“Providing necessary social goods, especially education, as a right rather than through debt” and some theory on debt as governance.

Alex Gourevitch, who is a postdoctoral research associate at the Political Theory Project at Brown University and blogs at the currentmoment, has a great post at New Deal 2.0: A Failed Social Model: Providing Basic Goods Through Crushing Consumer Debt.  He details how access to a variety of basic merit goods ranging from education to health care are now provided through consumer debt and the consequences of this new social model.  Why is this a problem?  My bold:

…There are, however, two problems with this theoretical view. First, there might be very good social reasons to not want to yoke access to certain social goods to debt. Education is a prime example. Taking on debt means accepting a kind of discipline. One must make all future calculations about, say, educational and career choices with the need to meet future interest payments in mind. In conscious and unconscious ways this narrows horizons and produces a more instrumental relationship to education…

If access to higher education were on the order of something like a right — a publicly financed good, provided at little or no cost, to ensure real equality of opportunity — then one can imagine a much different set of results. While conservatives like to talk about ‘freedom,’ this is a place where the left ought to have the upper hand in connecting economic practices to real freedoms. Providing necessary social goods, especially education, as a right rather than through debt not only reduces the disciplining effects of the latter. It also is a way of publicly recognizing and democratically defending the real freedoms of all citizens.

A second reason is that practice does not resemble theory…there is a deep historical reason for thinking that practice was the opposite of theory. The rise of debt-financed household consumption generally was the product of stagnating wages…

The entire social model, then, was built on a lie. The separation of consumption (financed by future promises to pay) from production (based on limiting present ability to earn) was a mirage. The problem has been that the underlying right to maintain a certain standard of living, or even to access to certain basic social goods like housing, health, and education, was just that: implicit….But this promise was always implicit and had to stay that way because it was mediated through the credit system. Access to these basic social goods was never a fully public claim each individual had against society. Instead, access to these social goods was a matter of a complex series of private, individualized claims against other private institutions like banks and employers, with the public role submerged in the form of altered market incentives. That is the difference between debt and right, and it is clear that the debt-based social model has failed.

Progressives really should have the upper-hand when it comes to freedom in these areas.  This goes beyond “submerging” the state in a series of private incentives.  It goes to what kinds of claims we make as citizens.

Following Alex here, I want to brainstorm for a minute on the idea of debt as a disciplining device.  What is special about debt?  In what ways does it motivate and change the background conditions of the agent who has it?  It’s probably easier to do this examination with the corporate finance literature, which spends a lot of time thinking about what debt does, and then think about how to extrapolate it to the citizen and merit goods provided through debt.  Maybe viewing the citizen as a firm here can be part of James Ferguson’s idea of using the moves of neoliberalism to flip its allocative goals on their head.

Let’s get the theoretical corporate finance going.  Let’s go to Jean Tirole’s masterpiece, A Theory of Corporate Finance.  From the summary on debt as a mechanism of governance and incentives for an abstract “firm” (p. 51), debt does the following:

- By taking cash out of the firm, it prevents managers from “consuming” it.  That it reduces their ability to turn their “free cash flows” into lavish perks or futile negative net present value investments.

-  Debt incentivizes the company’s executives.  Manager must contemplate their future obligation to repay creditors on time…this threat of illiquidity has a positive disciplining effect on management.  At the extreme…bankruptcy…termination of employment, frustration and stigma…

-  Under financial distress, but in the absence of liquidation, the nonrepayment of debt puts the creditors in the driver’s seat. Roughly speaking, creditors acquire control rights over the firm.  They need not formally acquire such rights.  But they hold another crucial right: that of forcing the firm into bankruptcy.  This threat indirectly gives them some control over the firm’s policies…

-  Finally, when the managers hold a substantial amount of claims over the firm’s cash flow, debtholding by investors has the benefit of making manager by and large residual claimants for their performance…Put differently, the entrepreneur fully internalizes the increase in profit brought about by her actions.

Very preliminary, but how do these corporate finance incentives change the behavior of citizens who use debt to negotiate their ability to access merit goods?  There’s three dimensions on which choices are constrained under debt that we’ll mention from most to least backgrounded.  The first is that it limits consumption of a merit good, specifically it limits it to the ability to repay in the long run.  A second would be the threat of illiquidity.  Instead of the government borrowing and paying over its long time horizon, citizens need to make each monthly payment over a much shorter timeframe.  This limits non-work options and further directs labor towards certain types of projects, as Alex mentions in his piece.  This goes to the ability to repay in the short-term – a crucial problem for people at the edges of the formal economy.

