Personal Ties Matter

It's been great to guest blog at Credit Slips for the past week. Thanks to Bob Lawless for being such a welcoming host and guiding me through the technical details. And to Debb Thorne for her warm introductory note.

I especially appreciate establishing a dialogue between legal experts and sociologists. In fact, sociologists who specialize in economic processes have recently been paying greater attention to issues of credit and debt. More specifically, they have examined how the creation, maintenance, and transformation of interpersonal relations intersect with a whole range of economic transactions from consumption to debt. Although they have dealt less frequently with debt and bankruptcy, their findings shed light on those tricky transactions as well.

While standard economic approaches focus on individual bargaining and strategizing in carrying out economic transactions, new approaches in the sociology of economic life start their analysis by focusing on interactions, transactions, and social ties. In different ways, sociologists show how regularly people create and rely on close ties for what others think of as strictly economic transactions.

Let me give you a few examples from the sociological and anthropological literature. Paul DiMaggio and Hugh Louch survey pre-existing non-commercial ties between buyers and sellers in consumer transactions involving major purchases: cars, homes, legal services, and home repairs. DiMaggio and Louch find a remarkably high incidence of what they call within-network exchanges. A substantial number of such transactions take place not through impersonal markets but among kin, friends, or acquaintances. Noting that this pattern applies primarily to risky one-shot transactions involving high uncertainty about quality and performance, DiMaggio and Louch conclude that consumers are more likely to rely on such non-commercial ties when they are unsure about the outcome. Risk favors reliance on friends and relatives.

In another study, Mariko Chang compares how households with different economic resources seek information about financial transactions. She finds that overall social networks constitute the most common source of information about saving and investment. Wealthier families, however, are more likely than poorer families to also consult financial professionals and certain kinds of media (e.g. direct-mail advertisements, the Wall Street Journal, or internet financial sites). The less affluent are more likely to rely exclusively on friends and relatives for information on such matters as account fees or interest rates. Among other reasons, Chang speculates that the wealthy are less likely to rely on personal networks because they find them less useful to gain information on savings and investments, they are reluctant to share personal financial information, or they are concerned with building expectations of reciprocal obligations.

As readers of this blog probably know from personal experience, close ties figure even more prominently in house purchases -- the largest expenditure that most households ever make. Nicholas Townsend's interviews of a group of men in their late thirties from varied social backgrounds, provides some specific evidence of how that works. Acquisition of homes, Townsend finds, often involves extraordinary efforts including relying on kin, increasing hours of work, and depending on wives' income. The men acknowledged receiving substantial family help of one kind or another in their first home purchase: help included both direct financial assistance (such as a loan from parents or a gift of a down payment), guarantees such as co-signing a mortgage, and other non-financial support in finding or building the house. It also included living with parents rent-free while saving for a down payment and buying from a relative below market price.

In addition, most men reported that they saw the likelihood of family assistance - especially their own parents' - in case of financial crisis as a crucial form of insurance. As we might expect from yesterday's discussion of the independence myth, Townsend reports that the men downplayed that substantial help in favor of self-portraits representing their own capacities to provide their households with adequate, appropriate shelter.

It is not just households that rely on interpersonal networks. One of the more surprising results from recent work on capitalist firms is how regularly business people develop and use ties with their suppliers, customers, and counterparts in other firms for aid and information in getting their own work done. Brian Uzzi, of instance, has looked at middle-market banking. There he finds that firms whose executives establish friendships (or personal relationships) with officials at credit institutions receive lower interest rates for loans than those that operate at arms-lengths. Across a wide range of commercial transactions, personal ties matter. They not only facilitate connections, but also often produce superior economic outcomes.

Specialists in credit and bankruptcy can surely benefit from this sort of theory and research. Most likely they will find that personal ties matter significantly to how, and how well, firms and households deal with financial crises.

