Debt

Guy goes to see his priest, completely distraught.  His life’s a mess, his business is failing, he’s considering suicide.  The priest tries to console him, then says “look, when I’m really facing a serious problem, one thing I do is take my Bible,  and just open a page at random, point blindly to a scripture.  Try it; God will guide you.”  Week later, the guy comes back, only now he’s at peace, he’s fine.  He says to the priest, “I did what you suggested, and you’re absolutely right; God showed me what to do.  I opened my Bible, pointed blindly at a page, and opened my eyes, and there it was, the answer to all my problems.  Right there in the Bible, it said ‘Chapter Eleven.'”

I was thinking about this the other day, while reading some Dickens, actually.  A constant thread in Dickens’ novels is debtors’ prison, either the threat of it, or the actuality.  We used to do that, all over Europe and in the US; we’d throw people in jail for debt.  The complete insanity of imprisoning someone for debt, putting him in prison where he can’t possibly earn the money he owes, doesn’t seem to have occurred to anyone until the 1830s in the US, and late 1860s in England.

Yes, America really was historically more lenient towards debtors than our European allies.  We had earlier bankruptcy laws, and laws that offered debtors a better deal.  In many states, debtors couldn’t be jailed for minor debts, and unlike in England, people jailed for debt had to be given a bed and food.  In England, this wasn’t the case.  The state took upon itself the responsibility of feeding and providing bedding for convicted felons.  Those jailed for debt, though, were on their own–if they wanted to eat, they had to hope their families could sneak food in.  Mortality in debtors gaol was correspondingly high.

Every part of that is nuts, of course.  Jailing people for owing money?  Where was Visa and MasterCard? But it’s heartening to note that while America did participate in the nuttiness, we did less of it and quit doing it earlier than our British cousins.

But then, we’ve long been a nation based on debt.  Most early white immigrants came here to avoid debts. If you were a poor person in Europe, you could sign an indentured servitude contract, get passage to America paid for free, work without wages for some period of time–seven years was normal–and then you’d be free, dead broke of course, but an American, free to start pursuing happiness.  This was the norm; this was not an exception, but the rule. That’s how most white people got here.  (For black folks, it was, uh, a less voluntary system).

When the United States of America actually became a real country, with a Constitution, the very first piece of legislation our brand-spanking-new Congress took up involved debt–the United States assumed the Revolutionary War debts of the states; nationalized states’ debts.  This was the brainchild of Alexander Hamilton, Washington’s Secretary of the Treasury, and it was a brilliant idea–it put the credit of the US on a sound financial footing right out of the chute.  Hamilton’s equally brilliant notion was the Bank of the United States, which provided credit for all sorts of internal improvements.  It also created an investor class, which poor farmer types loathed, which is why Andrew Jackson made getting rid of the Bank his highest priority.

Andrew Jackson represented The People, right down to their irrational prejudices, plus he lost a lot of money in the Panic of 1817, which he blamed on the Bank, plus he hated Nicholas Biddle, the Bank’s President.  So Jackson put the US economy on the gold standard.  And he hated using federal money for internal improvements; also he was opposed to debt.  Jackson’s policies worked beautifully, in the sense that they led directly to the Panic of 1837, which destroyed the nascent US economy for about seven years.  My goodness, Andy Jackson was an awful President, though I do appreciate the hilariousness of putting the face of a guy who hated national banks on twenty dollar bills issued by a national bank.  Though, as bad a President as he was, he wasn’t much worse than some of the bozos who succeeded him: Millard Fillmore, Franklin Pierce, James Buchanan, the Rufus, Goofus and Doofus of American Presidents.

As nuts as it may seem to toss someone in a rat-infested, disease-ridden dungeon without food because he fell a little behind on his bills, it fit the moral expectations of the period. Lingering medieval notions condemning usury, plus vaguely Puritan notions of fiscal probity and rectitude led to the idea that debt is somehow morally questionable.  Going into debt has always suggested a lack of backbone or moral fibre.

As it happens, I’m a pretty prudent guy, financially.  Well, okay, I’m married to a very prudent woman, who handles our finances.  We don’t owe money to anyone, except for our mortgage. But the federal government does right now carry a pretty substantial debt load, and that’s become a massive political issue, a Very Serious Problem that Congress Must Deal With right now. (Though no one can point to any specific way in which the national debt is actually hurting the economy.) We need to cut up the national credit card, we’re told.  We’re fiscally irresponsible, we’re piling debt on our grandchildren.  The word I keep hearing is ‘austerity.’ Austerity=morally rigorous.

