DOLLARS

The “Secular Stagnation” Debate

May | June
PAGE 7

2015
Will Abenomics Work?

&SENSE
PAGE 15

Primer on Land Reform

U.S. & CAN: $4.50

PAGE 24

What Full Employment Would Cost

REAL WORLD ECONOMICS PAGE 30

The Student
Loan
Crisis
and the
Debtfare State

Plus: The Assault on Retirement

• Social Security Absurdity
• The Pension-Busters’ Playbook
• Class-Based Pension Math
DOLLARS
&SENSE
REAL WORLD ECONOMICS
Dollars & Sense magazine explains the workings of
the U.S. and international economies and provides
left perspectives on current economic affairs. It is
edited and produced by a collective of economists,
journalists, and activists who are committed to social
justice and economic democracy.
the d&s collective
Betsy Aron, Nancy Banks, Nina Eichacker,
Peter Kolozi, Lyden Marcellot, John Miller,
Jawied Nawabi, Kevin O’Connell,
Linda Pinkow, Alejandro Reuss,
Dan Schneider, Zoe Sherman, Bryan Snyder,
Chris Sturr, Jeanne Winner
staff
magazine editors Alejandro Reuss, Chris Sturr
business manager Nancy Banks
development director Linda Pinkow
intern
Christopher J. Cooper
work study
Autumn Beaudoin
the d&s board
Jim Campen, Gerald Friedman, John Miller,
Linda Pinkow, Steven Pressman,
Alejandro Reuss, Abby Scher, Chris Sturr
associates
Aziza Agia, Randy Albelda, Teresa Amott,
Sam Baker, Marc B ­ aldwin, Rose Batt,
Rebecca Bauen, Phineas ­Baxandall,
Marc Breslow, Chuck Collins, James Cypher,
Laurie Dougherty, Laura Dresser, Janice Fine,
Ellen Frank, Tami J. Friedman, Sue Helper,
Thea Lee, David Levy, Arthur M ­ acEwan,
Mieke Meurs, Marc Miller, Ellen Mutari,
Amy Offner, Laura Orlando, Robert Pollin,
Smriti Rao, Adria Scharf, Susan Schacht,
Chris Tilly, Ramaa Vasudevan,
Thad Williamson
design
layout Alejandro Reuss and Chris Sturr
front cover illustration
© Michael Morganstern (mmorganstern.com)
printing   Boyertown Publishing
Dollars & Sense (USPS 120-730) is pub­lished bimonthly
by the Economic Affairs Bureau, Inc.,
One Milk Street, Boston, MA 02109, a non-profit
corporation. ISSN: 0012-5245. 617-447-2177. Fax:
617-447-2179. E-mail: dollars@dollarsandsense.org.
Periodical postage paid at Boston, MA, and additional
mailing offices.
For subscription information, contact Dollars & Sense, PO
Box 3000, Denville, NJ 07834 (1-877-869-5762). To
subscribe online, go to www.dollarsandsense.org. Please
allow 4–6 weeks for delivery.
POSTMASTER: Send address changes to Dollars &
Sense, PO Box 3000, Denville, NJ 07834-9811. All
articles copyrighted. Dollars & Sense is indexed in
Sociological Abstracts, PAIS Bulletin, Alternative Press
Index, and The Left Index. Subscriptions: 1 year, $24.95;
2 years, $39.95; institutions, $45/year; Canada, $33/
year; other foreign, $49/year (airmail), plus $20 for
institutions. Back issues available for $5.00 prepaid, or
on microfilm from UMI, 300 N. Zeeb Road, Ann
Arbor, MI 48106.
www.dollarsandsense.org
< From the Editors
Reform and Revolution
F or mainstream liberalism, it is an article of faith that our social ills can be fixed by this
or that relatively modest government intervention. There’s certainly some truth to the
view that economic outcomes—especially those of so-called “free markets”—can be im-
proved upon by well-designed public policy. Even an honest neoclassical economist
should recognize many instances of “market failure,” and so the need (at least sometimes)
for government intervention. But political institutions in capitalist societies are not gen-
erally arranged so as to generate the right interventions—even “sensible” public policies
that would seem to benefit virtually everyone, to say nothing of those that would benefit
the majority at the expense of powerful elites.
In the exercise of government power, elites often hold the trump cards. The policies
adopted often exacerbate social problems, rather than reducing them. Thinking of social
problems as basically caused by the misdeeds of private actors coupled with the inaction
of government, then, is not generally correct.
Susanne Soederberg gives a shining example in her cover story “The Student Loan Crisis
and the Debtfare State.” Soederberg argues that the “consumer protection” framing of the
problem—that the solution is to get government involved to rein in the predatory practices
of private educational lenders—is fundamentally flawed. The “debtfare state,” in her view, has
actively facilitated such practices. Government policy has pushed higher education into debt-
based financing, and the state has acted as the enforcer of student debt obligations.
Christopher J. Cooper’s “Active Culture” article, “The Crisis at Corinthian,” provides a stark illus-
tration—exposing not only the predatory practices a for-profit college educational chain, but
also the Department of Education’s harsh insistence on full debt repayment.
Junji Tokunaga’s article on the economic policies of Japan’s Prime Minister Shinzo
Abe, too, illustrates this point. There has been no lack of intervention by the Japanese
government to address the country’s decades-long economic stagnation. However, poli-
cies that make perfect sense from a mainstream Keynesian standpoint—expansionary
monetary and fiscal policies—have gone along with others that both favor elites at the
expense of the majority and are likely to impede the country’s economic recovery—like
tax cuts for corporations coupled with tax hikes on ordinary people.
In her piece on the current economic crisis in Europe, Marie Duggan points to a failure
of political institutions to deal with trade and debt imbalances, except in ways that are
extremely costly and painful for ordinary people. Europe’s main policy-making institu-
tions have pushed—especially on Greece—austerity policies sure to inflict great suffer-
ing on the people and likely to undermine economic growth across Europe. Duggan
points out that John Maynard Keynes developed a better solution way back in the 1940s:
make surplus or creditor countries spend their surpluses (rather than hoarding them),
which will boost demand for goods in the deficit countries, allowing the latter to grow
their way out of debt.
Both John Miller’s “Up Against the Wall Street Journal” and Arthur MacEwan’s “Ask Dr.
Dollar” point out that the burning problems in the U.S. economy—how to achieve sus-
tainable growth and good jobs for all who want them—are not economic, but political.
That is, we have the resources we need to solve our problems, but they are not deployed
correctly because powerful interests stand in the way. MacEwan is quite right that life in
capitalist America could be improved dramatically, even “without some drastic system
change,” if only these barriers to reform could be overcome.
Jawied Nawabi’s “Primer” on land reform and its importance to economic develop-
ment really gets to the root of the matter. Part of the case for land reform, he notes,
is economic—for example, small farms actually produce more output per acre than
large landholdings. However, the crux of the case is not narrowly economic, but “socio-
political.” Land reform is so essential to economic development because the power of
large landlords stands in the way of needed development policies.
In other words, you may aim at sensible, necessary reforms. But to get those reforms,
you just may need a revolution. D&S
 DOLLARS
&SENSE
REAL WORLD ECONOMICS

NUMBER 318 | MAY/JUNE 2015

CON TENT S

TH E R E GUL AR S

4 the short run

5 active culture
Corinthian 100 Debt Strike
page 15 page 19
7 up against the wall street journal
The “Secular Stagnation” Debate
FEATUR ES
24 primer
9 The Student Loan Crisis and the Debtfare State Land Reform and Development
How the government helped make the debt trap the new normal.
SUSANNE SOEDERBERG 28 in review
Jennifer Taub, Other People’s Houses
15 Can “Abenomics” Revive Japan’s Economy?
Why we need a progressive alternative. 30 ask dr. dollar
JUNJI TOKUNAGA What Would Full Employment Cost?

19 A Way Out for Greece and Europe
Keynes’ Advice from the 1940s
MARIE CHRISTINE DUGGAN

MAY/JUNE 2015  l  DOLLARS & SENSE  l  3

< The Short Run
By Alejandro Reuss, Zoe Sherman, and Jeanne Winner
Google at the Gate
On April 21, Google started giving pref-
erence in search results to sites that
display well on mobile devices. A grow-
ing proportion of web activity takes
place through smartphone screens, so
it is not an unreasonable policy.
However, the move provides a telling
illustration of the concentration of pow-
er. Since Google’s February announce-
ment of the new policy, businesses
have scrambled to update their website
designs—a race in which bigger busi-
nesses surely have the advantage. The
change is also a boon to sellers of mobile
devices. (Google is expanding that com-
ponent of its business.) In short, Google
says “Boo!” and the whole landscape of
commerce changes.
And the consequences are also politi-
cal, cultural, and social. What we see on-
line is a growing fraction of what we see
4  l  DOLLARS & SENSE  l MAY/JUNE 2015
of the world. And that view is filtered
through a very small number of portals.
The gatekeepers have real power, with-
out democratic accountability.
“Don’t be evil” may be Google’s
motto. But power corrupts. —ZS
TPP: Tremendous
Pharma Profits
Do you worry that medical care might
cost too little? Pharmaceutical com-
panies do, even though the top com-
panies reported profit rates of 20% or
more last year.
Since the 1980s, Big Pharma has suc-
cessfully lobbied Congress to grant the
industry more and more years of mo-
nopoly control, allowing them to steadi-
ly raise prices, ostensibly to pay for re-
search and development. (In fact, much
of the research is paid for by the govern-
ment, by funding research at universi-
ties, while the companies spend more
money on marketing than research.)
Now, the proposed TransPacific
Partnership (TPP) would allow
pharmaceutical companies to add years
to their current patents, and even re-
patent known medications, quashing
competition from generic alternatives.
We only know details like these
thanks to leaks, especially those pub-
lished by WikiLeaks. For some reason,
negotiations for the TPP have been
secret. Higher prices for medicine, ex-
porting more jobs, lowering wages,
and curtailing environmental protec-
tion. What’s not to like? —JW
CEOforPrez.org?
Former Hewlett-Packard CEO and
now presidential aspirant Carly Fiorina
forgot something on the way to the
Republican nomination—registering
the domain name CarlyFiorina.org.
A decidedly non-admiring member of
the public took advantage of the op-
portunity to grab the site, posting:
“Carly Fiorina failed to register this do-
main. So I’m using it to tell you how
many people she laid off at Hewlett-
Packard. It was this many: :( :( :( …”
The frowny-face emoticons go on for
rows and rows, then: “That’s 30,000
people she laid off. People with fami-
lies. And what does she say she would
have done differently? ‘I would have
done them all faster.’—Carly Fiorina.”
That made us think, what might
analogous websites look like for other
prominent presidential candidates? For
Chris Christie, maybe the number of
cars stuck in traffic during the infamous
Bridgegate incident. For Rick Perry,
perhaps a count of the federal agencies
he wants to abolish (one … two …
oops, what was the third one again?).
And for Hillary Clinton, the former sec-
retary of state in an administration that
has killed thousands as “collateral dam-
age” in drone strikes. Hmm … there’s no
emoticon for that, is there? —AR D&S
< Active Culture

The Corinthian Crisis

Former students at for-profit college chain go on debt strike.
BY CHRISTOPHER J. COOPER

G abby had worked in call centers

for years, and was tired of it. She
had always wanted to work in the
medical field. Gabby (not her real
name) is a working adult, not a teen or
even in her twenties. She isn’t trying to
become a doctor. She just wants a
working-class job in which she can
make a decent living and feel fulfilled.
In 2012, she finally took the leap to-
ward a career change. She decided to
enroll in the Everest Institute, a branch
of Corinthian Colleges, Inc. (CCI), to get
the certification she needed.
Gabby graduated at the top of her
class, with a 3.9 grade point average,
and was selected to be an “ambassador”
for the institution. She was accepted for
an unpaid externship program in a
medical office. One year later, Gabby
holds a temp position in the medical
field, but she makes less money than
she did at the call center, has no health
insurance, and now has upwards of
$20,000 in student-loan debt.
Meanwhile, the school she attended
was forced to shut down due to accusa-
tions of fraud and misrepresentation. Screen capture from Debt Collective website (debtcollective.org/studentstrike).
She is still expected to pay the full debt
she incurred for her year at Everest. Education Department’s answer … Everest, WyoTech, and Heald. CCI
In a world that puts increasing value Keep on waiting.” made in excess of $1 billion in annual
on higher education, some are profiting Since the Corinthian 15’s founding, revenue via for-profit colleges.
from people who, like Gabby, look to it has grown to over 100 former- The accusations of fraud and mis-
education as a step up to better working- student debt strikers, and has changed representation at CCI go back years.
class jobs. But some former students are its name to the Corinthian 100. Clearly, Back in 2004, alumni filed legal claims
fighting back. The “Corinthian 15” were this number has the potential to grow against the company for misrepresen-
15 former students at CCI institutions larger, and the larger it gets the more tation of the ability to transfer credits.
who united, in February 2015, in a debt pressure it can put on the powers that In 2005, four students filed suit claim-
strike—refusing to pay back loans they be to cancel these debts. ing that they were not properly trained
took out to attend an institution that CCI was founded in 1995 by five to pass national accredited exams. In
failed them. The debt-striking alumni executives at National Education 2008, alumni filed lawsuits claiming
met with Department of Education Centers, Inc. (NECI), a for-profit com- that they were presented misleading
(DoE) officials in March 2015 to express pany in the vocational-education in- statistics about graduates’ employ-
their outrage about being targeted and dustry. If you have not heard of ment success. Their feelings of being
exploited for profits, and to ask for help. Corinthian, you may have heard of the targeted and used were essentially
As the Huffington Post put it, “The company by its school names, like verified during a later investigation.

