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A Piketty-Graeber Dialogue : how to get out of debt
6 October 2013 - by Joseph Confavreux and Jade Lindgaard
There exists four principal methods to significantly reduce public debt: repudiation, a tax on capital, inflation, and austerity. Mediapart organized a first-time meeting between economist Thomas Piketty and anthropologist David Graeber.
Debt: The First 5000 Years, by anthropologist David Graeber, published by "Les Liens qui liberent"1, and Capital in the Twenty-First Century, published by Seuil, constitute without a doubt the most strong, expository, and political essays this year. Each of these two authors covers a long period - three centuries for Piketty and 5000 years for Graeber - to paint a striking picture of the way we've arrived at a time when inequality between people and the weight of debts have reached unsustainable heights.
Both of them rely on an impressive work to propose original solutions: an exceptional, progressive and, if possible, global tax on capital and inheritance for Thomas Piketty; a repudiation of debts, as several societies have known through history, for David Graeber.
Hence our desire to organize a meeting between these two researchers, on the occasion of their coming to Paris from America, a meeting centered on the question of understanding how to free ourselves economically, politically, but also mentally, from the processes of debt and the entrenchment of inequalities.
Both of you seem to think that the economic and financial system is at the end of the line, and won't be able to hold on much longer in this state. Could you both explain what your main reasons are?
Thomas Piketty: I'm not sure whether we're on the eve of a collapse of the system, at least from a purely economic point of view. It really depends on political reactions and the capacity of elites to persuade the rest of the population that the situation is acceptable or not. If there's a very effective PR machine2, there's no reason that the system can't continue to exist in this state. So I don't believe that purely economic forces will cause the fall of the system.
Marx thought that the tendency of the rate of profit to fall made the collapse of capitalism inevitable. In a way, I am more of a pessimist than he is, since even with a stable rate of return on investment, around 5% on average, and measured growth, wealth becomes more and more concentrated and the power of inheritance becomes stronger.
But this, in itself, doesn't mean that there will be an economic collapse. In this way my thesis is different than that of Marx, and also that of David Graeber. It will certainly produce an explosion of debt, notably American, which we all see - but there is at the same time a strong increase of capital, much superior the amount of debt.
The net wealth created is therefore positive while the growth of capital remains more rapid than the creation of debt. I am not saying that this is necesssarily a good thing. But there isn't any purely economic reason that makes this phenomenon synonymous with systemic collapse.
Thomas Piketty and David Graeber
But you've certainly said that the level of inequality has become insupportable?
TP: Yes but, here again, the PR machine, or the repression machine, in the countries you're talking about, or the combination of the two, can permit such a situation to last. A century ago, despite universal suffrage, the elites of industrialized countries successfully refused the imposition of any new progressive tax. We needed a war to create a progressive income tax.
David Graeber: But the debt of one person corresponds necessarily to the wealth of another, doesn't it?
TP: That's an interesting point. I loved your book - the only criticism I would make is that capital is more than just debt. It is true that more debt, whether public or private, creates resources for others. But you don't directly address the possible differences between debt and capital. You make it sound like the history of capital is that same as the history of debt. I think you're right to say that debt plays a more important role than has been assumed until now. And, in particular, in the fairy-tales that economists tell each other about the accumulation of capital, barter, the creation of currency or exchange.
The way you force people to look at the relations of power and domination in debt relationships is excellent. But capital is useful in itself. The inequalities of capital are a problem, but not capital itself. There is much more capital today than in the past.
DG: I'm not saying capital is no more than debt. I'm saying that everyone has been told the opposite, and it's our role to fill in the blanks that this leaves empty in the history of the work force, of industrial capitalism, of the initial forms of capital. I'm trying to broaden the concept. Why are you saying that assets increase when debt increases?
TP: Net wealth increases, by which I mean assets we can count, even taking into consideration debt.
DG: So there's more wealth per person than before?
