The Gospel of thrift

But the format was more tent revival than accounting seminar, with the first 90 minutes or so mostly devoted to Ramsey’s personal story of ruin and redemption. We heard how, during the second half of the 1980s, a young Ramsey built up a multimillion-dollar real-estate empire—then lost it all as the bank got nervous and called his loans, ultimately forcing him and his wife into bankruptcy. How, searching for help in his hour of need, he turned to the Bible and discovered Proverbs 22:7: “The rich rule over the poor, and the borrower is slave of the lender.”

At that moment, he told an audience so hushed that we could hear the ice squeak, Ramsey decided to never borrow another dollar again.

That is Megan McArdle on David Ramsey’s financial televangelism, in the most recent Atlantic. I stumbled upon the story listening to McArdle on the excellent EconTalk podcast.

Ramsey is not asking followers for their money. The opposite, in fact; he’s selling them on a lifestyle of saving, thrift and financial organization.

Economists are no strangers to self-control problems and impulsive buying. The usual solution is the commitment device–something we do now that makes it costly, or even impossible, for our future selves to behave badly. Some people cut up credit cards, or have their bank send a part of their paycheck straight into a retirement plan, mortgage payment, or bill due.

We think commitment devices are necessary because our preferences and behavior are hard (maybe impossible) to change. Ramsey’s example suggests otherwise. Part of his plan has you cut up credit cards, making borrowing off the future costly. Part provides a routine and a system that is reinforced by needing the permission of others to deviate. All are in line with commitment devices.

But part of Ramsey’s approach seems to be a fundamental change of mindset–a revelation and personal transformation. It is no coincidence that Ramsey is an evangelical.

Ramsey’s method looks like something new to me: not a marginal change of behavioral preferences, but a monster-sized one. Adherents are converted, financially, in the same way that some convert religiously.

Well, almost new. Listening to the podcast, it struck me: this is exactly what we are trying to do in Liberia in an RCT with street youth. Half the youth we are working with–drug addicts, street dealers, petty traders, part-time thieves, beggars, sex workers–are receiving training and funds to start a different sort of business. Half of these, though (and half those not getting a grant) are getting indoctrinated into saving, thrift and self-discipline.

I’ve seen this work, if on a small scale. A local youth NGO has a good track record with some real hard cases: addicts, criminal ex-combatants, and the like. We’re trying to see if their system works in a systematic way, and why.

In effect, we’re aiming not for marginal changes among all, but transformation among a few. I only recently saw the parallels to another sort of conversion.

Paternalistic? Manipulative? Absolutely. But people only start in the program if they want to, and we’re only aiming at the youth with behaviors that appear harmful to themselves and (more important) harmful to others.

Note to self: get in touch with McArdle and Ramsey. I wonder if he’d fly to Liberia?