About a year ago I finished David Graeber’s 2011 book Debt: The First 5000 Years. Since he’s an Occupy Wall Street anthropologist, you might expect me to dislike the book. But I enjoyed it, and learned a lot, even though it does ramble, and his economics is weak.
You are correct that there are supply and demand effects from lowering the cost of bankruptcy. Clearly the optimum is somewhere between Hammurabi's code (debtor's prisons, selling offspring into slavery to pay debts), and simple no-recourse/no-consequences lending. In today's equilibrium, however, all the costs are passed on to future borrowers, and so changing terms simply is a one-time redistribution, and to work subsequently has to be perceived as 'one time' (thus the attractiveness of those 'year of jubilee refutations').
If you think passing on costs to banks is absorbed by the banks, a free way to help consumers, consider that the return on equity for banks has been pretty stable over the past 100 years in the US, in spite of all those changes in laws and institutions (fico scores, etc.). It's like a payroll tax on 'employers': it's paid by the employee, really.
"It's also efficient to buy a house, take on a less than optimal job, and watch the value of the house rise. You could easily end up a winner by the time your retire."
Yes, and that's what I meant with the public's penchant for seeing for seeing real estate as an investment. Everyone counts on the price of their house rising faster in than overall economic growth and you end up with bubbles and older generations that are rent-seeking money from the younger generations.
"I don't see much sign of this happening in the many countries with public health care systems. Perhaps rationing-by-waiting damps it down."
Also poor people aren't savages... Hypochondria is a disorder that has nothing to do with income level.
> Making debts easier to break simply increases the cost of borrowing.
Bankruptcy laws made debts easier to break. Did they *simply* increase the cost of borrowing? Put otherwise, don't arguments against debt forgiveness also work against bankruptcy laws, which are a form of debt foregiveness? Don't they also work against the limited liability corporation, another variety of debt forgiveness?
>Standard economic theory says that such debt forgiveness redistributes to the very poor, but not by taxing the rich. - R.H.
> Making debts easier to break simply increases the cost of borrowing. Changing terms just really inefficient redistribution. - efalken
A tax on borrowing not only makes borrowing more expensive (primarily for the less poor) but it also makes lending (by the rich) more costly.
Perhaps more specific economic models make more precise predictions, but from these facts alone, it doesn't seem possible to predict whether forgiving debts redistributes *mostly* from the rich or from the less poor.
It seems there's an error in the analysis that says the rich aren't taxed by loan forgiveness because the analysis doesn't consider that not only do loans become more costly but also less profitable. In other words, the extent to which the (rich) lender can pass on its costs to borrowers isn't total (and probably not nearly total: otherwise, lenders would be neutral about [nonretroactive] loan forgiveness policies.).
[The basic reason that when redistribution occurs it does so inefficiently is that social coordination is hard: you can't typically manage to coordinate for the optimal result.]
Yes poverty can be seen as inefficient relative to a prior state where more insurance is imagined to have been possible. But then you do want to take into account the other costs of insurance, such as moral hazard.
It's also efficient to buy a house, take on a less than optimal job, and watch the value of the house rise. You could easily end up a winner by the time your retire. I live in a densely populated country where people regularly become millionaires doing this.
"provide affordable health care" sounds nice, but someone still has to pay for it and if it is underpriced, some forms will be overconsumed."
I don't see much sign of this happening in the many countries with public health care systems. Perhaps rationing-by-waiting damps it down.
"People no longer live in just one place all their lives. They are expected to be mobile professionally. It is efficient to rent, and it is efficient to invest in apartments so that others can rent them."
Why are you under the impression that I disagree with you here?
" "provide affordable health care" sounds nice, but someone still has to pay for it and if it is underpriced, some forms will be overconsumed."
There are a lot of countries where people don't go bankrupt over medical bills. Apparently it's not impossible to have such a system. Sure, people their still pay for it but not all at once and their rich pay more.