  MAY/JUNE 2015  l  DOLLARS & SENSE  l  5

< Active Culture
NATHAN HORNES II
I graduated from Everest with
a Bachelor’s degree in
Business and a 3.9 GPA. But
today I work two minimum
wage jobs. I owe $78,000 in
student loan debt even
though Everest is being sued
for fraud. Still, the
Department of Education has
refused to cancel my debt.
In internal company documents ob-
tained by the Department of Justice,
CCI described its target demographic
as “’Isolated, ‘impatient,’ individuals
with ‘low self-esteem,’ who have ‘few
people in their lives who care about
them’ and who are ‘stuck’ and ‘unable
to see and plan well for future.’”
In 2014, the DoE began an investi-
gation of CCI. By that July, it forced
the company to shut down twelve
schools and sell 85 others. The
Consumer Financial Protection Board
(CFPB)—after a ten-month investiga-
tion—filed a lawsuit over CCI’s loan
program and debt-collection practic-
es. When the DoE leveled a $30-
million fine against CCI in April
2015—having found widespread
“misrepresentation of job placement
rates to current and prospective stu-
dents”—the company shut down its
TANESHA MATTHEWS
I owe $60,000 for an online
degree. Everest promised that
I could transfer my credits.
They promised me job place-
ment assistance. But they
broke their promises. I have
ended up in a worse situation
than before I attended classes
at Everest. Now I am deep in
debt, and I can’t go to a real
school because I owe too
much money.
6  l  DOLLARS & SENSE  l MAY/JUNE 2015
remaining 28 campuses. Still, former
students are left owing thousands of
dollars, not only to private education-
al lenders, but also to the DoE in the
form of federal student loan debt.
The Corinthian 100 are now de-
manding that the DoE cancel the feder-
al student debt they owe for attending
CCI. The idea of debt forgiveness makes
sense: Students bore both explicit costs
(tuition and fees, interest on their edu-
cational debt, etc.) and many implicit
costs (such as time they could have
been at work or in other educational
programs) as a result of CCI’s abuses.
However, despite the fact that CCI has
been investigated, fined, and effectively
shut down by the Department of
Education, the DoE is still expecting
students to repay. It is hard to figure out
which is more shameful: The company
that markets career development via
for-profit colleges, preying on low-in-
come people who are just trying to so-
lidify their place in the working class?
Or the Department of Education, which
knows what CCI has done, and is still
charging the former students for the
crime to which they are victims?
In general, the conditions for can-
cellation of student debt are highly
restrictive. (See Susanne Soederberg,
“The Student Loan Crisis and the
Debtfare State,” p. 9) For example, one
program requires former students to
pay 15% of their disposable incomes
towards past educational loans. Then,
after 25 years, a student can apply for
cancellation of the remaining balance.
The National Consumer Law Center
(NCLC), however, suggests that the
DoE has the authority to cancel the
illegitimate Corinthian-related debt
with no strings attached. “Under the
Higher Education Act,” says NCLC at-
torney Robyn Smith, “the Department
of Education has clear statutory au-
thority to grant automatic debt cancel-
lations to Corinthian student loan bor-
rowers.” Of course, this doesn’t mean
that debt cancellation will be easy for
former Corinthian students to win.
MAKENZIE VASQUEZ
Who should have to pay for
Corinthian’s misdeeds? Not
me. How about Wells Fargo,
Corinthian’s largest investor?
Wells Fargo is a billion dollar
corporation that profited from
poverty. They should have to
pay to cancel all Corinthian
loans and fund free college
for everyone led into this stu-
dent debt trap.
Yet, thanks to the Corinthian 15,
turned Corinthian 100, and perhaps
thousands more from Corinthian and
elsewhere, it will not be easy-going
for the parties profiting from this
misfortune either. That’s the unex-
pected twist in the plan of preying
on “easy” targets. The targets are now
on the move. D&S
C H R I S T O P H E R J . C O O P E R is an
economics student at UMass-Boston and
a Dollars & Sense intern.
S O U R C E S : Jeffrey C. Billman, “Bad Education,”
Orlando Weekly, April 4, 2005 (orlandoweekly.com); The
People of the State of California v. Heald College, LLC;
Corinthian Colleges, Inc.; Corinthian Schools, Inc.; Sequoia
Education, Inc.; Career Choices, Inc.; MJB Acquisition
Corporation; Titan Schools, Inc.; Rhodes Colleges, Inc.;
Florida Metropolitan University, Inc.; Everest College
Phoenix, Inc.; and DOES 1 through 100 Inclusive, accessed
at the website of Inside Higher Education (insidehigh-
ered.com); “Class Action Suit Filed Against Corinthian
Colleges, Inc. on Behalf of Medical Assistant,” Reuters,
March 12, 2008 (reuters.com); Danielle Douglas-Gabriel,
“A dangerous revolt: People are refusing to pay back
student loans,” The Washington Post, Feb. 25, 2015;
Office of the Attorney General, State of California
Department of Justice, Press Release, “Attorney General
Kamala D. Harris Files Suit in Alleged For-Profit College
Predatory Scheme,” Oct. 10, 2013 (oag.ca.gov); U.S.
Department of Education, Press Release, “U.S.
Department of Education Fines Corinthian Colleges $30
million for Misrepresentation: Action complements
ongoing steps to protect students and consumers
against predatory for-profit colleges,” April 14, 2015 (ed.
gov); National Consumer Law Center, Press Release,
May 6, 2015 (nclc.org).
All former-student testimonials on this
page from Debt Collective website
(debtcollective.org/studentstrike).
< Up Against the Wall Street Journal
W $J
The Specter of Secular Stagnation
Will economists face up to the crummy, unequal economy?
BY JOHN MILLER
“The secular stagnation challenge then
is not just to achieve reasonable growth,

H yman Minsky, one of the 20th cen-
tury’s leading theorists of financial
fragility, used to say that there was
nothing wrong with the discipline of
macroeconomics that another Great
Depression wouldn’t cure. Today, al-
most six years since the official end of
the Great Recession, such an effect
might finally be taking hold.
Economist (and former treasury
secretary and World Bank chief econo-
mist) Lawrence Summers is champion-
ing what he calls the “secular stagna-
tion” hypothesis: the United States and
other industrialized economies have
been suffering for nearly two decades
from a chronic lack of demand—a
shortfall of both private and public
spending not just inducing a tempo-
rary recession, but causing long-term
(or “secular”) economic growth to slow.
Summers maintains that underlying
economic growth has declined to the
point that “it may be impossible to
achieve full employment, satisfactory
growth and financial stability simulta-
neously simply through the operation
of conventional monetary policy [that
lowers interest rates].”
It’s certainly ironic that Larry
Summers is today’s chief proponent of
the secular stagnation hypothesis, since
he played a key role in enacting policies
that contributed to stagnation. As trea-
sury secretary under Clinton, he led the
charge to deregulate derivatives trad-
ing, which would contribute mightily to
the financial crisis. And as chief eco-
nomic advisor in the Obama adminis-
tration, Summers quashed proposals to
enlarge the size of the fiscal stimulus,
which would have gone a long way
toward boosting growth.
Nonetheless, should the secular
stagnation hypothesis take hold, it
could help open up space for policies
that could improve many people’s lives.
do so in a financially sustainable way.
”
— Lawrence Summers, “What to Do
about Secular Stagnation,” World Econ
Forum, Oct. 31, 2014.
“Does the U.S. economy face secular
stagnation? I am skeptical, and the sour
skepticism go beyond the fact that the
U.S. economy looks to be well on the
employment today.”
— Ben Bernanke, “Why Are Interest
Rates So Low, Part 2: Secular Stagnatio
Bernanke’s Blog, Brookings Institutio
n, March 31, 2015.
The Secular Stagnation Debate
Nearly five years into the economic re-
covery, the U.S. economy expanded by
just 2.4% in 2104, a far cry from the 4.1%
average for all other economic recover-
ies since 1960. Even more importantly,
secular stagnation is not just the “new
mediocre” since the Great Recession.
The U.S. economy has produced just two
periods of rapid growth in the last twen-
ty years—in the late 1990s and in the
mid 2000s. Both were supported by low
interest rates, massive debt, and specula-
tive bubbles. Summers concludes that
the U.S. economy has been unable to
achieve adequate growth for a long
time, but that this has been “masked by
unsustainable finances.”
The signs of stagnation are even
clearer around the world. The IMF has
repeatedly lowered its growth forecast
for Japan, which is mired in decades
of stagnation (see Tokunaga, “Can
‘Abenomics’ Revive Japan’s Economy?”
p. 15), and has done the same for the
eurozone since 2007 (see Duggan, “A
Way Out for Greece and Europe, p. 19). It
estimates growth in both Japan and the
eurozone at little more than 1% a year
through 2020.
The mediocre growth persists despite
very low interest rates, embraced by gov-
ernments to encourage borrowing and
boost spending. As far back as the early
1990s, the Bank of Japan cut short-term
interest rates by dramatically expanding
the money supply. With the onset of the
but to
omic
ces of my
way to full
n,” Ben
Great Recession in 2008, the European
Central Bank and the U.S. Federal Reserve
Board did the same, with the Fed also
buying long-term corporate and govern-
ment bonds (engaging in “quantitative
easing”) in an attempt to bring down
long-term interest rates. “Interest rates
have been, and remain, very low,” Federal
Reserve Chair Janet Yellen rightly cau-
tions, “and if underlying conditions had
truly returned to normal, the economy
should be booming.”
Today, short-term interest rates con-
trolled by central banks remain barely
above zero: 0.25% in the United States,
0.1% in Japan, and 0.05% in the euro-
zone. Such low interest rates leave cen-
tral banks with practically no room to
cut interest rates further to boost eco-
nomic growth.
Real (inflation-adjusted) long-term
interest rates are down as well. Real
interest rates on ten-year government
bonds in the Group of Seven (G7) in-
dustrialized countries (Canada, France,
Germany, Italy, Japan, the UK, and the
United States) have fallen from just
under 5% in the early 1990s to 0.6% at
the end of 2013.
What explains this decline in inter-
est rates? Expansionary monetary poli-
cy, initiated by central banks to lower
rates and counteract slowing econom-
ic growth, is part of the answer. For
Summers, however, the chief explana-
tion for the drop in the real interest

