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While Republicans Focus on Public Debt, the Real Issue is Private Debt

In a nation where private debt ($38 trillion) eclipses public debt ($16 trillion), too many politicians and others constantly focus on public debt as a major factor in the health of our economy. This happens despite the research of economist Alan Taylor that suggests our nation’s major economic collapses, including the Great Depression and the Great Recession, were likely both caused by the weight of private debt (which includes corporate, household, and debt by the financial sector). His research does find that when governments have spent heavily during the same period that the private sector has become indebted, a magnification of the crisis occurs. This is because when the inevitable economic collapse happens, the government finds itself unable to spend money to help the economy rebuild. Instead, it becomes tethered to austerity pressures, which subsequently deepen the financial woes of the country. The people of the nation cannot produce the demand necessary to stimulate the economy, because they are encumbered with household debt. The government is forced by people who focus on revenue declines and rising debt to do the opposite of what it needs to do, like someone trying to solve a Chinese finger trap.

Two days after President Obama was re-elected, consumer debt hit another all-time high of $2.74 trillion. At the end of that quarter, economists reported that the economy had contracted for the first time since the recovery from the disastrous Bush Recession had begun. Another major factor for this backward slide was the reduction in government spending forced by Republicans. It is the perfect mix of ingredients to send the economy back into a tailspin. Instead of responding to the dynamic with an increase in government spending, as prescribed by the ever-wise Keynes, our leaders are still forcing negotiations on sequestration to further cut back on government spending. This week, Thom Hartmann pointed out that public debt is currently about 100% of GDP. After World War II, it was about 120% of GDP. Right after the War, instead of shutting down government spending, our nation’s leaders actually did the opposite. They spent money rather copiously by investing in the country’s infrastructure. The Interstate Freeway System we enjoy today was built. The GIs returning home from war were all sent to college, if they wanted to go, on the GI bill. One of the interesting things about the time frame after the War ended is that private debt was below 50% of GDP. Marginal tax rates on the wealthy were also as high as a whopping 90%.

Fast forward to the present, and we have the opposite situation, created in many ways by Ronald Reagan. We have private debt looming over 250% of GDP. This has happened in several ways. Reagan’s policies have led to the extinguishing of the middle class through stagnation of wages. Despite the fact that Americans have steadily increased their productivity, their wages haven’t increased correspondingly. Fully 50% of workers made less than $26,000 a year in 2010. Nearly half of Americans are one paycheck away from financial disaster. Under these circumstances, it is little wonder that people have been attempting to maintain their middle class lifestyle using credit; they don’t have the cash on hand to do it any other way. Reagan set in motion the crushing of labor unions, which further depresses wages. He demonized the poor so thoroughly that cuts to the social safety net have become accepted as the norm for the country, demanded by citizens at every social stratum, including the poor themselves.


Reagan gave corporations unfettered power when he ended the Sherman Anti-Trust Act. Thereafter, businesses merged into ever greater powerhouses, each time accumulating magnificent amounts of debt as vulture capitalists reaped profits. We’ve seen “bubble” after “bubble.” Each time, speculators drove up the value of stocks or homes well beyond what they are actually worth, only to skim magnificent profits, leaving behind small investors with empty pockets when the inevitable crash happens. Banks extending millions of mortgage loans to people that they knew had a dubious ability to repay them, then quickly selling the loans to profit before the scheme fell apart.

When it all went wrong, and some banks were left holding bad debt, they turned to the very people from which they had reaped unbelievable profits and said, “Give us some more money to bail us out.” Dutifully, and without consequence, the American people and their government complied. We’ve been told that the money was all repaid, but bailout guru, Matt Taibbi, says otherwise.

Economist Steve Keen  suggested a rather radical idea to stimulate the economy. It might be called a “We the People Bailout.” Or as Thom Hartmann calls it, a “Debt Jubilee.” Keen argues that we are at an impasse. Obama’s stimulus plan was unable to do as much as it should have, because when he invested dollars into American’s pocketbooks, they were so laden with debt, they simply used it to pay down that debt, rather than spent it to stimulate the economy. Further attempts to stimulate the economy are likely to be met with the same result. Thus, Keen recommends a one-time government debt payment program. In essence, this means that the government does a bailout of a sizeable proportion of household debt (e.g., credit card, mortgage, student loan).

The consequences would be two-fold. For banks, there would be much misery. They would lose out on billions of dollars in interest payments. For anyone paying attention for at least the past 30 years to their behavior, this certainly appears to be a fitting consequence. For the economy, it would be the greatest stimulus ever reckoned. People would have billions of dollars freed up to spend on goods and services. Financial literacy is very poor in this country, and offering extensive education to prevent a re-indebtedness would be exceptionally prudent. For example, how many people will ever hear that, this week, the Federal Trade Commission released a report showing that 20% of Americans have errors on their credit report that could be lowering their credit score, potentially affecting how much they pay for interest, whether they can rent or buy a home, or even whether they get a job? Worse yet, disputing those errors can be a nightmare in terms of actually getting the credit bureaus to fix the problem.

For Republicans, this notion of debt forgiveness even has precedence in the Bible, the Koran, and in many Native American traditions. Within the Bible’s Old Testament specifically, there are passages about the cancellation of debt that occurred every 49 years, when slaves were freed, people were given their original property, and freedom was celebrated. You don’t have to be religious or traditional to see to why early Judeo-Christian, Muslim, or Native American societies saw the merit in maintaining a healthy society by freeing people from debt. Conservatives are always preaching that we need to look to the past for the wisdom of our ancestors, yet here is one example where they likely wouldn’t dream of upholding that principle.

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