"reducing the public's penchant for seeing real estate as an investment rather than a place to live"
People no longer live in just one place all their lives. They are expected to be mobile professionally. It is efficient to rent, and it is efficient to invest in apartments so that others can rent them.
"provide affordable health care" sounds nice, but someone still has to pay for it and if it is underpriced, some forms will be overconsumed.
The quantity and quality of goods and services can still increase in a fixed currency supply system and those developments would essentially represent economic growth, they would result in deflation (more stuff can be bought for one unit of currency).
A fixed currency supply is essentially conservative of all economic activity. It enforces a zero-sum on new ideas that ultimately take time to accomplish. It says that you cannot have both WalMart and Amazon.com.
Loans are different than some of the other risky things the poor do, because loans have to be enforced by the state. So the state is involved one way or another.
Nevertheless, I'm glad you are directly addressing his arguments. I think a liberal of Graeber's type would say that the poor should have some other risky options foreclosed as well. Both because they are making bad choices for himself (or induced into making bad choices), and there is collateral harm that is caused (beyond just harm to the person).
Most rich people are rich in human capital, and need to borrow to realize this future human capital in consumption today. Someone having a $100k salary might well have to borrow $50k to buy a car.
But even then, I can grant your point that loan size increases with income. The point is that if we have loan forgiveness to people who are very poor, say below $5k a year, this loan forgiveness will be a much smaller proportion of these bigger loans. Thus, the generous forgiveness rules lowering extraction possibilities by $5k/year will increase interest rate much less on large loans.
why the hell would a multimillionaire loan $10k (he can pay that out of pocket and avoid paying interest)?
That's a very easy question. He would take out the loan because he thinks his profit rate will be higher than the interest rate.
If you mean to restrict to personal loans, then the conclusion from your assumptions is that multimillionaires have little need ever to take them. Thus, the conclusion follows that the higher interest rates won't affect multimillionaires.
in other words, their loans have just as much potential of making them penniless if things go south as the loans of poor people do.
Maybe, but the relevant statistic isn't the probability of their going broke conditioned on going south, but rather it's the unconditional probability of their going broke.
You are correct that there are supply and demand effects from lowering the cost of bankruptcy. Clearly the optimum is somewhere between Hammurabi's code (debtor's prisons, selling offspring into slavery to pay debts), and simple no-recourse/no-consequences lending. In today's equilibrium, however, all the costs are passed on to future borrowers, and so changing terms simply is a one-time redistribution, and to work subsequently has to be perceived as 'one time' (thus the attractiveness of those 'year of jubilee refutations').
If you think passing on costs to banks is absorbed by the banks, a free way to help consumers, consider that the return on equity for banks has been pretty stable over the past 100 years in the US, in spite of all those changes in laws and institutions (fico scores, etc.). It's like a payroll tax on 'employers': it's paid by the employee, really.
"It's also efficient to buy a house, take on a less than optimal job, and watch the value of the house rise. You could easily end up a winner by the time your retire."
Yes, and that's what I meant with the public's penchant for seeing for seeing real estate as an investment. Everyone counts on the price of their house rising faster in than overall economic growth and you end up with bubbles and older generations that are rent-seeking money from the younger generations.
"I don't see much sign of this happening in the many countries with public health care systems. Perhaps rationing-by-waiting damps it down."
Also poor people aren't savages... Hypochondria is a disorder that has nothing to do with income level.
> Making debts easier to break simply increases the cost of borrowing.
Bankruptcy laws made debts easier to break. Did they *simply* increase the cost of borrowing? Put otherwise, don't arguments against debt forgiveness also work against bankruptcy laws, which are a form of debt foregiveness? Don't they also work against the limited liability corporation, another variety of debt forgiveness?
>Standard economic theory says that such debt forgiveness redistributes to the very poor, but not by taxing the rich. - R.H.
> Making debts easier to break simply increases the cost of borrowing. Changing terms just really inefficient redistribution. - efalken
A tax on borrowing not only makes borrowing more expensive (primarily for the less poor) but it also makes lending (by the rich) more costly.
