I remarked a while back that cancelling debt as a way to spur economic recovery would be a radical solution that the financial sector, for one, wouldn’t stand for. So what does it say about the mess we’re in that conservative economist Carmen Reinhart1 (via David Frum) is now all but recommending cancellation of at least some household debt?
“Until we deal head-on with the fact that some of those debts are not ever going to be repaid, we will continue to have this shadow” over growth, Reinhart said today in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend.
She later admits that forgiving some debt and restructuring of others would be “kind of ugly,” which is an understatement. To begin with, recall that the Tea Party was born after the Obama administration announced an early effort to save homeowners from foreclosure, which prompted Rick Santelli’s now notorious rant about the “losers” that took out bad mortgages. For a lot of Americans, the idea that people might get help they don’t necessarily deserve, even if it would benefit the economy as a whole, is morally repugnant. This is just the hangover theory of recessions, as Paul Krugman put it back in the 1990s, but it’s this idea, I think, that has made it so hard to build support for tougher economic recovery actions. Some part of us wants to believe that we need to suffer, even if the suffering is to no purpose. Even otherwise well-meaning people, like the President, are essentially endorsing this view when they call for government tightening its belt, just like a family would during hard times. So long as this attitude remains prevalent, I doubt that support for debt cancellation will gain much traction.
On the other hand, another way to achieve the goal of relieving people of unsustainable debt loads is by undergoing a sustained, but temporary, bout of inflation. To be sure, it’s also controversial, but it has the virtue of avoiding the question of who is deserving of debt relief and who isn’t. Failing that, we could always bring back the tradition of Jubilee.
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Disclosure: In grad school, I took Reinhart’s course in international economic policy (i.e., Financial Crisis 101), and rather enjoyed it. ↩
