Financial Appeals to Authority

Dave Ramsey is a smart dude, but I disagree with him on a significant number of issues. A primary disagreement is on the issue of debt. We agree debt is often bad and mainline financial analysis ignores negative, subtle psychological and behavioral developmental impacts, but Dave goes to far by ruling out debt altogether.

One issue is that Dave has a hard time identifying the psycho-behavioral premium people pay by engaging in these negative habits. In one case he claims a 12-18% premium for using credit cards. People bag on him because he didn't include a citation, but the citation exists and it's from Dun & Bradstreet, a reliable source. Dave also notes social and even spiritual consequences from using debt. Again, I think he's quite right over a large field of debt uses cases, and even over the average use case, but not all of them.

Credit cards are easy targets because they easily fail on the math. Even ignoring the psycho-social, spiritual, and other side-costs from credit card usage, they are often, but not always, a financial mistake based on their interest rate alone. Many economists, as opposed to financial analysts, accountants, and so on, attempt to claim that there is no mistake when using high-interest instruments. They simply reveal high consumptive time-preference. This is a deep claim with a shallow answer: Sure, the consumer isn't irrational, but they are stupid.

They are stupid according to at least two, and easily many more, standards: First, the same consumers condemns themselves along different time periods. When people complain about their own persistent poverty and realize that their use of credit cards are to blame, they often experience regret. This doesn't always occur but it does occur with high frequency. In the language of economics, these people are temporally myopic. Indeed, they will often pay for training to overcome such myopic perceptions and habits. I see value in Ramsey to the extend he fills this market gap by providing techniques like the envelope system or the debt snowball.

A second way the person is deeply rational but basically foolish for the use of debt in some cases is that the person may be content with their own choices when they shouldn't be. This perspective requires certain normative assumptions which disquiets some academic economics, but they are seen as perfectly obvious in the mind of most people. Ramsey, myself, other financial analysts, and other economists would all agree that the use of credit cards or other high-debt instruments typically reduces people's long-term income. The moral perspective comes in when we say there is some moral obligation to achieve higher income or particular kinds of spending. I think we can do this in a few ways:

1. If a person could give money to a charity which results in the saving of a human life and they choose not to, they implicitly or indirectly contribute to that person's death, or otherwise make an immoral, or morally sub-optimal, choice.
   1. Notice this is not an explicitly Christian claim.
2. The parable of the talents indicates that wealth of a good person should grow over time.
   1. This should be balanced against excerpts of the Bible which indicate that real wealth is spiritual and that material riches are ultimately bad.
      1. Matthew 6:19–20
      2. Matthew 7:16
      3. Matthew 19:24
      4. Galatians 5:22-23
   2. I reconcile these scripture by adopting a strategy of earning to give. Under this strategy, then, it would be morally preferable to give more.
      1. Giving less is still giving and it need not be considered sinful, but it would be considered less-than-optimal.
      2. I think the distinction between sinlessness and perfection is found even in the bible itself, where perfection is an even higher standard.
         1. The distinction is pretty clear to me in the story recounted in Luke 18 and Matthew 19. There, a man who has followed the commandments asks, \"Teacher, what good thing must I do to get eternal life?\" Notice that Jesus seems to indicate material giving can lead to spiritual treasure when he says, \"...go, sell your possessions and give to the poor, and you will have treasure in heaven.\"
      3. In the Old Testament the bible established the tithe of 10%. Some Christians believe the tithe is currently effective under the New Testament while others don't. If there is such a minimum requirement then it may be sinful to give less than some measure of income.

Under the moral weight of earning to give, then, the economist who defends the myopic consumer as rational is defeated. Ramsey is defended in some sense, but I think he's wrong in another sense. Ramsey is wrong in the plain sense that sometimes debt instruments increase long-term wealth. I also think Ramsey is wrong on his theology of debt.

Ramsey admits that \"100% of references to debt are negative, [but] none of them say it's a sin...\" I agree that no reference to debt in the Bible say that it's a sin, however I disagree that all references are negative. Most references equate debt with slavery, but slavery in the Bible is a complicated concept. Bad people are considered slaves to sin, but good people are considered slaves to Christ. The idea that people can escape physical slavery is admitted, but the idea that people can escape spiritual slavery doesn't seem to be an option. Even regarding physical slavery, the bible says this in 1 Corinthians 7:21:

Are you a slave? Don't let that worry you--but if you get a chance to be free, take it.

In the mind of Ramsey's listeners, to be a slave is to be cursed, but this doesn't seem to be the biblical position. Instead, the biblical position seems to be that some forms of slavery are good, and some are bad, but God can use any of those situations for his own glory. I think that is also more compatible with how people should treat the use of debt.

Ramsey acknowledges that some debt instruments are better than others because he won't call people stupid for getting certain kinds of mortgages. This small concession is hardly the full-fledged support of certain mortgages I would give, but it's at least enough to show that Ramsey has contradicted himself and so his hard-lined, morally-backed approach to debt really is not so at all.

I think Ramsey's approach has another virtue, which is that it is relatively fail-safe. People are demanding a strategy to gain wealth from Ramsey. If Ramsey took the typically route of allowing debt he would have to say there is some risk of failure, but the expected result is a large gain in wealth. Instead, he advocates for a strategy which he thinks is basically fool-proof, although it's slower and results in less total wealth. Unfortunately, even that compromised result overstates Ramsey's strategic effectiveness. His approach is lower risk than the traditional approach, but it's not foolproof, it's not guaranteed to get you out of poverty, and no strategy is actually capable of truly removing risk from the pursuit of any level of wealth.

Let's look at just one debt scenario which doesn't modify Ramsey's formula much. Suppose I can get a mortgage which has a payment less than the rent I would otherwise pay. Taking this deal improves my monthly cash-flow and I also begin earning equity. In the extreme case where I can't afford my mortgage Ramsey would complain that I incurred a negative circumstance that otherwise wouldn't have occurred because \"100% of the foreclosures occur on a property that has a mortgage.\" This isn't quite true. I would otherwise have failed to pay rent, and in fact I would have been even more likely not to pay rent because rent was higher than the mortgage. While failure to pay rent doesn't result in a foreclosure, that's just a technicality. Both failure to pay rent and foreclosure result in homelessness.