleasure of a walk on the beach.
Another lesson for us now is that investing in any asset--stock, housing, or (especially) the latest innovation in financial derivatives--carries substantial risk. We need to learn and practice the virtue of prudence, or practical wisdom. Prudence guides our choice of actions as we seek to achieve legitimate goals. In our financial affairs this means carefully balancing a desire for high returns with the risk inherent in such assets. At the same time, we need to acknowledge the power of greed, or pleonexia in the Greek: that inordinate desire for what we do not possess. Greed clouds our judgment around financial decisions. Whereas practical wisdom says, “Be cautious,” greed says, “Go for it.”
This is also an opportune time to reassess our spending and saving habits. Have we developed habits of consumption that are unsustainable, given our income? Have we based our spending on assumptions about income growth that now appear unrealistic? Could we use this opportunity to develop habits of saving? While this is without question good for us individually, some economists worry that our failure to spend will prolong and deepen the economic slump. A recent Newsweek cover story carried the provocative title “Stop Saving Now!” The headline gave the impression that it is our patriotic duty to increase spending for the sake of the economy. But we should be wary of calls to help “the economy,” especially if it means taking on more debt. Again, practical wisdom should guide our actions.
Business managers and owners also have lessons to learn. Whenever the economy turns down, many businesses feel the pressure to cut costs through layoffs or salary reductions. Such actions may be necessary for a firm’s survival. But some businesses today are actually adding relatively low cost benefits (such as child care) in an effort to reduce stress and keep talented employees, ensuring their loyalty when the economy picks up and job opportunities expand. A small sacrifice of short-term profits can yield dividends in the long run.
And of course, these difficult times can teach all of us what it means to care for our neighbors who are suffering hardship. Non-profits are facing increasing demands for their services at the same time donations are declining. Jobs are scarce but volunteer opportunities are not. The unemployed, or college students who will soon graduate with bleak job prospects, might consider volunteering at a social service provider as a temporary alternative to employment. One of my students plans to spend a year working with the Mennonite Central Committee when he graduates; another will work in inner city Detroit.
Work of this sort may be difficult--and sacrificial--though undoubtedly satisfying. It can also provide opportunities to gain new skills and hone existing ones.
The difficult times we now face are in part the product of our excesses in good times. It’s not easy admitting these might be the consequences of our actions, or that we are getting, in a sense, the economy we deserve. But if we learn our lessons well, we might just avoid future “hard times,” and in the process, realize what matters most.
Dr. Bruce Webb is professor of economics and business at Gordon College. He and his wife live in Hamilton, MA.