Our Distorted Moral Reasoning About Debt

by Lewis Marshall, PhD Candidate in Chemical Engineering


“The problem is, is that the way Bush has done it over the last eight years is to take out a credit card from the Bank of China in the name of our children, driving up our national debt […] That’s irresponsible. It’s unpatriotic.” — Barack Obama

“[T]his debt is a mortal threat to our country. […] It is immoral to bind our children to as leeching and destructive a force as debt. It is immoral to rob our children’s future and make them beholden to China.” — John Boehner

I have bad news. America does not understand debt.

We understand personal debt well enough, and we are super judgmental about it. The iconic howl of rage at debtors [1] came from Rick Santelli in 2009, right after the financial collapse:

“The government is promoting bad behavior [with mortgage modifications and the stimulus.] How about this, President and new administration? Why don’t you put up a website to have people vote on the Internet as a referendum to see if we really want to subsidize the losers’ mortgages; or would we like to […] reward people that could carry the water instead of drink the water?”

Santelli thinks that anyone who can’t pay off their mortgage or their car loan is an immoral, lazy loser. And considering the adulation he received for his rant (and the resulting Tea Party movement), there are at least a few Americans who agree with him.

As repulsive as these comments are on a human level (remember, many of those who lost their homes in 2009 either lost a job during the financial collapse or got a deceptive mortgage, both of which were the products of the water-carrying wall-street firms that Santelli idolizes) they at least pass a basic arithmetic smell test. An individual borrower can get out of debt, and probably be better off for it. An individual borrower can change their behavior without affecting the whole market.

Sadly, Santelli seems like a visionary compared to the our leaders in Washington, and their confused moral panic over the national debt and the “fiscal cliff.”

Debt, Math, and Accounting Identities

The national debt of the United States is about $16.2 trillion.

Ok. That number is gigantic. But please, take a breath. Don’t panic. It’s not as bad as it sounds.

The most important misunderstanding about the national debt is the way it will affect the next generation. Both Democrats and Republicans often repeat some version of the line ‚”We must not pass our national debt on to the next generation!”

It’s embarrassing to hear politicians continue to make this argument, year after year, because it betrays a fundamental lack of understanding over the issue. This is a nonsensical proposition because there is no external creditor from whom we have borrowed money. We have borrowed the money from ourselves.

It is true that if the government incurs a debt that we don’t pay off, that debt will be passed on to future generations. However, the debt does not exist in a vacuum. To finance the federal deficit, the government sells treasury bonds. Those treasury bonds are a financial asset that are mainly held by Americans. They are a gift to future generations. [6]

More broadly, there are fundamental accounting identities to consider when we think about balancing the national budget. Where would the money come from? The relevant identity is:

(Private Surplus) = (Government Deficit) – (Trade Imbalance)

The trade imbalance is the smallest of the terms, but it has increased a little over the years. And there are things we could (perhaps should) do to decrease it.

But the private surplus is the real constraint. If you want to reduce the government deficit, you have to think about reducing the amount of money put into savings each year, by either individuals or corporations. The most direct route to either of these goals is to increase taxes (particularly on the wealthy, who have most of the savings). But this policy is anathema to the people most insistent that we balance the budget.

I’m not trying to say that deficits never matter. They become unsustainable when investors begin to question the ability of the government to repay the debt. This would be signaled by high yields on government bonds. And currently investors are happy to lend money to the US government money for 20 years at a time an interest rate on par with the rate of inflation.[2] We have other problems to worry about right now.

The Terrible Prospect of a Balanced Budget

As bad as our discourse on the budget deficit is, the logic of the “fiscal cliff” debate is even more tortured. If Congress does nothing, we are scheduled to have automatic cuts to defense spending and the general budget, and the Bush tax cuts will expire. This would put us on a path of shrinking deficits. Hoooray! Our children are saved from the crushing burden of debt and the accompanying crushing burden of owning too many savings bonds![3]

But now that Congress is faced with the prospect of the budget balancing itself, their priorities have changed. They are urgently trying to strike a deal to prevent the cuts from taking place, arguing that they would put people out of work. And that’s actually true, in a limited sense! Balancing the budget could harm the economy. It’s a standard Keynesian point of view that government deficits can increase employment, especially in bad economic times. (Fortunately, the automatic cuts would largely hit spending that is inefficient in creating jobs.[4]) But to admit this is to admit that balancing the budget is not our nation’s biggest priority. However, our politicians have no problem mixing debt-panic and fiscal cliff-panic justifications together interchangeably, depending on their policy preference of the moment.[5]

Debt relief that actually matters

While our nation’s leaders argue over a fake government budget crisis, many Americans are experiencing their own, ongoing budget crises. Our unemployment rate is still 7.9%. We still haven’t fully recovered from the financial collapse of 2008. More than 3 out of 4 American households are in debt. There are still 48.6 uninsured Americans one medical emergency away from bankruptcy. Right now, our individual debt is much less sustainable than our government debt.

The Occupy movement is focusing on relief for individuals in debt trouble, and they’ve happened on a happy fact: distressed debt is cheap, because it’s hard to collect money from people who can’t pay. Right now, it’s possible to buy loans in default for 5 cents on the dollar. And so, Occupy unveiled Rolling Jubilee, a plan to raise money to buy up distressed loans. As of this writing, they’ve raised $353k, allowing them to buy more than $7m dollars in outstanding personal debt. And now that they own this debt, they can simply abolish it.

This plan isn’t a panacea, certainly, and there are definitely risks involved. But the target, the debt of individual Americans, is something that needs to be addressed. Indebted individuals are hounded by collectors, they can’t save, they can’t invest, and they can’t move forward with their lives. If we’re going to have a national discussion about debt, this is the one we should have.

Money is important. It’s a useful proxy for distributing resources, reckoning about fairness, and keeping accounts. But it is not an end unto itself. When you think about national priorities, think about the causes of suffering first, last, and always.


Lewis Marshall is a Ph.D. student in Chemical Engineering. He is the former president of Atheists, Humanists, and Agnostics @ Stanford.

[1] Fun fact: The American heritage dictionary lists “sinner” as a synonym for “debtor.” Our moral attitudes toward debt run deep.
[2] The current inflation rate is 2.2%. The average over the last 2 years is 2.5%. Bond yields are below inflation for up to 10 year loans to the government, and 20 year loans are on par with inflation.
[3] The cuts to government spending and the increase in taxes would both reduce private savings, as implied by our accounting balance. Because the tax cuts were regressive, repealing them should disproportionately reduce the savings of the richest Americans.
[4] Military spending is one of the least efficient ways of creating jobs, though. Investing in clean energy, health care, and education would be much more efficient. And we’d get clean energy, health care, and education!
[5] For example, according to the Wall Street Journal: Boehner suggested that all of the Bush tax cuts, including for top tier tax payers, be extended past the January deadline to give the White House and Congress more time to address the country’s long term debt and entitlement issues next year. “I’m proposing that we avert the fiscal cliff together in a manner that ensures that 2013 is finally the year that our government comes to grips with the major problems that are facing us,” he said.
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