The Economics of Belonging by Martin Sandbu

Author:Martin Sandbu
Language: eng
Format: epub
Publisher: Princeton University Press
Published: 2020-04-18T00:00:00+00:00

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Wean the economy off credit financing. The most radical goal of a financial economics of belonging is to protect against the harms of credit by weaning the economy off debt financing. As I pointed out earlier, credit (or debt, depending on your perspective), and especially bank credit, is a particularly noxious form of finance, both in its instability and in the way it erodes economic growth by directing capital to activities with low productivity potential. Debt has also at times pacified the left behind by offering apparent improvements in consumption that are in the end unsustainable, at the cost of eventually leaving some trapped with greater debt burdens than they had been led to expect.12

This trap is all the more insidious as it blunts the tools policy makers have to relaunch the growth that would make the debt burden more easily bearable. Overindebted people spend any income increases on reducing their debts faster rather than consumption that boosts demand in the economy. Overindebted companies spend their revenues servicing their obligations rather than investing in expansion or productivity. Overstretched banks reduce their balance sheets to lower their bankruptcy risk. And overindebted governments feel unable to engage in aggressive deficit spending. In all cases, a surfeit of debt slows down the impulses of growth, which makes reducing debt all the harder. This is the “debt deflation” dynamic first identified in the 1930s and then reintroduced by observers of the Japanese economy after its financial crash in the early 1990s.13

An economy of belonging needs to avoid this trap if it can, and find a way out if it cannot. The solution is twofold. First, steer the economy away from funding its spending with debt in favour of other forms of finance such as equity. Second, transform debt itself so that it behaves more like equity.

What would the first outcome look like? It would see companies finance themselves much more with share capital—where investors hold a stake in the company and are rewarded (or not) depending on how profitable the business is, rather than according to predefined interest and repayment terms as is the case with loans. But not just companies. For individuals, too, we would see more equity-like financing arrangements—for example, for house purchases, where the “creditor” would receive a share of the price appreciation of the house when it was resold (and lose if the price fell). Equity-like financial contracts could be devised for much more inventive purposes—for example, education and training “loans” whose repayment would depend on how much they boost the “borrower’s” earnings. Such financing would make it less risky for individuals to invest in physical capital or their own skills and remove the danger of debt traps.14 Even governments could fund themselves more by issuing “sovereign equity” whose payments would vary with the growth of the economy, in contrast with the typical sovereign debt that governments issue today.15 In all cases, the advantage is that in a downturn, financial claims would simply lose value—like falling stock prices—instead of burdening debtors with preagreed payment commitments.

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