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An Assignment for Somebody Else

posted by Buce

Here's a research agenda for somebody else. I would like to know how much of our consumer lending is "asset-building," and how much is merely to cover expenses.

Best way I can tell, there isn't a lot of data on this topic. And there serious problems of definition (see below). But it makes a difference, and we could think more clearly about lending issues if we knew more.   

 The basic point is straightforward enough, well understood by accountants. If you spend $100 for current expenses, then you debit the "expense" column in the profit and loss account. If you spend $100 to buy a widget, then you credit your cash assert account, but you debit the widget asset account; it's "asset for asset" and you are no poorer than you were before.   

So here. Seems to me it is one thing if you use your credit card to buy groceries;* another if you use it to buy a washing machine. You were going to do the washing anyway (I hope!), and paying for the machine cancels out the cost of all those trips to the Laundromat (and all that pesky search for change).

I concede there are analytical difficulties. Under standard accounting rules, you "expense" costs of research—send them straight to the profit and loss. In a narrow sense, this is wrong: good research can be an investment, just as much as buying a fork-lift truck. But if we let people capitalize the cost of research, then every costly dumb idea would show up on the balance sheet as an asset.   

At the other end of the continuum, I can see the problem with real estate. In my day, we used to say: buy real estate—you’ll get out of paying rent, and then at least you’ll have your home. These days, when the residential real estate market has turned into a casino, I can see that things are a little different. Still, it seems to me it is one thing to borrow for a roof over your head, something else to borrow to pay last month's hospital bill.

An extra difficult case would be that matter of in human capital. Buying a law degree certainly ought to count as an investment, again just like the forklift truck. On the other hand, a lot of what passes for "education" (with student loans) appears at least as dumb as, well at least as dumb as corporate research (are there really "promising new careers in video game design?"). Historical note: a lot of our ancestors came here as "indentured servants"—contract labor. It's commonly thought of as a mean and undignified beginning, but we know for a fact that a lot of those indentured servants worked off their contracts and used the opportunity as a way to make a new start.      

As I say, I don't think we have supporting evidence on this issue. We can, of course, break out real estate lending, which is at least asset-related, if not always asset-creating. With respect to other consumer lending, I'm not sure we have so much as a good start. So get with it,  somebody.  Meanwhile, I am off to the wine shop to invest in good taste. 

*Full disclosure: actually, I do use my credit card to buy groceries. I always feel like I should explain to the clerk—hey! I pay in 30 days! I'm only doing this to get the miles!


In my economics classes, I remember that we used to say that saving was foregone consumption. I recall that current investment didn't count as saving, because it wasn't available as credit (consumption) to somebody else.

Maybe it would be worth using an economic theory to split up the payment of a residential mortgage along those lines, and then thinking about what would happen if we gave a different legal effect to those parts.

Right now, we distinguish between your equity in the house, and the secured debt held by the bank. Then we give the borrower the appreciation, and stick him with the risk of a reduction in value.

Instead, what if we gave different legal treatment to (a)the amount of the mortgage payment which replaces rent, (b) the amount that represents increased consumption (which should increase with the easy credit / exotic mortgages that become available), and (c) the amount that sort of represents saving (foregone consumption)?

Just a thought from a 2L who should be working on his casenote.

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