Debt and taxes

by John Quiggin on May 4, 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 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.

{ 32 comments }

1

P O'Neill 05.04.17 at 1:45 am

Question: do you consider the Tea Party as populist? Because the catalyzing force for it was pro-creditor opposition to mortgage relief. See Rick Santelli’s rant along those lines on CNBC, which is generally seen as a key point in Tea Party mobilization.

2

Shane 05.04.17 at 2:02 am

It is absurd on its face to suggest that pro-debtor populism and egalitarian social democracy are necessarily opposed, irrespective of any historical correlation. Perhaps we should look to their historical inability to unify as a possible reason for the failure of the left in America (beyond simply accepting the undemocratic nature of the American political system, as recently reaffirmed by Case-Deaton). Had the DNC not sabotaged Bernie’s shot at the presidency, we would have heard a lot more about making college universally available. But what of those who had taken on that debt already? With student loan debt long since having eclipsed credit card and auto loan debt in the US, the natural next step would have been to offer a debt jubilee to those bearing that $1.3 trillion in loans, whether or not that was part of the platform. Even neoliberal Obama allowed write-offs of loans made to finance higher ed at fraudulent for-profit colleges. A progressive President with a mandate to set the national agenda could have easily built on that flimsy precedent, and even if Sanders himself had not been the one to do it, his election would have certainly indicated the end of the Reagan regime, allowing an “articulative” President to follow (to adopt the framing of fellow CTer Corey Robin) to finish the job. This is but one example, with every reason to believe that taxes on the rich and spending on social programs would have increased concurrently.

But in the spirit of WJB, and since you brought him up, let’s talk about another change in the American system which undermines your pretense: namely, the fundamental change in the US monetary system following Nixon’s conversion of the dollar to a fiat system. While that has since been used primarily to compensate for our Presidents’ insufficient penis sizes by buying toys to kill brown people, as well as pumping as much of the commons into the oligarchs’ pockets as possible through other means, Modern Monetary Theory demonstrates that, under this fiat system, so long as we have the resources to do so, we need not concern ourselves with national debts or deficits, and if we want to rapidly eliminate the radical inequality which defines us now, we have every means to accomplish this from both the pro-debtor and social democratic sides of the tails-the-poor-win/heads-the-rich-lose leftist coin. Taking into account this total transformation in the nature of the monetary system voids any historical comparison pre-1971, thereby making this necessary reunification of the populist/social democratic left all the more possible.

3

John Quiggin 05.04.17 at 5:49 am

@P O’Neill I was thinking about that very point as I wrote, but didn’t spell it out. The Tea Party was not at all populist in its original incarnation. This is true in two respects
(i) Although its self-presentation was as a popular movement, its members were mostly hardcore Republican activists
(ii) Initially, its focus was entirely on economic policy, opposing both debt relief and redistributive taxation, with no position on culture war issues like immigration
Having said all that, I think you can have a popular movement that isn’t populist, but actively supports the ruling class.

@Shane MMT doesn’t mean what you think it means http://johnquiggin.com/2011/10/18/money-for-nothing/

4

reason 05.04.17 at 9:24 am

Isn’t inflation a pro-debtor policy and isn’t that positively correlated with Social Democracy?

5

Colin 05.04.17 at 9:30 am

“I’ve never seen a populist movement that wasn’t pro-debtor and anti-banker.”

Alternative für Deutschland, perhaps? Or do they also not count as proper populists?

6

RINO economist 05.04.17 at 9:48 am

Is it useful to distinguish relief on the stock of debt from relief on the flow of related interest payments, and consider the latter as well? A curious feature of US political debate is that no one in politics (and this includes the Tea Party so far as I am aware) seems to question the principle of tax relief on mortgage interest payments on owner-occuped residences. There is occasional reference to capping the amount of relief, but even this seems to get little traction.

In contrast, over the decades I have lived in the UK, such tax relief policy has been altered on a number of occasions by both Conservatives and Labour, before finally being eliminated by then-Chancellor of the Exchequer Gordon Brown in 1999/2000. Brown regarded it as a “middle-class perk”. In the US context, where mortgage interest relief appears to apply to any owner-occupied home, no matter how valuable, it would be even more of a bonus for the really wealthy.

7

John Quiggin 05.04.17 at 10:27 am

@5 I don’t know much about AfD but obviously the logic I set out regarding a pro-debtor stance doesn’t apply to foreigners. Does AfD favor pro-creditor domestic policies?

