Increasing debt and runaway inequality are of a piece. That's
because debt at compound interest rates is extremely powerful. Borrow a
little today, and in time, you could be destitute. To get a feel for its
power, imagine you borrowed just one nickel at 5% interest when Christ
was born. You would now owe the tidy sum of
$225,438,991,066,856,000,000,000,000,000,000,000,000,000—more money than
ever existed in the history of the world. Which is to say, those who
wield the power of debt, wields enormous economic power.
society we've given that power to private financial corporations, and
they've done a masterful job in pushing us to the brink of debt peonage.
The problem extends far beyond the much ballyhooed federal government
debt. The power of debt extends to nearly every aspect of modern life.
Our homes, schools, roads, bridges, highways, utilities, corporations
and virtually every product and good produced and sold depend on debt.
By some estimates as much as 30 cents of every dollar we spend goes to
cover interest payments on the debt accrued to make all that we buy.
(For example of the $6.5 of private enterprise income
in 2012, 36.8% went to interest payments.)
our banking system in private hands, the simple truth is that as the
debt levels accelerate, so does runaway inequality. Therefore key to
controlling runaway inequality is to dramatically curtail the power of
as a society we have done the opposite. For nearly a half century
between the New Deal and the 1970s, Wall Street was tightly controlled.
Taxes on the wealthy were high, worker wages were rising, and debt
levels on consumers, companies and government were low. After finance
was deregulated (circa 1980) private and public debt exploded, wages
stalled, taxes on the rich fell and inequality soared.
Financialism Transforms the Modern Corporation
about 1980, corporations ran up very little debt (see chart below).
Their earnings were more than sufficient to cover reinvestment in new
plant and equipment, research and development and improvements in
employee wages and benefits. This "retain and reinvest" corporate ethos
took place in an era when high finance was strictly regulated by
government. Banks were limited in size, geography and function.
Speculation was kept to a minimum as was the rampant buying and selling
of corporations by what we now call private equity firms and hedge
These controls, however, were radically upended by an
unholy alliance of academics, financial elites and pro-Wall Street
politicians. As finance became more and more deregulated, the massive
growth of corporate debt followed.
In theory all that new borrowed
money should have helped corporations and their employees prosper
through more reinvestment in its workforce and product development. But
those were not the goals of the new financial engineering. Instead,
"retain and reinvest" was replaced by "downsize and distribute." The new
debt often was used to buy up corporations. The acquired corporations
were then saddled with the new debt and forced to use its revenue
streams to pay it off.
The way CEOs were paid also changed. As
compensation became increasingly dependent on stock options, CEOs used
corporate earnings to buy up company shares in order to boost their
price and enrich themselves.
To pay back these mounting loans,
corporations squeezed their own workers. They downsized, moved abroad,
cut wages and benefits and replaced full-time workers with temps. CEOs
were transformed into financial engineers who sought more and more ways
to enrich themselves through debt, while forcing their companies and
workers to pay the price. So corporate capitalism morphed into what
should be called financialism.
The Invention of the Indebted Consumer
recorded history, societies have feared instability caused by the
imbalanced relationships between lenders and borrowers. Knowing how
easily creditors could dominate debtors, many of the oldest legal codes
focused on the mediating those relationships. (The first known written
laws, Hammurabi Codes
BCE, set maximum interest rates on various transactions.) To further
promote stability, most civilizations evolved powerful customs and
informal moral codes to discourage personal debt. For most of American
history, for example, going into debt was associated with unwholesome
gamblers, gangsters and struggling businesses.
attitudes on avoiding debt, however, crashed into the needs of mass
production. The ever-growing cornucopia of goods produced by modern
capitalist production, also required the mass production of the
"consumer." Through the advent of mass advertising, and later through
government supported mortgages, consumers were urged to buy on credit in
order to match demand to the enormous supply of goods produced.
just as with corporate debt, household debt was extremely modest until
the last vestiges of financial control evaporated. Before 1990, the
average consumer limited household debt to about 40% of disposable
income (income we can spend after we pay our taxes). But after modern
financial engineering invaded the housing and credit card markets
(making it possible even for dead people to obtain mortgages) household
debt soared to nearly 160% of household income.
households paid to service their growing debt, the more money flowed
into the financial sector. Rising inequality followed.
