The Case for a Debt Jubilee. Richard Vague
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the receipt of interest payments from borrowers does not commensurately increase their spending and investing. A significant number of those lenders are already spending and investing everything they intend to, and will most likely save rather than spend much of their increased earnings from higher lending levels. To use an economist’s terminology, they have a lower marginal propensity to consume.
In other words, debt, once it reaches high levels, reduces the spending and investing of borrowers without commensurately increasing the spending and investing of lenders. This is a major reason why the effects and impact of rising debt are so uneven, and so important to study.
In fact, average-to-lower-income individuals have borne the disproportionate brunt of rapid debt growth, as is clearly shown in the proportionately greater rise of their debt in relation to their income and net worth. As such, rising debt has been a key element of rising inequality, which in the United States has increased markedly from a Gini coefficient of 0.40 in 1980 to 0.48 in 2019. The accumulation of debt is likely a consequence and a symptom of growing inequality, of course, because greater inequality means that more people have to borrow to make ends meet.
The data from the Federal Reserve’s Survey of Consumer Finances indicates the trends. From 1989 to 2019, the debt of US households with net worth in the 1 to 59.9 percentile increased by 92 percent in ratio to their incomes. In stark contrast, households in the top 10 percentile saw debt to income rise by only 18 percent.
For this bottom 59.9 percent, not only has their debt increased by 92 percent in relation to income, but their financial net worth (financial assets minus debt) has declined from 43 percent to 24 percent of their income. They have a diminished relative capacity to spend on education, investment, and other consumption. For the top 10 percent, it’s a completely different story – in fact, almost the same story told in reverse. While their debt-to-income ratio has increased by only 18 percent, their financial net worth has doubled from 158 percent to 335 percent of their income. The contrast could hardly be more stark.
As part of this, since financial assets equal financial liabilities, then more debt, whether private sector or government debt, also means more assets – or wealth. Twice the debt to GDP does generally mean twice the financial wealth (assets) to GDP – but again it is the distribution of that debt and wealth that creates issues. As these numbers illustrate, the great preponderance of that asset growth has gone to the already well-off.
These numbers show the growing divide between average and wealthy Americans. And they show just as plainly how the accumulation of private sector debt exacerbates and widens that divide.
* * *
I’ve described the context and the problem: we have soaring private sector debt that strangles growth and widens inequality, and yet is largely ignored by mainstream economics. This book makes the case for a workable and meaningful solution. It is not another broadside against government spending or a call for austerity – far from it. We need to reduce the ratio of private sector debt to GDP, which is another way of saying reduce the burden of debt on households and businesses in relation to their income. It makes the case to unburden American households mired in debt with ideas that will improve lives, reduce inequality, and bring new vigor to the economy.
The proposals discussed in this book for certain types of broad debt restructuring and amnesty are intended to be politically feasible and thus to trailblaze a realistic path out of the debt trap. They target relief from the burden of mortgage debt, student debt, and more, along with an innovative and timely proposal for reducing government debt that is not dependent on austerity. These proposals are intended to be provocative but possible, and food for thought, even for those who disagree.
We use the term “debt jubilee” to capture an ensemble of related ideas and terms that deal with broad debt restructuring, including forgiveness, cancellation, modification, or amnesty – terms that we will use somewhat interchangeably in this book. Debt jubilee takes many forms, as we will see.
To understand the importance of jubilee, we must understand three important realities about economies. This book will discuss these three realities in more detail because, once they are fully understood, the need for forms of jubilee, both big and small, becomes clearer:
First, debt almost always outgrows GDP, and has reached very high levels in developed economies. It almost never grows at the same rate as (or a lesser rate than) GDP, reaching a sustained equilibrium. This debt growth is no accident, nor is it caused primarily by external circumstances; instead, it is an intrinsic, persistent feature of economic systems that comes from the very nature of growth and debt.
Second, and as I’ve already begun to describe, high debt to GDP is harmful. It stultifies economic growth, brings financial distress to families, and widens inequality.
Third, debt doesn’t decline by itself, and it is almost impossible to reduce it without significant, overt initiatives.
Some assume that debt reduction can easily be achieved, but as we will discuss in Chapter 3, it is very hard to accomplish and resists conventionally invoked solutions such as inflation and growth itself. In fact, none of the mechanisms, including inflation and growth, that are traditionally assumed to improve a county’s debt profile work particularly well, if at all. Thus, the need – and case – for jubilee. To function at its best, our economy needs broad-based and inventive new initiatives for debt restructuring. Without these, debt levels will simply bring further growth challenges and burdens.
The good news is that jubilee would bring economic renewal. All would benefit: households would be financially stronger, and governments, businesses, and financial institutions would be better off because those households would be stronger.
Jubilee is not a quixotic, impractical dream of the soft hearted, but a key component of a well-functioning economy that should be integrated into that economy. It can improve the functioning of that economy – like the design features of an engine that prevent it from overheating and keep it running smoothly and optimally. Properly designed, jubilee would bring what has never been achieved in contemporary economic history: sustained growth coupled with a mitigation of the unchecked rise in the debt-to-GDP ratio and prevention of the crises that follow.
This is the future we should be aspiring to attain.
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