@7 Inflation is a classic populist policy, as in the Cross of Gold speech. Social democrats generally don’t aim for high inflation, though conservatives accuse them of causing it.

8

steven t johnson 05.04.17 at 10:31 am

It is not clear to me how MMT addresses money creation by private hands. At first glance, it doesn’t seem to be of much relevance to the real world.

But thinking of banking and populism brings to mind Thomas Jefferson and Andrew Jackson and what I suppose you must call the Unamerican System, in opposition to the American System. In this vision the national government essentially functioned as an engine of land redistribution, selling Native American lands to speculators for high prices that could substitute as much as possible for taxes on the property and consumption of settlers. The lands would serve as a kind of non-revolutionary assignat. What was for the settlers was free collateral provided cheap credit. Soft money would foster economic growth by promoting small farms. And moral virtue too, small farmers being the salt of the earth. In practice I think this promoted land speculation and financial instability. But this was in the long run apt to the interests of many, particularly plantation owners, like Jefferson, or would be plantation owners, like Jackson. As for virtue, slave patrols and militias killing Indians promote a kind of solidarity among certain segments of the population. It appears to me this still passes for a kind of virtue in many eyes.

As for the lack of a left in the US, it still seems to me that repression, by violence and other forms of repression played a much over-looked part at all times. Trump recently blathered about Andrew Jackson preventing the Civil War. The popular media of course avoided the common sense observation that he may have been thinking of Jackson’s threats in the Nullification Crisis. It is of course also the case that Jackson’s connivance in the censorship of abolitionist literature in the US mails promoted disunion by giving special privileges to the southern planters. This kind of repression played a major part in promoting illusions about the relative popularity of slavery and abolition.

In contemporary times, the difference between populism and any kind of leftism I think, is that populism holds that “we” are over-taxed, and growth and freedom (defined as disposable income, of course,) depend on lowering taxes. I believe “we” are underpaid, not overtaxed. But as near as I can tell there are no reputable economists who believe this.

9

bob mcmanus 05.04.17 at 11:06 am

If debt relief/inflation are populist* regimes, than how could we characterize pro-creditor/disinflation/deflationary regimes?

If high taxes characterize social democracy, how would we characterize low tax, or movement towards lower taxes, regimes? Does incidence matter?

Wasn’t the post-WWII compression consensus largely inflationary and high-tax (at least more so than now?). Isn’t that considered the peak of social democracy? What sort of regime would you say we are in now, looks pro-creditor, low tax to me.

*Populism usually is in opposition to “elites” even more than oligarchs, including especially intellectual, artistic and bureaucratic elites.

In any case this short post is interesting.

10

bob mcmanus 05.04.17 at 11:12 am

Should have given it more thought, and taken the latest Thomas Frank and his analysis of decayed social democracies as professional class regimes into consideration.

Anti-populist regimes might be considered rentier economies, rentiers including not only landowners and professionals, but artists, entertainers, athletes, academics.

11

T 05.04.17 at 12:21 pm

JQ – The problem with creating a new true populist/progressive economic movement (pro-debtor/pro-transfers/pro-labor/pro-progressive taxation) in the US has always been race. FDR was only able to forge his coalition with the South by allowing them to keep their boot on the necks of the blacks.

12

Katsue 05.04.17 at 12:41 pm

His racial politics aside, I’m not sure I see what distinguishes William Jennings Bryan from New Deal Liberals.

13

Z 05.04.17 at 12:45 pm

Since pro-debtor populism and egalitarian social democracy draw on the same general base of popular support

Do they, though? I’m not sure I have a firm analytical grasp of this category but in the 1850/1950 period, the historical political movements I would identify as “pro-debtor populist” (the American Populists, Bryan, Boulanger, early Italian Fascism, Poujade…) had a popular constituency of rural farmers, small-shop owners and unskilled manual workers (so relative losers of the new industrial economy) in predominantly pre-industrial regions and countries with weak religious organization of social life and general weak social structures whereas historical social-democratic movements in the same period had a more urban, more industrial, more educated constituency (so, among popular classes, relative winners of the new industrial economy) and flourished in polities with a strong vertical social structure (typically upheld by powerful Lutheran or Calvinist churches).

Sociological, geographical and cultural parallels with the contemporary situation may be drawn by the interested reader.