  MAY/JUNE 2015  l  DOLLARS & SENSE  l  7

< Up Against the Wall Street Journal
rate (the price of savings), is the chron-
ic excess of savings (the supply of sav-
ings) over investment (the demand for
savings). He calls this the “essence of
secular stagnation.” Private savings
(largely retained earnings held by cor-
porations) have exceeded private in-
vestment in the eurozone since 2001,
in Japan since well before 2000, and in
the United States since 2008 (after the
housing bubble burst).
Demand-Side or Supply-Side?
Summers attributes the excess of sav-
ings to too little private investment. A
shortfall of overall spending (or “aggre-
gate demand”) is holding investment
below the levels necessary for full em-
ployment. In the middle of last year
(second quarter 2014) business invest-
ment in the G-7 countries stood at
12.4% of GDP, well below the 13.3%
level in 2008 and further behind the
13.8% peak in 2001.
That’s not the way former Fed Chair
Ben Bernanke sees it. Yes, economic
growth is slow, interest rates are low,
and private investment has fallen short
of private savings. But Bernanke attri-
butes that shortfall to a “savings glut,”
an over-supply of savings, rather than a
paucity of investment. What held back
economic growth (outside of the hous-
ing sector) from 2002 to 2006, he ar-
gues, was that China and other coun-
tries with large trade surpluses saved
more than they invested and used their
excess savings to buy U.S. securities.
That helped to finance the housing
boom, but also drove up the value of
the dollar, making Chinese exports
cheaper for U.S. buyers, and causing
domestic production to suffer.
Does it really matter if the problem is
a glut of savings or a dearth of invest-
ment opportunities? In fact, it does. The
policy implications are quite different.
If what’s plaguing the global economy is
Bernanke’s savings glut, the appropriate
policy is to get emerging economies “
to reduce interventions in foreign ex-
change markets for the purpose of gain-
8  l  DOLLARS & SENSE  l MAY/JUNE 2015
ing trade advantage.” But chalking up
excess savings entirely to developing-
world trade policies, as Bernanke does—
not acknowledging the role of ever-
rising domestic inequality and massive
debt burdens—is literally one-sided.
Moreover, changing exchange rates, as
Summer points out, merely transfers
spending from one country to another,
instead of adding to it.
If the main problem
is a shortfall in
private-sector
demand, then the
public sector needs
to boost spending.
On the other hand, if Summers is
right and the main problem is a persis-
tent shortfall in private-sector demand
(in particular, due to lack of investment
demand), then the public sector needs
to boost spending. For economist Paul
Krugman, who has long maintained
that today’s economy suffers from a
chronic lack of demand, that makes the
secular stagnation hypothesis “a very
radical manifesto.”
A Radical Manifesto?
The secular stagnation hypothesis
does have radical implications, some
more radical than others.
Summers, for instance, favors a pro-
gram of enlarged and sustained public
investment, “a natural instrument to pro-
mote growth.” Public investment is, in-
deed, much needed. Net public invest-
ment (subtracting out depreciation) in
the United States fell from 1.5% of GDP
in 2008 to just 0.5% of GDP in 2012, and
had actually turned negative in the euro-
zone. And he has an answer for those
concerned that increasing public spend-
ing would push government debt to
unsustainable levels: In a world with
near-zero real interest rates for govern-
ment debt, public investment projects
would generate enough revenue to ser-
vice the associated debt as long as those
projects yielded any positive return. For
those in the United States still concerned
about the buildup of public debt,
Summers has proposed that the U.S.
government enact a carbon and gas tax
to pay for infrastructure investments.
There are yet more radical implica-
tions of the stagnation hypothesis that
get us closer to the roots of the ongoing
economic crisis. Among the factors that
Summers lists as contributing to a short-
fall of investment is income inequality.
Stagnant wages and booming profits
have reduced consumer spending and
added to corporate retained earnings.
Worsening inequality—which Summers
says threaten to turn the United States
into a “Downton Abbey economy”—
does not only diminish demand. It also
empowers moneyed interests to resist
public spending that would bring about
continuous full employment.
In the last analysis, the secular stag-
nation problem is a political problem
rather than an economic one. With suffi-
cient political will—and political
might—we could enact a program of
large-scale public investment that would
put an end to secular stagnation.
Investments in clean energy (retro-fitting
homes, upgrading the electrical system,
building mass-transit) and education
(reducing class size, improving school
building, and boosting financial aid for
students) are both worthwhile for their
own sake and have been shown to effec-
tively create jobs.
Surely that would be far better than
an economy that depends on financial
bubbles and unsustainable household
debt to keep it from stagnating—and
that rewards the elites who stand in the
way of needed reforms. D&S
J O H N M I L L E R is a professor of eco-
nomics at Wheaton College and a mem-
ber of the Dollars & Sense collective.
S O U R C E S : Available at dollarsandsense.org.
 The Student

© Michael Morgenstern (michaelmorgenstern.org).

Loan
The Student Loan Crisis and the Debtfare State
How the government and lenders have made the debt trap the new normal.

Crisis
BY SUSANNE SOEDERBERG

and the
Debtfare State

B Y S U S A N N E S O E D E R B E RG

E DU C AT I O N A L D E B T H A S B E C O M E A T I C K I N G T I M E B O M B . W I T H
over $1 trillion in outstanding loan balances, the student loan industry has a lot in common with
the sub-prime mortgage industry, which went into a devastating crisis in 2007-8. Both rely on a
financial innovation called “asset-backed securitization” (see sidebar) to raise capital and to hedge
risk—in other words, to raise money for loans and to reduce the likelihood that investors will lose
their money. Student loans asset-backed securitization—or SLABS—means student loan agencies
package student debts and sell them to investors who expect to get their money back, plus interest, as
students pay back their loans. In theory, selling off nicely bundled packages of debt to investors allows
these institutions to turn around more quickly and make new loans. For this reason, SLABS is touted
as the main channel through which the lending industry moves funds from investors to students—
and so is supposed to be of mutual benefit to students, lenders, and institutional investors such as
hedge funds and pension funds.
Like the sub-prime housing industry, however, SLABS ultimately depends on the ability of borrowers
to meet their debt obligations. Herein lies the rub. Since as far back as the recession of 2001, the majority
of student debtors have not been able to get decent paying jobs upon leaving college.
Poor job prospects, as well as mounting costs of basic needs such as health care and housing, mean many
college graduates have not been earning enough to pay back their loans. Default rates on student loans have
been climbing since 2003. By 2012, student loans registered the worst delinquency rates in consumer
credit, worse than even mortgage debts and credit cards.
Despite the uneasy relationship between the profitable student loan industry and growing student debt
defaults, students continue to borrow to pay for college, and educational loans are the only form of con-
sumer debt to increase markedly since 2008. The industry has grown steadily over the past several decades
in lockstep with rapidly rising tuition and fees—and with the government’s prioritization of loan-based
funding over grants. To understand the growth of this risky business, we need to first grasp the basic alli-
ance between government and finance in the profitable world of student debt.

Sallie Mae and the Student Loan Industry

The student loan industry is made up of a wide array of overlapping public and private actors and institu-
tions. There are two main categories of educational loans and lenders: public student loans, which are
issued by the federal government and represent the largest category of loans (85%), and private student
loans (15%), which are issued by a few large banks such as Wells Fargo and JPMorgan Chase. ››
MAY/JUNE 2015  l  DOLLARS & SENSE  l  9
 S T U D E N T LO A N S A N D D E B T FA R E
By far the most powerful private actor in the
industry is Sallie Mae, a former government-
sponsored enterprise, or GSE (see glossary). Sallie
Mae’s original role when it was founded in 1972
was to raise funds by selling student loans (also
known as debt securities) on secondary markets,
where investors buy securities from other inves-
tors. In this way, Sallie Mae could finance low-
interest rate loans to increasingly more students
by subsidizing and guaranteeing repayment to
their private lenders. In 1996, Sallie Mae became
the first GSE to be privatized and was subse-
quently renamed the SLM Corporation—
although the moniker of Sallie Mae remains.
In 2010, the Federal Direct Loan Program (see
glossary) assigned Sallie Mae and four other private
educational lenders (FedLoan Servicing, Great
Lakes Educational Loan Services, Nelnet, and
Direct Loan Servicing Center) the role of federal
loan servicers. These are companies that handle,
for a fee, the billing and other services on federal
STUDENT DEBT GLOSSARY
Default on a debt is the failure to make payment on interest or
principal when it falls due.
Dischargeable debt is debt that can be cleared through bank-
ruptcy proceedings. The federal government has enacted laws
to prevent students from attempting to wipe out their educa-
tion debt by filing for bankruptcy, unless they can prove “un-
due hardship”—and even then courts have been unwilling to
discharge student debt.
Federal Direct Loan Program (FDLP) is a new law, enacted in
2010, under which public student loans originate directly from
the U.S. Department of Education, effectively ending the abil-
ity of banks to issue federal government-backed student loans.
Government Sponsored Enterprises (GSEs) were created by
Congress to enhance the efficiency of funds flowing between
saving and borrowing in key areas of the economy. GSEs
Fannie Mae and Freddie Mac are associated with housing,
while GSE Sallie Mae deals with education. GSEs assist in the
flow of funds by providing loan guarantees, reducing lenders’
risk of losses due to borrower default.
Stafford Loans are a kind of fixed-interest-rate federal student
loan. They are the most affordable type of student loan.
10  l  DOLLARS & SENSE  l  MAY/JUNE 2015
student loans. By far the largest, Sallie Mae (or,
more precisely, its offshoot company Navient),
provides service to 3.6 million loan customers on
behalf of the U.S. Department of Education. Sallie
Mae has been growing at such a rapid pace that it
has been diversifying into areas such as debt collec-
tion, insurance and consumer banking, and the
issuing of credit cards to college students. Sallie
Mae remains the main lender of private student
loans and the largest issuer of SLABS.
Raising Funds, Reducing Risks—for Whom?
SLABS is often presented by economists and neo-
liberal policy makers as a highly efficient method
of raising capital and reducing risk for lenders,
including the risks of default and bankruptcy. This
view of SLABS conveniently ignores the unequal
relations of power in the educational loan busi-
ness—and how the business generates revenue
from commissions, fees, and interest.
Consider, for example, a first-year undergrad at
UCLA who gets a four-year, $25,000 student loan
from Sallie Mae. Depending on the repayment
schedule and an interest rate based on creditwor-
thiness, this student could end up paying Sallie
Mae anywhere from $50,545.95 (based on a 145-
month repayment plan) to $70,259.07 (based on a
193-month repayment plan) to even $74,126.61
(based on a 144-month deferred repayment plan).
The deferred repayment option costs more because
the student is not required to make payments dur-
ing school or, according to the Sallie Mae website,
is allowed to “pay as much as you’d like.” Sallie
Mae’s rosy language leaves out why student bor-
rowers might choose loan terms that are more
expensive in the long run: they are worried about
their ability to repay, because their families have no
extra resources and they may end up unemployed
or underemployed after graduating from college.
Shortly after issuing the loan to the UCLA stu-
dent, Sallie Mae securitizes the debt, packaging it
with a bundle of other similar student loans. It then
sells this debt bundle to an outside investor, like a
pension or hedge fund, pocketing the total amount of
the original loans plus fees and commissions. In doing
so, Sallie Mae receives payment on its student loans
immediately, as opposed to receiving small monthly
payments for twelve to 16 years from students and
bearing the risk that these students might default.
Revenue is extracted in student debt collection, too.
Thanks to amendments to the Higher Education Act
 Asset-Backed Securitization
Asset-backed securitization (ABS) is a financial technique used by governments and corpora-
tions to obtain funding on the basis of present and future revenue streams. It is classic finan-
cial alchemy: a special-purpose vehicle (a corporation, a trust, a limited liability company, or
a partnership) is permitted to transform illiquid assets (mortgages, student loans, credit card
receivables, song royalties, etc.) into tradable securities (bonds, swaps).
The use of ABS was first made famous by the recording artist David Bowie in 1997, when
he turned to this method to raise $55 million. Bowie generated this vast amount of money
by using current and future music royalties from his first 25 albums as collateral. These royalties were transformed into
bonds with a maturity date of 10 years—“Bowie bonds”—that were then available for purchase by investors.
In 2001, a Greek finance minister suggested that the Parthenon should be securitized as a way of reducing Greece’s
large public debt. In this case, a securitization bond would be issued, backed by a stream of future revenues from an-
nual ticket sales to tourists. The deal fell through, but the point remains: there are no limits to assets that can be re-
packaged and subsequently traded as securities (such as bonds) to raise capital.
ABS has been touted by its supporters as an efficient way of raising capital for corporations and governments
(cheaper than turning to banks or other funders for loans) as well as an effective tool for managing risk of default, as it
diversifies and thus spreads the risk. One way it is said to reduce risk on the underlying assets is by what is referred to
as “tranching,” or subdividing the assets into several classes of securities which are then tied to a large number of un-
derlying loans—a process that has given it the moniker “slice and dice financing.”
The 2008 sub-prime housing crisis revealed the dark side of this financial innovation. Mortgage-backed securities
(MBSs) were used to raise capital to lend to people who wished to purchase a home but were categorized as high-risk (i.e.,
“sub-prime”) borrowers. Instead of receiving small monthly payments for a period of 30 years, a bank may prefer to move
the loan off its balance sheet by bundling it with other similar loans and—with the financial backing of a housing GSE
(see glossary) such as Freddie Mac or Fannie Mae—selling it to an outside investor such as a pension or mutual fund. This
method allows the bank to receive funds immediately by selling the loan (mortgage) and thus is motivated to issue more
loans to more people, including sub-prime borrowers. Put differently, banks are given incentives to engage in risky “loan
pushing,” since they can securitize and sell off the loans, thereby avoiding exposure to the risk of default.

