The Rise of Serfdom in Modern America

 

 A Tragic History of Economic Bondage

Serfdom was a condition of bondage or modified slavery which developed in western Europe during the middle ages and was practiced in some countries until the mid-1800s.  The serfs were the lowest (peasant) class in an economic system called feudalism where the "lord" of the manor (they arrogantly gave themselves God's own title to be elevated above their fellows) owned all the productive assets (in an agrarian society that meant land) and everyone else was subservient.

The serfs on a manor were legally obligated to provide their labor to their lord, who used them at his will in his fields, mines, armies etc.  In exchange the serfs were given a measure of protection and allowed to use a small plot of the lord's land to feed themselves through subsistence farming.
Serfdom was dealt a death blow (pardon the unfortunate word-play) by the bubonic plague which wiped out over a third of the population and reduced the labor force to such a degree that the serfs discovered and then wielded their economic power with the lords.

Although feudalism faded, other forms of human/economic subjection continued.  The most notorious example of subsequent economic bondage was the African slave trade as well as the enslavement of indigenous peoples in the various places the Europeans colonized.  Slavery's decline began with the abolition of the slave trade in England in 1807 led by the remarkable William Wilberforce (the subject of the wonderful movie "Amazing Grace"--if you haven't seen it stop reading this, find a copy, and go watch it now).

During the industrial revolution when innovative machinery began to supplant land as the chief productive asset many companies exploited their laborers through the "truck system" in which employees were paid in private currency issued by the company (called scrip) that could only be spent at the company store which provided goods and services at inflated prices and offered credit which legally bound the employee into a lifetime of bondage.

Horrible injustice was perpetrated on and by our ancestors through serfdom, slavery, and owing one's soul to the company store.  We should be grateful to live in modern times where such oppressions are now only the unfortunate vestiges of a barbaric past.  Well, not so fast....

Voluntary Bondage Through Debt 

Across the world, but especially in the United States of America, a new version of economic serfdom emerged during the expansion after the end of World War I.  Public as well as commercial financial institutions, led by the US Federal Reserve, loosened household credit requirements to stimulate reconstruction.  The result was that household debt grew at unprecedented rates and got out of control during the 1920's.  Household debt is all money owed by a household to financial institutions, and includes home mortgages (first and seconds), credit card, lines of credit, student loans etc.  When too many households' debt loads became unsustainable relative to their incomes and default rates spiked, banks became insolvent, everybody panicked, and the Great Depression of the 1930s ensued.  

Once again, after World War II household debt began to expand to fuel the baby boom and a new consumerism required to keep the war-idled factories humming.  Household debt burdens rose steadily since the 1950s peaking in 2008 and leading to the financial collapse we now call the Great Recession.

The chart to the right from an analysis by the Federal Reserve Bank of San Francisco shows the explosion of household debt relative to both assets and income.  Notice from the gray line that average household debt reached more than two times average household income.  That means that families would have to work for over two years and spend NOTHING in order to pay off debts.  Instead, families and individuals continued to spend more than they earned and simply added to their debt.  

Household debt is different than commercial debt in that it is not used to buy a productive asset (i.e. it doesn't pay for itself by generating income).  The one possible exception to this is student debt which ostensibly can be paid back through the higher earnings that the education will enable.  However, student debt burdens have also risen to unsustainable levels for many individuals because in an era of unemployment and underemployment the incremental income resulting from the degree isn't enough to pay off the debt.

Unsustainable levels of household debt create economic bondage just as real and insidious as serfdom.  The lords of our time are the debt obligations we enter into with financial institutions like mortgage lenders or credit card companies who own productive assets (capital), and the serfs are those of us who end up being compelled to provide our labor to service our lords.  Ironically our bondage is voluntary because we are too undisciplined to defer our gratification.  We buy more house, car, furniture, education, electronics, food, and fun than we can pay for.

Digging Out of the Hole

 Just like with losing weight, the process of paying down existing debt is painful and difficult, but the concept is so simple--raise your income while reducing your expenses and then use the difference to pay off debts.