I will note one thing. Among the political movements which emerged in reaction to the excesses of the neoliberal regime, explicitly positioned themselves as defenders of losers of the current system and managed to successfully attract voters from this latter group, very few have been both electorally successful and unflinching in their general commitment to human equality (in particular, totally devoid of racism, sexism, nativism, xenophobia, islamophobia…). Mélenchon’s France Insoumise is one of this very small set (a fact that explains part of my disappointment of seeing it summarily be dismissed by Chris).

14

T 05.04.17 at 3:08 pm

US Rural Protestant voters have always loved transfers — TVA, military bases, SS, Medicare, agricultural transfers and price supports and you name it. Those states always got back $1.20 in transfers for every $1.00 they contributed in taxes. Republican neoliberalism gave them the race stuff but started taking away their incomes and threatened their transfers, hence Trump (who of course lied but paid lip service to their economic concerns.) Of course, the other unifying issue was abortion. To those not in the know, Southern Baptists were pro-abortion until the 1970s. Look it up as they say. So now there were two issues — race and abortion — that the Republicans successfully used as a wedge to divide the common economic interests of the economic progressives and populists.

What do all these folks pine for? FDR and Eisenhower, the later who would be considered a mainstream Democrat today. Take away race and abortion issues and you get 60% of the vote. But you can’t put the toothpaste back in the tube.

As an aside, the sexism issue is will go away over time as women gain economic power. The analogy I would make is the assimilation of Jews and Catholics in the 30s when they became “white.” Look at the way Trump treats Ivanka. Even the pigs don’t want their daughters the way they treat women.

15

Jake the antisoshul soshulist 05.04.17 at 5:50 pm

An appreciable number of right populists admire some of the wealthy. As long as they don’t support Democrats. They do not see the wealthy as elites, but as someone like them who has been able to build a personal fortune.
They hate the bureaucracy, but not the rentier, even though the bureaucracy works for the rentier. I suppose they feel an affinity with the rentier. And that they would like to be in his place.

16

mdc 05.04.17 at 7:11 pm

“Look at the way Trump treats Ivanka. Even the pigs don’t want their daughters the way they treat women.”

cf USA today interview, Aug 1 2016:

‘What if someone had treated Ivanka in the way Ailes allegedly behaved?

His reply was startling, even by Trumpian standards. “I would like to think she would find another career or find another company if that was the case,” he said.’

17

Luke 05.04.17 at 8:24 pm

Oh jeez and here I was thinking that the Populist movement in the US contributed to the long battle for a progressive income tax and antitrust before social democratic parties even got started. Thanks for correcting me, I’ll now go ahead an oppose debtors movements as insufficiently rigorous in their analysis.

18

T 05.04.17 at 9:37 pm

mdc – Yep. With fewer children, and women entering the workforce, the oligarchs see their daughters as successors, not their son-in-law as back in the day. And the 1% and those below the oligarchs see their daughters as future professionals. The women thing is slowly turning into a class thing as it did with other groups (Irish, Italians, Jews) that came to be seen as “white.” And so it goes. Sheryl Sandberg had no problem crossing a picket line of Hispanic housekeepers to talk about “leaning in.” https://www.thenation.com/article/housekeepers-versus-harvard-feminism-for-the-age-of-trump/

19

Ebenezer Scrooge 05.05.17 at 12:15 am

It’s worth noting that the US has about the most pro-debtor bankruptcy regime in the world, even after the Credit Card Debt Slavery Act of 2005. And as Piketty notes, only the US and UK have significantly progressive income taxation regimes.

On the third hand, I’m not sure if social democracy has much explanatory power. The US and UK are laggards as social democracies, but so are the rich Asian countries, and they’re virulently pro-creditor. (Bankruptcy, IIRC, formally disqualifies a person from high-level government jobs in Japan. I have no idea how they do things in Singapore, but I imagine it has something to do with flogging.)