in 1991, debt collectors that specialize in student debt
are permitted to tack on hefty collection (25%) and
commission fees (28%) to the outstanding loan,
making debt collection a highly lucrative business.
Private lenders are not the only ones benefiting
from the educational loan business. The Department
of Education, which also securitizes its loans, is
believed to have generated $101.8 billion in revenue
from student loans from 2008 to 2013. It does so
largely by exploiting a spread between the low inter-
est rates it pays to borrow money (e.g., 2.52% based
on the 10-year Treasury bond rate in 2013) and
what it charges students (e.g., 6.8% for Stafford
Loans (see glossary)).
The basic premise driving SLABS is that power-
ful financial actors and institutions are able, through
regulatory and legal sanctioning by the government,
to transform a debt obligation (student loan) into a
financial asset (SLABS) that can be traded on the
secondary markets. This can be understood as the
“commodification of debt.” The underlying assets
for SLABS are student loans that have been sliced
and diced to create packages of debt obligations that
are then sold to investors such as pension funds.
SLABS has proven to be a lucrative device to hedge
risk for investors, raise capital, and even to generate
income when student loan debtors default (through
derivative contracts such as credit default swaps,
which pay off in the event of default).
Once we peel away the complexities of SLABS,
we are left with the basic problem: the success of the
“investment” ultimately depends on the ability of
the debtor to earn enough money to pay the princi-
pal of the loan, plus interest and fees. The alchemy
of finance cannot erase the risk of how hard it may
be for the student to ever repay the loan because the
student will struggle to find gainful employment
after graduation. From this angle, SLABS—like all ››
MAY/JUNE 2015  l  DOLLARS & SENSE  l  11
 S T U D E N T LO A N S A N D D E B T FA R E
forms of credit—rests on the ability of the state to
ensure that debtors (students) will repay the loan—
no matter what their incomes may be.
Debtfare and Discipline
For the student loan industry to continue to
expand and remain lucrative in the face of increas-
ing rates of delinquency and default, the state
must discipline the debtors. In my recent book,
Debtfare States and the Poverty Industry (2014), I
refer to this new feature of neoliberal gover-
nance—emerging alongside the rollback of the
welfare state, dereliction of labor laws, and
increased levels of precarity among working- and
middle-class Americans—as “debtfarism.”
Private lenders are not the only ones benefiting
from the educational loan business.
The Department of Education is believed to have
generated $101.8 billion in revenue from
student loans from 2008 to 2013. It does so
largely by exploiting a spread between the low
interest rates it pays to borrow money and
what it charges students.
Debtfarism represents a set of institutional and
ideological practices aimed at regulating and nor-
malizing the growing dependence on expensive
consumer credit to meet basic needs, such as edu-
cation. Personal bankruptcy law is a core regula-
tory feature of debtfarism, as it acts to deal with
defaults in the student loan industry and to ensure
the legal and moral obligation of debt—regardless
of the borrower’s ability to repay.
For many students, the draconian changes to
the bankruptcy code with the enactment of the
Bankruptcy Abuse Prevention and Consumer
Protection Act (BAPCPA) of 2005 represented a
major turning point. Among its notable features,
the BAPCPA was designed to keep student debtors
out of bankruptcy in three ways.
First, BAPCPA made relief under Chapter 7
(under which most debts are immediately
12  l  DOLLARS & SENSE  l  MAY/JUNE 2015
cancelled) more difficult to access. Granted, federal
student loans have long been exempt from dis-
charge (the release of a borrower from the obliga-
tion to repay her/his student debt through bank-
ruptcy) under Chapter 7, but some legal loopholes
were available to highly distressed debtors, particu-
larly holders of private student loans. The passage
of BAPCPA makes it nearly impossible to pursue
debt relief under Chapter 7.
Second, BAPCA made it more difficult for
highly indebted students to qualify for the other
remaining option for bankruptcy relief—Chapter
13 (adjustment of debts). Student debtors filing
under Chapter 13 can only be granted bank-
ruptcy protection if they prove “undue hardship.”
Undue hardship is determined through means-
tested procedures making human suffering reduc-
ible to algebraic equations. (Congress refused to
provide a clear and transparent definition of
“undue hardship,” opting instead to transfer
responsibility for interpretation to the courts.)
Chapter 13 also requires debtors to jump through
more hoops, such as mandatory pre-bankruptcy
credit counselling and a rigorous repayment plan
for three to five years before the courts discharge
“some” debt. Despite these obstacles, desperate
student debtors continue to file under Chapter 13
to seek relief from dischargeable types of con-
sumer credit, such as credit cards, medical debt,
and auto loans.
Third, BAPCPA added private student loans
to the types of educational loans that cannot be
discharged without adequate proof of undue
hardship. This means that private lenders such
as Sallie Mae now enjoy the same state protec-
tion from debtor bankruptcy as the federal gov-
ernment. Moreover, private educational lenders
such as Sallie Mae have been granted powers to
garnish the wages, tax refunds, and even Social
Security benefits of delinquent debtors with no
statute of limitations.
The debtfare state’s extension of super-creditor
status to dominant private institutions like Sallie
Mae deepens the hold corporations have over edu-
cation financing. One out of every five students
carries private loans, which have higher interest
rates than government loans and carry fees that
add to the balance. Many students are turning to
private loans to augment their federal loans due to
the increasing costs of living (health care and rent)
and tuition (especially at for-profit colleges).
 To manage the relentless wave of defaults, the
government introduced the College Cost
Reduction and Access Act in 2007 (effective July
1, 2009), which tweaked various aspects of the
BAPCPA. While the law included some small vic-
tories for individuals holding public student loans,
it also created a system of income-based repayment
plans under which student debtors would be com-
pelled to pay (through wage garnishment) 15% of
their discretionary incomes (earnings available for
savings or spending on non-essentials) for a period
of 25 years. Only after this period would the bor-
rowers be able to apply for cancellation of the
remaining debt. It should be underlined that this
system applies only to public educational loans
(e.g., Direct Loan and the Federal Family
Education Loan (or FFEL) programs) and to those
student debtors who earn enough discretionary
income to permit the garnishment. Moreover, it is
an income-based repayment system that favours
public-service employees over other workers.
Under the Loan Forgiveness for Public Service
program, for instance, public-service employees
can apply for the remaining debt cancellation after
paying 15% of their discretionary income for 10
years. All other student debtors are required to pay
15% of their discretionary income for 25 years
before applying for the remaining balance of their
debt to be cancelled.
The Rhetoric of Consumer Protection
Framing private educational lending as a consumer
protection issue makes it seem as if the root cause
of the student debt problem is the predatory prac-
tices of private educational lenders, distorting the
role of the debtfare state. The state has played a
critical role in the construction and normalization
of students’ increased reliance on loans—both
public and private—to fund their higher educa-
tion. It has withdrawn funding for education, over-
seen the rise in student tuition and fees, and shifted
from grant-based to loan-based financing. In other
words, the consumer protection framing veils the
role of the debtfare state in actively facilitating
predatory practices.
Consumer protection has also remained
largely rhetorical. Consumer protection for stu-
dent loans does not deal with the social dimen-
sions of student debt risk, such as defaulting,
dropping out of college, moving back home,
working two or more jobs, putting off marriage
and starting families, and even—despite the ››

THE SHIFT IN SUBPRIME LENDING FROM HOUSING TO COLLEGES

Aside from forging the 2007 College Cost Reduction and Access Act for holders of federal loans, under debtfarism the
government has invoked consumer protection to deal with private loans. With rising concerns about mounting stu-
dent debt, the Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Education released a 2012
joint-report about the state of student loans in the United States, with a specific focus on private student loans.
The report argues that risky lending practices tied to private student loans have not only increased more rapidly than
public student loans over the past decade, but have also come to share many similarities to the 2007 subprime mortgage
crisis. Private lenders (banks) issued loans without considering whether borrowers would be able to repay, then securi-
tized the loans and sold them to investors to avoid losses when students defaulted. According to the report, there have
been more than 850,000 defaults in private loans since the 2007 crisis, exceeding a total value of $8.1 billion.
Debtors who default are then subject to disciplinary measures such as a downgrade in credit scoring, which could
affect future employment opportunities due to the prevalence of employer credit checks. Defaulters are also doggedly
pursued by collection agencies eager to cash in on commission and collection fees.
Private student loans are a riskier form of credit for students than federal loans, because interest rates are far higher than
for public loans. The report suggests two main reasons for the increase in private student loans and subsequent defaults.
The first is the lack of proper financial education for students and their families. Public student loans have lower
interest rates and better consumer protection clauses than private loans, suggesting that people who are taking out
private loans are unaware that better terms are available.
The second reason is greed, fuelled by institutional investor appetite for SLABS. Aggressive lending practices,
which lie at the heart of this private lending growth, prompted the Secretary of Education to argue that subprime
lending has moved from the housing market to colleges.

MAY/JUNE 2015  l  DOLLARS & SENSE  l  13

 S T U D E N T LO A N S A N D D E B T FA R E
long odds—filing for bankruptcy to reduce over-
all debt loads.
This has not been uncontested. Growing num-
bers of student debtors have channelled their anger
and frustration with the management of these loans
through numerous acts of protest, active lobbying,
and advocacy to achieve debt justice. One of the
more popular mobilizations has been the Occupy
Student Debt Campaign—a loose network of sev-
eral thousand student debtors and debt activists that
sprang out of the Occupy Wall Street protests.
Occupy’s Strike Debt Working Group and
Rolling Jubilee Fund grabbed headlines with their
“search and destroy” campaign in 2013. Using
donated funds (largely through crowdsourcing),
Rolling Jubilee located and purchased student debt
at discounted prices and then abolished it. The
campaign has cancelled $3.85 million of privately
The “poverty industry” includes educational
lending, but extends to other forms of
consumer credit such as payday loans, credit
cards, sub-prime housing loans. The increasing
reliance on expensive personal loans to
replace or augment wages—as well as obtain
an education—is not a natural phenomenon.
held debt through this approach. Rolling Jubilee
acknowledges that this gesture was symbolic in
that it sought to expose how debt operates and to
empower student debtors.
The Debt Collective emerged from Rolling
Jubilee and from growing student outrage with the
exploitative strategies pursued by for-profit colleges.
The group aims to create a platform for advocacy
and for debtors to unite in collective action. One
such act of resistance has been the country’s first stu-
dent debt strike, in which more than 100 former
students of the for-profit Corinthian College system
are refusing to pay their federal loans. For-profit col-
leges like Corinthian derive 66% of their revenues
from federal student loans. (See Chris Cooper, “The
Corinthian Crisis,” p. 5.)
14  l  DOLLARS & SENSE  l  MAY/JUNE 2015
These activist organizations have been vital in
exposing the injustices and exploitative nature of
the student loan industry. One of their most
important roles has been to politicize debt, con-
vincing insolvent borrowers that they should move
beyond the dehumanizing narrative of debt as an
individual problem by collectively challenging the
moral sanctity of debt.
Building on this momentum will require a focus
on the powerful class interests that have benefited
from student loans—from the issuance of private
and public loans, to servicing and securitizing stu-
dent debt, to collections. While protestors are right
to vilify and target key corporate players such as
Sallie Mae, more critical light needs to be cast on
the role of the debtfare state in both legitimating
the profitable “poverty industry” and failing to
provide adequate public support for social pro-
grams, including education.
The poverty industry includes educational
lending, but extends to other forms of consumer
credit—such as payday loans, credit cards, sub-
prime housing loans—all of which feed off of and
reproduce marginalization and insecurity. The
increasing reliance on expensive personal loans to
replace or augment wages—as well as obtain an
education—is not a natural phenomenon. Rather,
it is a social construction that needs be revealed,
attacked, and uprooted, not negotiated within
the territory of consumer protection, which is
sponsored by the debtfare state and the capitalist
interests it represents. D&S
S U S A N N E S O E D E R B E R G is a professor of political
studies and global development studies at Queen’s
University, Canada.
S O U R C E S : Consumer Financial Protection Bureau (CFPB) and
Department of Education, Private Student Loans, 2012 (files.con-
sumerfinance.gov/f/201207_cfpb_Reports_Private-Student-Loans.
pdf ); Ozgur E. Ergungor and Ian Hathaway, “Trouble ahead for
student loans?” Federal Reserve Bank of Cleveland, Economic
Commentary, May 2008 (files.eric.ed.gov/fulltext/ED505621.pdf );
Federal Reserve Bank of New York, “Are Recent College Graduates
finding Good Jobs?” Current Issues, Vol. 20(1), 2014 (newyorkfed.
org/research/current_issues/ci20-1.pdf ); Project on Student Debt,
“Student Debt and the Class of 2012,” The Institute for College
Access & Success, 2012 (ticas.org/sites/default/files/legacy/fckfiles/
pub/classof2013.pdf ); Amy Traub, Tamara Draut, and David Calla-
han, The Contract for College, Demos, 2012; U.S. Department of
Education (www.ed.gov); Susanne Soederberg, Debtfare States and
the Poverty Industry: Money, Discipline and the Surplus Population,
Routledge, 2014.
Can “Abenomics” Revive Japan’s Economy?
Why we need a progressive alternative embracing
greater income equality and alternative energy investment.
BY JUNJI TOKUNAGA