The Independence Myth

Financial aid from parents to children hardly seems to be a political issue, unless you happen to be running for governor of New York. Eliot Spitzer, currently New York attorney general, got into serious trouble during his 1998 campaign for accepting millions of dollars from his wealthy father to repay a bank loan for money he used to run his earlier 1994 campaign. Bernard Spitzer, his father, was stunned at the criticism: "I couldn't believe that there was any objection, to a father lending money to a son who wants to enter the political world" (The New York Times, October 12, 2006). Bernard Spitzer is not the only one helping his children out.

As Tamar Lewin reported last year in the New York Times (July 14), increasingly long-lived and prosperous American grandparents are providing financial aid to their children and grandchildren as never before, including tuition costs and real estate down payments. Yet they often conceal their help in fear of damaging their children's reputations for independence (In fact many of the grandparents interviewed by Lewin requested anonymity for fear of embarrassing their children). The longevity and prosperity are new, but aid across generations is old. The aid has always included money, but it has also included a wide variety of other help, including personal care.

The distinctive American myth that upright individuals and households take care of themselves economically has long hidden extensive exchanges across generations. It has also hindered clear-sighted public policy for dealing with economic emergencies, dependency, and personal care. Critiques of Social Security and Medicare that treat their financing as intergenerational warfare, for example, ignore the frequency with which government aid reduces the financial strain on children of aging parents.

When Americans lived shorter lives and older people had neither investment income nor government benefits to support them, it is true, more financial aid flowed from younger to older generations. But even then grandparents often took care of children, helped with household chores, provided contacts for job finding, and offered gifts that made a difference. For most American families, a house or apartment is their largest single chunk of wealth. Parents regularly either pass on their own homes or make substantial contributions to the financing of their children's first homes.

A surprising parallel appears among America's low-wage immigrants. Migrants from Mexico, Central America, and the Caribbean send back huge amounts of remittances each year. To Mexico alone, US immigrants sent about $17 billion in 2004. Often the money sent back home supports grandparents who are taking care of the migrants' children while the migrants work in American cities. It also helps buy houses. Some of the migrants will return to live in those houses after their stints in the American labor force. Others will use their savings to bring their elderly parents and their children to live in the United States. Here again inter-generational transfers belong to webs of mutual aid.

That mutual aid does good and bad. On the positive side, it maintains solidarity and security within families across generations. Ironically, it even supports the myth of independence in that way.

On the negative side, it reinforces inequality as whites much more frequently pass on property while blacks and Hispanics less often have substantial property - including houses - to pass on. Elimination of inheritance taxes aggravates the difference between haves and have-nots. It also means that a death, divorce, or loss of job can devastate not just one household but a whole connected group of kin.

Here smarter public policy could take advantage of people's readiness to help each other in reducing inequality and reinforcing the safety nets that people build for themselves. For example, something so simple as paying grandparents for care of their grandchildren (which has worked well in some experiments) could make a big difference to low-income households.

Yes, changing demographics are strongly affecting the place of American grandparents in the lives of their children and grandchildren. For all the bickering, uncertainty, reluctance, grudges, and myth making that accompany mutual aid, the extent of help, financial and practical, remains striking. Generations help each other, parents care about their kids, and kids continue to do what they can for aging parents.

Women's and men's money: what difference does it make?

Last Sunday, the New York Times business section reported the increased economic muscle of US women, married and single. Women, the Times notes, are not only earning more but spending their money in previously male consumer territory: purchasing homes, cars, consumer electronics, and financial services.

Let's be careful about what we infer from this trend. Does it mean that household economies have become gender-neutral? That household economic decisions and practices no longer divide by gender? Probably not.

It's certainly true that US women are acquiring greater power over household decisions and extending that power over a larger range of consumer goods and services. But there are considerable reasons for doubting that the gendered household division of labor is about to vanish. In fact, substantial research shows persistent gender differences not only in the amount of money earned by men and women, but in how they earn that money, in who handles household finances, and even more intriguing, in how they spend it.