20

kidneystones 05.05.17 at 12:15 am

@3
(i) Although its self-presentation was as a popular movement, its members were mostly hardcore Republican activists

This seems a remarkable claim to make without a single piece of supporting evidence. What distinguished the 2010 tea party from hardcore Republican activists is that of its members were independents with no position on cultural issues (see your ii below) and Democrats.

http://www.gallup.com/poll/127181/Tea-Partiers-Fairly-Mainstream-Demographics.aspx?utm_source=alert&utm_medium=email&utm_campaign=syndication&utm_content=morelink&utm_term=Politics

Rep: 49
Ind: 43
Dem: 8

(ii) Initially, its focus was entirely on economic policy, opposing both debt relief and redistributive taxation, with no position on culture war issues like immigration

The 2010 Tea Party was about everyone playing by the rules – banksters in jail, not bailed out. Ditto for everyday folks who bought too much house. That extended (easily) into pro-immigration/anti-illegal immigration positions.
http://www.nytimes.com/interactive/2010/04/14/us/politics/20100414-tea-party-poll-graphic.html?_r=0
The 2010 Tea Party members were better educated and more affluent (but not rich) than average Americans. The NYT poll offers a different distribution GOP/Independent/Dem, but not by much. What is clear is that the Tea Party was white, conservative and somewhat religious, but certainly not ‘mostly hardcore Republican activists.’

21

kidneystones 05.05.17 at 12:28 am

Should read ‘is that many of its members were independents with no position on cultural issues…and Democrats.’

Second correction. JQ is correct that a significant subset of Tea Party members were/are hardcore Republican activists (hostile to the GOP establishment for the most part). Moreover, I’d guess that the vast majority of the hardcore activists within the Tea Party (again, a subset of a much larger whole) are/were hardcore Republicans – although very much of the anti-GOP establishment Ted Cruz – Sarah Palin variety.

Perhaps JQ agrees.

22

J-D 05.05.17 at 1:03 am

The Omaha Platform adopted at the foundation of the People’s Party (or Populists) included both free and unlimited coinage of silver and a graduated income tax. William Jennings Bryan personally was an advocate of income taxes, including in Congress and in the ‘Cross of Gold’ speech.

23

Colin 05.05.17 at 1:35 am

Another wrinkle in the ‘pro-debtor and anti-banker’ line nowadays is that in the global financial crisis, the biggest debtors (aside from sovereign states) were the banks themselves. Regardless of your sympathies in general for debtors and creditors, it looks hypocritical to say the least to impose harsh bankruptcy terms on individual debtors who over-borrowed to buy a house to live in, while the banks who gambled other people’s money and lost simply get handed another pot of money (never mind the personal liability of the senior bankers, who get a ‘bonus’ when the gamble goes well but don’t get a ‘penalty’ if it goes badly). The culture of impunity for bankers goes beyond simple debt relief: for instance, in the US, if you’re so much as suspected of making money from the illegal drug trade, the police can seize your assets, but at the same time, the US decided not to prosecute HSBC for laundering large amounts of money for drug gangs, in a classic example of ‘too big to jail’. I think a lot of popular anger in the last decade stems from this double standard, rather than a general pro-debtor sentiment.

I suppose the social-democratic solution to the banking crisis would have been to buy the failed banks, rather than bailing them out: if the biggest banks are too fundamental to be subjected to the discipline of the market, then they should instead be controlled by the state or by a broad class of stakeholders (e.g. co-operative banks). Indeed we did see some of this, but it was framed as a temporary measure. It would be interesting to see a mainstream left-wing party advocate for a deliberate nationalization of part of the finance industry.

24

kidneystones 05.05.17 at 1:37 am

Thanks for putting 20 and 21 up, John. To expand, and on the question of populism – ways to resist and other popular topics. What the NYT-Times and Gallup poll confirms is that the Tea Party membership was angry with the status quo and, in the process, helped revitalize the zombie corpse of the GOP.

Nobody in 2009 predicted that George Bush’s GOP would demolish the Democrats in the 2010 midterms.

The Tea Party must be destroyed worked for both establishment Democrats and the GOP establishment. Koch Konspiracy tales and cherry-picked Birther stories populated all media outlets, for the most part, as the GOP set up its own ‘Tea Party Brand’ to compete with and co-opt tea party activism. Lois Lerner forced local tea party groups fill out out endless reams of paper and, as noted above, because the original tea party was all about obeying the rules – that part of the party was effectively sidelined to the immense satisfaction of both the GOP and Democratic establishments. The CT community is a good case in point. I remember clearly my disappointment and surprise at discovering that many here regarded Glenn Reynolds as an advocate of increased police powers and an authoritarian state. The CT community, as an example of good leftists, fixated on telling and re-telling stories of the ‘incredible stupidity’ and ‘racism’ of tea party supporters, much to the satisfaction of the Clinton wing of the Democratic party. Daily Kos and other sites that previously protested America’s military adventurism became boot-licking apologists for the Obama/Clinton wars.

