A debt jubilee?

In the Western tradition, the idea of the year of jubilee comes to us from the Old Testament.    The idea was to avoid permanent alienation of people from their ancestral land –  in effect, land transfers were term-limited leases, and if by recklessness or bad luck or whatever people lost their land it was for no more than fifty years. In the fiftieth year –  the Year of Jubilee –  all would be restored: land to the original owners and hired workers could return to their land.   It wasn’t a recipe for absolute equality –  the income earned wasn’t returned etc –  but about secure long-term economic and social foundations.

For many –  for me –  it has an appeal, although one could argue that in many respects modern society already reflects some of the vision underlying the original near-eastern ideas: after all, we prohibit slavery, we allow personal bankruptcy (and discharge from bankruptcy without paying all the original debts), we provide education free at the point of use, and a welfare system for those who might otherwise fall through the cracks.

But this post isn’t about exploring those ideas, but about one very specific modern championing of the idea that we hear a bit more of again at present: the idea of some sort of debt jubilee in which, in a highly-indebted system, the outstanding debt is, in some form or another, simply written off.

One person who has been championing such a scheme for some time is Professor Steve Keen, an Australian economist now teaching at a university in London.   He has quite a following in some circles – I used to read his blog moderately regularly for a time, and perhaps 7 or 8 years ago The Treasury hosted a visit here (in the course of which his stocks sank among most officials).  However, he was interviewed a few weeks ago by Gareth Vaughan at interest.co.nz on his ideas for policy in the wake of the coronavirus.  He and I share the view that the biggest macroeconomic risks at present are deflationary rather than inflationary but, it would seem, we agree on little else.   You can read or listen to his other ideas for yourselves if you choose, but one strand of what he was championing was a “modern debt jubilee”.

I do not wish to be seen to be critiquing or attacking a straw man, but I have had difficulty finding anything online that sets out in very specific terms exactly what he has in mind.

Here is what he said in the interview

Firstly, Keen says, they should be implementing a modern debt jubilee now.

“It’s quite feasible to do it [but] I never thought it would happen. People asked me what chance I thought this had of happening. I said it’s less than a snowflake’s chance in hell. We are in hell now and the only way out of hell, as well as getting a vaccine for the virus, is to reduce this burden of private debt otherwise we’ll have a financial collapse after the coronavirus,” says Keen.

The alternative, he argues, is mass loan defaults.

“You simply have to accept that debt can’t be repaid when too much debt has been issued. So we have to reduce private debt and we have to do it now. [We] should do a debt jubilee now, not once we get through this crisis. Otherwise there’ll be many people who can’t pay their rent, as well as people who can’t pay their mortgages,” says Keen.

“If we do it now we’ll enable the payments system to continue functioning. If we don’t do it now then it’s quite possible the payments system will collapse. Small businesses won’t get any cash income, households won’t get wages. Everybody will end up having no money in their bank accounts because that money will be used to pay off debt.”

What Keen’s advocating for is governments’ capacity to create fiat money being utilised to distribute an equal amount of money per person across entire countries.

“And people who were in debt would get their debts reduced, either by an offset account or by actually paying their debts down. People who are not in debt get a cash injection. And that cash injection can also be used to buy newly issued corporate shares which are used to pay down private debt. So as well as reducing household debt, you reduce corporate debt and you also democratise the ownership of corporations,” says Keen.

And although I have found a couple of other references (including here and here)  there is still no sight of some critical parameters.

Nonetheless, it is worth bearing in mind that elsewhere in the interview he describes the large increase in household debt in recent decades as “unconscionable debt” and repeatedly highlights the very large increase in the ratio of household debt to GDP in New Zealand since about 1990 (about 30 per cent then, about 100 per cent now).   And although he talks about “reducing” household debt, “jubilees” have connotations of very substantial writedowns, so he clearly isn’t talking about something like dishing out, say, a mere $10000 per household/person.  The Reserve Bank tells us that as at the end of last year recorded household debt was about $310 billion.

Moreover, Keen also tells us (see extract above) that he thinks the same amount should be distributed to everyone.  I’m not sure whether he really means “everyone” or just adults, but since under-18s can’t contract binding debts there shouldn’t be any need for jubilees for them.  That still leaves 3.8 million residents (and here I’ll just ignore the fact that a significant number of them are temporary non-citizen residents; I just want to get a sense of the plausible scale of what Keen might be calling for, not tie down every detail).

As we all know, recent first home buyers in Auckland typically have to take on fearsome levels of debt.   They appear to be the sort of people Keen focuses on, since he blames the rise in house prices on banks and their over-aggressive (“unconscionable”) lending setting up a house of cards that might otherwise be about to tumble.  I presume a $500000 mortgage isn’t at all uncommon (last year the nationwide average first home buyer mortgage was about $400000) and many will be larger than that.

Now, of course the typical new buyers are a couple, but for those marginal Auckland purchasers that might still be $250000 each.

