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The Return of the Royal "We"

Getting Dazed and Confused With Paul Krugman

by ROB URIE

Paul Krugman is at it again, pushing his economic patch-jobs at the plutocrat state instead of imagining the social struggle needed to resolve ongoing economic and financial crises. The offending passage from his New York Times piece (link) reiterates the economic truism that debt is “money that we owe ourselves.”

This is misdirection through aggregation, conflating corporate and government debt owned by pension funds and charitable organizations with underwater mortgages, student loans and sub-prime auto loans in their economic effects. And within his own economics, disaggregating the “we” renders far different results than he suggests.

The explicit issue is this: certain types of debt, defined by context, represent a transfer of wealth from productive to speculative uses. And in a class struggle framework, the transfer to speculative uses correlates highly with increased empowerment of a predator class that is largely responsible for the current crisis of capitalism and that has successfully stifled attempts by well-meaning economists like Mr. Krugman to save the existing political-economic order from its own internal contradictions.

An example: approximately one-third of households with mortgages owe more on the mortgages than their houses are worth. The economic implication is that every dollar of mortgage principal repaid is lost savings for the homeowner in proportion to the difference between the original loan amount and the ultimate value of the house. This difference also represents the transfer of these lost savings to the bank that made the loan and that accepted the house that has declined in value as collateral. So who should take the loss, the homeowner or the bank?

Repaying the full loan amount would reduce the savings of the household (reducing lifetime consumption) while rendering the bank whole for risk that they knowingly undertook. When this is aggregated personal tragedy becomes a major economic drag for the next sixty years. But also importantly, given the current state of banking, renewed lending by the banks would go to speculate on financial asset prices, as loan demand for productive investment is non-existent these days.

This asset-price speculation, or in economist Hyman Minsky’s terms, “Ponzi” finance, was behind the most recent financial and economic crises. And until this type of finance is ended there is little chance that Mr. Krugman’s Keynesian prescriptions would be more than temporary patches in a series of ongoing crises. But it also is the reason why not all debt is created equal. Ponzi finance is economically destructive because it is destabilizing, something that Mr. Krugman refuses to acknowledge.

Mr. Krugman’s confusion lies in the term ‘investment.’ Companies ‘invest’ by borrowing money to increase production enough to repay the loan and earn a profit. Students take student loans to, with apologies for the terminology, ‘increase their human capital.’ And workers take mortgages to buy houses so that they have a place to live while they work. And workers take out auto loans to buy cars so that they have a way to get to work and back. In an economic sense, borrowed money must be part of the productive process for the system to function.

Because most loans take years to repay, they in a sense draw against future production. If too much money is borrowed against future production, the risk increases that if it fails to materialize, a financial and economic calamity will result. Add outright lender fraud on an industrial scale and this is what happened in the 2000s.

But it is the particulars that get lost in Mr. Krugman’s conflation of productive and speculative investment that matter. Beginning in the 1970s Western economies were restructured along neo-liberal, or radical free market capitalist, lines. The “free-market” terminology is misleading because corporations are fundamentally dependent on government research, transfers and expenditures, but it helped neo-liberal proponents sell the fiction that “natural” forces were behind the structural changes that they created.

What neo-liberal policies have achieved is to reduce wages for working Americans, reduce the proportion of Americans working, and shift the balance of corporate revenue away from workers and into corporate profits. This has coincided with a dramatic increase in household debt, in part to maintain standards of living in the face of declining wages and in part at the encouragement of banks to feed their securitization (financial fraud) pipelines.

Large corporations have been able to repay their debts because they are keeping an increasing proportion of corporate revenues that had previously been paid to labor in wages. The banks survived because they received several trillion dollars in free money in the bailouts. They continue to survive on government guarantees and economic predation. On the other hand, households have seen their fortunes greatly diminished while the institutional mandate that they repay misbegotten debts by any means possible has been strengthened.

Prior to the 2000s home mortgages tended to be of the 30-year fixed rate type. This meant that households that took mortgages were borrowing against 30 years of future income. As wages have declined, paying these mortgages has required a larger proportion of household income. This point is made for several reasons. In the first, press reports have framed the mortgage equity extraction of the 2000s as a way of maintaining previous levels of consumption. Well, yes, but with wages squeezed, this was in some fair proportion out of necessity rather than decadent desire.

Second, prior to the 2000s the American economy was structurally set up for stable, if cyclical, labor markets as evidenced by the types of loans offered (30-year fixed rate). By setting into motion a long-term decline in wages and by increasing employment insecurity, the capitalist reformers (neo-liberals) set the household debt crisis into motion at least a decade before it became evident in the financial crisis. With existing mortgage payments taking an increasing share of household income, household debts became more burdensome even without the amount of debt increasing.

Third, the anti-democratic nature of these reforms needs to be emphasized. Not only did economic reformers put policies into place designed to drive wages and employment security down, they did so on a global scale and through mechanisms specifically designed to undermine existing democratic institutions. Many of the trade agreements passed by un-elected officials behind closed doors supercede national policies and once passed are very difficult to reverse. In a real sense the neo-liberal reforms pushed by academic economists including Mr. Krugman were an anti-democratic coup that sealed the plutocrats’ power.

So back to Mr. Krugman: yes, private debt is money that we owe ourselves if ‘we’ are one with corporate executives, predatory bankers and their apologists in academia. But if that is truly the case, let them pay the debt. That would be the real test of this ‘we.’ I write this because what has been missing in recent years is any sense that the ruling elite, the plutocrats, see their lot as in any way tied to ours. And since they’ve given your economic patch-jobs about as much of a listen as our requests for higher wages and more jobs, you may one day start thinking about joining the revolution. If so, we have a place for you. But it won’t be writing love letters to the plutocrats who benefit from our loss.

Rob Urie is an artist and political economist in New York.