Recall Muhammad Yunus' micro-credit program discussed yesterday. Most of Grameen Bank's small loans recipients are women. Why? Reportedly, Yunus found not only that women repaid loans more often than men but that when women controlled the money, families were more likely to benefit from the income. Based on their own investigations, sociologists, economists, and policy experts have reached similar conclusions: direct transfers to women, including welfare payments, are more apt to be earmarked for their children's needs.

Other types of gendered patterns in household economic behavior appear across social classes and ethnic groups. Just today, the New York Times (November 1), describes the complex arrangements made by working mothers who go on business trips but still manage household finances for their time away. Stacy Hirsh, a mother of two children, works in the marketing and business development division of a financial services company in Manhattan. Before leaving on a business trip, the article reports, among other tasks, Hirsh prepares checks made out to the piano teachers and cash for the housekeeper. Other mothers post lists of household tasks for their husbands and baby sitters.

Meanwhile, in immigrant families, such gender differences in economic activity often lead to marital conflict. Wives who discover greater autonomy and household power after migration insist on purchasing homes, home furnishings, and other durable goods ensuring long-time residence in the U.S. Their husbands, on the other hand, less enthusiastic about the new household democracy, often opt to save funds destined for their eventual return to their homeland.

As readers of this blog may well already know, Debb Thorne's interviews with bankrupt couples uncovered a remarkable gender pattern among families facing bankruptcy: husbands withdrew, while their wives assumed the household's financial dirty work. Many husbands, for example, refused to answer the telephone as bill collectors started hounding them. They kept themselves ignorant of current finances, and left all the legal work to their wives. As one husband told Thorne:

I'm so bad, I mean, I love my wife, but I have to admit I was bad. They'd [bill collectors] call and I'd say "Oh, I'm sorry, he's not here right now" or, "she's [his wife] right here."

Many wives, therefore, found themselves in charge of keeping careful records, juggling bills, holding off hostile bill collectors, taking the initiative to file for bankruptcy, and then dealing with the arduous legal paperwork.

When couples on a drive get lost, women tend to do the asking for directions because men are reluctant (or too embarrassed) to admit their failures as map readers. Similarly, it looks as if when things go wrong in credit and bankruptcy, women in households specialize in managing external relations.

Considering women's increased involvement in families facing bankruptcy, it would be important to find out what deliberate changes take place in consumption and possessions among such families. Which items for instance are people more likely to sacrifice and sell? Which items do they hold on to? How does that differ by gender? Considering strong evidence showing that mothers are more likely than fathers to allocate money for their kids' consumption, one might expect for instance, that mothers will struggle to preserve more of the dwindling income for children and households and less for external display. Students of credit and bankruptcy should stay alert to differences in the ways that men and women deal with financial stress. They matter to household welfare.

Micromarkets

This year's Nobel Peace Prize winner, economist Muhammad Yunus, revolutionized poor people's economies by re-inventing micro-credits. In an effort to alleviate worldwide poverty, Yunus created a system of small individual loans to borrowers without any collateral. Interest rates are high, up to twenty percent. Yet, astonishingly, most borrowers repay their loans. Originally established in Bangladesh, Yunus' Grameen Bank became a model for microlending across the world. Now, despite the Nobel committee's anointment, competitors in the microcredit business are contesting Yunus' approach.

In this week's New Yorker, Connie Bruck's article "Millions for Millions" describes the controversy. Bruck reports an emerging battle between Yunus's philanthropic approach to credit and a hard-nosed alternative treating micro-credits as just another market. Although Yunus has necessarily paid attention to keeping the loan fund solvent, on the whole he has considered these loans to be a form of assistance that will help very poor people exit from poverty. His market-oriented competitors take a very different line: they see the basic value of micro-credits as the integration of poor people into markets that will eventually both profit them and educate them.

As articulated by eBay founder Pierre Omidyar, the market-oriented approaches go even farther. Philanthropy, Omidyar warns, distorts market efficiency. By preserving microcredits as unprofitable charity payments, he argues, in the long run, the programs undermine their own ultimate goals. Profit-making microfinance programs, on the other hand, will guarantee their success. They'll do better than charity because they create efficient markets, integrate poor people into those markets, and make savvy entrepreneurs out of poor people in the process.

