Debt is not a static issue
Early in his book Debt: The First 5,000 Years, David Graeber talks about meeting a woman at a party who, upon hearing him recommend debt forgiveness for poor countries, says “Surely one has to pay one’s debts.” It sets him thinking:
The reason that it [the phrase] is so powerful is that it’s not actually an economic statement: it’s a moral statement. After all, isn’t paying one’s debts what morality is supposed to be all about? Giving people what is due to them. Accepting one’s responsibilities … What could be a more obvious example of shirking one’s responsibilities that reneging on a promise, or refusing to pay a debt?
He then talks about the horrors that paying ones debt can impose on a country, invoking a malaria outbreak in Madagascar:
The problem was, it took money to maintain the mosquito eradication program, since there had to periodic tests to make sure mosquitoes weren’t starting to breed again and spraying campaigns if it was discovered that they were. Not a lot of money. But owing to IMF-imposed austerity measures, the government has to cut the monitoring program. Ten thousand people died. I met young mothers grieving for lost children. One might think that it would be hard to make the case that the loss of ten thousand lives is really justified in order to ensure that Citibank wouldn’t have to cut it’s losses on one irresponsible loan that wasn’t particularly important to its balance sheet anyway. But here was a perfectly decent woman – one who worked for a charitable organisation, no less – who took it as self-evident that it was. After all, they owed the money, and surely one has to pay one’s debts.
The story, while moving, is odd. Graeber is attacking strawmen – no-one insists that the only reason that countries (or individuals) should pay their debts is in order to keep creditors happy and prosperous or to fulfill some mythical impulse.
A country, organisation or individual that regularly defaults on its loans will quickly find that no-one wishes to lend to it. And loans are important! For example, if an education ensures a higher income and the income allows one to cover the costs of an education, it is a tragedy that some people cannot gain access to an education simply because they don’t initially have the wealth needed. Borrowing money now and paying it off later with one’s future income can be a welfare enhancing decision, leaving a person better off even after taking interest into account.
Poor (and sometimes, rich) countries face an analogous problem: investing in roads, electricity generation, health infrastructure, schools, clean water etc will not only ensure a higher standard of living but also pay for themselves: the higher output generated* from these measures create a tax stream that can be used to pay for these utilities. The problem is that (sometimes high) costs have to be paid now while this income stream is in the future. The solution: borrow now, invest and pay off the loans with the tax revenue that it creates.
This solution can be twarted by high interest rates. High interest rates are caused by the suspicion that a country will default on its loans. The suspicion arises when countries start defaulting on their loans. Thus, one ought “pay ones debts” because it is in ones interest to do so, since one may need to borrow money for fresh investments in the future. The notion that morality is the only reason that causes people to be serious about not defaulting is false.
Public policy is full of hard decisions: should I increase military spending or cut indirect taxes? Should I spend tax revenue on higher education or advanced healthcare? But “investment decisions” are easy since they pay for themselves and therefore don’t suck away resources from other goods (and indeed, they frequently generate the resources other goods need) – unless you’re locked out of the capital market.
What Mike Beggs calls Graeber’s ‘willful ignorance’ of economics is most glaring in his treatment of debt as a matter of consumption, while in a large chunk of economic literature borrowing is a method of investment. The difference between the two is that consumption creates pleasure (utility) now while investment creates a stream of future output, which can be consumed (or re-invested). Throughout the book, Graeber talks only of borrowing that has been done for consumption. This twists his weighing the costs and benefits of debt forgiveness, making the issue merely a virtuous transfer of wealth from rich creditors to poor debtors. The notion that this will hurt poor people in the future by sharply reducing their ability to borrow from those (now wary) rich creditors escapes him. And he isn’t alone in taking this static view of debt.
Finally, let’s look at Madagascar, for if the cost of repayment is indeed 10,000 lives, few would recommend not defaulting. But Graeber makes a poor case for this. His claim is that IMF-imposed austerity measures caused 10,000 deaths rests on three premises or links on the chain of causality. Firstly, that monitoring and spraying would have end the malaria outbreak. Secondly, that adequate funding from the national government would have resulted in effective monitoring and spraying. And thirdly, that IMF-austerity was responsible for the inadequate funding. The first premise seems reasonable. But the second premise is somewhat suspect. Madagascar is hardly known for its quality of governance – it’s had to turn to the IMF and World Bank for loans not once, not twice but eight times since it’s independence in 1960. And when the national government is this bad, organs are rarely better. Corruption, sloth and incompetence would have reduced the efficacy of the monitoring authority and the deaths could therefore have happened anyway. For an account of how devilishly difficult it is to fight mosquito-related disease, I recommend this New Yorker piece by Malclom Gladwell.
But it is the final link that demands (and doesn’t receive) supporting evidence: the IMF has no reason to demand that malaria monitoring specifically be axed; it doesn’t distort the economy in any way. The Madagascar government could have just as well cut military expenditure, government salaries etc. If this program was axed, it was by the government, with its own interests in mind.
Graeber seems to believe that no cuts ought to have taken place. However, governments rarely turn to the IMF until they’ve run down their other options. If the Madagascar government couldn’t raise money from any of the other markets, some cuts were inevitable. And the notion that a lender-of-the-last-resort should allow a debtor to continue a spending pattern which got it locked out of capital markets is self-evidently absurd, since the loan then does nothing but postpone the inevitable breakdown.
We again hit another example of Graeber’s inability to think of debt as a tool of investment. Madagascar is poor. It needs to spend huge amounts on roads, dams and all the other lovely things which cost a bomb but would prove a boon in long run. It can’t do that if it is locked out of capital markets. Defaulting is not necessarily in its best interest.
This is Part 2 in a 4 part series on David Graebers Debt: The First 5,000 Years.
*Healthy citizens are more productive than unhealthy citizens. Educated citizens are more productive than uneducated citizens and so on.