This Is A Head Scratcher

From Rodger Malcolm Mitchell’s Free Money: Plan for Prosperity:

4. Americans today have too much personal debt. False. Private debt adds money to our economy. Though bankruptcies have increased lately, that is due more to the liberalization of bankruptcy laws, rather than to economics. Despite rising debt and bankruptcies, our economy has continued to grow. The evidence is that high private debt has had no negative effect on our economy as a whole, though it can be a problem for any individual. (p 151)

I might be reading this wrong but from my interpretation, Mitchell is essentially saying the private debt does not matter because there is no evidence for private debt having a negative effect to the economy as a whole. But this is a radical position to take, who exactly agrees with this? Most of the stuff I read concerning Post Keynesian/MMT literature, though I mostly read the Post Keynesian literature more, is that excessive private debt is insanely dangerous to an economy. There is actually a nice article by Alan M. Taylor entitled “The Great Leveraging” which confirms this position. Steve Keen makes a similar proposition as the article, in that private debt was a big factor to the outcome of the 2008 crisis. In fact, he is also very vocal on the importance of private debt in an economy. I am sure that Michell doesn’t fall under the infamous neoclassical money framework (this is to say: one man’s liability is another’s asset), but his claim that ‘high debt has no negative effect to our economy’ is highly questionable.

I dont know, maybe I read this wrong or have a bad interpretation of it, if so please correct me.

UPDATE

It is also worth pointing out that some MMTers dont necessarily  agree with Mitchell on this. For example, Bill Mitchell (no relation?) states the following on his blog:

Disturbingly, the Government still doesn’t fully understand the way ahead. They are wrong to say that the past 11 years of budget surpluses have given them this capacity to spend. The Government can spend whenever it wants to irrespective of last year’s budget position.

Further, running surpluses has been bad for the economy because it undermines the private sector’s ability to save. With the surplus ripping off private liquidity, households and businesses can only enjoy spending growth by increasingly going into debt. This debt binge is one of the principal causes of the current financial crisis.

This statement is more like it. I mean this is at least what a Post Keynesian would say.

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3 responses to “This Is A Head Scratcher

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