December 20, 2014 § Leave a comment
I recently finished reading “Debtor’s Prison”, the latest of several books written by Robert Kuttner, editor of American Prospect magazine and visiting professor at Brandeis University. This was a recommendation from professor Milton Lower, my economics mentor.
This is an angry book but the writer does not waste space expressing his anger. Instead he paints a vivid picture of a four-century history of stupidity, avarice and oppression that is well calculated to evoke anger in any reader equipped with even a vestigial conscience.
The History of Bankruptcy Law
The book guides you through a history of bankruptcy law, various economic booms and busts and governmental reactions to them. It is laced with nuggets of interesting details.
For example, did you know that Daniel Defoe (yes, the one who wrote Robinson Crusoe), played a significant role in redesigning English bankruptcy law by injecting the idea that it might be wise to let defaulting debtors remain free to work and earn money with which to pay their debts, instead of leaving them to rot in jail? Neither did I until I read this book.
I will not try to summarize the history that Kuttner narrates. His thesis is that bankruptcy law was historically designed to rescue investors and business proprietors whose choices and judgments proved to be disastrous. Individuals, by contrast, who, for whatever reason, found themselves unable to pay debts incurred to finance their consumer purchases, their rent or other private obligations, were regarded as immoral wastrels entitled to no remedy except confinement in prison.
About two-thirds of Kuttner’s book concern the treatment of government debt. He contrasts two different political reactions to government debt.
The Austerity Solution
One reaction is based on fear that government debt will lead to inflation by increasing the money supply and hence, reduce the value of wealth, including bonds and other forms of contractual debt (e.g. mortgages). This causes the wealthier segment of society to pressure government to reduce debt.
There are two ways to do that: raise taxes and cut expenses. Because we have a progressive tax system, raising taxes is despised even more than government debt by those with wealth. So, austerity is the constant battle cry of the wealthy, especially the rentier class, whose wealth and income consists of holding and manipulating financial obligations, not producing real goods and services.
The Consumer Demand Solution
The solution favored by Kuttner is to use government expenditures to transfer wealth, obtained either through taxation or by incurring more debt, to the working class segment of society, thus facilitating their demand for goods and services, thus creating more income for those whose businesses satisfy that demand, thus increasing taxable revenue and thus enabling government to reduce its debt.
In other words, to Kuttner, austerity remedies for excessive government debt is like using gasoline to put out a fire.
The Moral Argument
One idea that recurs throughout Kuttner’s book is his rejection of the argument that affording relief from debt is immoral. He identifies this morality argument as the basis for many of the harmful policies adopted by governments to deal with debt problems. He recounts and discusses the Rick Santelli rant that triggered the launch of the Tea Party in U.S. politics. As the collapse of the housing bubble began, Santelli erupted in a televised angry spiel, complaining that improvident home purchasers should not be helped because that would be unfair to others who had not defaulted on their mortgages.
As Kuttner notes, Santelli stupidly failed to mention that fire sales of foreclosed homes would drive down neighborhood home values, regardless of whether the owners were current on the their mortgage payments.
Another example: After WWI, Britain, France and other allies spent decades trying to punish Germany for its “war guilt” by requiring it to pay a huge “war debt”. This was obviously impossible, because the war left Germany economically prostrate, but the victorious nations, like stupid Santelli, failed to perceive the generalized damage to the entire European economy caused by keeping Germany from regaining economic stability and resuming trade with its neighbors.
Kuttner contrasts the treatment of Germany following WWI with the treatment of Germany, Italy and Japan following WWII, when the Marshal plan and other measures designed to restore their economies to economic health proved beneficial, both to them and to the economies of the allied nations who had defeated them in the war.
Kuttner also identifies the policies of Angela Merkel and her influence on the European Union’s policies toward Greece, Italy and Spain. He recounts how her insistence on stringent austerity requirements as a price for the EU’s assistance to those struggling economies needlessly condemned their populations to impoverishment and hampered their ability to recover from their financial problems. Chancellor Merkel, according to Kuttner, suffers from the Santelli stupidity virus. By extending their impoverishment, their EU trading partners suffer from diminished export markets.
Kuttner also recounts the history of the IMF, beginning with its Bretton Woods birth, when it promised to be a useful central bank with resources available to restore nations from economic crises. He describes how it was overtaken by bankers who subscribe to the Merkel-Santelli doctrine. Now it requires that, in exchange for its help, a country must condemn its population to decades of poverty and deprivation.
As a result, in the wake of the current world-wide recession, some nations, notably India, have refused to deal with the IMF, preferring instead to cope with their economic problems with policies of their own. As a result, their recovery has been less traumatic and quicker than their neighbors’, who received “help” from the IMF.
Pete Peterson – Man of Many Wrecking Crews
Kuttner’s book includes a remarkable description of how a single wealthy man, Pete Peterson, has been able, over several decades, to be a significant force behind a wide array of America’s fiscal and economic policies. Kuttner catalogs a remarkable number of ways this billionaire has managed to pick cabinet members, influence Fed policies, buy college and university curricula designed to indoctrinate generations of business school graduates and economists with Peterson’s right-wing ideology.
In this brief summary I can’t do justice to Kuttner’s carefully researched list of Peterson’s accomplishments. I can only assure you that, as described by Kuttner, Peterson makes the Koch Brothers look like amateurs. The Kochs merely buy politicians. Peterson buys the minds of thousands of people who occupy jobs where they can do more damage in a month than a U.S.Senator can do in years.
Referring to Peterson, Kuttner writes:
“A former commerce secretary under Richard Nixon, he is personally close to Democratic economic eminence Robert Rubin. The two have long promoted the idea of a grand fiscal bargain in which Democrats agree to cut social insurance and Republicans agree to higher taxes. Peterson served as chairman of the Council on Foreign Relations, and in 2002 he led the search committee that successfully recommended Rubin protege Timothy Geithner as president of the Federal Reserve Bank of New York. One can assume that Geithner, later Obama’s Treasury secretary, returns Peterson’s calls.
Peterson has spread his money around, giving over $50 million dollars to the influential Institute of International Economics, long headed by Democrat C.Fred Bergsten. The outfit was duly renamed the Peterson Institute For International Economics, a separate entity from the Peterson Foundation.”
This is by no means all of Peterson’s accomplishments. It is troubling for me to realize how much this man has been able to buy adherence to his ideas and to insinuate them into the operational policies of America. It is troubling because, as described by Kuttner, they make not the slightest sense except to enrich the wealthy and beggar the rest of us.
This is a useful and important book. Its revelations enable you to see today’s political debates with a new pair of glasses. My comments have covered only a small taste of the information in it. I recommend it if you crave the ability to understand some of the context surrounding the current debates about the deficit, tax reform and the global economic market place.