How a debt jubilee could help the U.S. avert economic depression
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This is part of our “Econ Extra Credit” project, where we read an introductory economics textbook provided by the nonprofit Core Econ together with our listeners.
What is the next step to prop up the virus-battered United States economy, even as the $2 trillion stimulus package only begins to percolate out? Well, Republicans and Democrats have returned to talking about a massive infrastructure building program that would employ lots of people. That would be a post-COVID-19 intervention.
More immediately, some economists want more done to ease the debt owed by individuals, small businesses, cities, towns and states. Michael Hudson, a professor of economics at the University of Missouri at Kansas City and president of the Institute for the Study of Long-Term Economic Trends, is one of those economists.
“Right now, America’s economy is strapped,” said Hudson, author of “…and forgive them their debts.” “America could have another economic miracle by writing down the debts.”
The following is an edited transcript of Hudson’s conversation with the Marketplace Morning Report’s David Brancaccio.
David Brancaccio: Now you look at this as an economist and not as a biblical scholar, but what, in the Old Testament there are references to everybody getting released from their debt every 50 years?
Michael Hudson: Well, the Jubilee Year of Leviticus 25 was based on Babylonian practice for over 2,000 years. And, apparently, when the Jews were returned after the Babylonian captivity, they brought back the practice of debt cancellation, called “andurarum.” When any new ruler would take the throne, the first thing they would do would [be to] free the personal debts. And they wrote this Babylonian law into the center of the Mosaic Law when they edited the Bible. You would forgive the personal debts that had mounted up, basically, among the small holders on the land. You would liberate the “bond-servants” — people who had been obliged to work off their debts in labor — and you would return any land that was forfeited. And these three parts of the Jubilee Year were exactly what was done and what continued to be done throughout almost all of the Near Eastern kingdoms — Mesopotamia, their neighboring Near Eastern kingdoms, even Persia, according to Herodotus.
Brancaccio: Wow. I mean, you’re talking precedent there. Now, you think we need something like this now and that we need it quickly?
Hudson: A debt cancellation is needed when debts go beyond the ability to be paid, and all personal debts, all non-business debts, tend to mount up beyond what they can be paid. You have debt-strapped individuals right now who lost their jobs, or their stores have closed down, or they work in restaurants and they’re unable to earn the money to pay. Arrears are rising on student debts [and] on automobile loans, it’s obvious that the debts are growing so large that the only way of paying them is to foreclose on the property, or let them be homeless, or kick them out in the streets. And the reason that the Babylonians and the early Jews cancel the debts was not because they were idealists. They weren’t egalitarians. All the debts have to be canceled by the government. And the government cancels it because it doesn’t want to make the economy fall into austerity. It doesn’t want people to lose their livelihood and become unproductive members of society. The reason your cancel the debts is you want to preserve stability.
Brancaccio: But outside the historical context, in the context of this pandemic, are you thinking of debt cancellation for maybe a few months till we get through the worst of this? Or you’re talking about going further than that?
Hudson: Well, certainly, you would cancel the debts for a few months, but just the moratorium wouldn’t work. You can simply say the landlord’s are not going to collect for three months, as the rule is in New York, for instance. Suppose you’re a restaurant and you say, “OK, we don’t have to pay rent in three months, but we’re not getting any business.” And when business begins again, they’re still not going to have the money to pay the rents, which are a rental debts to the landlords, which are the most expensive expense in businesses. So the problem is, you can’t let these debts accumulate, or you’re going to have defaults right across the board. The states and localities, New York City and New York state, have to pay unemployment insurance, and all the other costs associated with the coronavirus out of their own revenues, and yet they have to balance the budget. If New York state and City have to repay all of the debts that they run up, then you’re going to have the whole character of government change. And in order to prevent the economy from being distorted, you have to adjust simply say these debts won’t be paid.
Brancaccio: So you’re not just talking people, families, households being released from debt, you’d like to see this extended to maybe state and local governments?
Hudson: Yes. And already there is a discussion about how to do this for Third World countries that export raw materials, whose prices are collapsing because of the slowdown, and that are dependent on tourism. So you’re going to have a lot of governments throughout the world that owe their debts in dollars not being able to repay. So this is a worldwide phenomenon.
Brancaccio: I mean, it’s quite a cost to this. Will any lender ever lend another penny after this?
Hudson: Of course. Lenders will always begin lending money as long as they see that there’s a normal ability to pay. The problem is that somebody has to lose when the debts can’t be paid. And the question is who should lose? Should it be the poorest people, should it be the wage earners? Should it be the small businesses, or should it be the banks? Well, one way or another, it has to be either the banks, or else the government will simply create the money to reimburse the banks. But in terms of justice, the banks have made an enormous amount since 2008. They were bailed out in 2008, their net worth and their stocks have soared in value. So, logically, the banks should lose something and bear some of the costs. And the government can simply pay for the cost just as it pays for military expenditures, or for Social Security, or anything else. The government’s able, simply, to print the money. What makes it hard today is that the debts are owed to the banks, and to the landlords, and to private creditors, and they’re very politically powerful. So this is going to be the political struggle or conflict that is unfolding in the next few months in the United States.
Brancaccio: And I just learned this in preparation for talking with you today, professor, they did a version of a debt jubilee in the years that followed the Second World War in Germany?
Hudson: Yes, that was the economic miracle. And Germany canceled all debts except for the debts that employers owed their employees. And everybody kept a minimum balance. And it was easy for the allies to cancel the German debts in 1948, because most debts were owed to the old Nazis, or the people who had been Nazis, or to banks that were part of the Nazi regime. So the Allies didn’t want to let the creditors, who were the old Nazis, have power over the coming German democracy. So they canceled the debts, and Germany, as a result, its industry and its families were debt free, and that’s what enabled it to recover. And that was the essence of the German economic miracle: the debt cancellation. Right now, America’s economy is strapped. America could have another economic miracle by writing down the debts.
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