J APAN ’S CON S ERVATIVE L IB ERAL D E MOC R AT I C PA RT Y ( LD P ) — LE D BY

››
Prime Minister Shinzo Abe (pronounced “AH-bay”)—won a landslide victory in the December 2014
Prime Minister
snap election for the House of Representatives, the lower house of the national parliament. The Liberal Shinzo Abe
Democrats and their partner party in the ruling coalition, the Komeito, won 326 of 475 seats, giving them laughing during
a two-thirds supermajority in the House of Representatives. a visit by
President
Why did Abe win so handily? Since the end of 2012, the Abe government has carried out an eco- Barack Obama
nomic revitalization program called “Abenomics”—its response to Japan’s ongoing economic stagnation, to Akasaka
the “lost decades” of the 1990s and 2000s. Abenomics consists of three “arrows”: aggressive monetary Palace in Tokyo,
April 24, 2104.
“quantitative easing,” massive fiscal stimulus, and “structural reforms” to the economy. The main reason
for Abe’s resounding victory is that he succeeded in persuading the electorate to stay the course, with Credit: Official
White House
slogans like “Abenomics is progressing” and “There is no other way to economic recovery.” Meanwhile, photo by Pete
he shifted voters’ attention away from more controversial matters, such as his plans to restart Japan’s Souza (public
nuclear power plants (which were shut down after the March 2011 Fukushima nuclear disaster) and to domain).
bolster the country’s military forces.
Rather than leading to a rebound of domestic consumption and investment spending, which could
lift the economy as a whole, however, Abe’s neoliberal reforms would lead to rising inequality and con-
tinued stagnation. We certainly need significant public spending. The Abe government, however, has
carried out pork-barrel public projects that will not revive the Japanese economy in the long term, while
averting another recession. Rather, we must explore programs to facilitate the development of new
industries, such as renewable energy (RE), instead of the defense and nuclear power industries that the
Abe cabinet favors.

What Is Abenomics?
Abenomics has been mainly about more aggressive monetary “quantitative easing”—central bank pur-
chases of various kinds of bonds (other than short-term government bonds, purchases of which are
considered “conventional” expansionary monetary policy) from banks and other private owners of
financial assets. The Bank of Japan, the country’s central bank, has been engaging in “Quantitative
and Qualitative Monetary Easing” (QQE) since April 2013, with the goal of raising the inflation rate
to 2% within two years. ››
MAY/JUNE 2015  l  DOLLARS & SENSE  l  15
 ABENOMICS
According to advocates of Abenomics, infla-
tionary expectations driven by aggressive mone-
tary easing would reduce real interest rates (that
is, interest rates adjusted for inflation, which are
calculated by subtracting the inflation rate from
the nominal interest rate). In turn, lower real
interest rates will make corporations willing to
borrow more, raising investment spending and
generating domestic employment. The increase
in investment would lead to strong corporate
profits, eventually translating into higher wages,
which would in turn increase consumption
spending by households. This is basically a form
of “trickle-down economics,” in the sense that,
according to its advocates, strong corporate
profits would trickle down to everyone else in
the economy.
Rather than leading to a rebound of domestic
consumption and investment spending, which
could lift the economy as a whole, Abe’s
neoliberal reforms would lead to rising
inequality and continued stagnation.
Under the QQE program, the Bank of Japan
(BOJ) pledged to double the size of the monetary
base (currency in circulation plus banks’ reserves
on deposit at the central bank). By the end of
October 2014, unsatisfied with the results of the
program, it decided to accelerate this enlargement
of the monetary base. With the BOJ being twice
as aggressive as the U.S. Federal Reserve in its
bond-buying, its balance sheet has gone above
50% of GDP.
Economist Paul Krugman has strongly sup-
ported Abenomics—“the sharp turn toward mon-
etary and fiscal stimulus adopted by the govern-
ment of Prime Minster Shinzo Abe”—and hailed
it as a model for other countries to emulate. In a
2013 column in the New York Times, he stressed
that Japan could be the first major country to
climb out of the kind of recession and stagnation
in which has also befallen Western countries since
the global financial crisis in 2008.
16  l  DOLLARS & SENSE  l  MAY/JUNE 2015
The Effects of Abenomics So Far
The effects of aggressive monetary easing have,
mainly, been limited to higher stock prices on the
Tokyo Stock Exchange and the drastic depreciation
of the Japanese yen in foreign exchange markets.
The Nikkei 225, the index for the Tokyo stock
market (analogous to the S&P 500 for the New
York Stock Exchange and NASDAQ), has soared.
The yen, meanwhile, has depreciated by more than
42% relative to the dollar in the last two years.
Some have pointed to these developments as proof
that Abenomics is working.
In fact, these effects will not contribute to the
trickle-down dynamic that advocates of Abe’s pol-
icy expect, for two reasons. First, aggressive mone-
tary easing will not stimulate overall household
consumption spending. The dramatic stock mar-
ket rally has sparked a “wealth effect,” which might
lead those who own a lot of financial assets—feel-
ing flush with their new riches—to spend more.
Meanwhile, however, workers’ wages have not kept
pace with inflation. In addition, the Abe govern-
ment introduced a sales tax hike, from 5% to 8%,
in April 2014. Such conditions tend to make ordi-
nary people reduce their consumption spending.
The benefits of trickle-down Abenomics clearly
have not reached everyone.
Second, corporations, particularly big multina-
tionals, are hoarding their profits. Corporate profits
have been rising significantly, underpinned by the
drastic depreciation of the yen. This has boosted the
competitiveness of Japanese industry in global mar-
kets. But corporations have held onto most of these
profits as internal reserves, rather than engaging in
investment spending that would lift the economy.
According to Japan’s Finance Ministry, the reserves
of Japanese nonfinancial companies reached a record
304 trillion yen (nearly $3 trillion) by of the end of
fiscal year 2013. As a consequence, Japan’s GDP
shrunk for two consecutive quarters, a common def-
inition for recession, after the second quarter of
2014. (Figures for the first quarter of 2015 were not
available at this writing.)
What Kinds of Policies Will Abe Push Now?
Abe’s landslide victory in the snap election could
not only enable him to stay in office until late
2018, making him longest-serving prime minister
in Japan since World War II, but also give him
abundant political capital for further pursuing his
economic agenda.
 On what kind of policies will Abe spend this make it easier for big corporations to fire full-
political capital? First of all, he will likely purse the time employees, lowering incomes for wage
“third arrow” of Abenomics: structural reforms of earners even further.
the economy. The Abe cabinet announced a
• Third, radically reducing social welfare spending
“Revision of Japan Revitalization Strategy: 10 Key
in the fiscal year 2015 budget, in order to reduce
Reforms” in June 2014. Parts of the strategy, such
the massive fiscal deficit.
as enhancing women’s labor-force participation
and advancement could be epoch-making in Japan, • Finally, completing the final stage of negotia-
if they worked well. But most of structural reform tions over a free-trade agreement, the Trans-Pa-
plans are based on a neoliberal approach of low cific Partnership (TPP), with the United States.
corporate taxation, deregulation, reduction of fis- The TPP would open the agricultural market in
cal deficits, and free trade. Broadly, Abe would Japan to an unprecedented level of imports,
likely push four neoliberal policies: which would inflict big damage on many Japa-
nese farmers.
• First, lowering corporate taxes, while planning
the second stage of the sales tax hike from 8%
Do We Have a Progressive Alternative
to 10% in April 2017. The Abe government
for Reviving the Economy?
has agreed on the basic outline of fiscal year
Many voters understood the problems with
2015 tax reforms, including a 2.51 percentage-
Abenomics before the December snap election. An
point reduction in the effective corporate tax
November opinion poll by Nikkei, Japan’s leading
rate. The tax cut could be a further boost for
economics and business news company, reported that
big corporations that have already received the
51% of the public opposed Abenomics, compared
windfall from the depreciation of the yen.
with 33% who favored it. Disappointingly, a lack of
• Second, accelerating the push for labor market strongly progressive alternatives from the opposition
“flexibility.” Labor market deregulation would parties helped Abe win his landslide victory. ››
Soyamisaki (Cape Soya) Wind Farm in
Wakkanai City, Hokkaido, Japan,
August, 2011.
Credit: S. Kawamura, Wikimedia Commons,
Creative Commons Attribution-Share Alike
3.0 license.