2010 represented a rare opportunity for grass-roots leftists to form common cause with a motivated anti-elite movement dedicated, as JQ notes, almost exclusively to economic, rather than cultural issues. The Tea Party wanted the banksters in jail and were doing more to protest cash handouts to Wall St. than any on the left. Most on the left were smugly sneering at the caricatures and straw men propagated by TPM, Media Matters, and other faux grassroots meme machines. Most of the tea party members, like most Trump supporters, want social security, good healthcare, and good education and were at least open to working hand-in-hand with anyone willing to take on Wall St.

The ‘left’ supported big pharma, big insurance, Wall St. and the continuation of America’s military adventures in 2010. Then and now leftists privilege culture over economic necessity. Trump and Bernie supporters are angry and frustrated that in the current climate Wall St. always wins. That’s no accident. Both the GOP and Dem establishment know that cultural issues force average voters to divide their energy as effectively as the divisions in France in 1788. The three orders vote separately according to their cultural status, and in the process never achieve the power to change anything.

No perfect leader is coming over the horizon. I hoped Bernie would carry the day, he didn’t. So, I and others ready to turn the tilted playing field upside down are left with the vulgarian bumpkin. I’ll take him, or any other populist, everyday, flaws and all, rather than any candidate of the establishment of either party.

25

Sean McCann 05.05.17 at 2:08 am

Thank you for this, John Quiggin!

26

Anders 05.05.17 at 12:18 pm

@3 “MMT doesn’t mean what you think it means”

John – your linked piece seems to argue that it is wrong / damaging to maintain that a monetarily sovereign govt “does not need taxation to finance public expenditure”. But Shane was not maintaining that no taxation is required. He was effectively just espousing the (fairly standard) MMT tenet that the constraints on public expenditure are real, not financial.

Separately, whilst you make a good case that in practice pro-debtor policies appear inversely correlated with pro-redistributive policies, I wasn’t clear from your post why any given party would necessarily need to make a choice between the two.

27

SamChevre 05.05.17 at 1:19 pm

I agree with the conclusion, but propose a complementary set of reasons (I’ve been thinking of this since the initial comment.)

Pro-debtor policies particularly benefit the petite bourgeoisie, at the expense of the grande bourgeoisie. Social democratic policies particularly benefit the proletariat, generally at the expense of the petite bourgeoisie.

28

Layman 05.05.17 at 10:21 pm

kidneystones:

“What distinguished the 2010 tea party from hardcore Republican activists is that of its members were independents with no position on cultural issues (see your ii below) and Democrats.

Rep: 49
Ind: 43
Dem: 8″

Strangely, the very next set of numbers in your link are these:

Conservative: 70
Moderate: 22
Liveral: 8

Given that 70 of Tea Party members described themselves as conservative, I’m wondering where you came up with “…no position on cultural issues…”

29

kidneystones 05.05.17 at 11:43 pm

@28 Quoting JQ at comment 3 (ii) – “Initially, its focus was entirely on economic policy no position on culture war issues

I’d also distinguish between data individuals provide in response to a poll and efforts expended trying to actively pursue an agenda, which is what I take JQ to mean when he writes that the ‘focus’ of the 2010 Tea Party ‘was entirely on economic issues.

You’re entirely welcome to disregard my observations on Tea Party priorities and other topics, of course. Have a nice day!

30

reason 05.08.17 at 9:41 am

John Quiggin @7
re AfD domestic policy.
Does UKIP have a domestic policy?

31

John Quiggin 05.08.17 at 10:05 am

@30 Again, I’m no expert. The manifesto here seems like standard populist stuff – lots of goodies for which foreigners will pay

http://www.ukip.org/ukip_manifesto_summary

32

Katsue 05.08.17 at 1:09 pm

@19 I’m not sure what it means to say that the US has the most pro-debtor bankruptcy regime in the world, apart from credit card debt (and student loans). How many bankrupt people don’t have credit card debt?

In any case, going by what I’ve read in the press, it certainly doesn’t have the most pro-debtor foreclosure regime.

Wrt income taxes, I quote a Thomas Piketty paper from 2006, the second link I found to a Google search for “piketty us uk tax regimes”.

“France had less progressive taxes than the US or UK in 1970 but has experienced an increase in tax progressivity and has now a more progressive tax system than the US or the UK”.

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