Policy makers in the U.S. love to talk about the burden of debts that they will leave behind for future generations. One example often cited by debt hawks a family that has borrowed too large a mortgage and will have a hard time making the payments. While it certainly paints strong visual, its wrong in two ways.
First, families have to pay back their debt–governments do not. They need to make sure that the debt grows slower than their tax base. The U.S. never repaid the debt from World War II, the debt just became irrelevant as the economy continued to grow and grow. What policy makers need to focus on is not the debt, but strengthening the tax base and that includes getting people back to work…more likely by government driven Keynesian policies.
Second, an over borrowed family owes money to someone else, however the US debt is largely owed to the U.S. This was clearly true of the debt incurred by winning WWII, which was much larger as a percentage of GDP, but that debt was owned by taxpayers in the form of war bonds. That debt didn’t make the U.S. poorer in fact the post war generation experienced the greatest economic boom in wages and living standards in the nation’s history.
In the wake of the debt debates austerity is now in vogue and at stake is the U.S. economic future. A part of the austerity fashion wave is the idea of generational justice. It is said that the U.S. is passing on its children and grandchildren and as the debts become payable, future generations will be burdened by rising interest rates and lower living standards.
The economics of this are misleading. The well-being of children and grandchildren in 2023 and 2033 is not a function of debt reduction but instead about putting economic growth back on track. If The U.S. reduces debt by cutting social spending and “tightening its belt” the economy will fall stagnate and lower wages. The debt will out pace growth and there will be little money to invest in education, research and job-training.
Real generational justice would entail making sure that wages are adjusted for inflation, college loans rates are reduced and investment in growing markets needs to be maintained. The next generation can and will produce for the U.S., they just want the same opportunities their parents enjoyed.
As our government returns to work and prepares for the next debt debate it seems the world has spent the years since 2008 stumbling from one debt crisis to another. If we include the Third World debt crisis, which affected most human beings on the planet, the world has been in continual debt crisis since the 1970’s. This might seem like a new period of human history brought on by virtual credit but a broader view shows credit and debt have been the predominate form of money in the world. In Mesotopamia, elaborate credit systems predate coinage by thousands of years. The remarkable thing is that they were able to maintain these system without a large state but instead relied on two aspects: honor and overarching insitutions typically religious in nature.
Honor held most agreements together as merchants needed to develop reputations of integrity. Not just of paying their debts and being a pillar of the community but also forgiving other people of theirs if they were in difficult times. Thus driving the idea that money was not the most important thing. This allowed merchants in Ethiopia and other Indian Ocean trading posts to avoid written contracts preferring to seal contracts with a handshake and ” a glance at heaven.” If there were problems they referred to Sharia Courts who had no power to arrest anyone but could destroy someone’s reputation or “credit worthiness.”
The religious institutions, which were larger than states, ensured that debt didn’t fly out of hand. Periods of history dominated by credit money where everyone realized that money is just a promise or “social agreement” need some mechanism to protect those in debt. Often Mesotoapia kings would declare slates clean and simply start over when debates became to great. In Judea traditions this became known as the seventh year Jubilee. In the Middle Ages Islam and Christianity both put restrictions on debt bondage making trade possible as ordinary people knew they would not be entirely impoverished and had the ability to make purchases. These religious institutions then became the foundations for honor and trust while protecting the citizens who had fallen into debt.
This explains our current global debt crisis. We have established a global system of debt through the International Monetary Fund and S&P (who manages U.S. credit rating) which protects the creditors and not the debtors. There is no debt forgiveness, and the people cannot restart. As developing nations pay off interest worth 10 times their GDP and many Americans fall into debt bondage we should look to our past for inspiration.
With the debt ceiling debate in the news, it’s a good time to ask what the global institutions charged with regulating the international economy have to say about U.S. fiscal policy. When countries borrow money from the International Monetary Fund, what the IMF says can affect markets and policies of those governments. But the U.S. receives only advice and no funds so how much leverage can the IMF have with its largest shareholder?
The goal of the IMF is to make sure that nations are adopting policies that prompt a stable currency and produce economic growth. Starting in 1999 the IMF began publicizing report cards on countries in order to engage their politicians in a policy minded debate. The IMF review and its impact was seen when the review was published in July of 2011 and then the debate between Congress and the White House was settled in April of the same year.
Much like criticizing your boss, when the IMF talks about the policies in the U.S. there is a tendency to stress the positive. Lately however this has not been the case. The 2011 IMF report called the U.S. model “unsustainable” and recommended an array of changes including raising the retirement age, cutting Social Security and nationalizing the sales tax. With changes to the social safety net and increasing protections for labor, the recommendation had something for everyone. Despite this, there were few in Congress that took to the report and no mention of it by the White House.
Just because information is available doesn’t mean it will find its way into the hands of policy makers. Just as the IMF wishes the U.S. would learn from the debt ceiling debate in 2011, it needs to adapt how its message gets out there.