MAY/JUNE 2015  l  DOLLARS & SENSE  l  17

 ABENOMICS
What kind of policy should we implement to
avert a return to recession? As economist Richard
Koo argues in his recent book The Escape from
Balance Sheet Recession and the QE Trap, we have to
carry out not austerity policies but fiscal stimulus,
which can stabilize the economy. Reasonably, the
Abe government announced expenditures totaling
3.5 trillion yen (US$29 billion) in 2015. But fiscal
stimulus and monetary easing can only buy time to
sow the seeds of economic revival in Japan. Now is
the time to explore an alternative program for long-
term recovery.
First, we need to increase real wages, which
could lead to a rise in consumption spending. Abe
and Haruhiko Kuroda, governor of the Bank of
Japan, are trying to encourage big companies to
raise wages in 2015, which is part of their pro-
gram to achieve 2% inflation. To spread the ben-
Japan has to learn the lessons of the
Fukushima nuclear disaster and start to
develop renewable energy. This could end
deflation and move the country onto a path of
sustainable economic growth.
efits of economic recovery through the economy
as a whole, however, we have to extend higher
wages not only to workers at big corporations,
but also to those at small- and medium-sized
enterprises (SMEs), which are the main engines
of the Japanese economy.
Second, we need a new set of public invest-
ment projects that could foster basic industry
for the next generation. Japan is a global leader
in renewable energy technology. In fact,
the country accounts for the majority of
renewable-energy patent applications world-
wide. (Japan’s share is 55%; the United States’,
20%; Europe’s, 9%.) The Japanese government
should drastically redirect the energy research
and development (R&D) budget away from
nuclear power generation—which reached 69%
of total energy R&D spending in 2010—and
toward renewables.
18  l  DOLLARS & SENSE  l  MAY/JUNE 2015
The financial system in Japan has the potential
to serve as a bridge between lenders and financial
investors who want to finance RE projects, and
borrowers who plan to start renewable energy busi-
nesses. On the lending side, Japanese individual
investors have been among those most interested,
worldwide, in “World Bank Green Bonds,” which
are designed to raise funds for green economy proj-
ects in developing countries. On the borrowing
side, many firms and entrepreneurs, some sup-
ported by local governments, have applied to start
businesses including solar, wind, geothermal, and
biomass power generation.
A “feed-in-tariff ” (FIT) law, passed in July
2012, allows private providers to sell renewable
energy to big electricity companies at prices to be
fixed by the central government. This has fostered
a boom in RE business, particularly in solar power
generation. According to Japan’s Agency for
Natural Resources and Energy, renewable-energy
generating capacity has increased from about
567,000 kilowatts in July 2012 to nearly 72 mil-
lion kilowatts in October 2014. These develop-
ments imply that Japan has both extraordinary
financial resources that could provide funds to RE
businesses and numerous firms and entrepreneurs
eager to make use of them, if given a chance.
As Koo explains, Japan’s “lost decades” and its
deflation are attributable to insufficient private
investment demand. It could take a significant
amount of time for these alternative programs to
create new investment opportunities and lift the
economy as a whole. But Japan has to learn the les-
sons of the Fukushima nuclear disaster and start to
develop renewable energy. This could end defla-
tion and move the country onto a path of sustain-
able economic growth. D&S
J U N J I T O K U N A G A is an associate professor in
the Department of Economics, Dokkyo Univeristy,
Saitama, Japan.
SOURCE S: Paul Krugman, “Japan the model,” New York Times, May
23, 2013; “Without reforms, Japan’s leader remains vulnerable,” Wall
Street Journal, Dec. 15, 2014; “Acquisitions, financing worries behind
Japan Inc.’s bulging reserves,” Nikkei Asian Review, June 23, 2014;
Richard Koo, The Escape from Balance Sheet Recession and the QE Trap
(Wiley, 2015); “Japan cabinet approves Y3.5tn stimulus spending,”
Financial Times, Dec. 27, 2014; “Patent-based Technology Analysis
Report-Alternative Energy Technology,” World Intellectual Property
Organization, 2009; “Japan and nuclear power,” Mainichi, Jan. 22, 2012.
A Way Out for Greece and Europe

Keynes’ Advice from the 1940s

BY MARIE CHRISTINE DUGGAN

I S T H E R E A WAY F O R G R E E C E T O H O N O R I T S D E B T S W I T H O U T
impoverishing its people? Most people see only two ways out of the current crisis: Either Greece services its
debts, and the wealth gap between creditor and debtor nations in Europe rises; or Greece defaults, and the
››
The signing of the
Anglo-American
European banking system is forced to write-down its assets by the value of the Greek IOUs. However, there loan agreement
is a third way: creditors could promise to spend the money they receive from Greece (in the form of debt ser- at the State
Department,
vice payments) on Greek imports or on long-term for-profit investments in Greece. This third way involves Washington, D.C.,
re-aligning institutional incentives so that the creditors only gain when the debtors themselves grow. Dec. 6,1945.
Problems like those Greece faces are not new. And, in fact, the best solutions are not new either. During Seated from left:
John Maynard
the Second World War, Britain faced a similar situation of trade deficits coupled with a cut-off of interna- Keynes, Lord
tional credit. John Maynard Keynes devised a solution which did not impose all the burdens on the debt- Halifax, James
ors by reducing wages. Instead, it would not be just debtor countries—but also creditor countries—that Byrnes, Fred
Vinson.
would have to “adjust.” The creditors would have to spend their surpluses (rather than building up reserves),
allowing the debtors, in turn, to grow their economies and pay back their debts. Dependence on the fickle UK National
whim of the foreign investor is the story line that unites the post-war British context with that of Greece Archives (public
today. In another similarity, the subtext for Greece, since it joined the eurozone in 2001, has been the need domain).
to increase its productive capacity and infrastructure so that its products—priced in euros—are produced
efficiently enough to compete with those from other eurozone countries. A solution like the one Keynes
proposed for Britain towards the end of the war would offer Greece the best way out today. ››
MAY/JUNE 2015  l  DOLLARS & SENSE  l  19
 KEYNES AND GREECE
The Trap of Short-Term Debt
The euro became Greece’s sole currency in 2002.
This opened the door to marketers of credit from
wealthier eurozone nations. The Greek government,
firms, and households had previously been making
payments in drachmas, which were considered
“funny money” by international investors because
the currency could lose value in a depreciation of its
exchange rate relative to the euro. But after 2002, the
Greeks began making payments in euros on loans
denominated in euros, so the creditors faced no risk
of exchange rate loss. No one had ever been so enthu-
siastic before about lending to the Greeks. Between
2005 and 2008, foreigners opened bank accounts or
moved into the country (capital account increases),
or invested in Greek stocks and government bonds
(portfolio investment), as shown in the top half of
Figure 1. Greek
2010 Balance of2011
Payments, 2005-2008
2012
20.0
2005 2006 2007 2008
0.040.0
30.0
-20.0
Billions of Euros
Figure 1. As these moneys flowed in, they permitted
Greece to finance an excess of imports over exports
which resulted in the growing current account defi-
cit shown in the bottom half of Figure 1.
The fact that investors from other European
countries were willing to lend to Greece was not the
problem. Rather, the problem was the short-term
nature of the loans. There are basically two types of
foreign investment: short-term and long-term.
Portfolio investment and foreign bank accounts are
both short-term purchases of paper assets. Foreign
direct investment, on the other hand, involves an
institution in a creditor nation opening a physical
business in Greece as a subsidiary, or engaging in a
joint venture with a Greek business partner. Without
the option of a quick and easy exit, the direct inves-
tor has more of a stake in ensuring the growth of the
business activity undertaken in Greece.
In 2008, foreign lenders provided Greece with
short-term funds to the tune of 16.4 billion euros,
while foreign direct investment was barely one-
tenth that amount, only 1.7 billion euros! Such a
predominance of foreign portfolio investment and
bank accounts is problematic because the flow can

20.0
reverse in the time it takes to push a button on a
Billions of Euros

-40.0
10.0
computer, giving the portfolio investor incentive
-60.0 0.0
to flee at even the slightest hint of trouble. As
-10.0
-80.0 Figure 2 shows, net portfolio investment demon-
-20.0
-100.0 strated its short-term nature by turning negative—
-30.0
into a net outflow from Greece—in 2010. The
-120.0
-40.0
outflow reached panic proportions by 2012.
Current FDI
AccountPortfolio
CapitalOther (Banks)
Account Direct Investment
When short-term investment dominates, foreign
Portfolio Investment Bank Accounts
creditors hold the debtor nation hostage. If the
Source: IMF Balance of Payments (billions of euros); bank accounts also include “other.” creditors don’t like the country’s public policies,
Note: The figures are based on the IMF balance-of-payments data. In this accounting system, foreign portfolio
investment (purchases/sales by private foreign sector or foreign governments of stocks and bonds) and foreign direct they can quickly sell off their holdings. Had the
investment are included in the “financial account.” The financial account “other” includes government-to-government
loans, bank loans, loans to and from international organizations, and trade credits.
eurozone wanted each nation to preserve its political
sovereignty, it should have put in rules to heavily
Figure 2. The Greek Financial Account: discourage short-term speculative loans between
Capital Flight from 2010 to 2012 eurozone partners. In fact, the opposite occurred.
2010 2011 2012
20.0
Greek entry into the eurozone was viewed as a mar-
keting opportunity for short-term credit from
0.0
financial institutions in wealthier nations.
-20.0 When foreign holders of Greek government
Billions of Euros

-40.0
bonds decided to sell in 2010, Greece was running a
fairly high trade deficit, on the order of 10% of GDP.
-60.0
It is possible for a nation to import more than it
-80.0 exports, but only so long as foreigners are willing to
-100.0 lend to or invest in the nation. In 2008, foreigners
were interested in lending to Greece, but the global
-120.0
economic crisis in 2009 made them jittery. By 2010,
FDI Portfolio Other (Banks) they no longer wanted to lend to the Greek
Source: Greek Article IV Report, IMF June 30, 2013 in billions of euros. “Other” refers mostly to bank accounts.

