How much crop a sharecropper can share is obviously crucial both to sharecroppers and landlords. It is in fact of current concern to all of us. Because the share of the crop the sharecropper surrenders is exactly equivalent to what a debtor gives up in paying interest on debts. Sharecroppers – and debtors – cannot consume or invest that which they give up.
If a sharecropper shares too little of his crop, the landlord fails to extract maximum possible income from the farm he owns, and “leaves money on the table”. The landlord obviously wants to maximize the percentage of the crop he takes. On the other hand, if the landlord takes too much, the sharecropper can’t survive to plant a crop next year. The landlord must leave the sharecropper at least enough to survive on. If the farmer does not survive, no crop is produced next year, and output falls. The system collapses.
Thus, there is an upper limit on the amount of the farm’s production that the sharecropper can turn over to the landlord.
Both sharecroppers and landlords understood this elementary fact, even though they were not economic geniuses. In the US, they ended up setting the amount taken by the landlord at about 50% of the crop. That number produced a stable system. It could go on indefinitely. Unfair, maybe, but stable. Sustainable.
Which means landlords and sharecroppers were smarter than our “Nobel Laureates” in economics. (Nobody gets a Nobel Prize for Economics, there simply isn’t one, but the winners of the faux-Nobel prize in economics “in honor of Alfred Nobel” allow it to be called, erroneously, the Nobel Prize.)
The “Nobel Laureates” lead almost all of the economics profession, and just about every talking head on television, in blissfully ignoring a very similar limit we have run into these days. Today’s limit is not on how much crop a sharecropper can share without collapsing the system, but rather how much interest the average person can pay.
But it is important. Interest paid by wage earners is just like the portion of their crops surrendered by sharecroppers. Interest payments, just like surrendered crop shares, can not be consumed by the wage earner, nor invested. Those who pay interest, either directly or indirectly, can not use their interest payments in any way. Mortgages, auto loans, credit card debt, and student loans are places where interest is paid directly. Less obvious are indirect payments: everything purchased has built into its price the interest paid in producing it. And interest payments made indirectly account for a big portion of the taxes everyone pays, both local and national.
Interest payments are simply taken away from interest payers, just as crop shares are taken from the sharecropper.
Almost all economists believe there is no upper limit on the percent of income paid to the average citizen that can be extracted for interest payments, because total debt in the economy “doesn’t matter”.
They think this because they, and everyone else, learned it in the basic economics course they took in school: total debt doesn’t matter. It can’t matter, after all, because “it’s just money we owe to ourselves”.
This is taught almost everywhere. It is advanced in the press, for example, by “Nobel Laureate” Paul Krugman in the New York Times.
A simple thought experiment shows it to be total nonsense.
Imagine it is Paris, during the French revolution. Marie Antoinette is in the tumbrel rolling to the guillotine. She is about to lose her head. She shouts to the angry crowds around the tumbrel, who can no longer feed their families because so much of what they produce is shipped off to the crown as taxes and interest on debt: “Your debts can’t possibly matter. After all, it’s just money we owe to ourselves”.
Marie Antoinette probably did not shout that out, because it is so patently false. Not so The New York Times, the Wall Street Journal, and Fox News. They, and almost everyone else, simply assume it is true, that debt can’t possibly matter, because it’s “just money we owe to ourselves”. (The WSJ and Fox News are of course against Federal debt, which they ceaselessly tell us is ‘bad’. Non-federal debt, twice a large, is never discussed, because it is ‘good’.)
Why is this falsehood so widely believed? The textbook “Economics” by Paul Samuelson, first published shortly after WWII, quickly became a classic, used worldwide for teaching basic economics. His book dominated the teaching of economics throughout the last half of the 20th century. Samuelson taught at MIT. The “Paul Samuelson Professor of Economics at MIT” spoke recently at Davos. David Stiglitz and Paul Krugman, two “Nobel Laureates” in Economics, are products of MIT.
What does Samuelson teach about debt? He says in his textbook that “debt can’t make any difference, because after all it is just money we owe to ourselves.” And so say Therow and Heilbrenner and Stiglitz and Krugman, who on his blog this past December repeated Samuelson’s further explanation that debt within a body politic is just like money lent by a wife to her husband to start a business, so “it can’t make any difference”.
But it DOES make a difference, because the bulk of debt is not “in the family”. It is owed by the 99% not to their family but to the 1%. We have a big group of debtors – almost everyone – whose debt is owed to a much smaller group or creditors, the 1%. And it keeps growing.
Many have argued that the growing debt burden on the “the middle class” is unfair. It is worse than unfair – it is unstable. Unsustainable. Doomed.
Once interest payments extracted from the “middle class” grow large enough, the debtors can no longer purchase the output that society is capable of producing. The shortage of “demand” causes production to shrink. Unemployment climbs. Demand shrinks further. The economy collapses.
It’s very much like the collapse that would occur if landlords extracted too much from sharecroppers. But they did not. Sharecropping may heve been unfair (and continues to be!), but it was stable. It could be sustained forever.
Not so the growing debt burden. At some point, it hits a ceiling, and can grow no more. Economic collapse eventually occurs, due to insufficient “demand”. (The needs are still there, maybe growing in fact, but they can’t be filled because the debtors can’t afford to pay for them. And the purchases of the creditors – the 1% - are insufficient to buy all that could be produced.)
There are two solutions offered to “fix” the economy, one from each end of the left/right spectrum. Both are wrong. Neither will fix the underlying problem: too much interest-bearing debt.
The left wants government to attack the lack of demand directly: “jumpstart” the economy by replacing declining private demand with public demand; have the government step in and spend money that will replace the decline in private spending. This means increasing the deficit and therefore (in our present system), government debt. Krugman keeps arguing that Obama’s efforts to do this have been too small, if only they were larger they would work. Wrong. They can’t work.
Those efforts are widely condemned as ‘Keynesean’, with the accompanying mantra “You can’t borrow your way out of debt.” It won’t work, but not because deficit spending is ‘Keynesean’. It’s because you can’t jumpstart a car that is out of gas. Total debt is at a limit. It simply cannot be increased.
The right has a different solution: get the government “off the back of business.” Cut “unnecessary regulation” Cut taxes. Let the free market reign, and Adam Smith’s “invisible hand” will do its magic.
This not only does not work, it will make the situation worse.
Both left and right define recovery of the economy as “getting the banks lending again.”
Fix the economy by increasing the debt of $600,000 already on the backs of a typical family of four? Nonsense.
The problem is the huge total debt itself. It must be reduced. Drastically. And it will be reduced, one way or another. Like a sharecropper who needs at least enough to live on, so do average citizens. Take too much away from them in interest, and collapse ensues.
As Michael Hudson keeps saying, debt that cannot be repaid will not be repaid.
So the only question is whether debt will be drastically reduced by peaceful means, or by violence. Once enough people cannot feed their families, violence ensues.
Let’s reduce total debt substantially. And peacefully.