Debt Peonage for Students
debt became the next territory for Wall Street to occupy. Once again,
this required upending successful past practices. From WWII through the
mid-'70s, public higher education was virtually free, led first by the
GI Bill of Rights and then by the robust California and New York
tuition-free higher educational systems. As the chart below shows, until
the late 1980s, there was virtually no student loan debt at all. But as
money for the public sector dried up (largely due to tax breaks for the
rich) public financial support for higher education lagged behind
tuition costs. Wall Street filled the breach and student debt
Government Debt Is Bad for Whom?
we turn to government debt, a topic always super-charged with
ideological fervor. But no matter where you stand on the role of
government and how it should be financed, one basic fact should be
acknowledged: Throughout the ages, the wealthy would rather loan the
government money than pay taxes. The reason is simple. When the wealthy
loan money to governments (historically to fight wars) they stand to
make more money in return. Not so if they are taxed.
In the modern
era, this is even more true since government debt instruments pay
interest that often is tax deducible. The rich benefit by loaning money
to government and having the rest of us pay it back through our taxes,
It follows, therefore, as financial interests and the
wealthy increase their power over the economy and politics, we should
expect federal, state and local government debt also to rise. Again,
this was not
the case for most of the post-WWII period when
Wall Street was tightly controlled. During that era, taxes on the rich
were high and public debt levels were low. But after the deregulation of
Wall Street, public debt mushroomed, just like corporate, household and
Heading Toward Debt Peonage?
are certainly beholden to Wall Street. By 2006, 40% of all US corporate
profits went to Wall Street —up from 7% in 1980. And over $21 trillion
is now hidden in offshore tax havens– and moves there via Wall Street.
Furthermore, the top three banks dominate the entire financial system.
These oligopolists have made it clear to all, they are far, far too big
to fail, jail or curtail.
What will happen when this debt pyramid comes tumbling down again? As financial expert Ellen Brown points out
after the next crash we should expect a new kind of bailout. It's
called a bail-in, and it already has become part of European planning.
Instead of giving billions to the banks, the government will ask the
banks to take it from their depositors—namely us.
Escaping Debtors Prison?
ever-rising public and private debt, we seemed trapped. After all a
cornerstone civilization is that debts must be repaid or bankruptcy
declared.(Countries like ours that can print their own money, however,
can never go bankrupt.) As the economy grows, it is likely that federal
debt as a percent of the entire federal budget will decline. But with
stalled personal incomes, households may be struggling with debt
indefinitely. But there is another way out.
It's starts with
recognizing that the root of the problem is not just the quantity of
debt per se, but rather who really controls and profits by it. Private
banks do not have to be masters of the economic universe. Instead, we
could model our financial system after public banks, like the Bank of
North Dakota. If we had 50 state banks, instead of just one, the
income-distorting power of increasing debt could be curtailed, and
would be much more money in the public treasury. In North Dakota, the
state bank returned record profits nine years in a row, with $81.6 million flowing
into the state coffers in 2012. It provides support for infrastructure
projects. It insists that when it loans money to businesses, jobs must
be created in North Dakota. It helps ease the burdens of student
loans...and it doesn't gamble in financial markets.
But, there's a
catch that Wall Street detests: The CEO of the Bank of North Dakota
makes per year what a top Wall Street banker makes in one hour! So, if
we want to really do something about runaway inequality, we will need
public bankers who are more than willing to work for about $250,000 a
year, instead of $50 million.
We are learning painfully each and
every day that reregulating Wall Street does not work. Reforms have been
tepid at best. Banks get fined, and then fined again, for every
financial sin imaginable—money laundering for gangsters and rogue
states, ripping of servicemen and women by financing payday loan sharks,
colluding to fix interest rates, insider trading, controlling commodity
markets, and illegal financial gambling. Yet the same executives and
the same institutions prevail as if these crimes are just the normal
cost of doing business.
Change becomes much more possible if and
when we are able to transform every discussion about debt into a debate
about creating public banks to replace Wall Street's financial