• Raise your income - under the law of supply and demand the only way you can raise your income is to become harder to replace.  You must be better than others at provide a service that people with money need.  Why does a professional basketball player make 50X more than a teacher?  It's not because what he does is 50X more important than what the teacher does.  It's simply that there is a high demand for his services (millions want to watch him play) and he is very difficult to replace.  If you are going to earn more money you must understand the law of supply and demand and use it to your advantage.  Choose (or move to) a career that is in relatively higher demand, and become the best at it.
• Lower your expenses - Just do it.  Sell your home and rent or buy a smaller one.  Replace the new car with a cheaper used one.  Eliminate every discretionary expense--you don't need it and you can't afford it.  For example, take leftovers to work instead of going out for lunch, wait for movies to come out in the second run theaters or on video, cancel your cable subscription, sell your expensive toys and don't replace them etc.
• Pay off debts with the difference - That money that you're saving by raising your income and lowering your expenses isn't yours to keep or spend.  Give it back to buy your freedom.  Start with your most expensive credit (ones with the highest interest) and pay it down.  Loan consolidation (paying off expensive loans with a new less expensive loan) can be a good idea but only if you have stopped spending more than you earn.

Prevention

It is far easier to stay out of bondage than to get out of it.  I've talked about some of these concepts in other posts but they bear repeating:

• No credit card debt - feel free to use a credit card (I like the convenience of my AmEx and the frequent flier miles I earn from it) but only if you pay it off every month with no interest.  Beyond that don't ever carry a balance on a credit card period!  It's like a drug so "be smart--don't start".
• Work your way through school - especially for an undergraduate degree or a technical certificate work while you go to school to pay for it as you go along.  Take less credit hours if you must.  Work hard to get good grades so you can take advantage of scholarships.  My bachelor's degree took me 6 years but we graduated with two degrees, three children and no debt.  I did take out a short-term student loan once because of the timing of our income.  It had to be paid back in 3 months which we did. 
• Rent or buy half the house you can afford - You need shelter but it can be a humble shack if that's all you can pay for.  We have happy memories of our time in a tiny single-wide trailer in the early days of our family.  When it comes time to buy a house figure out what payment you can minimally make in a pinch and have a lender help you determine how much house you could buy on a 15 year fixed mortgage.  Don't spend any more than that on a home.  One rule of thumb is to buy the worst house in the best neighborhood that your spending limit will let you afford and then work to improve it--your equity will grow faster that way.  Gain some skills in remodeling and home repair.  Learn to do-it-yourself.  There are all kinds of resources to help you learn (e.g. people at the hardware store, internet sites, books, neighbors etc.). 
• Plan for the worst - Don't establish a standard of living assuming that you will alway have a job or an income, or that you'll remain healthy.  Bad things will inevitably happen in your life and if you're living on the edge of the cliff those unfortunate events can push you over.  Store food staples.  Develop an emergency fund of at least 4 to 6 months of income.  Maintain insurance to cover catastrophic health emergencies--if your job doesn't provide it, buy it yourself.  While Premium Health Insurance may be too expensive for you, you can buy high deductible (e.g. you pay the first $7,500-$10,000 out of pocket) policies at reasonable rates.  Without insuring against catastrophic risks you are always only seconds away from financial ruin.  I am the eternal optimist, but we make economic decisions like the I'm the world's biggest pessimist.  Take the advice of Peter Wastholm, "expect the worst, and you will never be disappointed".
• Take measured risks - this may seem contradictory to my previous advice but since the future is uncertain, every decision is filled with risk (e.g. will this turn out to be the right spouse, house, career, investment etc.).  The magic is mitigating those risks by forethought followed by faith, and flexibility.  Consider your options, make your best decision and pick a plan A, imagine everything that could go wrong, brainstorm ways of dealing with the downsides of plan A (i.e. plans B and C), and then execute your plan with confidence and agility.
• Choose to make at least 10% of your income inaccessible  - We are like most people I know--we're lousy at daily discipline regarding spending and saving.  We (or our children) nearly always find some way to spend all the money we can get our hands on.  If we have it we seem to use it.  What has worked well for us is to make one-time savings decisions with recurring compounding benefits.  Examples of this are to: 
• Create an "off-limits" savings account to build up our emergency fund and then ask the bank to automatically transfer $X into it whenever we get paid
• Set up automatic mortgage payments that are higher than required and make sure the bank will redirect the extra toward the principal.  When you first start making house payments the "rule of 78ths means most of those initial payments will go to interest while most of the ones at the end will go to principal--banks do this so they can collect their interest faster--so making even a $50/month extra payment to principal can cut your costs and time to pay it off drastically.
• Decide on a 401K contribution that the company takes out ahead of time.  If your company has a 401K matching program make sure you contribute at least as much as they will match (i.e. if they match up to 4% of your income in contributions to your 401K make sure you contribute a minimum of 4% of your income)

Unlike in ancient times when oppression was imposed on those in bondage we live in an age when we get ourselves into serfdom.  The great news is that we also have the choice to avoid it or get out of it.  You have the power within you so make the decision now to do whatever it takes to live free!