Perhaps more specific economic models make more precise predictions, but from these facts alone, it doesn't seem possible to predict whether forgiving debts redistributes *mostly* from the rich or from the less poor.
It seems there's an error in the analysis that says the rich aren't taxed by loan forgiveness because the analysis doesn't consider that not only do loans become more costly but also less profitable. In other words, the extent to which the (rich) lender can pass on its costs to borrowers isn't total (and probably not nearly total: otherwise, lenders would be neutral about [nonretroactive] loan forgiveness policies.).
[The basic reason that when redistribution occurs it does so inefficiently is that social coordination is hard: you can't typically manage to coordinate for the optimal result.]
Yes poverty can be seen as inefficient relative to a prior state where more insurance is imagined to have been possible. But then you do want to take into account the other costs of insurance, such as moral hazard.
*NM*
"It is efficient to rent"
It's also efficient to buy a house, take on a less than optimal job, and watch the value of the house rise. You could easily end up a winner by the time your retire. I live in a densely populated country where people regularly become millionaires doing this.
"provide affordable health care" sounds nice, but someone still has to pay for it and if it is underpriced, some forms will be overconsumed."
I don't see much sign of this happening in the many countries with public health care systems. Perhaps rationing-by-waiting damps it down.
Only if the debtors had an higher political weight than the creditors.
"People no longer live in just one place all their lives. They are expected to be mobile professionally. It is efficient to rent, and it is efficient to invest in apartments so that others can rent them."
Why are you under the impression that I disagree with you here?
" "provide affordable health care" sounds nice, but someone still has to pay for it and if it is underpriced, some forms will be overconsumed."
There are a lot of countries where people don't go bankrupt over medical bills. Apparently it's not impossible to have such a system. Sure, people their still pay for it but not all at once and their rich pay more.
"reducing the public's penchant for seeing real estate as an investment rather than a place to live"
People no longer live in just one place all their lives. They are expected to be mobile professionally. It is efficient to rent, and it is efficient to invest in apartments so that others can rent them.
"provide affordable health care" sounds nice, but someone still has to pay for it and if it is underpriced, some forms will be overconsumed.
The quantity and quality of goods and services can still increase in a fixed currency supply system and those developments would essentially represent economic growth, they would result in deflation (more stuff can be bought for one unit of currency).
A fixed currency supply is essentially conservative of all economic activity. It enforces a zero-sum on new ideas that ultimately take time to accomplish. It says that you cannot have both WalMart and Amazon.com.
Loans are different than some of the other risky things the poor do, because loans have to be enforced by the state. So the state is involved one way or another.
Nevertheless, I'm glad you are directly addressing his arguments. I think a liberal of Graeber's type would say that the poor should have some other risky options foreclosed as well. Both because they are making bad choices for himself (or induced into making bad choices), and there is collateral harm that is caused (beyond just harm to the person).
Most rich people are rich in human capital, and need to borrow to realize this future human capital in consumption today. Someone having a $100k salary might well have to borrow $50k to buy a car.
But even then, I can grant your point that loan size increases with income. The point is that if we have loan forgiveness to people who are very poor, say below $5k a year, this loan forgiveness will be a much smaller proportion of these bigger loans. Thus, the generous forgiveness rules lowering extraction possibilities by $5k/year will increase interest rate much less on large loans.
why the hell would a multimillionaire loan $10k (he can pay that out of pocket and avoid paying interest)?
That's a very easy question. He would take out the loan because he thinks his profit rate will be higher than the interest rate.
If you mean to restrict to personal loans, then the conclusion from your assumptions is that multimillionaires have little need ever to take them. Thus, the conclusion follows that the higher interest rates won't affect multimillionaires.
in other words, their loans have just as much potential of making them penniless if things go south as the loans of poor people do.
Maybe, but the relevant statistic isn't the probability of their going broke conditioned on going south, but rather it's the unconditional probability of their going broke.