Debt, & ideology

Is high personal debt a threat to the UK economy? Vince Cable thinks so. He told radio 4 yesterday (9’28” in):

A sudden change in household confidence – people beginning to get alarmed about their debt levels – could trigger a serious downturn.

This is a more ideological claim than you might think.

First,some economics. As Simon says, the question of what is the right level of debt is a very tricky one, not least because so much depends upon the distribution of debt. In fact, it’s possible that high consumer debt far from being a bad thing is in fact to be welcomed, because it’s a sign that households might be rightly optimistic about the future.

What’s more, history tells us that consumer-led downturns are quite rare. Since data began in 1955, there have been 45 calendar quarters in which real GDP fell. In only 11 of these did consumer spending fall by more – and several of these were in response to increases in sales taxes (1968Q2, 1975Q3 and 1979Q3) interest rates or oil prices (1980Q4). It’s rare therefore for an exogenous drop in consumer spending to trigger a recession. More often, consumer spending acts as a stabilizing force.

Recessions are far more often due to errors by those in power than to consumers: policy-makers setting interest rates wrongly; corporate bosses investing too much and then retrenching; or bankers cutting credit after making bad loans.

 This is why I say Cable’s claim is ideological. In inviting us to worry about the alleged irrationalities of consumers, he is deflecting attention away from what has more often been the threat to our prosperity – the errors of our rulers*. In this way, a question that might undermine the legitimacy of the rich and powerful – do bosses, banks and policy-makers know what they are doing? – is not asked.

From this perspective, there’s a link with the fuss over Peter Tatchell being “no-platformed.” The kerfuffle over students’ wanting to limit cognitive diversity distracts us from a more pernicious form of no-platforming – the Westminster bubble’s narrowing of the Overton window to exclude many ideas from debate. It expects us to give a toss what a criminal associate thinks about Brexit whilst underplaying or ignoring more serious issues such as the cases for a citizen’s income or worker democracy or what to do about the UK’s lamentably low productivity.

What we see in both cases is a means of shoring up inequalities of power: fretting about consumer debt or silly student politics whilst underplaying the greater defects of the powerful help to legitimate the latter.

You might think I’m making a Marxist point here.  Maybe. But I’m also channelling another classical economist – Adam Smith:

We see frequently the vices and follies of the powerful much less despised than the poverty and weakness of the innocent. (Theory of Moral Sentiments, I.III.29)

* In fairness, such errors might be occasionally inevitable because we can only have limited knowledge of complex emergent processes.

Comments

[Carol]

In fact, the so-called mortgage crisis here in the US was caused by the banks and other loan companies, NOT by poor people buying houses, as the right wing ideologues keep trying to say.

[Magnus]

if consumers have too much debt, and the government has too much debt, then presumably someone is holding a lot of assets?

Ok nasty Jonny Foreigner is part of the answer, but less than half of it for the UK I'm sure.

So just who are these mysterious people?

[David]

Thank you Chris...... one of your best!

[Keith]

No amount of debt is too much if you have the income to finance it. Most debt is backed by real property in the UK so it is only politicians and central bankers who can make it unsustainable by tanking the housing market suddenly as the Tories did in 1989-91.

On the other hand the fact poverty pay and benefit cuts force people to loan sharks is a real problem.

A problem of poverty caused by cable putting a far right Government into power with the help of the formerly Liberal Party. A problem sure to get worse from the policies of the Cabinet driving up rents and driving down pay and cutting benefits even more. Thanks a bunch Vince! Go fuck off and take Clegg and your party with you.

[Churm Rincewind]

Er, what "fuss over Peter Tatchell being no-platformed"? All that's happened is that an NUS representative has declined to participate in a specific event if he were to be present.

That's not "no-platforming", as the link provided makes abundantly clear.

So the conclusion that "what we see...is a means of shoring up inequalities of power" is entirely unwarranted.

[Ralph Musgrave]

Vince Cable is a complete plonker. For years he's been wittering on about excess debt AT THE SAME TIME as wittering on about the need not to regulate banks too tightly. He apparently hasn't worked out that the more latitude banks are given, the more they'll lend, i.e. the higher debts will be.

[George Carty]

Carol, I'd suggest that urban containment policies -- which became increasingly popular towards the end of the 20th century due to environmental concerns -- were a bigger factor in the global house price bubble of the '00s.

The fact that the United States bubble was confined mainly to coastal cities in what Paul Krugman called the "Zoned Zone" illustrates this. In non-coastal America (Paul Krugman's "Flatland") developers can easily buy land at near-agricultural prices, so no bubble can form in the first place.

Of course the UK's building land market is even more restrictive still, due to the Town and Country Planning Act 1947 (and its successors).

[Marko]

With negative interest rates , the banks will soon be sending you money based on your debt levels. The more debt you have , the more money they'll send to you.

Soon , people will be lined up at the banks , eager to sign up for more and more debt.

I'm sure this will work out just fine. Peachy , in fact.

[Luis Enrique]

There are those on the self described heterodox side of economics who fret about debt. Is that ideology too, in your view?

[Almar]

By coincidence, I have just come across a link in the Economist's View blog to an interesting article on personal debt http://blogs.scientificamerican.com/mind-guest-blog/why-don-t-people-manage-debt-better/ It suggests many people find it very hard to rationally manage their debts.

[Cassius Sq]

Forgetting Cable completely, I think there is a genuine concern over high levels of debt as it seems to point to a broader structural problem: that for the system of production to reproduce itself requires an unfair burden to be placed onto those with the least power. Why should 'consumers' be lumped with this burden?