The Real Debt Issue


On May Day there were riots in Greece in protest of the ruinous austerity imposed by the European Union and the International Monetary Fund. Eurostat, the official European statistics agency, announced Tuesday that unemployment had hit a new high of 19 million. Youth unemployment on a continent-wide basis is now at 25 per cent. The austerity imposed by the European Union has ruined countless lives, driven pensioners into grinding poverty and halted or reversed the life-plans of millions of families.

In the United States, economic recovery is stalled by “the sequestration” agreement, millions have lost their homes and future prospects because of foreclosure, employment growth has left long-term unemployment untouched. And last week, a major study used to justify policies of austerity has been proved to be premised on erroneous calculations and the authors, Carmen Reinhart and Kenneth Rogoff, forced to admit that, in fact, re-calculation showed that, contrary to their initial findings, during fiscal downturns stimulus spending actually results in modest economic growth—that contributes to debt reduction.


In a New York Review of Books essay on David Graebner’s Debt: The First 5000 Years, “The Debt We Shouldn’t Pay,” American Prospect co-editor Robert Kuttner argues that the public debt Europeans and Americans alike are being asked to underwrite is not due, on the whole, to excessive government spending, but rather, whether the case is Ireland, Spain, Iceland or the U.S., due to government assumption of private, speculative debt.

Demands for austerity rise out of a simplistic moral tale that says, “People pay their debts.” Beginning with the biblical jubilee legislation and reforms of Solon in 6th century BC to the reform of British Poor Laws, modern bankruptcy protection and debt forgivenesse, the real story is more complex. The war debt imposed on Germany after World War I helped lead to the Great Depression, whereas the Allies’ debt forgiveness of Germany after World War II led to the German economic miracle. The problem of present-day austerity, Kuttner argues, is that private individuals and sovereign (national) debtors are required to pay the piper, while the corporations and financiers whose speculation caused the fiscal crisis are made whole and allowed to go free.

The lesson is that there are moral and political limits to indebtedness and a history of feasible alternatives to the present impasse, so costly in human terms. Read Kuttner yourself in the May 9 New York Review of Books.

Drew Christinasen, S.J., is Visiting Scholar, Boston College, and beginning in January 2014, Distinguished Professor of Ethics and Global Human Development at Georgetown University.

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5 years ago
This is something of a mischaracterization of the issue surrounding Reinhart-Rogoff. Their research was not on the effects of stimulus spending on growth, but the correlation between debt (as a percent of GDP) and growth. That indirectly touches on stimulus spending because one argument against it is that it adds to the debt, which according to Reinhart and Rogoff's research, would slow growth. But the research was not designed to provide conclusive conclusions on stimulus spending per se, which of course could be done in a variety of circumstances at a variety of debt levels. Even so, the results of the discrediting of Reinhart/Rogoff's research shouldn't be exaggerated. While the original data had shown that debt levels above 90% of GDP would lead to negative economic growth, their re-calculated results show that it leads to growth just over 2%; this matches the results of the scholars who pointed out the error. However, this is still over 1% lower than the growth experienced at lower levels of debt. So the reality is that higher levels of debt still slow growth.
Robert O'Connell
5 years ago
Will we be reading soon that Jesuit colleges are forgiving all student debt?
Alexander Lim
5 years ago

I guess this is exactly what Obama and the Liberals are doing to our country today - so that we can become a debtor nation ( as if we are not - we our in fact, the biggest debtor country in history ); thus, like Germany and Japan after WWII, with the Allies' help, we will likewise "prosper" ? And what about the nations who helped them? Have Germany and Japan ever thought about paying back ? Heck, No. I think you'd better "rethink" about your logic here.
In answer to a previous comment re: Should students in Jesuit schools expect a debt forgiveness? I guess if you are a die-hard Jesuit ! I was educated by the Dominicans all the way from grade school - to high school- to college and eventually, to Med School. Jesuits are just too liberal for my taste.

Rick Fueyo
5 years ago
With a single brief exception recounted on the Planet Money podcast, the US has been a debtor nation throughout its short history by design (Hamilton's). And the policies of the current administration have helped our fiscal solvency, not hurt it.
ed gleason
5 years ago
I see no comments complaining about banks that had 40 times leverage. Lets see, that's 4000% for the bailed out banks ...not the 90% they think is criminal for our country. a country that is worth more than all the banks in the world combined.. ..[Hell... California is worth more than all the banks]. And they ignored the skewed data and bad arithmetic of their phony study. Dislike/hate for Obama can cause PhDs to fail grammar school arithmetic. .
J Cosgrove
5 years ago
So I guess those comments about fighting two wars on the credit card that I heard somewhere must be referring to enlightened fiscal management.


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