Edward Hadas

Debt is a moral matter. While most economic activity is concerned with the “is” of how things are (investment, consumption and so forth), debts are always entwined with an “ought” – to repay. In discussing controversial debts–for example government borrowing in the euro zone and the U.S.–the moral question should be addressed directly: should these debts be paid off in full, or is some forgiveness justified?

Aristotle can help frame the argument. The philosopher condemned all lending at interest because money cannot create wealth by itself; a loan is just a way for the lender to take advantage of the borrower. Some proponents of Islamic finance make a similar argument, but it is not quite right. Capitalism has shown that loans can indeed produce wealth. If the lent funds are invested well, enabling the borrower to improve his lot and the world’s, then interest payments are the lender’s just reward for providing the fruitful funds.

But Aristotle’s moral logic remains relevant; his condemnation is appropriate for loans which do not share wealth justly between borrower and lender. Unfair loans should not be made, and where they have been, full repayment only compounds the original injustice.

Libertarians, believers in the right of individual to make their own decisions, have another contribution to the moral discussion. They point out that loans are freely agreed contracts which should be honoured. Both sides should understand the possible consequences of their free choices. Borrowers should repay, even if that requires making sacrifices, and creditors who make bad lending decisions should suffer losses.

In the euro zone, some libertarians (and most Germans) consider the borrowers’ obligations to be paramount. The governments of Greece and the other over-extended nations can and should repay all their agreed debts. The citizens just have to work harder and pay more taxes.

Other libertarians take the opposite moral line. Losses are the just punishment for the foolish creditors. And the Aristotelian logic may justify forgiveness. The lent money has mostly been spent unproductively, so the borrowers now have few gains to share with the lenders. The original loans turned out to be unjustly generous to the debtors, but the terms have become unjustly harsh.

Which side has the stronger moral logic? Forgiveness looks right for Greece, where the debts are particularly high and the government and economy are particularly inept. For the rest, it is a closer call.

Turn to the U.S. government, which is building up its own substantial debt pile. The American moral debate on the practice is as old as George Washington, who warned that such debts “ungenerously throw upon posterity the burden which we ourselves ought to bear.” Today, the National Research Council writes of “an unfair and crushing burden on future generations.”

Foreign debts are particularly crushing. Citizens get to spend now on consumption and investment but are obliged to repay foreigners later, with interest. This deferment has produced $4.5 trillion of foreign debt in the U.S., 30 percent of one year’s GDP. That is far less than Greece’s full year of GDP, but enough to worry about.

If the U.S. authorities were committed to full repayment of thee foreign debts, they would strive to keep the dollar’s value constant and to avoid inflation. That way, the foreigners would receive not just the contracted dollars but the full agreed economic value. While American authorities may care in theory, they are not concerned enough to refrain from loose monetary policy, which pushes the dollar down.

In this case, pro-repayment libertarians have right on their side. The largest and one of the richest economies in the world – and the issuer of the global reserve currency – is honor-bound to make good on its debts. While the creditors should have noticed that the country was becoming less responsible, their neglect does not excuse American indifference.

For purely domestic U.S. government borrowing, Aristotelian scrutiny is more appropriate. Do the ultimate borrowers, the mostly poor beneficiaries of federal programs, gain enough from these loans to justify the higher taxes that will be needed later to repay the mostly rich lenders? There is no obvious answer to that question, but it is well worth asking.

More generally, philosophical arguments ratify what practical experience teaches. Lenders should be wary about lending to governments. The choice to borrow rather than to raise funds through taxes is usually a sign of political weakness. When the time comes to repay, governments may be unable or unwilling to persuade the people that the sanctity of contracts is a principle worth protecting.

Also, the proceeds of loans to such governments are likely to be spent foolishly. Then full repayment will fail the Aristotelian test of justice. The rioters in Athens may know little about the Ancient Greek philosopher’s doctrine on lending, but they could be protesting in his name.

By Edward Hadas
The views expressed are his own.

Occupy Wall Street can claim a tremendous heritage. In almost every generation – from the French Revolution of 1789 to the student revolts of the 1960s – popular movements have rejected a society which, they say, denies some sort of basic freedom. But for a protest to leave a lasting impression, it has to start or mark a significant cultural change. What could OWS signify?

The Occupy movement certainly expresses popular fury at high finance. But that sentiment is far from revolutionary. President Obama and many business dignitaries have expressed sympathy. There also seems to be anger at inequality created by unjust practices. In the words of an October 14 blog entry on Occupywallst.org, the “99 percent” of the population will “no longer tolerate the greed and corruption of the one percent.” Such righteous indignation could perhaps spawn a revolution, but only if it came with a more positive agenda. As it stands, though, the manifestos and soundbites coming out of the leaderless groups are long on complaints and short on both intellectual coherence and suggestions for new arrangements.

Still, this movement must have something going for it. It has spread around the world and attracts much friendly attention from the mainstream media. I see three forces at work.

First, economic confusion. Occupiers see the economy as a disaster. They blame the triumph of “neoliberals” who put their trust in small government and big companies. Many of the hand-lettered signs at Occupy protests go further; they suggest the enemy is not an erroneous ideology but a huge economic conspiracy of the elite against the people.

Such claims are not justified. The global economy is certainly not in bad shape. The big news these days is the increasing prosperity and influence of China, India and other countries which used to be too poor to matter. The U.S. economy does have problems, especially in the job market, but the country remains prosperous. Occupy is certainly right that the elite are still powerful; that is what elites do. New laws and regulations would be enough to temper corporate power; a brand new economic order is not required.

As for the dangers of neoliberalism, faulty ideology did indeed lead to inept deregulation of the financial sector, but the political tide is already flowing in the opposite direction. In other parts of the economy, there is no need for reversal. During the years leading up to the crisis, the U.S. government increased its sway over healthcare, education and mortgage finance – three of the four domains citied in the Occupy Wall Street blog as under neoliberal control.

