Trust Russell Brand, not this condescending professor, on the economics of debt relief

Russell Brand apparently wrote a political manifesto, which led Jamie Ross to the clever idea of having a fancy professor check Brand’s ideas. The professor in question, political theorist Chandran Kukathas, was not impressed. But while many of Kukathas’ criticisms are spot-on, he gets one big question very wrong — the potential stimulative power of debt relief.

Brand on debt: “Cancelling personal debt would stimulate the economy more than any ‘too big to fail’ bank quantitative easing.”

Professor Kukathas: “Mr Brand is quite confused when he refers to ‘“too big to fail” bank quantitative easing’. Quantitative easing is neither necessary nor sufficient for stopping a bank or any other corporation from failing.

“Second, cancelling personal debt is very good for debtors and very bad for creditors. I would love my mortgage debt to be cancelled, I would then have plenty more money. But those people who deposited their money in the bank from which I borrowed would have less or nothing. I really fail to see why this would stimulate the economy.”

So, yes, Quantitative Easing and bank bailouts are different things and Brand has them confused. But there’s plenty of reason to believe that redistributing economic resources from creditors to debtors would stimulate the economy.

The key issue is that if a debtor gets an extra dollar he’s likely to spend it on current consumption, whereas a creditor is likely to save it. In a full-employment economy, reducing the creditors’ savings reduces the pool of capital available for investment. That raises interest rates and slows investment, even as the new money in the pockets of debtors raises consumption. The economic impact is neutral in the short-term, and by reducing investment you get a negative long-term impact.

But if the economy isn’t at full employment — i.e., it’s in need of stimulus — then this works differently. Because inflation is low, the central bank will keep interest rates low regardless of the diminished pool of capital. But the newly enriched debtors will still raise their level of consumption, boosting the economy. Even better, with more demand for consumption goods in the economy, companies may even be inspired to invest more. That boosts the economy’s long-term prospects.

But don’t take my word for it. Here’s a paper from Randall Kroszner on debt forgiveness during the Great Depression. Atif Mian and Amir Sufi did a mountain of empirical work showing that debt forgiveness would boost the US economy today for their book House of Debt. Here’s a recent blog post of theirs presenting some additional evidence. Here’s Paul Krugman on the virtues of debt relief. Here’s a couple of papers by Gauti Eggertsson putting the argument I gave above in terms of a formal economic model.

The basic principle “ask an expert, not a celebrity” is sound. But Kukathas isn’t any more an expert on macroeconomics than Brand. And in this case, it shows.