Pay off debts, invest in education, enrich lives

November 3, 2008
One of my friends suggests that 2008 is for economists what 1492 was for cartographers. It's an appealing analogy. The smart money was betting on adventurers seeking a new route to untold riches.

What the explorers found was not the end of the earth, but a new, uncharted land to which they would bring disease and calamity. In time, the new lands would be resettled and become productive. Possibly, in our time, we will learn to live comfortably in the new financial world we have created.

So what should we do now? How should you and I, people who think of themselves as prudent, deal with the financial crisis that is morphing into a significant economic downturn? The Wall Street and Main Street experts tell us to hold tight, don't panic, and don't sell.

That's pretty good advice from people who might have no idea what you should do with whatever money you would get from selling off the big losers in your portfolio. It's also good advice from people who do not want to see the public selling more stock and driving prices lower. It might get people to think about other investment vehicles in the future.

We were the ones who bought into the idea that the stock market would always be our best bet despite its fluctuations. We tolerated the irresponsible suggestion that our Social Security money should be put at risk in the stock market. We wanted to invest for the long term, yet bought financial instruments that can change in value at electronic speed.

A man recently asked me, "If you suddenly came into a whole lot of money, how would you use it?" It's a good question at any time. My answer was that I would pay off my mortgage first. Then I would put aside funds for the education of my grandchildren.

Basically, it is the same answer I have given every time over the years that I have been asked that same question. First, get debt-free. Second, invest in your family's human capital.

Americans have accepted debt as a way of life. We don't save to consume; we consume and hope that someday (with the help of inflation), we can pay back in depreciated dollars. That new flat screen HD-TV? You want it now, get it now! In fact, get two so you don't have to fight the kids or your significant other for the "good" set. When you pay it off, without doubt, your income will be higher so the debt won't mean as much. And you don't have to be more productive to get paid more; all you have to do is insist on a "fair" cost-of-living adjustment.

Yes, first get rid of debt. Then invest in your family's capabilities to be qualified and productive citizens. Today, we think about education in terms of increased income. But, as you may have heard, money does not qualify a person to be a good citizen. Knowledge of history, law, literature, grammar, mathematics, the sciences, the arts, diverse cultures—all the components of a liberal education—are necessary for an adult to be a contributing member of society. It is a liberal education because such learning frees the recipient to think clearly and thus evaluate alternatives.

And, if I had any money left over, I'd give it to organizations that improve my community. In these tough times, many people will reduce their philanthropic donations. Now is not the time to do that. Now is the time to remember the museums, the zoo, public broadcasting, as well as the symphony and the theater. It is the time to remember the shelters for the homeless and the abused.

Normally, at Thanksgiving and Christmas, we spend excessive amounts on gifts and decorations. This year, starting now, if we must cut back, let's do so intelligently. Let's think about what is best for us and our community in the long term. The rewards will be there in a joyous new year.


Marcus taught economics for more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. He can be reached at mmarcus@ibj.com.
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