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Debt and taxes

May 4th, 2017

To misquote Benjamin Franklin and others, the only certainties in economic life are debt and taxes. Among the themes of political struggle, fights over debt (demands from creditors to be paid in the terms they expect, and from debtors to be relieved from unfair burdens) and taxes (who should pay them and how should the resulting revenue be spent) have always been central.

I mentioned in a comment at Crooked Timber recently, that Pro-debtor politics is always in competition with social democracy, and a couple of people asked for more explanation.

What I mean is that dissatisfaction with an unequal and unfair society can be made politically effective in a couple of different ways. One is to focus on the unfair burden of debt and to change rules to reduce the penalties that can be levied on debtors.
Politics of this kind can broadly be described as ‘populism’. Although this is an even more debatable term than most in politics, I’ve never seen a populist movement that wasn’t pro-debtor and anti-banker.

Moderate versions of this kind of populism include more generous bankruptcy laws. The most extreme form involves moratoriums or jubilees, suspending or scrapping the collection of debts.

But even in this extreme form, pro-debtor populism doesn’t involve any kind of challenge to the capitalist order. Rather, it seeks a kind of moral regeneration, akin to that undergone by Dickens’ Scrooge (I’m riffing off Orwell (on Chesterton, IIRC) for this example).
By contrast, a focus on taxes leads to a demand for progressive taxation, falling heavily on the rich and used to finance both monetary redistribution and the provision of public services. That’s essential to both liberalism (in the standard US use of the term) and social democracy.

Since pro-debtor populism and egalitarian social democracy draw on the same general base of popular support, it’s natural to see them as competitors. This competition is symbolised by the emergence of Donald Trump, wealthy tax dodger and serial bankrupt, as the leader of a global populist upsurge. But it can be demonstrated more systematically. At the national level, there’s long been argument about the failure of any kind of socialist (or even seriously social democratic) movement to emerge in the US. One explanation that hasn’t to my knowledge been discussed, at least in the way I’m thinking about it is the competitive appeal of pro-debtor populism, from William Jennings Bryan to The Grapes of Wrath.

Comparison of US states allows statistical analysis of the kind social scientists are more comfortable with. The relevant paper here is by Grant and Koeniger showing that (i) redistributive taxation and bankruptcy exemptions are negatively correlated;

I’m hoping to do a followup on anti-austerity politics, particularly in Europe, but this will take a fair bit more time.

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  1. May 5th, 2017 at 05:41 | #1

    Macaulay’s Virginia has some rousing lines channelling the hatred of the Roman plebes for their patrician creditors. He has more in the introduction to the piece:

    “Among the grievances under which the Plebeians suffered, three were felt as peculiarly severe. They were excluded from the highest magistracies; they were excluded from all share in the public lands; and they were ground down to the dust by partial and barbarous legislation touching pecuniary contracts. The ruling class in Rome was a moneyed class; and it made and administered the laws with a view solely to its own interest. Thus the relation between lender and borrower was mixed up with the relation between sovereign and subject. The great men held a large portion of the community in dependence by means of advances at enormous usury. The law of debt, framed by creditors, and for the protection of creditors, was the host horrible that has ever been known among men. The liberty and even the life of the insolvent were at the mercy of the Patrician money-lenders. Children often became slaves in consequence of the misfortunes of their parents. The debtor was imprisoned, not in a public jail under the care of impartial public functionaries, but in a private workhouse belonging to the creditor. Frightful stories were told respecting these dungeons. It was said that torture and brutal violation were common; that tight stocks, heavy chains, scanty measures of food, were used to punish wretches guilty of nothing but poverty; and that brave soldiers, whose breasts were covered with honorable scars, were often marked still more deeply on the back by the scourges of high-born usurers.”

  2. Ernestine Gross
    May 5th, 2017 at 20:55 | #2

    “I’m hoping to do a followup on anti-austerity politics, particularly in Europe, …”

    Are you sure there is a unique notion of ‘austerity politics’ in post Brexit Europe?

    Surely, the outcome of austerity politics consisting of constraints on private and public debt together with constraints on income and wealth inequality is different from the outcome of austerity politics which consists of public debt constraint only or austerity politics which consists of public and private debt constraints.

    Anti-austerity politics (unconstrained government debt growth) had been tried by Greece with horrific consequences for the relatively poor but large segment of the population.

    The heading of your post is much more meaningful to me than the ‘austerity’ and ‘anti-austerity’ theme, particularly in relation to Europe.

  3. Jimmy
    May 7th, 2017 at 08:45 | #3

    Professor Quiggin, I was just wondering if you’ve had an opportunity to read Game of Mates, a book authored by some of your UoQ colleagues. I haven’t read it yet because I couldn’t find it in any of my local bookstores and had to order it from Book Depository. I would be very interested to read your review of the book.

  4. Ikonoclast
    May 8th, 2017 at 08:01 | #4

    Ross Gittens has a reasonable review of it (for Ross Gittens who is not the most incisive tool in the shed);

    http://www.smh.com.au/comment/james-ruse-the-man-that-always-wins-australias-game-mates-20161128-gszlq6.html

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