But I go back to our history.  A big movie right now is Lincoln: great movie about a great president.  Well, how did we win the Civil War?  How did we get rid of slavery?  Deficit spending.  Major increase in our national debt–Lincoln’s Secretary of the Treasure, Salmon P. Chase, did a brilliant job selling debt to bankers.  How did we defeat the Kaiser, WWI?  Debt.  How did we fund the New Deal, fund the recovery from the Great Depression?  Major increase in the national debt.  (And the one year, 1937, when Roosevelt decided the debt was too scary and it was time to try austerity was the one year the recovery stalled enough to send us back into recession.)  How did we defeat Hitler?  Debt.

This is why a Constitutional amendment requiring balanced budgets is such a terrible idea.  During times of national emergency, like a World War or a major Depression, we need to spend and we need to borrow.  One thing governments can do is borrow very large amounts of money at low interest, and that’s a tool that comes in handy when you’ve got a Hitler to defeat.

What happened in our country, though, is essentially this: for the first time in our history, two Presidents, Ronald Reagan and George W. Bush, pursued policies that increased the debt without a national emergency to justify them. They believed in a false ideology called ‘supply-side economics,’ that persuaded them that cutting taxes would have a ginormous stimulative effect on the economy.  Republican tax cuts, plus massive spending increases in Medicare and an unfunded war, left the country with an unprecedented level of national debt.  Then, right at the end of the Bush presidency, we actually had a national emergency–the world-wide financial crisis.  That’s exactly the kind of thing that adding more debt is meant to combat–exactly the kind of thing for which stimulus spending, funded by debt, is the preferred response.

So we really are piling debt on debt.  That debt isn’t actually hurting anything right now, but it could in the future, and does need to be dealt with.  Otherwise, as our friends on the right constantly remind us, we could become Italy, Spain, or Greece.  Our economy resembles the economies of those three countries only in the sense that they are countries and have economies.  Still, we will need some austerity; cut spending, pay back debt. The fact that conservatives are currently and hypocritically and massively overreacting to our current debt levels doesn’t mean that we don’t have a problem.  We’re gonna need to pay some of that debt back.

But not now. The danger is inflation–the Really Serious impending catastrophe is hyperinflation. But the canary in the mine shaft is interest rates–if we were in danger of hyperinflation, we’d see it there. And interest rates have never been lower.  We’re just barely recovering from a major recession.  We’re still in a liquidity trap; stimulative spending is still needed.  Give it a year or two, look at austerity maybe sometime in 2015.

Cutting spending now is quite a bit like throwing our country into debtors prison–punish someone who can’t pay his bills by making it way harder for him to pay his bills.  We have too many people in this country without jobs, and too many who have jobs but are badly underpaid.  We need prosperity before we even think about austerity.  The time to cut spending is when the economy is booming, which right now, it’s not. Tune out the noise, folks. The sky isn’t actually falling.

 

6 thoughts on “Debt

  1. Aren’t low interest rates a cause of hyperinflation? And raising rates a common (but futile) response? Inflation and hyperinflation are really distinct phenomena, with different causes, durations, features, and solutions. I associate high interest rates with regular inflation, but not hyperinflation.

  2. The fiscal cliff/deficit emergency is currently the front-runner for my personal Most Made Up Political Crisis of 2012 Award. Which is pretty impressive, really, considering we had a Presidential election last year.

  3. During times of crisis (war, bad private economy), the government should go into debt. During times of peace and good private economy, the government is supposed to rack up surplus money, but that didn’t happen in recent years. So now there are no good years for the government. They spent too much on entitlement programs.
    This is a serious problem that has already begun to catch up with us, as ratings (our estimated ability to pay back loans) dropped last year.
    Thanks to my one semester in economics for this. It’s such a fundamental principle that they teach it in Econ 101.

    • I know all that is the conventional wisdom, but I think it’s all completely wrong. The US rating did drop, and it had absolutely no effect whatsoever on our ability to attract loans–in fact, interest rates dropped. It was just Standard and Poor’s overreacting to nonsense. As for spending too much on entitlement programs, that’s not the issue. The issue is demographics–too many old people. But entitlement funding is completely fixable–just adjust the payroll tax formula a little, a minor tweak.

    • In 2000, they asked candidates George Bush and Al Gore what to do with our budget surplus. Al Gore said pay down debt. George W said tax cuts. We were 600 Floridian votes away from putting your plan into action.

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