I presume Keen does not have in mind giving them –  and all the rest of us –  $250000 each, although doing so would certainly allow most (but not all) mortgage debt to be fully repaid.     But even if we wanted to make possible a 60 per cent writedown for those couples with the new unconscionable $500000 mortgage, he’d still have to be looking at $150000 each, as gift/grant from the Crown.  Across 3.8 million adults, that seems to come to $570 billion dollars.

All paid for, in his own words, through the Crown’s ability to create fiat money –  change the Reserve Bank Act and get for the Crown an (interest-free) overdraft of $570 billion.  Halve the payment and it is still serious money.

You’ll have noted that Keen is also concerned about corporate debt –  a big concern at present in some countries (where it has grown rapidly in recent years) but much less so in New Zealand.  For those –  most of us –  without mortgages (whether because we have paid them off, or never been able to get into the housing market in the first place), we get a rather large addition to our bank balances.   Keen notes that the proceeds could be used to buy “newly issued corporate shares which are used to pay down private debt”.

I don’t know about you but I know what I would be doing not just with my $150000 but with all my non-indexed financial wealth the minute I thought that anything like what Keen was proposing was likely to be implemented: I’d be looking to put it into real property (houses, gold, whatever) or getting it into the currency of a country not adopting such a policy.  Anyone with non-indexed debt at present would prudently be doing the same –  and locking in a long-term fixed interest rate – not using the proceeds to pay off debt.  It might be hard to generate inflation at present, under present –  largely self-imposed – constraints, but simply handing $570 billion will do it.

I hope all regular readers will recognise that I am not one of those looking for inflation under every stone.  I worry about deflationary risks at present –  as does the market – and I do not believe monetary policy is doing anything like enough to respond to those risks at present.  Much as I am sceptical of the idea of giving out some modest amount (say $2000) to everyone as some sort of stimulus, in the current climate – large negative output gap, little or no inflation –  such a payment, even funded directly by the Reserve Bank –  would be net stimulatory in the near-term.  There is a considerable amount that can be done to get us back towards full employment as soon as possible.

But not by simply handing out $570 billion, with no obligation to repay.

(Presumably Keen does not think his scheme would dissolve into very high inflation, but I’ve never seen him anywhere articulate the case for why not.)

When I think of debt writeoffs, I think of explicitly recognising that someone has to bear those costs –  on any very substantial scale there are few/no free lunches.  Banks will have to write off some debt –  perhaps quite a lot –  over the next few years, and their shareholders will bear that cost.  That is the business they went into.  Writing off mortgage debt more generally on the sort of scale Keen seems to envisage can only be done by imposing fearsome losses on others.  It is so utterly different from that Old Testament conception (which, in effect, limited the scale of liabilities anyone could run up in the first place).

I have some sympathy with the view that requiring young –  and now not so young –  people to take on multiple hundreds of thousands of dollars of debt to get into a basic house in our cities is pretty unconscionable and deeply unjust. But, frankly, that isn’t fault of the banks but of the central and governments that make land –  a resource we have in abundance – artificially scarce.  In fact, I’ve even gone so far as to argue that if ever we managed a government with the courage to fix the land market, it might be both opportune (building coalitions) and just to offer some compensation to the losers –  those more or less compelled to take on very high debt in recent years just to get a foot on the ladder.   But there would be an explicit, shared, cost to that.

And more generally I’m not persuaded that current debt levels –  public, private or total –  in New Zealand pose any vast threat of economic or financial collapse.  Keen likes to highlight how much debt has risen since, say, 1990, but it isn’t obvious why that is the most relevant benchmark.  In a speech I wrote with Alan Bollard a few years ago, I included a chart showing that mortgage debt (house and farm) was materially lower then  as a per cent of GDP than it had been in 1920s New Zealand,  I rechecked the numbers this morning and the picture today is the same as it was in 2011.  Contrary to Keen, our banking system looks pretty robust, not ricketty.

I also take the view that there is plenty that can and should be done to assist individuals and firms through the next few months.  There is a strong case for income support (broadly defined) or even income insurance (of the sort I’ve championed here) but that is very different proposition than somehow looking to wipe out debt without identifying whose claims to real resources will be wiped out to pay the economic cost of that (as distinct from the “which account to write the cheque on” issue that Keen deals with).

You might be wondering why I bothered with this post, or dealing this extensively with a pretty extreme idea.  The reason is that Radio New Zealand is recording tomorrow (for broadcast on Sunday morning) an interview with both me and Keen. I might have more to say about some of his other ideas –  some of which make Winston Peters championing New Zealand manufacturing seem moderate –  next week. In the meantime I wanted to understand as well as I could what Keen was actuallly championing on the debt front.  As I said, I don’t want to attack a straw man –  that never persuades anyone –  but I simply haven’t yet found an articulation of what he is proposing that looks economically feasible or sensible.