The overhang of debt in Europe and the US has made recovery from the global financial crisis particularly tenuous.
Is there a dramatic and simple way out of all this? Some argue that there is: a “debt jubilee”. Drawn from the Old Testament book of Deuteronomy, the concept derives from the biblical injunction for a day of rest one day out of every week, a “sabbath” day that reflects the teaching the God rested on the seventh day after creating the world in six.
There is another injunction for a sabbath year every seventh year, in which people are to not work and on the year after the seventh of those sabbatical years , i.e. the 50th, (one year after the 49th) there would be a jubilee year during which any slaves would be emancipated and everyone would return to their land and family to live off of natural providence. A clear implication of this teaching is that all obligations, including debt obligations, would be forgiven in the process.
The jubilee year is a moral and religious issue concept, not an economic one, and was not practised in actual fact. However, it has been an inspiration to the modern debt jubilee movement, which drops the religious context but makes political and economic (and to a degree moral) arguments for extinguishing all or at least some of the debts the world is currently drowning in.
The main economic justification for a modern debt jubilee is simple. With debts forgiven, governments, households and individuals could spend the money currently devoted to interest and principal repayments on consumption which would, in turn, increase economic demand and encourage economic growth, and eventually take the world economy out of constant crisis.
This would also be an ethical policy, which lifts debts incurred through financial manipulation (such as unscrupulous mortgage bankers) and undue political influence (such as taxpayer bailouts of banks that caused the crisis in the first place). It would be fairer than the current arrangement, in which current debt largely burdens poor people with repayments falling to rich and culpable individuals and institutions.
Two basic questions arise: is a debt jubilee really a new idea, and would it work?
There is some precedent for debt relief as a solution to economic crisis. Perhaps the most famous example was the campaign launched by U2 rock star Bono to provide debt relief to developing countries. Bono was a major public face of a coalition called Jubilee 2000, which managed to get the G8 group of major economies to commit to write off $100 billion in developing country debts to developed nations. The idea has similar foundations to the current debt jubilee movement, except it is much more narrow in focus.
Private markets also deal regularly with situations where a debtor can no longer repay debt, technically referred to as a default. In those cases, a debt workout may be instituted which may include a stretching out of payments, forgiveness of parts or all of the debt by lenders, or even an outside infusion of capital to the indebted party to help them keep current with payments (the major way in which the European Union (EU) is dealing with public debt crises in Greece, Ireland, Portugal and Spain).
So private lenders often forgive debt but, unlike a jubilee, this is not out of goodwill. The intent is to get as much of the loan repaid as possible, even if this might be injurious to the borrower or the larger economy.
So there is a precedent for debt forgiveness. But would the widespread and broad application of such forgiveness as called for by the modern debt jubilee movement actually work?
The experience of developing country debt forgiveness suggests that forgiveness there did have the desired effect of freeing up resources in low-income countries which could then go to more pressing development needs. However, some resources thus freed up got wasted anyway and an argument was also made that forgiving loans frittered away by government merely encourages such recklessness in the future. This certainly could be a risk for a modern debt jubilee.
Also, a blanket debt jubilee within the developed world would be much bigger, touching the greater part of the world economic, financial and monetary system. Applied globally, a big issue is that one person’s debt is another person’s asset. While a debt jubilee would cancel the burden to the borrower, it also would eliminate the value of the debt as source of wealth to the lender.
Imagine if all Greek government debt was cancelled. The Greek economy would be better off, but all the banks who made the loans could well be wiped out.
This is the main reason why the EU is going to such great lengths to bail out Greece, rather than eliminate or allow a debt default there. There are ways to avoid this problem, especially if central banks printed special money to give to debtors specifically to pay back debt, a form of cancelling the debt without actually eliminating it as an asset to the lender. However, inflationary pressures and other monetary distortions would certainly come along with that solution.
It is also argued that defaults and bankruptcies, while painful, do clear out unproductive actors in the economy, clearing the way for more dynamic businesses to take their place, much in the way that a forest fire destroys older trees to make way for new ones. Japan’s ‘zombie economy’ is often pointed to as an example of how a debt jubilee could make the economy worse in the long run.
While Japan never instituted an actual debt jubilee, it has had almost zero interest rates for a long time, making debt repayment obligations minimal and allowing inefficient “zombie” companies to drag along, locking out more entrepreneurial potential (a concern, by the way, being expressed about current central bank policies of very low interest rates around the world). It is indeed plausible that a widespread debt jubilee might lead to the same sort of outcome on a global scale.
So is a debt jubilee the answer to our woes — a providential gift, so to speak? From an economic perspective, the answer is likely to be no — at least for a full version of it. However, there might be an argument for targeted debt forgiveness or at least lenient and well-ordered bankruptcies containing forgiveness in especially acute cases.
And in many ways, a debt jubilee is said to be more ethical or moral than current arrangements. Which may very well be true, just not necessarily always economically sound.
Cameron Gordon is an Associate Professor of Economics at the University of Canberra and has an ongoing appointment as a Principal Investigator at the University Transportation Research Center (Region 2) in New York. This article first appeared on The Conversation.