In ancient Babylon, a newly enthroned king declared a jubilee, wiping out the debts of the people. In modern America, a faint echo of this idea – call it jubilee-lite – is spreading.
Support for the cancellations was motivated by Democratic presidential candidates. Senator Elizabeth Warren of Massachusetts has said she will write off most of the $ 1.6 trillion in US student loans. Senator Bernie Sanders of Vermont would go further – wiping out everything, plus $ 81 billion in medical debt.
But it also comes from other directions. In October, one of the Trump administration’s top student loan officials resigned, calling for wholesale write-offs and describing the American way of paying for higher education as “bonkers.”
Zillow Real Estate Company cited medical and academic responsibilities as major obstacles for future tenants and home buyers. Moody’s Investors Service listed the headwinds on student debt – less consumption and investment, more inequality – and said forgiveness would boost the economy like a tax cut.
While the current debate centers around college costs, long-term numbers show how debt has spread through the economy. The United States relies on consumer spending for growth – but it did not provide significantly higher wages. Household borrowing closed the gap as low interest rates made it affordable.
And it’s not unique to America. Ever-increasing debt of one kind or another weighs on savings in the whole world.
The idea that debt can grow faster than the ability to repay, up to unbalance a society, was well understood thousands of years ago, according to Michael Hudson, economist and historian.
Last year Hudson published “And forgive them their debts”, A study of the ancient Near East, where the tradition known as the“ jubilee ”- the writing off of debt – has its roots. It describes how the practice spread through civilizations, including Sumer and Babylon, and played an important role in the Bible and Jewish law.
The leaders were not motivated by charity, says Hudson. They were pragmatic – trying to make sure that citizens could meet their own needs and contribute to public projects, instead of just working to pay creditors. And it worked, he said. “The companies that have written off the debts have enjoyed steady growth for thousands of years.”
Forgiveness was good for the economy, would be a modern way to put it. In an October article, Moody’s examined how this might apply if America forgives student debt.
There would likely be a “modest increase” in household spending and investment, and possibly higher rates of home ownership and business creation, he said. The buyback of student loans would increase the government’s own debt – but “only marginally”, since it already owns three-quarters of it. After this one-time blow, budget deficits each year would be slightly larger due to the loss of income from loan repayments, equal to 0.4% of GDP in 2018.
Critics generally raise two key issues with debt cancellation. One is about fairness. The other is known as “moral hazard”: will today’s write-offs lead to more imprudent borrowing tomorrow?
These questions “need to be carefully considered” for student loans, says William Foster, senior credit officer at Moody’s and lead author of the report. “Who would benefit, who would not, what attempts at equal treatment should exist.” Any plan should also address “what would be the situation of the next generation of students with regard to the accumulation of debt,” he said.
Sanders and Warren plan to remove moral hazard by making state college tuition free. But they took some criticism on the issue of fairness.
A to study by the Urban Institute said richer households hold more student loans – so writing them off would be regressive. Pete Buttigieg, another Democratic presidential candidate, wants to direct financial support towards the poorest students, saying there is no reason to subsidize the richest.
Savings can be skewed across age cohorts, as well as income groups. Foster says the idea of debt relief plays into “the larger debate about the prospects of young Americans today: job opportunities, the cost of education, income levels and slower wage gains since the financial crisis “.
The last Democratic administration also fought for debt cancellation. Under President Obama, the government took steps to help underwater owners. But he failed to get a measure allowing judges to reduce the principal owed on mortgages – known as “cramdown” – through Congress.
Democrat-leaning analysts have been arguing over the episode ever since.
“There have been 5 million foreclosures,” explains Mike Konczal, a member of the Roosevelt Institute. “It is a real stain on the legacy of the Obama presidency. They had access to tools to be able to fight them.
In their 2014 book “Debt houseEconomists Atif Mian and Amir Sufi argued that the economy would have rebounded faster with more write-downs. Larry Summers, Obama’s economic adviser, pushed back examined it – praising their analysis but qualifying the political proposals as naïve.
Years before the financial crisis, two of 2020’s top contenders – Warren and Joe Biden – took opposing positions in yet another clash over debt relief.
Biden argued a 2005 bill it made it harder to get out of debt by going bankrupt – on the grounds that it would reduce abuse and help secure cheaper loans. Warren, then a Harvard professor specializing in household finance, attacked him to punish troubled families.
Konczal says this bill reflected a widespread idea that over-indebtedness was the result of extravagant “lifestyle issues”. In reality, he says, “middle-class families were in a much more precarious situation than we thought” – and depended on debt for the most part.
Forgiveness is not the only great idea for reducing the economy’s dependence on private debt. Another is to pay for things like houses or education with instruments that are a little more like equity and less like debt.
Mian and Sufi have suggested a type of mortgage in which the lender shares the risk if the prices go down and the rewards when they go up. Some lawmakers, educators, and investors also apply a similar model to college funding.
Mitch Daniels, director of Purdue University and former Republican governor of Indiana, is one of the champions of revenue sharing agreements. They work like this: Investors fund students and get paid back – with a return on equity, hopefully – when graduates start earning higher salaries than a degree. should to bring.
Hudson, the historian, also says equity financing is better. But he thinks the government should play a role. In a 2018 article with Charles Goodhart of the London School of Economics, he offers public equity funds to help first-time buyers, students and small businesses. By removing debt financing, the authors say, it could be a modern take on the old jubilees.
“The point is, debt causes instability in a society,” says Hudson. Another lesson he learned from studying credit over thousands of years: “Debt that can’t be paid, won’t.