We all make bad financial decisions at some point. Whether it’s as relatively minor as feeding too many bills into a slot machine at a casino, or as life-shaping as taking out way too much money to pay for college or a house — we’re all bound to fall into a money suck of some kind. There’s really no avoiding it. While most of us tend to think that we’re fairly money-savvy — we’re always on the lookout for the next scam or pyramid scheme — we’re often lulled into a false sense of financial security by thinking that someone out there has our back.
That someone? The government. It’s the government’s job to look out for the best interests of the citizens, after all. And if there were something terribly amiss, we imagine that some state or federal regulatory agency would step in to right the wrong. In some cases, that’s true. But in others, we see just the opposite.
In fact, in many ways, the government actively encourages us to make bad decisions with our money. People are actually incentivized to ignore what’s in their best interests, and in these cases, put themselves in precarious financial situations.
Now, when we use the term “government,” it could mean any number of things. There are multiple levels of government everywhere you go — from city to county, state to federal — with numerous laws and programs in effect. With so much going on all at once, a climate is created in which some laws or programs create unintended consequences; consequences which actively end up hurting those they were supposed to help.
The following are a few examples of how some of these laws and programs do just that. While it’s hard to think that government officials were trying to create bad law, or hurt citizens in some way, sometimes that’s what ends up happening. In this case, that harm comes in the form of dire financial situations.
Here are three ways the government is encouraging us to make bad financial decisions.
1. Incentivizing bad loans
As portrayed in movies and books like The Big Short, the financial crisis and subsequent Great Recession were, in large part, due to failures in the housing market. It’s incredibly complicated, so you should do your best to research and come away with an understanding of what happened, but basically, the housing market failed because there were millions of people who couldn’t pay their mortgages, and defaulted on their loans. These folks signed up for loans they couldn’t pay (there is a lot of blame to spread around for this, from the borrowers to lenders to regulators).
The problem here is that the banks were giving borrowers money that they knew they wouldn’t be able to pay back. And part of the reason they did that is because the government told them to. In order to expand housing and mortgage availability, the government told banks to make funding available to those riskier borrowers — in effect, incentivizing bad financial decisions for borrowers who should’ve known better.
Again, it’s very complicated. But an example of how good intentions can backfire.
2. Student loans
College costs are absolutely insane, as anyone who’s even thought about enrolling can tell you. While there’s no real easy, direct answer as to why, it mostly comes down to another example of policy creating unintended consequences. Again, like we saw with the housing crisis, the government has made the availability of loans and funding for college very easy. If you want money for school, you can probably get it. Because there is so much money flying around, colleges and universities have no reason to contain costs — they can raise tuition (and associated fees) seemingly at will, because kids are going to pay it.
They’re going to pay it, because their only other option is to miss out on a college education — and that can hurt your chances at having a solid, sustainable career.
So, because the government has made student loan money so easy to get, it’s led to huge spikes in tuition costs. Costs so high that it’s probably not in anyone’s best interest to take on so much debt. In effect, we have students graduating with hundreds of thousands of dollars in debt and little, if any, hope of paying it off.
3. Subsidizing debt
Not all debt is bad, necessarily. It’s often in people’s best interests to take on a mortgage or student loans (as long as they’re of a reasonable amount) in order to build wealth. But, as we’ve discussed, things can and do go wrong. And debt is a tricky thing. It’s often a necessary evil for many households, but too much of it, or the wrong types, can ruin people for life. The final way in which the government encourages us to make bad financial decisions is by actively subsidizing our debt, by employing subsidies and programs that make borrowing difficult not to do.
A piece from The Economist digs into this idea of “debt distortion,” and points to things like subsidies for residential mortgages as an area in need of policy change. “Not only do these subsidies increase financial fragility, they fail to achieve their purported goal of promoting home-ownership,” the piece says. “The shares of people owning their own homes in America and Switzerland, two countries with vast subsidies, are 65% and 44% respectively—no more than in other advanced economies like Britain and Canada that offer no tax break. The wisest step would be to phase out tax relief gradually, as Britain did in the 1990s.”
Tax breaks like this may blur our vision, and lead to bad financial decisions. Again, it’s not something that’s being done on purpose, but is happening nonetheless. In these cases, unintended consequences are prevailing, and for the sake of your personal finances, you need to be aware of how a seemingly good decision to take on debt could ultimately bury you.