TP: It's obvious. Let's take housing. Not only is there more housing than 50 or 100 years ago, but, in percentage of a year of production, there are more houses "net debt" than in the past. Reported from one year of GDP, as you measure national capital, defined as all the revenue generated by economic activity, and if you deduct all private and public debt in the country, the ratio has increased in rich countries for 40 years. It's a little less spectacular in the US than in Europe or Japan, but it increases there too. Therefore assets increase faster than debt.
DG: To get back to the initial question, on a possible collapse of the system, I think that historical predictions like this are traps. This much is certain: every system has an end, and it is very hard to know when it will happen. But we do see signs of a slowdown of the capitalist system.
On the technological level, one doesn't have the feeling, like in the 1960s and 70s, that we find ourselves on the brink of great inventions. In terms of political vision, we seem far away from the grand postwar projects like the creation of the UN or the beginning of the space program. No one can even begin to act on climate change, even though it threatens the viability of our ecosystem and humanity itself.
This feeling of impotence comes particularly because, for 30 years, the PR machine - the coercion machine - has been further mobilised to win the ideological war for one thing or another, to create the conditions for the capitalist system to remain viable. Neoliberalism has privileged the political and the ideological over the economic. In a way, you could say that they wanted to give everything to make believe that capitalism is viable in the long term, instead of working on making it actually viable in the long term. As a result, it's a war of the imaginary, effective only so far as people being able to find themselves once again with shit jobs thinking nothing else is possible.
We see clearly that this ideological hegemony is reaching its limits today. Does this mean that the system is imploding? It's hard to say. But if it were starting to implode, it would look similar to what we're seeing. Economic systems can experience fundamental changes. Capitalism is young. It's reasonable to imagine that it could become something else.
"Back to Mesopotamia"
Is capitalism itself the source of the problem or can it be reformed?
TP: One of the points I appreciate the most in David's book is the continuity it establishes between slavery and public debt. The most extreme form of debt is slavery - you belong to someone else forever, and potentially your children too. In principle, one of the clearest signs of the progress of civilization has been freeing ourselves from slavery.
Seal for the Society for the Abolution of the Slave Trade, Britain (1787)
However, as David tells us, the intergenerational inheritance of debt, which was done alongside slavery, has found a modern existence, which is public debt and its increase - which allows the transfer of debt from one generation to another. We could imagine an extreme case, with an infinite quantity of public debt, which would represent not just one, but 10 or 20 years of GDP, and which would completely recreate a slave society, where all production and all creation of wealth would be allocated to repay debt. Everyone would be, in this scenario, a slave to a minority of the population - it would be a return to the beginning of history.
In reality, we aren't there yet - there is still a lot of capital to face the debt - but this way of looking at things helps to understand this strange situation, where we place the burden of guilt on debtors and we're constantly repeating that each of us "owns" 40 or 50,000 dollars in national public debt.
It's particularly crazy because, again, we collectively posses more wealth than debt. A large portion of the population owns very little of the capital, since it is very concentrated. Until the 19th century, 90% of stock shares were owned by 10% of the population. Today it's a little different - in the United States, 73% of stock is owned by the richest 10% - but it's still a level of concentration which means that 50% of the population has nothing but debt. For that half of the population, public debt per person is therefore more than what they have. But 50% of the population "owns" more capital than debt. So it is absurd to guilt populations to justify austerity policies like this.
So is the cancellation of debt the solution, like David wrote? I have nothing against it. But I'm more in favour of a progressive tax on inheritance, with strong marginal rates on the highest-income groups. Why? The question is what we want the day after to look like. What do we do once debt is cancelled? What's the plan?
Cancelling debt is to declare that the last creditor, the lender of last resort, is responsible. However, the system of financial transactions as it exists currently permits large firms to free themselves of their instuments of debt well before cancellation. The last lender, by way of intermediaries, is not necessary very rich. If you cancel debt, you can't be sure that the most rich will be forced to pay.
DG: No one is pretending that the cancellation of debt is the only solution. For me, it's an inevitable element in a series of solutions. I don't believe that cancellation of debt could resolve all our problems. It acts more like a conceptual rupture. To be quite honest, I truly believe that the massive erasure of debt will, somehow, happen, in one form or another.
