Public debt was not implicated in the collapse of 2008, nor is it retarding the recovery today. Enlarged government deficits were the consequence of the financial crash, not the cause.1 Indeed, there’s a strong case that government deficits are keeping a weak economy out of deeper recession. When Congress raised taxes in January at an annual rate of over $180 billion to avoid the so-called fiscal cliff, and then accepted a “sequester” of $85 billion in spending cuts in March, the combined fiscal contraction cut economic growth for 2013 about in half, according to the Congressional Budget Office. Moreover, some of the causes of public deficits, such as Medicare, reflect to a large extent inefficiency and inflation in health care rather than profligacy in public budgeting.
Here comes a point that’s now been lost sight of both in most countries tha are now been fed the austerity cure:
It was private speculative debts—exotic mortgage bonds financed by short-term borrowing at very high costs—that produced the crisis of 2008. The burden of private debts continues to hobble the economy’s potential. In the decade prior to the collapse of 2008, private debts grew at more than triple the rate of increase of the public debt. In 22 percent of America’s homes with mortgages, the debt exceeds the value of the house. Young adults begin economic life saddled with student debt that recently reached a trillion dollars, limiting their purchasing power. Middle-class families use debt as a substitute for wages and salaries that have lagged behind the cost of living. This private debt overhang, far more than the obsessively debated question of public debt, retards the recovery.
We may think that debt – however incurred – has to be repaid: it a moral duty on us as individuals and as a society. Then again maybe there is a time when we have to think again.
In the case of a broad downturn,2 debt ceases to be purely a moral question, and becomes a pragmatic one: Will it help the overall economy for the law to demand that debts always be paid in full? Was it economically sensible to throw debtors into jail? Is it sensible now to force troubled corporations or banks to liquidate? To compel sales of millions of homes in a depressed market? To destroy the economic potential of entire nations so that they can service old debts that were incurred corruptly by previous governments or banks? Society properly discourages borrowers from taking on imprudent burdens, and the prospective loss of property or even liberty functions as a deterrent. But in a general collapse, debt forgiveness may become necessary if the economy is not to sink further.
He reminds the reader that debt relief and forgiveness has not been unknown, even in recent history. During the Great Depression and Roosevelt era
… the US government became serious about debt relief, with a series of policies that refinanced distressed home mortgages, reformed and recapitalized banks, extended relief to bankrupt consumers, financed a huge war debt at below-market interest rates, and wrote off some of the international debts of allies and enemies alike. (Britain, America’s closest ally, received near-total forgiveness of wartime Lend-Lease debt.)
Germany, today’s enforcer of Euro-austerity, was the beneficiary of one of history’s most magnanimous acts of debt amnesty in 1948. The Allies in the 1920s made the catastrophic error of helping to destroy Germany’s economy with reparations and debt collection policies. In the 1940s, after a brief flirtation with World War I–style reparations, the occupying powers agreed to behave differently: they wrote off 93 percent of the Nazi-era debt and postponed collection of other debts for nearly half a century. So Germany, whose debt-to-GDP ratio in 1939 was 675 percent, had a debt load of about 12 percent in the early 1950s—far less than that of the victorious Allies—helping to produce postwar Germany’s economic miracle. Almost every German can cite the Marshall Plan, but this larger act of macroeconomic mercy has disappeared from the political consciousness of Germany’s current austerity police.
Kuttner is wise enough to know the chances of countries such as Ireland having their debts relieved are remote.
The question of who gets debt relief reflects the distribution of political power—and power normally lies with large creditors such as banks.