The Case for a Debt Jubilee. Richard Vague

to 260 percent of GDP. Taking the five largest European countries together – Germany, France, the United Kingdom, Spain, and Italy – private sector debt increased from 80 percent of GDP in 1970 to 149 percent in 2019, while in that same period total debt grew from 108 to 238 percent (though within this, the distribution is tilted to the benefit of Germany because of its huge net export advantage). In Japan, from 1964 to 2019, the total private debt-to-GDP ratio grew from 118 to 163 percent, including a huge private debt growth spike that brought the banking crisis of the 1990s. The country’s total debt in this period grew from 123 to 402 percent of GDP.

      Collectively, these countries tell the overall global story, since they constitute 60 percent of world GDP and 75 percent of the world’s debt. The debt problem, especially the private debt subset of that problem, is global but concentrated in the larger, developed countries. Developing countries tend to have lower total debt-to-GDP ratios, but even in

      a developing country such as India, the trend is clear. From 1951 to 2019, India’s private sector debt grew from 22 to 87 percent of GDP, and total debt from 47 to 159 percent. (A detailed analysis of these other countries is beyond the scope of this book, which is focused on the United States.)

       Chart 2

       Sources – BIS, CEIC data. Countries Included – Germany, UK, France, Spain, Italy

       Chart 3

       Sources – BIS, CEIC data

       Chart 4

       Sources – BIS, CEIC data

       Chart 5

       Sources – BIS, CEIC data, Federal Reserve, Treasurydirect.gov. European Countries Included – Germany, UK, France, Italy, Spain

In the United States today, private sector loans are asphyxiating many households and businesses. The debt burden for individuals in almost every age group and for businesses of every size is increasing. In my investigations of household debt, it has not been uncommon to find families with all of the following: mortgage debt as great as or greater than the value of their home; student loans still outstanding for the parents; and large debts tied to some unexpected healthcare expense. A growing number of economists decry our slowing long-term growth rate as “secular stagnation.” They explain it as a structural slowdown from such factors as a chronic lack of demand, without recognizing the rising burden of private sector debt as a basic culprit in that stagnation. Families with high debt are far less able to pay for their own children’s college, build additions to their homes, buy appliances, or start new businesses – the very types of things that power an economy forward. Likewise, small businesses that carry too much debt are far less likely to expand, add product lines, or invest in research and development. This huge debt overhang portends an extended period of stagnant and ever-slower economic growth with falling living standards for millions of debt-burdened households.

      Not only is the high burden of private debt a deeply consequential problem in its own right, it has also been an underlying issue in several of our recent, and worst, social and economic problems. Runaway household mortgage debt growth brought the 2008 global crisis. The ensuing slow GDP growth largely resulted from the residual burden of this crisis debt, and some commentators believe it helped kindle the discontent that led to Donald Trump’s election in 2016. Since minority communities have disproportionately felt the private debt burden, it has also exacerbated the racial injustice that has only become more urgent and visible in the 2020s. High debt, along with unemployment and underemployment, has contributed to our opioid crisis. As we will see, it deepens inequality. And this debt will hobble our efforts to move the economy forward from the pandemic.

High Private Debt Is a Harmfully Consequential and Yet Largely Ignored Problem

Private debt has enormous effects on American economic and societal trends – and yet it is not central to the most widely used economic forecasting models. Some economists have downplayed the adverse effect of this dramatic increase in household debt in part because they maintain that the decline in overall interest rates has offset it. To be sure, lower interest rates have helped many debtors immensely, especially mortgage holders, who have repeatedly refinanced to lower rates. But the debt service burden on households is still alarming, even accounting for lower rates. Though it has come down to some extent very recently, the “debt service ratio,” which estimates the payments consumers make on their debt in relation to their income, is still roughly 30 percent higher now than it was in the 1950s and 1960s, the two most vibrant growth decades in the post-World War II era (see Chart 6). It’s no coincidence that our highest-growth decades since World War II came when households had their lowest debt service burden. The debt payment ratio story is similar for business.

      This is the vicious dynamic at the heart of working Americans’ financial distress. Higher debt curbs spending, which constrains growth. Constrained growth suppresses wages. Lower wages further constrain spending and growth. And lower wages contribute to one of the most problematic and most dire examples of private debt today as a symptom of economic dysfunction: the extent to which Americans who have seen their wages stagnate over recent decades rely on debt to meet their basic needs.

       Chart 6

Some mainstream economists have also ignored or assigned little importance to private sector debt because they contend that for every borrower there is a lender, and if you add those two totals together, then debt nets to zero – and thus its aggregate effect is neutral. They maintain that high levels of debt are not a problem because it all balances out.

      That logic helps explain why those economists missed the mountainous ascent of US mortgage debt that caused the 2008 crisis, a total that rose from $5 to $10 trillion in five years. The profession’s myopia relative to the 2008 crisis is now legendary, but, despite this, little has changed within orthodox economics, which continues to relegate private debt to a minor consideration.

These economists are correct on one point, however: when you consider borrowers and lenders, total debt does indeed net to zero. In fact, as we will revisit, financial assets equal financial liabilities, a well-established principle of economics, since the creation of an equal asset and liability results from the same transaction. In the case of a $1 million loan, a $1 million asset is created on the books of the bank, and a $1 million liability is simultaneously created on the books of the borrower. But although it nets to zero, private debt’s effect is anything but neutral, and would only be neutral if lenders and borrowers were the same. But lenders and borrowers are decidedly not the same, and the distribution of these debts among actual borrowers and lenders matters greatly. Private debt borrowers are a broad swath of millions of individuals and businesses, including millions of small businesses; in contrast, lenders are much more concentrated, with banks alone accounting for 33 percent of all private sector debt.

Rising