For me then, the discussion is more about the details of the cancellation: overtly, by vertical decision, protecting the interests of existing structures; or under the impetus of social movements. Most political and economic leaders that I've spoken with recognize that a form of repudiation of debt is necessary.
TP: This is my problem - the bankers agree with you!
Stele of Democracy crowning Demos (Museum of Athens)
DG: As soon as the erasure of debt begins, the question is how we take possession of this process so it turns out well. Because, in history, there are many examples of the erasure of debt which served to preserve the existing, usually inequal, social structures.
But this erasure has also, at times, served to produce social change. Take the origins of the Athenian and Roman constitutions. In both cases, there was a debt crisis, and a way of rectifying it was to make structural political reforms. The Roman republic and the Athenian democracy were born from debt crises.
In reality, all the major moments of political transformation were born in one way or another from debt crises. During the American revolution, the repudation of debt to Britain was one of their demands. I think that we are approaching a similar moment, which demands political invention.
But erasing is not a solution in itself, as there are many historical versions that were terribly regressive. The Boston Consulting Group has released a paper titled "Back to Mesopotamia"3 on this topic, where they examine models to see what would happen in the case of mass cancellation of debt. Their conclusion is that this would create huge economic disorder, but not doing it would create even more! If you want to protect the current economic structures, it will be necessary to go through it. This is a typical example of the reactionary response to the proposition of erasing debt.
Occupy Wall Street poster for May 1st 2012
Concerning capitalism- it's difficult for me to imagine it survive more than another 50 years, particularly in view of ecological issues. So when we reproach the Occupy Wall Street movement for not formulating some concrete demand - which was done - I called for, perhaps provocatively, the idea of cancelling debt and of instituting 4 hour work days. This would be ecologically beneficial and would respond to the hypertrophy of work hours which would have us work more at jobs which for the most part serve no purpose other than to keep people busy.
The current mode of production is founded more on moral principles than economic princples. The growth in debt, work hours and work discipline, it all goes together. If money is a social relation that represents the promise that each accords the same value to a banknote that is in his or her hands, why don't we think about the type of promises that we would like to make to each other, in terms of future productivity and satisfaction at work? This is why I say that abolition of debt is a conceptual rupture. It's to help us imagine other forms of social contract, which could be renegoiated democratically.
"If you aren't scared of Iraq, there's no reason to be scared of the Bahamas or Jersey."
You've written, Thomas Piketty, that the repudiation of debt isn't a "civilized" solution. What do you mean by that?
TP: Because the last lenders of debt are not necessarily those who ought to be paying. What do you think, David, of the proposition of a progressive tax on wealth, which seems to me to be a more civilized way to make this happen?
I really have to say that I'm truly very perplexed to be faced with the fact that the most fervent supporters of the aboltion of debt, including you, are the same people who want "haircuts" - the expression used at IMF and Bundesbank - which is to say: the holders of public debt take more of the risk, so now, they have to pay. Let's reduce the value of Greek debt by 50%, Cypriot debt by 60%. This is not a progressive solution at all!
I am surprised - excuse me - that you aren't taking seriously the question of which tool we must equip ourselves with, which collective institutions to create, in order to better target what we want to target? A part of our role as intellectuals is to declare which collective institutions we would like to build. Tax is part of it.
DG: Progressive taxation seems to me typical of the Keynesian era and of redistributive mechanisms founded on the hypotheses of growth rates which don't seem really supportable anymore. These forms of systems of redistribution rely on projections of increases in productivity, linked to increases in salary which, historically, happen at the same time as the application of redistributive fiscal policy. Are these policies viable in a context of low growth? With what social effect?
TP: Low growth makes this kind of redistributive fiscal tool even more desirable. I'm not just talking about a traditional income tax, I'm talking about a progressive taxation of wealth and capital. There is a quantity of capital which people own, minus debt, If you impose a progressive tax rate on this capital, for those who possess very little, the tax rate is negative, and this would in effect erase part of their debts. So it's something very different from Keynesian income tax policies.
