What If the Fiscal Cliff Is the Wrong Cliff?

By Robert Wright

One premise of the people who built the "fiscal cliff"--who committed Congress to either make big inroads on the deficit or have big inroads made automatically, meat-cleaver style--is that government debt is central to our economic problems. What if they're wrong?

PrivateDebt.JPG I don't mean "What if public debt isn't a problem?"--because it is, and I don't doubt that addressing it in some measure is a good idea. I mean: What if public debt is such a small part of the problem that we're setting ourselves up for pain followed by disappointment? What if we'll make lots of budget cuts, dampening economic activity in the short term, only to find that the long-term benefits, while real, are dinky in the scheme of things, and there's a much bigger problem that's been left unaddressed?

That's the view of some analysts whose voices aren't getting much airtime amid all the freaking out about the fiscal cliff. They say that private debt--mortgages, credit card bills, business loans, etc.--is a much bigger problem than public debt, and we're going to have to confront it before we truly recover from the great recession.

This summer my Atlantic colleague Steve Clemons published a report on this subject--co-authored with entrepreneur Richard Vague, and based on data Vague had collected. It makes for bracing, and sometimes scary, reading. Especially when you realize that, as Financial Times columnist Edward Luce notes in discussing the Clemons-Vague paper, private debt is "higher as a share of America's GDP than anywhere in Europe."

Now Clemons and Vague have put together a video on the subject, and the segment below, in which Vague explains the data with the help of some illuminating visual aids, is very much worth watching. Below the video I offer a thought or two on what can be done about the problem.

See web-only content:
http://www.theatlantic.com/business/archive/2012/12/what-if-the-fiscal-cliff-is-the-wrong-cliff/265964/

So what do you do when your economy is burdened by a huge debt overhang?

How about we just forgive the debt?

That may sound simplistic, but, actually, there tends to be an element of out-and-out debt forgiveness in what is described more technically as "debt restructuring" or "debt relief." And people are starting to talk about doing this sort of thing on a large scale. For example, Martin Wolf, chief economist at the Financial Times, agrees with Vague and Clemons that the private debt problem dwarfs the public debt problem, and he lays out some ambitious approaches to debt relief here.

Obviously, debt forgiveness is more popular among debtors than among creditors. But you can't please everybody! And, needless to say, creditors often have more money than debtors, so when you shift money from the former to the latter, you may be putting money in the hands of people who are more likely to spend it. Which in turn could mean there will be a short-term stimulative effect on the economy--which wouldn't be a bad thing right about now.

That last paragraph was just me talking--not somebody who actually knows what they're talking about. But Martin Wolf and Richard Vague (who has started successful companies in both the financial and energy sectors) are actually worth listening to, and they both say that, one way or another, we've got to help people get out from under the mountain of debt that looms, barely seen, beyond the fiscal cliff.

[Update, 1/9/2013: I should have noted, by way of full disclosure, that Richard Vague is chairman of the Governors Woods Foundation, which last year gave a donation to the Nonzero Foundation, of which I'm president. (As for why it took me a month to note this: This afterthought occurred to me, inconveniently, on a one-week silent meditation retreat I went to shortly after posting this piece, and I failed to attend to it immediately upon returning.)]

This article available online at:

http://www.theatlantic.com/business/archive/2012/12/what-if-the-fiscal-cliff-is-the-wrong-cliff/265964/