To Fight Debt by Forgiving Debt

"Debtors' Prison" by Robert Kuttner, Knopf, 335 pp., $26.95 hardcover

We recently finished a new book by Robert Kuttner called Debtors’ Prison: The Politics of Austerity Versus Possibility. It was quite an eye-opener. Austerity, of course, is a dirty word around the left end of the political spectrum, one we’re used to arguing against, as it tends to hurt the most vulnerable among us. But Kuttner’s book is really good at articulating many other reasons why austerity is punitive, and why other possibilities make much more sense.

As he points out early, one main problem is that your average layman confuses and conflates many different kinds of debt. Perhaps it comes from our everyday experience. When you lend your neighbor $100, you expect to be paid back. If they don’t pay you back, you’re going to be irritated if you see them coming home with full grocery bags and a shiny new bicycle for their child. Naturally, you don’t expect them to starve their children or sell their car, but unpaid debts have a quiet moral component in our daily lives.

Generally speaking, neighbors don't create casualties over loaned money. So why do big banks and nations? (Still from "Neighbors," by Norman McLaren, National Film Board of Canada)

But as Kuttner points out, a lot of our conventional, day-to-day ideas about debt and austerity don’t really apply to high finance. You see, the way big banks lend money is a far cry from the way you might lend your neighbor money. Banks are driven to lend money, because it’s how they make money. They can lend money and then sell the debt to others. They are insured against losses via the federal government. Financial institutions are also, unless constrained by law, driven by spasms of speculation, eager to invest in the hottest new trends, bidding up prices until the inevitable crash comes. Crashes can also be lucrative, as financial institutions can wreak havoc in bond markets, driving entire governments further and further into the red. Clearly, international finance is something completely different from you lending your neighbor a hundo.

If neighbors behaved like bond traders and big financial institutions, this might be what it would look like.

Despite this, most people cling to mundane ideas about debt and austerity. We blame borrowers, not overzealous creditors or irresponsible financial institutions, for their condition. In doing so, arguments about austerity ring true, and discussions of debt forgiveness seem foolish and simple-minded.

But in chapter after chapter, Kuttner demonstrates that our most sustained periods of economic growth in the West were based on policies of forgiving debt, along with laws that constrained speculative capital, forcing financiers to put their money into productive enterprises that benefited our industrial economies. And when unconstrained speculation resulted in crashes and austerity was the medicine, economies saw lower or negative growth, as well as sliding standards of living for citizens, all of which made the initial debts loom that much larger.

As has become obvious with the troubles in Greece and other small European countries, demanding that governments slash social programs and sell off assets in order to pay off debts ends up shrinking the entire economy, thereby making the debt more difficult or even impossible to pay off. Worse still, as economic activity spirals down and governments cut safety nets, it is ordinary people who suffer the effects most. For instance, a recent study in The American Journal of Public Health estimated that Americans stand a greater chance of dying from the effects of austerity than being killed in a car crash. Dr. Howard Waitzkin, an American sociology professor emeritus who contributed to the study, said, “The policies of cutbacks currently proposed in the United States for Medicare and Social Security will lead to

devastating effects on health services and outcomes. Instead of austerity policies, we need increased public sector spending to stimulate our failing economy and to protect the health of our people.”

At the heart of it all are our ideas about debt as a moral obligation. Kuttner argues, quite successfully, that they shouldn’t be a yardstick in international economics, where financial speculators offer attractive lines of free credit, driving up prices and then, after a crash, demanding speedy repayment, putting whole economies at risk.

To critics like Kuttner, instead of helping a debtor become prosperous enough to honor debts, austerity kicks debtors when they're down.

So if austerity isn’t the answer, what is? Kuttner suggests that debt forgiveness is one of the tools that allows governments to put people back to work and resume normal investment. But another vital piece of the solution is to put constraints on speculative private capital to end the bubble-crash cycle and force financiers to invest in actual productive enterprises. In the end, all that stands in the way of that is the enormous political power wielded by Wall Street.

It’s a good book, a little wonky, but surprisingly free from jargon. You get the sense that Kuttner strived to write a book that would tell stories that made his case, and he does a good job of that. You also can tell he wants ordinary citizens to be able to grasp something that only the “experts” are supposed to understand. For anybody wanting to help spread economic democracy and take back political power, this book is a good place to start. At the very least, it offers an excellent history of debt, bankruptcy and debt forgiveness, topics in play all around us these days.

Bear in mind, Robert Kuttner is no leftist radical rushing to the barricades. He was a longtime columnist for BusinessWeek, a co-founder of The American Prospect and works at Demos, a nonpartisan research and policy center. A liberal capitalist, Kuttner wants to see economies grow and provide citizens with jobs, and if that means policing white-collar crime and shackling irresponsible investment banks and bond traders, so be it. While radicals will likely find Kuttner’s proposals lacking, fans of Elizabeth Warren and the politically rehabilitated Eliot Spitzer will likely find many worthy arguments here.