“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?