To make sure that happens, Omidyar donated $100 million to Tufts University, with the principal earmarked for promoting profitable microfinance investment opportunities. Yunus strongly disagrees. For him and his followers, ordinary profit seeking contradicts microcredits' social goals. He told Bruck: "[Omidyar] says people should make money. I said, Let them make money -- but why do you want to make money off the poor people? You make money somewhere else. Here, you come to help them."

The Yunus-Omidyar dispute pivots around separate spheres/hostile worlds ideas I mentioned in yesterday's posting. For Yunus and his followers, mixing aid to the poor with profit-making taints their effort. Commercialization necessarily undermines microcredits' virtuous goals, corrupting relations between lenders and borrowers on one side and among borrowers on the other. Hostile worlds fears run in the other direction as well. For Omidyar, philanthropic sentimentality corrupts market efficiency by preserving unprofitable ventures and teaching people to expect handouts.

Both approaches, however, challenge another standard myth in the study of economic change. Here the mistaken dichotomy divides a so-called "real" economy of firms and corporations from allegedly peripheral economic activity. The periphery includes micro-credits but also, among others, immigrant remittances, household economies, gift exchanges, and the underground economy. The real economy, in this mythology, consists of transactions that go on in the world's central markets.

What's wrong with this view? First, across the world billions of people depend for their economic survival not on jobs or investments in firms, but on micro-credits, remittances, household economic activity, gift exchanges, and underground economies. Second, in the aggregate those supposedly peripheral transactions are not trivial. They have large macroeconomic consequences. For example, the World Bank estimates there are 7.000 microfinance institutions that serve 16 million people in developing countries. The total cash turnover of MFIs world wide, according to the World Bank, is estimated at US 2.5 billion. The New Yorker article mentions that the Grameen Bank has distributed more than $5.3 billion to nearly 7 million borrowers. When it comes to migrant remittances, World Bank estimates places the total for 2005 at around US $ 250 billion. In addition to being crucial to the lives of their participants, microcredits and migrant remittances add up to major elements in worldwide transfers of capital.

Microcredits have an additional feature that leads many observers to label them as peripheral: most borrowers are poor women who use the small loans to start tiny local businesses. More about that tomorrow. 

Intimate Debts

I am delighted to share my thoughts with the Credit Slips blog community. While I do not specialize in issues of credit and bankruptcy, I have been working on the moral and personal side of economic processes over my entire career. I began by studying the spread of life insurance. How, I asked, do organizations such as life insurance companies go about setting monetary prices for human life? I then moved on to the changing valuation of children's lives, documenting a dramatic transformation in children's economic and sentimental value in the US roughly between 1880 and 1930. How, I now asked, did this change in the economic valuation of children happen, and what were its consequences? For my next project, I left children for money. After studying children's allowances, I became intrigued by how we go about differentiating among different kinds of monies. Looking at families, welfare, gifts and other settings, I found people creating and managing different kinds of monies for different sets of social relations.

More recently, my book The Purchase of Intimacy, looks at the intersection of economic activity and intimate personal relations, both in everyday practices and in the law. How, I ask, do people manage without either botching the economic consequences or damaging the relations? Doesn't the mixture of intimacy and economic activity cripple both of them? After all, don't we know that cronyism corrupts business and money destroys love affairs as well as friendships? If you value your friendships, we are routinely warned, don't spoil it by loaning money to your friends. If you care about workplace efficiency, we hear, restrict workers' intimate associations. If workers get too chummy on the job, too intimate, they will spend more time with each other than with their work. So, people warn, mix intimate relations with economic activity at your own peril.

They are wrong, at least most of the time. My book, The Purchase of Intimacy, shows that the world does not divide into two segregated spheres of intimacy and economics. All of us routinely mix our most intimate relations with economic activities. In fact, we owe economic support to our children, our spouses, our parents, and often our friends. No loving household would last long without regular inputs of economic effort. People who have intimate relations with each other, who care for each other, regularly pool their money, make joint purchases, invest shared funds, organize inheritances, and negotiate divisions of household work.