Second, utopianism. The spirit of Woodstock lives in OWS. There are tents, talk of peace and love and hope for improvement in human nature. “We must change, we must evolve” is a typical slogan. Utopianism, though, was not invented in 1968. The belief that society can be made perfect through radical democracy has long been part of the Left’s revolutionary ideology. More than two centuries of history show how easily the failures of past experiments in radical social engineering are forgotten. The enthusiasts at Occupy have duly forgotten.

Third, the decline of the Left. If the moderate left had a distinctive agenda for reform, Occupy’s wrongheaded and unrealistic musings would look like a dangerous distraction. But there is nothing to be distracted from. Even a crisis in speculative financial capitalism has not spawned substantial left-wing proposals for reform.

The Democrats in the U.S. make a partisan show while the European center-left parties mostly feud among themselves. As bearers of anything like an ideology, though, the Left is a spent force everywhere. The decline is easy to explain. The Left’s basic economic demands have largely been met: the proletariat has mostly become middle class and the government mostly protects the weak. That leaves the Left without an obvious agenda. In practice, it must choose between fine-tuning and revolution. The politicians go for incremental policy initiatives. The timidity leaves room for extremists to flourish.

Occupy’s participants might want to be revolutionaries, but they are a pale imitation of the idealists of the 1960s. While the new movement is undoubtedly counter-cultural, corporate leaders and politicians have learned how to co-opt such incoherent anti-establishment sentiments. Apple, for example, has done brilliantly by combining high tech, high prices and a veneer of counter-culture. Occupy participants use more than their share of Apple products.

Indeed, the grief over the death of Apple’s founder, Steve Jobs, gives a more accurate cultural reading than Occupy. The college dropout who wandered to Asia looking for enlightenment became a hero for many of the 99 percent. They may feel oppressed by the state of the economy, but they sense they have more to lose than to gain from any substantial change in the system that has provided iPhones and iPads. So what does OWS signify? The shallowness of our discontent.

Another recession could be about to arrive, or even be here already. Some people fear it will be as bad as the last one, which reduced output in the U.S., euro zone and Japan by 5.1, 5.5 and 8.9 percent respectively. Those GDP declines are often described in cataclysmic terms: staggering, disastrous or traumatic. Such words are vast – and dangerous – exaggerations.

Even at the trough of the last recession in 2009, real GDP in most rich countries was as high as it had been five or six years earlier – when economic conditions were not considered particularly bad. And that comparison is too harsh on the 2009 consumer experience, which included iPhones and the Airbus A380 super jumbo jets, both better than the comparably valued goods available in 2003.

Americans and Europeans have little enough reason to moan about their recessions; citizens of the world have much less. For mankind as a whole, the small travails of the wealthy are much less important than the entry of the truly poor into the modern economy. Industrial production in emerging economies, a good measure of that development, has increased at a heartening 6 percent annual rate over the last decade, according to the most recent data from Dutch consultants CPB. The recession reversed two years’ progress, but only briefly.

Of course, production is only one part of the economy. The recession has been harder on other parts. It led to both increased unemployment and a decline in the relative position of the poor, especially in the U.S. Neither of those bad trends has been fully reversed. But the former was caused mostly by the end of an unsustainable excess of construction activity while the latter only amplified a decades’ old pattern.

The last decline is often compared to the Great Depression, but was nothing like the economic pains experienced during the two decades after the First World War. Then a series of crises, including a 25 percent reduction in U.S. GDP, helped lead the world into the most destructive war in history. The desire not to repeat the inter-War experience spurred on the potent official response to the 2008 financial crisis.

That response basically worked, but the scary headlines and wild assertions continue, as if fascist governments were once again coming into power and hungry mobs were breaking into food stores. In fact, the few rioters have had less noble objectives: the defense of unaffordable pensions in Greece and the acquisition of branded consumer goods in the UK.

What causes the wide gap between perception and reality? I have two suggestions.

First, too many people look at the economic world largely through financial glasses. The recession made only a slight dent in industrial prosperity but the financial crisis which preceded it really was cataclysmic. Several major institutions almost failed, central banks lent and governments borrowed as never before, and the cult of free financial markets was discredited. And unlike the economy, the financial system has not really recovered. If anything, the crisis has broadened – from banks to governments.

Still, financial insecurity cannot really explain the prevalence of tragic rhetoric. The fear and trembling reflects a more profound error – a mistaken understanding of the economic good. Many people judge economic success only by the pace of expansion. For them, it is not enough to have adequate or even abundant quantities of necessities, comforts and luxuries. They say that an economy is only good if it consistently provides more of all these things, and that the faster the pace of increase, the better the economy.

That approach to life has bad consequences, even ignoring the limited satisfaction provided by material things. For individuals, it is a recipe for discontent. Those who always covet more wealth will inevitably spend much of their life feeling that they do not have enough, with or without recessions. The irrational craving for GDP growth also distorts economic policy. It makes small, temporary and otherwise trivial setbacks in consumption – a few less days of holiday or a few more months with the old car – look like, yes, staggering disasters.

It is right for policymakers to respond strongly to genuine or possible disasters. But when economic times are good, financial conditions should be something like normal. That is not happening right now. Despite three years of stability in rich countries and strong growth in poor ones, monetary and fiscal conditions remain extreme and policymakers, worried about another recession, are reluctant to make big changes.

The combination of financial extremism and fear of any decline in GDP could lead to a truly painful decline in output, if the already weakened global financial system becomes totally dysfunctional. The irony would be painful. The foolish desire for constant and fast economic growth would have made those scary headlines – otherwise completely unmerited – come true.