And last is that when things start to go wrong, coercion becomes foregrounded.  Creditors get in the driver’s seat, as they get to dictate terms on which repayment functions.  Even if they don’t exercise these rights directly, they can do it by virtue of how miserable they can make life for the “managers.”  Which in this case are citizens.

What else do you see in this comparison?

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14 Responses to “Providing necessary social goods, especially education, as a right rather than through debt” and some theory on debt as governance.

  1. Doug Henwood says:

    But the Jensenite theory of debt as incentive was discredited by the experience of the 1980s. Corporate debt levels, relative to profits or GDP, have been stable for a long time now. High debt crushes at least as much as it disciplines. Time to bring student debt under the bankruptcy code!

    • HonoH says:




      (一)因發現、命名、使用而取得的「原始權利」 (Inchoate Title)。

      (二)根據「大陸架公約」第二條規定: 「海岸國有行使發掘大陸架與利用其天然資源之主權權利 (Sovereign Rights)」 而取得的「主權權利」。


      第一步,收回原始權利 (Inchoate Title)。 釣魚台最早是由中國人發現、命名和使用的。據史籍記載,自從一四0三年至一九六九年這五百年間,中國人自由來往釣魚台,視為家常便飯,並且留下大量文字紀錄。近三十多年來,日本政府突然宣佈釣魚台為其治下領土,不許中國人自由往來釣魚台,剝奪了中國人五百年來自由來往釣魚台的權利,這不但違反國際法理,而且違背人類公理。


      第二步,積極行使主權權利 (Sovereign Rights)。美國總統杜魯門於一九四五年九月二十八日發表的有關大陸架的一項聲明指出:「美國政府認為大陸架之底土及海床所有天然資源,由土地連接國家行使管轄權,是合理及公正的。」根據該項聲明精神,聯合國於一九五八年簽訂了《大陸架公約》(Continental Shelf),其中第二條規定:「海岸國有行使發掘大陸架、與利用其天然資源之主權權利。」


  2. Tim says:

    I’d like to see some analysis that incorporates negative non-rational emotional aspects of creditor control. Stress makes people act in ways that aren’t predictable or always in their best interests. I think this is an important argument against the debt-based provision of education.

    • “negative non-rational emotional aspects of creditor control.”

      I’d like to see that as well, Tim. One of the worst things about being seeing so many of my peers in the double-digit youth unemployment bracket is knowing how much human capital is going to waste.

      It’s not just that creative, hard working young people are disincentivized from taking innovative risks thanks to the debt-allocation of healthcare and education, it’s having some sense of what it feels like on the personal, experienced level. Spending your 20s and early 30s working to pay off compound, undischargable interest in an unstable economy takes a certain psychic toll.

      Now, combine that a large contingent of combat veterans in the same age group (often the same people,) and consider the aggregate effect for a generation which is now being asked: ‘Why don’t you grow up and get married?’ ‘Why are you loitering on Wall Street?’ ‘Why don’t you go get a job?’

      • swhiser says:

        “‘Why don’t you grow up and get married?’ ‘Why are you loitering on Wall Street?’ ‘Why don’t you go get a job?’”

        Like a parent giving mixed messages, it’s psychological bind.

  3. Pingback: Debt and Coercion « thecurrentmoment

  4. Charles Pye says:

    I tried to discuss this on my blog recently, here:

    I argued that most degrees, especially the humanities, need to be funded publicly because they’re a public good, with an external benefit to all of society. If we insist on making every student pay for their own education, by taking on large debt, then we’re almost forcing students to only take degrees that have a large financial benefit to them, personally, like engineering and finance. And for the most part, higher education is supposed to be more about enriching society at large, rather than making the individual students wealthy.

  5. chlewis says:

    I don’t think this changes the political calculus any — surely most of the people who are against any more public rights will always think of discipline as a good thing?

    • Joseph Howell says:

      Why is discipline a bad thing? It seems that both sides of the political fight are asking for morefisca discipline in our government.

    • Joseph Howell says:

      It seems that “discipline” is the great uniting theme of our time…from occupy to tea party.

      • chlewis says:

        There are two kinds of discipline, though; external, as applied to dogs and children, and internal, as in devoting one’s ability to meet one’s goals. The former is a bad goal for a free country but a profitable tool for a ruling class.

        The question is, is student debt and the no-jobs-without-a degree system now a fair or an unfair system? It’s beginning to look a lot like sharecropping.

  6. Pingback: On Student Debt and Youth Unemployment — The League of Ordinary Gentlemen

  7. Pingback: A New Metaphor for Student Debt Burdens: Faculty Taxes | Rortybomb

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