Let me be more specific: couples buy engagement rings; parents pay nannies or child care workers to attend to their children; adoptive parents pay lawyers and agencies money to obtain babies, divorced spouses pay or receive alimony and child support payments, parents give their children allowances, subsidize their college educations, help them with their weddings and their first mortgage, and offer them substantial bequests in their wills. Friends and relatives send gifts of money as wedding presents, and friends loan each other money. Immigrants dispatch hard-earned money as remittances to kinfolk back home. In all these cases, people are making economic contributions to intimate relations.

The separation of spheres is a myth. Of course, people sometimes cheat, hurt, disappoint, and fail their intimate economic partners. Exploitation and economic irresponsibility often do occur in intimate relations. But it's not a necessary or even likely outcome of mixing intimacy with economic activity.

So why do we worry so much about the mingling? Where do these worries come from? Our concerns draw from two complementary but partly independent misunderstandings. We can call them "separate spheres" and "hostile worlds." Separate spheres notions identify two distinct domains of social life that operate according to different principles: rationality, efficiency, and planning on one side, solidarity, sentiment, and impulse on the other. Hostile worlds beliefs say that when such spheres come into contact they contaminate each other. Their mixing, goes the argument, corrupts both; invasion of the sentimental world by instrumental rationality desiccates that world, while introduction of sentiment into rational transactions produces inefficiency, favoritism, and cronyism. In this account, a sharp divide exists -- and should exist -- between intimate relations and economic transactions, since any contact between the two spheres contaminates both of them.

Separate spheres and hostile worlds ideas appear in social science, where generations of analysts have deplored what they saw as the erosion of authenticity and intimacy by an encroaching market. Outside of social science, the same themes frequently resound in moral discourse, when people explain bad behavior as a consequence of greed and call money the root of all evil. In American law, the doctrines of separate spheres and hostile worlds show up in new versions. Courts, for example, regularly rule that economic transactions between spouses must count as free gifts rather than quid pro quo exchanges - at least until the moment of divorce. But practices based on separate spheres and hostile worlds figure in everyday life as well. Sexually intimate couples, for example, ordinarily take great care to signal (both to others and to each other) that they are not simply exchanging sex for economic rewards.

Social scientists who are rightly suspicious of those widely held ideas have often replied with a "Markets Everywhere" argument. When you look closely enough, they argue, you see that intimate economies operate pretty much the same as corporations and retail stores, calculating costs and benefits.

My book, Purchase of Intimacy, takes up these questions in a variety of settings: looking at couples, relations of care, and household economies. It examines practices and also looks at what happens when things go wrong and people go to court. For example, when engagements sour and a jilted fiancée takes her ex to court demanding the return of expensive gifts, what do courts say? Or when a child takes care of her ill father for years, is she legally entitled to a greater share of the inheritance than her brother that seldom visited? Or, if parents help out their married daughter with her first mortgage, and later she divorces: was that money a gift or a loan? In divorce cases, should courts consider the economic value of a wife's household work in determining the settlement?

These specific questions suggest a larger set of questions for specialists in debt and bankruptcy. Here are a few:

1. How do courts decide whether a transfer of assets is a gift, a loan, quid-pro-quo compensation or fulfillment of a natural obligation?
2. How do ordinary Americans make the same distinctions?
3. Is there something distinctively American about those distinctions or are they common across the world?
4. Does the kinds of asset - for example, cash, real estate, jewelry, or personal services - make a difference in those decisions?
5. Does extensive debt or personal bankruptcy make a difference?
6. Under what conditions and how do loans undermine personal relations?

Later postings will touch on some of these issues.

If you want some background, you may want to look at one or another of my books:
Morals and Markets: The Development of Life Insurance in the United States, (first published 1979).
Pricing the Priceless Child: The Changing Social Value of Children (1985).
The Social Meaning of Money(1994).
The Purchase of Intimacy(2005).