On top of that, low growth makes income tax and wealth tax even more desirable since, with a low growth rate, the gap between the rate of return on capital and the rate of growth gets wider. During most of human history, growth has been nearly zero, and the rate of capital growth has been around 5%. When the rate of growth is around 5%, like in Europe after the war, the gap between the two is therefore smaller.
But when the rate of growth is more like 1%, or even negative like in certain European countries, the gap between the two rates becomes enormous. It's not a problem from a purely economic perspective, but it is one from a social point of view, because it permits huge concentrations of wealth. Faced with this, progressive taxation on wealth and inheritance is useful.
DG: But wouldn't this progressive tax on wealth have to be international?
TP: Yes of course. I am an internationalist like you, so I don't think we'd have much to debate about that.
DG: It's interesting that, historically, when you look at an era when credit is strong, in general you have this overarching system which protects debtors and restricts creditors from doing things, unless it's something that is acceptable to debtors. Those systems that restrict creditors from having too much sway over debtors have taken different forms: a monarchy with divine right in Mesopotamia, biblical Jubilee, the canon law in the Middle Ages, Buddhism, Confucianism, ... in short, in these societies there would be an instutional and/or moral apparatus which would maintain a form of control on credit.
Today, we're in a phase where credit is crucial, but we do things the other way around. We already have overarching institutions, of a type that is quasi-religious in the same way that neoliberalism could be viewed as a kind of faith, but instead of protecting debtors from creditors, they do the opposite.
For thirty years, between the IMF, the WTO, the Bretton Woods financial institutions, investment banks, multinationals and international NGOs we have a world-size international bureaucratic system which, unlike the UN, has the ability to put its decisions into effect. Since this entire structure has been explcitely put into place to defend the interests of financiers and creditors, how would it be politically possible to transform this system into doing the opposite of what it was made to do?
TP: We'd need to convince more people, what can I say?! It's important to know now where we want to go. If anything worries me, it's that for the institutions you're talking about, it's much more natural than you'd think to cancel debt. Why do they love this "haircut" idea? Because you stay in the moral system of the market. The ones who are guilty are the ones who have the debt. The risk for me is that that the financial institutions would go in the direction that you're describing.
As a case in point, during the Cypriot crisis, despite having discussed a progressive wealth tax bill - slightly progressive - the IMF and the ECB ultimately decided to proceed with "haircuts", and chose a tax that was equal for everyone.
In France, in 1945/46, there was an enormous public debt. Two tools were used. First a lot of inflation, which is historically the main way that you free yourself from debt, but which reduced the little which was possessed by for example older aged people, who lost everything. This meant that by 1956, there was a national consensus to create an old age allowance, a form of minimum income for retirees who have lost everything. The rich lost nothing as a result of the inflation. Inflation doesn't reduce their wealth, because they invest in hard assets, which are protected.
For them to lose their money, there was another mechanism put in place: a progressive, special tax on wealth and capital, created in 1956. However, 70 years later, the IMF is trying to make us believe that it's technically impossible to establish a progressive, graduated tax on capital. I am truly scared that these institutions that you're speaking of have strong ideological reasons to prefer haircuts.
Isn't there a risk of fiscal evasion? Isn't it more easy for those who possess capital to escape from taxation than to escape the effects of the cancellation of debts?
TP: No, it's very easy to escape the effects of debt repudiation, like escaping inflation. The big portfolios don't hold the debt instruments - they are made of proper assets. Is it possible to fight fiscal evasion? Yes, if you want to do it, you can do it. When modern governments want their decisions to be respected, it happens.
Oil wells on fire in Kuwait (1991)
When Western govenrments want to send a million soldiers to Kuwait to make sure that Kuwaiti oil wasn't annexed by Iraq, they do it. If they aren't scared of Iraq, there is no reason to be scared of the Bahamas or of Jersey, let's be serious! Making a very progressive tax on wealth and capital doesn't pose any technical problems. It's a question of political will.
1. A publishing house, literally "the ties that free ". Or even more literally "links which liberate".
2. "appareil de conviction", machine of conviction. In other places it's written "appareil de persuasion", etc. I tried to do my best with it. I have no idea what they originally were saying in English (but that's true of the whole thing, obviously).