Debt: The Good and the Evil

Debt causes many problems in an economic system, but some benefits as well. How can a new system be designed to only incorporate the benefits?

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Let’s start with the simplest case to consider, a wholly self-contained, up-and-running Just Deserts socio-economic system. The good side of debt is that it can be used to speed up growth of production in an already-growing system. The basic idea is that funding is obtained to finance capital acquisition and operations, which produce enough benefits to cover all costs and repay the debt.

The bad side of debt is that it can be used for permanent consumption costs, growing continually, as the consumer chooses to consume more than his allocation of benefits can sustain. This means that the debtor must continually and exponentially go deeper into debt, meaning that much of his income and all of his holdings will eventually be confiscated by the debt holder. This works for individuals, for organizations, and for government organizations and entities. The organization situation is much like that for an individual, meaning the debt holder eventually collects the title to all the organization’s property. For a government organization like a nation, it does the same thing, allowing current consumption at the price of confiscation of nationally-owned property and also future income, such as taxes. Greece is the preeminent example. The time displacement of the repayment allows bad effects to be unfelt for as long as the term of the debt, and if it is rolled over, successive terms. Since people typically only have the ability to think in the short term, debt is a successful means of further enriching those already wealthy.

In some situations, personnel rotation in a government organization means those who will face the problems of repayment are not those who enjoyed the benefits of consumption. There are many ways to implement such a situation, such as a politician staying in power because voters are happy with the benefits distributed from the debt funds, being short-sighted at best, followed by the politician’s retirement before the debt comes due. Many other means of benefiting by the time difference between incurring and discharging a debt exist, and because of the flexibility such a situation provides, it is likely that no solution can be found other than outlawing or prohibiting this type of debt.

Thus, there is growth acceleration on the good side, and countless scams on the other side, along with all the pitfalls of a myopic view of life. In a Just Deserts economic system, taxes or income restrictions prevent any individual from personally amassing enough funds to make large-scale loans, meaning that there could be small debts, which do not debase someone’s life, but no large ones.

Growth acceleration can be accomplished by other means that loans from individuals; debt from other organizations which can legitimately amass large amounts of delayed benefits could happen. So can other means of obtaining funding, typically meaning some ownership rights in the organization needing or wanting the money are traded for up-front funds. This is the stock market, plus all types of individualized arrangements made between a producing organization and a funding organization. In a Just Deserts economic system, there would be funds in possession of insurance organizations and pension organizations, as well as possibly specialized organizations, the equivalent of today’s mutual and hedge funds, except with necessarily more diverse ownership. Thus, debts for growth acceleration would not be interfered with.

Debts for temporary consumption needs, such as necessitated by temporary disability, or for replacement of productive capacity, such as necessitated by permanent disability, would be handled by insurance funds. Once started, these insurance funds would exist to replace lost benefits for someone suffering from a disability, either temporary or permanent. They would be paid into as part of a mandatory deduction from working wages and salary. The usual objection to such insurance funds is that they drive workers and employers to use a black market, where possible. Whether this is palatable depends on the regulations against it, and the results on the workers who have to choose whether to use it or not. Having high fines and fees prohibiting it, and a very low level of benefits for those who use it might reduce this objection.

Once again, this can be described as a myopic viewpoint. Someone who avoids taxes and insurance withholdings gains possibly in current consumption levels, but risks later problems. Since people do not see later problems as clearly as they do current ones, the black market can burgeon. But with education and experience, it might be reduced substantially in a Just Deserts socio-economic system.

Debt for the purpose of raising current consumption levels would not be possible in a Just Deserts socio-economic system. No organization would have the right to grant such debt. Thus debt in a Just Deserts system is somewhat simplified, compared to contemporary systems.

Now enlarge the domain being considered. Suppose there are external actors, individuals, organizations or governments, outside the Just Deserts system boundaries. They are not constrained by the rules and regulations of the Just Deserts system and can provide debt to those individuals, organizations and government bodies within the system.

There are always two polar extremes in dealing with any behavior that is considered undesirable by some authority. One is to involve a chain of actions, such as detection, confirmation, punishment. The other is to arrange the situation so that the natural consequences of the behavior are so negative that it is discouraged. The latter arrangement does not work well when the natural consequences are not immediate, or not definite. Then the typically myopic individual can not rationally weigh these consequences, and therefore can make decisions based mostly on immediate effects. With organizations, one can expect they are run under rational considerations, but decisions within organizations can be made by individuals seeking personal benefits in the short term, as opposed to organizational advantages in the long term. The same holds whether the organization is a private one or a governmental one. Thus, in the absence of a magic wand that transforms everyone into a rational person able and willing to weigh long-term consequences, and to put the organization’s benefit in front of personal benefits, only regulation will work.

Regulation can have just as many horrible consequences as depending on individual rationality and organizational altruism. If governmental organizations involved in regulations were all full of rational, well-educated individuals with the best interests of the nation at heart, they would work well. The real trick in designing a socio-economic system is to make one that works with venal and stupid people in it. Clearly one major avenue for improvement is to properly train and educate children, but even that can be subverted in the interests of personal benefits and even to further some misunderstandings of how both education and government work. So, no magic wand.

Regulation is made easier by transparency. So is the detection of misdeeds by regulators, if the transparency is so thorough that private individuals, or organizations constituted to serve as checks on mis-regulation, can obtain the same data as the regulators. Rather than make transparency something that is only in effect in special instances, it could be the default situation unless there were compelling reasons to deny it. In the financial arena, this would mean that any individual, organization, or government body that went outside the nation where Just Deserts was the system employed, and violated the principles of it, would be obvious and visible to any organization that chose to inspect the pertinent records. If transparency is the standard, the next level of deception involves maintaining false records that are visible, and a set of other records that are hidden. This would allow debt money to come into an organization, but it would not allow it to be used, as the transparency of most records would show off the entry point of the illegally sourced funding. In other words, it could be put into a hidden external account, but could not be brought into the nation and mingled with internal funds without leaving a trace.

The other difficult situation, besides relations with external non-Just Deserts nations, is the transition from any other system into a Just Deserts one. Specifically, this means that if there were a nation with a large international debt, what would happen to this debt when the nation worked through the transformation of itself into a different system, a Just Deserts one. For example, consumption levels might have been higher in that nation for previous times than could have been justified by the level of production there. This means that some external actors have loaned money to the nation so that it could have an average consumption level higher than otherwise possible. Does the nation repudiate this particular amount of debt, or does it decide to lower consumption levels and pay back the debt? Usually debt is not repudiated unless the debtor is willing to assume there will be no more debt in the future. This is the situation with a Just Deserts nation, so repudiation would not have the same theoretical effect as it would in a nation that was bound and determined to have inflated consumption levels until the dam burst and economic collapse occurred. There are good arguments to be made for both honoring the debt and dishonoring it, and such decisions would have to be made in the framework of the whole transition, by whichever rational, non-myopic, and altruistic people can be found within the nation to make such weighty decisions.

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