20  l  DOLLARS & SENSE  l  MAY/JUNE 2015

government, but rather to sell off their holdings of
Greek government bonds (for 8.5 billion euros).
Meanwhile, Greece planned to import more than it
exported (23 billion euros), so the IMF came up with
31.5 billion euros to fill the gap. In the short term, it
would have been very punitive to the economic base
to cut off imports completely, since some are inputs
to the economy (such as computers) and others are
essential to subsistence (such as medicine).
Why did the international banking system step in
with the first 31.5 billion euro bailout? The answer is
that creditor institutions were unwilling to let Greece
default. Between 1990 and 2010, many banks made
loans around the world to borrowers who might
never be able to pay those loans back. If the interna-
tional banking system were to admit that some loans
will never be repaid, then banks would have to write
down their assets by the amounts of those loans.
Greece is just the tip of the iceberg in that regard. The
last thing that the international banking system wants
is for Greece to repudiate the loans.
IMF loans are designed to rescue the interna-
tional banking system, rather than to assist the
debtor nation. That explains why the loans did not
end Greece’s problems. The IMF wanted Greece to
let holders of Greek bonds sell them off—for the
money that the IMF had newly lent. The IMF
hoped that the ability to liquidate Greek bonds
would deter the bondholders from actually selling.
The IMF was playing a confidence game to prevent
portfolio investors from hitting the “sell” button.
The long-term solution for Greece, however, is
completely different. To reduce reliance upon foreign
financing, Greece would like to export more than it
imports. Winning over international buyers will
require lowering Greek production costs. The way to
lower costs significantly and sustainably is to invest in
new technology and infrastructure that permits the
same workers to produce more during any given
period. However, the IMF insisted that Greece lower
the cost of production while also reducing imports
(read: no more new technology) and ceasing to bor-
row above emergency levels. Under those circum-
stances, the only way for Greek products to gain any
market share would be for wages to drop—by a lot.
Real wages did drop and unemployment rose to 27%.
Many households had accumulated debt between
2002 and 2010, and as they lost jobs, debt burdens
relative to incomes rose. At the same time, the Greek
government could no longer borrow by issuing bonds
(because Europeans, including Greeks, were no
Figure 3. IMF Bailouts Plug Ever-Larger Hole in
Greek Balance of Payments, 2010-2012
2010 2011 2012 2013
150.0
100.0
Billions of Euros
50.0
0.0
-50.0
-100.0
-150.0
Current Account Financial Account Capital Account IMF
Source: Greece: Article IV Report, IMF on June 30, 2013 (in billions of euros).
longer willing to buy them), so the government
reduced benefits (as the IMF was also urging). By
2014, the Greek people had endured enough and
voted the left-wing SYRIZA coalition in on a plat-
form to end IMF control of government policy.
IMF loans are not meant to rebuild a country,
but rather to tide it over through a panic until the
private sector is willing to lend to the country again.
Problems like those Greece faces are not new.
During the Second World War, Britain faced a
similar situation of trade deficits coupled with a
cut-off of international credit. John Maynard
Keynes devised a solution which did not impose
all the burdens on the debtors by reducing wages.
If IMF loans fail to reverse a temporary panic, they
wind up growing dangerously large (look at 2010 to
2012 in Figure 3). As the SYRIZA government’s
finance minister, Yanis Varoufakis, has pointed out,
“We have resembled drug addicts craving the next
dose. What [SYRIZA] is all about is ending the
addiction.” Greece is in a bind: IMF loans are emer-
gency funds that cannot be used to improve produc-
tive capacity, educate the people, or build infrastruc-
ture. Wages and employment are falling at the same
time as social insurance, so the people are under-
standably bitter. If Greece leaves the eurozone now,
the return to the drachma will put salaries back into
drachma, which will not have the purchasing power ››
MAY/JUNE 2015  l  DOLLARS & SENSE  l  21
 KEYNES AND GREECE
of euros. All exits seem to lead to a lower standard of
living for the people of Greece and greater income
inequality between nations in Europe.
Enter John Maynard Keynes
Let us now turn to Keynes’ suggestion for Britain at
the end of World War II. Like Greece today, Britain
at the time had a damaged industrial base and poor
infrastructure (due to Hitler’s bombs). Furthermore,
wealthy foreigners who had lent Britain money in a
short-term way were trying to liquidate their British
holdings just when Britain needed long-term credit.
In Britain’s case, the short-term holdings of foreign
money came in the form of the London bank
accounts of imperialists in South Africa, Canada,
Australia, India, and other nations of the collapsing
British Empire. These wealthy families wanted to
transfer their money to New York banks, and to
In 1944, chastened by two world wars and the
rise of fascism, governments were willing to put
restrictions on how banks made money, and to
commit to economic policies that would bring
jobs and prosperity to the working class.
import products from the United States as well.
Britain was running a trade deficit, and the rest of
the world was trying to remove funds all at the same
time. In both respects, the situation was similar to
Greece today.
Keynes gave considerable thought to the prob-
lem: How could Britain’s banks honor the commit-
ment to permit depositors to remove funds while
also rebuilding its industrial base? And he came up
with a logical solution: put pressure on creditors as
well as debtors to “adjust.” His logic was that debtors
always feel the pressure to make payments—on pain
of cut-off from future loans, threat of asset seizure,
or other punitive measures (such as the threat today
of pushing Greece out of the eurozone). However,
creditor nations do not feel a similar pressure to
spend what they get from exporting more than they
import—i.e., running a trade surplus. They can
hoard the surplus by building up reserves. The first
rule for Keynes, then, was that creditor nations
22  l  DOLLARS & SENSE  l  MAY/JUNE 2015
should have their surpluses confiscated if they did
not spend it by the end of the year. He never antici-
pated any confiscation actually taking place—like
any “use it or lose it” account, the point was to pro-
vide an institutional incentive for the creditor to
spend the entire surplus by a certain time.
The second rule would have consisted in limiting
the types of spending that creditors could make to
long-term investments, imports, or donations. This
brings us to the way out for the eurozone and Greece.
It will be safe for Greece to repay its debts to the credi-
tor nations of Europe, if the eurozone nations agree
that the creditor nations will spend the money they
receive from Greece on Greek imports or long-term
loans or joint ventures in Greece. Since Greece is not
exporting enough to pay for imports that will build
up its infrastructure, then by definition the eurozone
nations do not find it sufficiently enticing to buy
imports from Greece. In this case, eurozone nations
would make long-term investments in Greece so that
Greece could generate the capacity to produce
imports that were appealing to Europe.
Perhaps this scenario seems too draconian—
forcing creditors to purchase from or make long-term
investments in Greece on penalty of losing the income
from annual Greek debt payments. Consider, then,
that the eurozone nations could simply make a rule
that every member nation would need to spend its
trade surplus with other eurozone nations by end of
year, and that such spending take the form of imports,
long-term investment, or donations. (Portfolio invest-
ment would be highly discouraged.) Each nation
could import, invest in, or donate to the individual
country of its choice, but since any surplus would
have to be spent by a certain time, the effect would be
to make every eurozone economy balance its interna-
tional payments. Imagine an inflatable rubber glove.
As air goes into one finger, that finger inflates. Once
that finger is filled, the air will naturally flow to
another finger. In the end all five fingers of the rubber
glove will be equally inflated. In just this way, if every
creditor nation must spend its current account sur-
plus by the end of the year in other eurozone nations,
then the entire eurozone economy will expand.
Postscript for Europe Then,
Prescription for Europe Now
Keynes’ plan did not pass at the Bretton Woods
Conference in 1944, but his proposal did influence
debate. The United States rejected the “use it or lose
it” clause that would have required it to import
from or physically invest in debtor countries until
its huge post-war surplus was gone. However, the
United States did donate via the Marshall Plan, and
financed long-term loans through the International
Bank for Reconstruction and Development. Britain
obtained a long-term loan from the United States
for reconstruction (see photo on p. 19), rather than
the gift that Keynes sought, and it was several years
before Britain permitted deposits to be freely con-
verted out of London banks. Yet the negotiations
did result in restrictions on portfolio investment, so
that foreign direct investment became the domi-
nant form of international investment between
1945 and 1973. During that period, global income
inequality was reduced.
In 1944, Europe and the United States had been
chastened by two world wars and the rise of Nazism
and Fascism. All 44 nations sending representatives to
Bretton Woods understood that economic forces had
contributed to the horror in which so many had lost
so much. Nobody wanted to live through it again. To
prevent political extremism and its deadly conse-
quences, governments were willing in that moment
to put restrictions on how banks made money, and to
commit to economic policies that would bring jobs
and prosperity to the working class.
For a similar scenario to come off today, poli-
cymakers must remember the fragile nature of
global institutions and the importance of curtail-
ing investments where creditors escape with prof-
its while debtors lose ground. Europe is a family,
and when the business owned by one family
member is small and precarious, other members
do not make short-term loans at high interest, or
push the firm into bankruptcy and seize the
assets. Family members buy from each other and
invest for the long-term in each other’s enterprises
because such willing and profitable action fosters
family strength and stability. D&S

M A R I E C H R I S T I N E D U G G A N is a professor of
economics at Keene State College in New Hampshire. She
received her PhD from the New School for Social Re-
search in 2000. Since then she has taught macroeconom-
ics, history of economic thought, and economic history.

S O U RC E S: Marie Duggan, “Taking Back Globalization: A China-United
States Counterfactual Using Keynes’s 1941 International Clearing Union,”
Review of Radical Political Economics, 2013; Eric Helleiner, States and the
Reemergence of Global Finance (Cornell, 1994); Robert Skidelsky, Chapter 36:
“Keynes ‘New Order,’” John Maynard Keynes 1883-1946 (Penguin, 2003).
Greek anti-austerity protests in May 2010.
Credit: Philly boy92, Wikimedia Commons,
Creative Commons Attribution Share-Alike 3.0
Unported License.

MAY/JUNE 2015  l  DOLLARS & SENSE  l  23

< Primer
Land Reform
A Precondition for Sustainable Economic Development
B Y J AW I E D N AWA B I
It is in the agricultural sector that
the battle for long-term economic
development will be won or lost.
—Gunnar Myrdal,
economist and Nobel laureate
T he phrase “land reform” often con-
jures up memories, for those lean-
ing right, of frightening extreme-left
ideologies. On the progressive left,
meanwhile, land reform is often treat-
ed as a passé topic.
With the advent of rising inequality,
climate change, weak government
institutions, failed states, terrorism,
corruption, and a whole slew of other
socio-economic problems—sown or
exacerbated by three decades of neo-
liberal policies in the “developing
24  l  DOLLARS & SENSE  l MAY/JUNE 2015
Green tea farm of Boseong, Jeollanam-do, South Korea.
Credit: Fred Ojardias (Creative Commons Attribution 2.0 Generic License).
world” (Global South)—it is high time
we revisit the issue of land reform. We
need to bring it back to the center of
the discussion on sustainable econom-
ic development. Land reform is not
political extremism; rather, it is a criti-
cal policy mechanism for the world to
address issues of poverty, hunger, ur-
ban slums, and good governance.
What is “land reform”? It is usually
defined as the redistribution of large
landholdings to smaller ones. Land is
transferred from large landlords to
those who have been working the land
as tenants (such as sharecroppers) or
paid agricultural workers, as well as dis-
possessed underemployed or unem-
ployed urban workers who migrated
from rural areas looking for employ-
ment and wound up living in urban
slums. That is one model of land reform.
Another model is redistribution in the
form of rural communes or cooperative
or collective farms. A combination of
the two models is also possible.
Reemergence of Land Reform
Movements
Despite the attempts by international
institutions (like the IMF and World
Bank) and oligarchic political elites in
the global South to suppress land re-
form policies, there have been growing
social movements pushing for land re-
form in the last two decades. Neoliberal
“free trade” policies have exposed small
farmers to devastating global competi-
tion (especially from giant mechanized
industrial farms in the global North),
leaving hundreds of millions of them
dispossessed, and have forced them
into the reserve army of impoverished
unemployed or underemployed living
in urban slums. From Brazil and Mexico

