Debt, Rights and Social Goods

We have been living in a society where debts, rather than rights, have been the major means for accessing basic social goods. There is now, to a degree, some resistance to this social model. Debt burdens have been a major theme of the Occupations; various state Attorneys-General have grown spines and started investigating foreclosure fraud; and Yves Smith posted a class-action filing by shareholders in Lender Processing Services, one of the worst. When coupled with the work of anti-foreclosure organizations, this amounts to a growing awareness of the problems with debt-financed access to basic social goods like housing and education. And it may lead to alternative ways of thinking about how we win access to these goods.

After all, while the previous decade has been represented as a debt-financed spending binge, when consumers lived well-beyond their means, this turns a complex story into a morality play. A major part of the credit binge was about how people get access to housing and education. Sub-prime mortgages (especially with the decline of affordable housing) were the only way for many to gain access to a home. Student loans were the only for many to gain access to higher education, and thus participate as equals in the radically unequal distribution of opportunity in theUnited States. Mike Konczal posted the following graph at Rortybomb showing the dramatic rise of student debt. In a decade, student loans have gone from a third the number of home loans to nearly equal.

If there is a reasonable expectation that debtors can meet their interest payments then in theory debt is not a particularly bad way to finance access to certain goods. It is on the individual borrower to make a judgement about reasonable debt burdens to take on.

There are, however, two problems with this. First, there might be very good social reasons to not want to yoke access to certain social goods to debt. Education is a prime example. Taking on debt means taking on a kind of discipline. One must make all future calculations about, say, educational and career choices, with the need to meet future interest payments in mind. In conscious and unconscious ways, this narrows horizons and produces a more instrumental relationship to education. We saw many of our college classmates make more conservative professional choices (corporate law, consulting, finance, medical specialist) than they might otherwise have made (public service, teaching, science, labor and public interest law) in order to ensure their ability to pay back loans.

Many have talked about how the growth of finance sucked the math and physics geniuses, who might have contributed something lasting to society, into hedge funds and investment banks. But the alteration of professional choices was much wider than that. The number crunchers at the top were, one suspects, simply lured by lucrative pay. The much more widespread, and difficult to measure, shift in career choices due to the discipline of debt burdens is probably the more important, and still ongoing, effect. If, on the other hand, access to higher education were on the other order of something like a right – a publicly financed good, provided at little or no cost, on the grounds of real equality of opportunity – then one can imagine a much different set of results. While conservatives like to talk about ‘freedom,’ this is a place where the Left ought to have the upper hand in connecting economic practices to real freedoms. Providing necessary social goods, especially education, as a right rather than through debt-financing not only reduces the disciplinary effects of the latter, it also is a way of publicly recognizing and democratically defending the real freedoms of all citizens. To be clear, this is not a moralistic criticism of debt as evil or irresponsible. It is that there might be very good reasons why society would not want to impose certain kinds of discipline on (most of) its citizens, not just because there is good reason to want them to have real equality of opportunity, but also because, simply from a social point of view, its members talents might be much more productively used in some other area than those that promise the most immediate monetary returns.

A second reason why providing social goods like housing and education through debt is a bad idea is that practice does not resemble theory. Again, the theory is that so long as each individual makes a reasonable calculation about ability to meet debt payments, there is nothing wrong with financing access to basic social goods through credit. Putting systematic fraud to one side (but remembering it is unlikely that credit can sink that far into housing and educational markets without it), there is a deep historical reason for thinking that practice was the opposite of theory. The rise of debt-financed household consumption generally was the product of stagnating wages. Consider, for instance, the rise in consumer debt-payments relative to savings.

And compare that with the fate of median real earnings during that same period:

Debt-financed consumption, was, in other words, a response to the declining ability of most households to afford consumption levels, not an increasing ability to or trust in future ability to finance debt-payments.

The entire social model, then, of offering homes, education, cars not to mention ‘non-necessities’ was built on a lie. The separation of consumption (financed by future promises to pay) from production (based on limiting present ability to earn) was a mirage. In a different kind of society, it is conceivable that one might separate a worker’s contribution in terms of effort from the amount of consuming he or she might do. But not in this one. The problem is, in this one, the underlying right to maintain a certain standard of living, or more minimally, to maintain access to certain basic social goods like housing and education, was just that: implicit. Every so often, of course, it was made somewhat public, for instance when Clinton or Bush would say something about providing housing to the poor and minorities who could not otherwise afford it (mainly by changing market incentives, and promoting sub-prime borrowing, as it turned out). But this promise was always implicit, and had to stay that way, because it was mediated through the credit system. It was never a public claim each individual had against society, in virtue of his or her needs and freedoms. Instead, access to these social goods was a matter of a complex series of private, individualized claims against other private persons and institutions like banks and employers. That is the difference between debt and right, and it is clear that the debt-based social model has failed.

To be clear, this is not some moralistic rejection of debt, or a claim that society needs to learn to live within its means. There are some situations where debt-financing is a perfectly good option – the calls for more austerity at present, for instance, is ideological claptrap. Moreover, any economy always has to take a bet on the future if it is going to innovate, and take the risk that innovations will fail. But there are certain kinds of goods that are better provided as a matter of right, both for the sake of the freedom of the persons who need those goods, and as a matter of fairness in how they are provided.