Wednesday, August 27, 2008

America Gives Even in Tough Times

I uncovered an interesting report about the charitable giving of Americans. You would probably think that in this tough economic time we are going through as a country, charitable giving would be the first thing to take a hit. After all, it would be an "expense" for you to cut back on, right?


Not so:

Americans shook off economic uncertainty and gave a record 306.4 billion dollars to charitable causes in 2007, an increase of 3.9 percent for the year, a survey showed Monday…George Ruotolo, chair of the Giving Institute, said charitable contributions held up even with Americans fretting about high oil prices, the subprime real estate crisis and the ongoing war in Iraq.

"People don't appear to be panicking, they feel that it's going to be OK in 2008," Ruotolo told AFP.

"I'm not bullish but I am satisfied. Even when you adjust for inflation giving still was on the plus side in 2007."

The overall total is up just one percent when adjusted for inflation. It also represents 2.1 percent of US gross domestic product.



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Read the Whole Article Here
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Although there are again "expected cutbacks" again this year, these stats are pretty cool huh? Even though we are hurting (overall, not necessarily on an individual level) people still give to the causes--306.4 billion dollars. In case you were wondering, it's the most giving of any country in the world, both on an overall amount and a per capita basis. Most of the giving went to religious, educational, human service, health, and fine arts organizations.

Why do you think this is?

Personally I think part of it has to do with partly with our generosity and partly because of how people in general respond to crisis-type situations. Churches generally have programs to directly address poverty, and so do other community organizations. We give in disasters both here and abroad. Plus, despite our country being rich, we're certainly not uptight with our earnings.

Wednesday, August 13, 2008

Why Financial "Firm Nudges" Work

This week's topic comes from an excerpt of the Financial Times (a Wall Street Journal competitor) touched a bit on behavioral economics and finance as part of a larger article. Here are a few excerpts that I'd like to expound on:



They first give some examples of behavioral economics in everyday life:





If people's magazine subscriptions are automatically renewed, they renew a lot more than if they have to send in a renewal form. Moreover, people are influenced by how problems are framed. If told that salami is "90 per cent fat-free" they are far more likely to buy salami than if they are told it is "10 per cent fat"…



Findings of this kind suggest that even when people have freedom of choice they are influenced, or nudged, by the context in which their decisions are made. This power gives business and governments opportunities. Automatically enrolling people in a savings plan dramatically increases participation, even though people retain the right to opt out.





My first impression after reading the article was the seriousness this newspaper commands even though it's printed on pink paper. But seriously, it's the last sentence in the quote above that I found to be interesting. If sellers can exploit the complacency of the American consumer, why can't savers do the same? I think the idea of automatic enrollment programs would definitely be a good thing. It plays to the out-of-sight, out-of-mind mentality we all have in some aspect. If you automatically enroll people in a 401(k) or IRA while giving them the opportunity to opt out, you don't take the freedom of choice away, and you get people to save.



Some people may be against this on "nanny-state" grounds—many feel that they should be able to do whatever they want with their money and they shouldn't have a company "making" them save money. In response, I'd say that (1) an opt-out feature is available for those smart enough to take it, and (2) given the state of Social Security and Medicare solvency, it's important to have a "safety net" available just in case said nanny-state haters get to a point where they will need the government to help out in old age.

Saturday, August 02, 2008

Feds Will Bust the Clock



Feds Will Bust the Clock!




The great National Debt Clock is running out of numbers. I took this picture of the clock after the government released its budget numbers for the next fiscal year, which will soon push our debt to TEN TRILLION DOLLARS. The debt clock can only go to $9,999,999,999,999. So that means...a NEW RECORD! Woohoo! For those of you who care about such things, and are still reading this, allow me to explain how this will affect you and your future generations.

Think of all the “Big Things” that the government gives out that most citizens think about—Social Security, Medicare, Medicaid, and other programs. Politicians have also tried to talk about other “free” things they want to give out to you like education, tax breaks, stimulus checks, subsidies, federal grants, etc. Nothing on that list is terrible, per se; but all this is often mentioned without how it’s going to be paid for. You see, the government doesn’t have a lot of money stashed away in a bank somewhere to pay for these things. Most of these things are paid for through a tax, which means you are paying for them.

Consider the future of some of our current programs: Medicare is running a large deficit. Social Security will also run a large deficit soon. Remember last week when we talked about when banks fail? Well, the government assumes the debt for those as well. This week, a mortgage bailout bill was passed, adding onto the deficit. But unlike you, when you run a deficit (by putting more things on credit cards than you can pay off at the end of the month), you can max out and the credit companies can call the debt. The government doesn’t “max out” anymore. They simply increase their own debt limit. Can you imagine what you’d do with such power? What if you could set your own credit limit and change it when you got close to maximum, over and over again?



Ballin!




And like a hopeless debt monger, the government doesn’t seem to see any reason to pay for the slew of new programs they are putting forward. Making more money available (by printing more of it or by lowering the rate at which people banks can borrow it) does not solve the problem—an increase in quantity of something usually means a decrease in quality (or value).

So, as we always say, don’t look for the government to take care of you, because at some point it just won’t be able to. Let the politicians debate the finer points of whether Social Security, Medicare, and other such programs will be there for Our Children. Instead, focus on guarding against future shortfalls by getting in the habit of investing (and diversifying those investments) as early as you can. You never know when the next economic shortfall will come, or when the next housing bust will be here.