Economists’ Logic of Spending, Saving, and Borrowing

The guys at the Freakonomics blog can always be counted on for some interesting conversation starters.  Today, Steven Levitt pits conventional wisdom about saving money against advice on the topic from Milton Friedman (via Jose Scheinkman).  Conventional wisdom (taking the form of Levitt’s wife) holds that one should prudently save money from all income, no matter how small, whereas the economist’s advice is that it doesn’t make sense to save much during lean times if one expects future times to be fatter.  Thus, "[w]hen times are good, you should save, and when times are bad, borrow."

There are at least two additional applications where it seems that the economist’s logic holds.  First, the human body may benefit from this advice.  Dubner and Levitt have written about Seth Roberts’ Shangri-La Diet in the New York Times Magazine, their book, and on their blog.  The theory roughly stems from similar principles as Friedman’s thoughts on saving money: when your body expects food to be plentiful (as signaled by food that tastes good and is familiar), it saves more of the calories consumed as fat; in times of need where food is undesirable (signaled by bland and unfamiliar tastes), your body spends more of its saved energy.  Roberts’ original idea was based on the idea that food was not always as easily attainable as it is today: our ancestors’ bodies survived by using their energy efficiently when its source was unpredictable–thus, obesity was a rare occurrence but a natural response to an abundance of food.  By manipulating the body’s theorized response to taste, Roberts tricked his body into believing that food was not plentiful, and so it should spend, rather than save, its consumed energy. 

Second, this advice may help us assuage any guilt we might have had about those looming student loan debts we’re all furiously accumulating here in graduate school.  Levitt points out, "[m]ost likely, I would never be as poor again as I was starting out."  As grad students, we haven’t even officially started out yet, in Levitt’s terms, as he was given all this advice when he was a first-year assistant professor.  I can say that I am most likely poorer today than I will be in the foreseeable future.  The moment that we secure our first jobs, we can expect our pre-loan incomes to more than triple.  Compared to what we will be earning in the future, there is no reason not to enjoy our loans now.  Student loans also have relatively low interest (which is paid by the government until you graduate if you qualify for subsidized loans), so borrowing now and paying it off later, plus a bit extra for the interest, just makes more sense than wallowing in squalor as graduate students only to have more money than we know what to do with in just a few years.  (I’m knocking on wood as I type to ward off any external shocks.)  Additional arguments could be made that a malnourished and unhappy graduate student is an unproductive graduate student.  If we don’t finish our degrees, then we won’t be able to expect our future reasonable incomes.  Essentially, doesn’t this mean that borrowing now ensures our ability to pay off the loans (and then maybe save some money, too) in the future?

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