to the Philippines and Zimbabwe, social
movements for a more just and fair dis-
tribution of wealth—particularly land—
are confronting these devastating con-
sequences of neoliberalism.
Social protest has led even elite insti-
tutions such as the World Bank to ac-
knowledge the issue. The Bank’s World
Development Report 2008: Agriculture for
Development, at least rhetorically put
agriculture and the productivity of
small farmers “at the heart of a global
agenda to reduce poverty.”
Agriculture as Technical Problem?
The central tendency of mainstream
economic development theory since
the 1940s and 1950s has been to view
agriculture as a mere stepping stone
towards industrialization. Economist
Arthur W. Lewis’ “dualist” model was
particularly influential in casting agri-
cultural labor in developing countries
as redundant—with a “surplus” of
workers adding little or nothing to
agricultural production. This surplus
labor force, Lewis argued, should be
moved out of the agricultural sec-
tor—this would supposedly not re-
duce output—and into the industrial,
which he viewed as the key sector of
the economy.
LAND REFORM AND
COLONIZATION
If we broaden the concept of
land reform, the whole pro-
cess of colonial settlement in
North America, Central and
South America, Australia, and
New Zealand was one big land
reform, appropriating the
lands of indigenous peoples
and distributing it to the
European settlers. So land re-
form can be understood as a
much more common experi-
ence of the “developed” world
than it is usually thought of in
the economic literature.
Besides moving inefficient peasants
out of the rural sector, mainstream de-
velopment economists proposed to
boost agricultural yields by consolidat-
ing small farms into large ones—sup-
posedly to take advantages of econo-
mies of scale. Thus, instead of reducing
land concentration, this would in-
crease it, essentially accomplishing a
reverse land reform. Such an industrial
model of agriculture would use expen-
sive capital equipment (imported from
the global North), petroleum-based
fertilizers, herbicides, and pesticides.
Today’s version of the model increas-
ingly pushes the adoption of geneti-
cally modified seeds controlled by cor-
porations like Monsanto.
During the 1960s and 1970s, this
frame of thought led many interna-
tional institutions (such as the World
Bank, Asian Development Bank, etc.)
and governments in the global South
to embrace the “Green Revolution.”
The Green Revolution was essentially
a plan to use “science and technolo-
gy” to increase crop production in
developing countries. The use of fer-
tilizers, pesticides, and high-yield
crop varieties was supposed to boost
agricultural productivity, reduce rural
poverty, solve problems of hunger
and malnutrition, and thus avoid
peasant movements and rural politi-
cal instability. This was, as econo-
mists James M. Cypher and James L.
Dietz put it, a “strategy wherein it
was hoped that seed technologies
could be substituted for missing land
reform and for more radical ‘red revo-
lutions’ of the socialist variety threat-
ening to sweep across the globe at
the time.”
Viewing agricultural productivity
as a purely technical problem, advo-
cates of the Green Revolution did not
aim to transform the structure of land
inequality and landlord power. To
take the case of India, the Green
Revolution boosted agricultural
yields, making the country technically
self-sufficient in food production.
  MAY/JUNE 2015  l  DOLLARS & SENSE  l  25
$
However, the changes primarily ben-
efited medium and large-sized land-
owners who used capital-intensive
technologies, high-yielding mono-
crop seeds, and large inputs of fertiliz-
ers and pesticides. “Rural inequity
worsened because of the growing
prosperity of the large and medium
farmers and the unchanged position
of the landless and small farmers,”
concludes Indian scholar Siddharth
Dube. “And because large farms use
more capital and less labour per unit
of produce than small farms, rural em-
ployment grew much less than it
would have if land reform had taken
place and the increase in production
come from smaller farms.”
The Economic and Socio-
Political Cases for Land Reform
There are two broad arguments for the
importance of land reform. The first is
based on the widely observed inverse
relationship between farm size and out-
put per unit of land area: smaller farms
produce more per acre of land than
larger farms. Smaller land holdings are
more productive and ecologically sus-
tainable for a number of reasons:
1) Higher labor intensity. Small
farmers use more labor per unit of
land, which helps generate more out-
put and more employment per unit.
2) Higher multiple cropping. They
grow more crops per year on a given
piece of land.
3) Higher intensity of cultivation.
Small farmers leave a lower propor-
tion of land fallow or uncultivated. In
addition, they cultivate crops that are
higher value-added per unit of land.
4) Lower negative environmental
impacts. Small farms use fertilizers,
pesticides, and other agrochemicals
more sparingly than large farms. This
reduces negative impacts of harmful
chemicals on workers and neighbors.
Small farmers, overall, have a greater
incentive to employ environmentally
sustainable techniques than large
industrial ones.
< Primer
The importance
of a land reform
is in changing
the hierarchical
structure of agrarian
class relations
while increasing
productivity. The
idea is to break the
power of landlords.
››
Urban agriculture
in the Daeya-dong
neighborhood of the city
of Gunpo, South Korea,
July 2014.
Credit: L4 Ferguson
(Creative Commons
Attribution-Share Alike
3.0 Unported license).
26  l  DOLLARS & SENSE  l MAY/JUNE 2015
While the economic case for land
reform can be construed as a narrow
technical argument on how best to
boost agricultural productivity—which
land-reform opponents could argue is
unnecessary due to the advent of the
Green Revolution—the socio-political
argument is aimed against this kind of
narrow technical thinking. The impor-
tance of a land reform is in changing
the hierarchical structure of agrarian
class relations while increasing produc-
tivity. The idea is to break the power of
landlords, who keep peasants as a cap-
tive labor force in rural areas and act as
a conservative political force at the local
and national levels of the state.
The central mechanism by which
landlords wield their power is through
patron-client networks that give them
control over local and regional govern-
ment institutions. Landlords keep the
poor majority dependent on them for
jobs and access to land, while also using
them as a captive power base for local
elections (in countries where there are
elections, such as India and Brazil). This
way, they can block the development of
state programs providing public goods—
like public roads, clinics, schools, water
systems, etc.—for everyone. Instead,
they perpetuate a more narrowly target-
ed development relying on private
goods—fertilizer, pesticides, expensive
high-yield seeds, privately controlled
water wells, loans that put peasants in
ever-deeper debt, etc. They provide, also,
a form of private insurance system for
those clients who exhibit proper loyalty,
in contrast to social support systems
available to all—which would reduce
the peasants’ vulnerability and the land-
lord’s power. The consequence is that
the state’s good-governance capacities
are distorted and corrupted, favoring the
narrow interests of the landlords and the
political elite that is connected to them
(often by kinship).
Transformative socio-political land
reform for developing countries is
aimed at diminishing wealth inequali-
ties in the initial stages of develop-
GOOD GOVERNANCE
The “good-governance func-
tions” of the state are policies
beneficial to the large major-
ity of the population. Good-
governance states exercise
control over a certain territo-
ry, depend on a broad part of
their population for revenue,
and in turn provide the popu-
lation with a wide range of
public goods: the rule of law,
transportation infrastructure
(paved roads, extensive and
affordable public transporta-
tion, etc.), public utilities
(electricity, clean water,
sewage systems), human
services (health, education
systems), and job security
or at least temporary unem-
ployment insurance.
ment and breaking the grip on power
of the upper-class elite (including not
only landlords but also big industrial,
financial, and commercial capitalists
generally allied with them). This de-
mocratization of society would make
it possible to orient the state towards
long-term national development pol-
icies which can create more condu-
cive socioeconomic and sociopoliti-
cal conditions serving the population
as a whole, and not just the elite.
The socioeconomic conditions
would include a more egalitarian class
structure in the rural sector, greater
incentives for farmers to increase their
productivity due to owning the land
they work, greater farmer incomes al-
lowing the farmers to send their chil-
dren to school, better nutrition due to
higher caloric intake, and greater small-
farmer purchasing power leading to
greater demand for the products of
labor-intensive manufacturing. The
sociopolitical democratization would
mean the breaking of landlord power,
political stabilization resulting from the
inclusion of the peasant masses in the
political system, and democratization
of decision making now liberated from
landlord capture of local and national
state bureaucracies.
Land Reform Is Not Enough
There have been many more failed
land reforms than successful ones.
Reforms have failed mainly because
they have not been thorough enough
in breaking the power of the landed
elite, and in extending the role of the
government in an inclusive develop-
ment process. Across Latin America—
in Mexico, Bolivia, Brazil, Chile, and
Peru—land reforms have had partial
success, but for the most part have
not dislodged rural elites and their
industrial counterparts from political
dominance. This has contributed to
an image of land reform, even among
the progressive left, as a tried and
failed policy. There are also examples
of half-successful land reforms in
South and East Asia—in India,
the Philippines, Indonesia, and
Japanese and South Korean cases: In
Japan in 1945, 45% of the peasants
were landless tenants. By 1955, only
9% were tenants and even they ben-
efited from much-strengthened pro-
tective laws. In pre-reform South
Korea in 1944, the top 3% of land-
holders owned about 64% of the
land, with an average holding of 26
hectares. By 1956, the top 6% owned
just 18% of the land, with an average
of about 2.6 hectares. Meanwhile,
51% of family farmers owned about
65% of the land, with an average
holding of 1.1 hectares.
Nowhere in Latin America or
Africa, nor elsewhere in Asia, did land
reforms come so close to such equal-
ization and radical reshaping of tradi-
tional social structures. The East Asian
land reforms succeeded in bringing
about the long-term national devel-
opment policies by creating more
conducive socioeconomic and socio-
political conditions—breaking the
existing power structure, allowing for
the emergence of developmentally
oriented states (as opposed to neo-
liberal models that saw state promo-
tion of economic development as
anachronistic and “inefficient”).
Successful land reforms require fol-
low up—supportive policies invest-
ing in rural infrastructure develop-
ment (irrigation, electricity, roads,
health clinics, schools), plus provid-
ing services such as clear and legiti-
mate land records, micro-credit at
reasonable rates of interest, and
training for farmers in the newest
skills for sustainable farming. Japan,
Taiwan, South Korea, and arguably
even China’s development paths
serve as examples of transformative
land reforms in the last fifty years.
What these countries achieved was
remarkable growth with equity. D&S
J AW I E D N AWA B I is a professor of
economics and sociology at CUNY Bronx
Community College and a member of
the Dollars & Sense collective.
S O U R C E S : Available at dollarsandsense.org.

Thailand—where peasants did reap

some benefits like reliable ownership
titles, which allowed them to borrow
on better terms, boosted crop yields,
and reduced malnutrition, though
without fundamentally altering the
class structure.
On the other hand, successful
land reforms were thorough, exten-
sive, and swift. Key examples in the
twentieth century include Japan,
Taiwan, South Korea, and China.
Land in the first three countries
was distributed as family-sized
farms. (China initially had a collectiv-
ized land reform.) Looking at the

››
Mass march at the 5th Congress of Brazil’s
landless workers’ movement, Movimento
dos Trabalhadores Rurais Sem Terra
(MST), Brasília, June 14, 2007.
Credit: Wilson Dias, Agencia Brasil
(Creative Commons Attribution 3.0
Brazil license).

  MAY/JUNE 2015  l  DOLLARS & SENSE  l  27

< In Review
ARM’d and Dangerous
Other People’s Houses: How Decades of
Bailouts, Captive Regulators, and Toxic
Bankers Made Home Mortgages a
Thrilling Business by Jennifer Taub.
Yale University Press, 2014.
BY STEVEN PRESSMAN
O ther People’s Houses is a must-read
for those wanting to understand
what happened to the American
Dream of homeownership and build-
ing wealth by paying off one’s mort-
gage. It is a scholarly, insightful, and
deeply depressing account of how
the U.S. government let financial insti-
tutions impose excessive risks on
middle-class households. The conse-
quences of this are still being felt.
Jennifer Taub, a professor at the
Vermont Law School, focuses on what
she knows best—the regulatory and
legal issues that impact financial insti-
tutions and lending. She also weaves a
good deal of history and economics
into her story about how the American
Dream of homeownership was killed.
Her book demonstrates that the recent
housing collapse was not some new
crisis, but a continuation of the 1980s
Savings and Loan crisis.
Taub develops this link through
the story of one family and one
mortgage. In 1984, Harriet and
Leonard Nobelman bought a condo
in Dallas; eventually this mortgage
was owned by American Savings &
28  l  DOLLARS & SENSE  l MAY/JUNE 2015
Loan. By 1989, illness and job loss
led to financial problems for the
Nobelmans and they stopped mak-
ing mortgage payments. Their mort-
gage company refused to modify
their loan and began foreclosure pro-
ceedings. The Nobelmans sought
relief through bankruptcy, which
postponed the foreclosure.
Their case eventually reached the
Supreme Court. A 1993 decision kept
the Nobelmans, and all homeowners,
from reducing their mortgage debt
via bankruptcy. At this point, financial
institutions developed a false sense of
security. They thought borrowers
would be forced to repay mortgages
no matter what, so they could lend
without worrying about write-downs.
Washington Mutual (WaMu) bought
American Savings & Loan, inheriting the
latter’s corporate culture of risky lend-
ing. CEO Kerry Killinger grew WaMu into
a huge and reckless lender.
Option adjustable-rate mortgages
(ARMs) became WaMu’s flagship prod-
uct, comprising more than half of its
mortgage originations. Option ARMs
offer low teaser rates. They also give
homeowners the option to pay only
part of their mortgages each month,
with the rest added to the principal.
After five years the mortgage be-
comes a regular loan at a higher inter-
est rate. Borrowers were told not to
worry about this because they could
always refinance; at worst they could
sell the house and downsize.
When option ARMs “reset” to high-
er rates, many homeowners found
themselves underwater (their house
was worth less than what they owed).
With negative equity, they could nei-
ther refinance their mortgage nor sell
their home for enough to pay off the
remaining debt.
American Savings had only $30
billion in assets when WaMu bought
it. WaMu had $300 billion when it had
to be shut down. Part of the reason it
grew so large is that the Office of
Thrift Supervision (OTS) was reluctant
to close WaMu because the OTS was
funded by assessments on the institu-
tions it regulated. WaMu supplied
more than 12% of its 2008 budget.
Taub tells a riveting story about
problem mortgages, but she is at her
best when identifying the institution-
al changes that led to these problems.
First, there was deregulation. The
1982 Garn-St. Germain Act allowed
ARMs with low teaser rates and op-
tion ARMs. The 1994 Riegle-Neal
Interstate Banking Act enabled state
thrifts (as S&Ls are known) like
WaMu to set up branches around
the country rather than being con-
fined to a single state. This raised
the issue of which state would regu-
late thrifts, something that came
under the jurisdiction of the Federal
Reserve. Fed Chairman Alan
Greenspan let financial institutions
shop around, believing investors
could police markets better than
government regulators.
A second problem was securitiza-
tion. The Secondary Mortgage
Market Enhancement Act of 1984
allowed private mortgage-backed
securities (MBS) with different tiers
or classes. Risky loans could be put
into lower tiers, giving investors
higher returns for greater risk. The
1999 repeal of the Glass-Steagall Act
of 1933, which had separated com-
mercial from investment banking,
enabled banks to use their deposits
to buy such securities.
Third, collateralized debt obliga-
tions (CDOs), which are insurance
contracts against a borrower’s default,
convinced regulators that there was
no risk letting banks buy MBSs.
Fourth, rule changes turned banks
into over-leveraged gamblers.
Leverage means that banks use little
of their own money or capital to make
investments or loans; the rest is bor-
rowed from depositors or others. In
November 2001, the Fed and the FDIC

lowered capital requirements on
MBSs. Capital requirements force
shareholders to bear some of the
costs of bad loans made by banks.
They also reduce the cost to taxpayers
of bailing out banks and paying in-
sured depositors.
Fifth, the system was rife with
conflicts of interest. Regulators of
financial institutions were owned by
the financial institutions in their re-
gion or, as with the OTS, they were
funded by those they regulated.
Politicians, dependent on financial
institutions for campaign contribu-
tions, pressured regulatory agencies
not to regulate and threatened to
reduce their funding (and force lay-
offs) if they were too strict.
Credit rating agencies also faced
considerable conflicts of interest.
Before any security can be sold, it must
be analyzed and rated by an indepen-
dent agency. Ratings (AAA, AA, A, etc.)
are supposed to reflect the quality of
the security or the likelihood that the
buyer will get repaid. The problem is
that rating agencies make money from
rating securities and banks send their
business to agencies giving their secu-
rities high ratings. Wanting business,
agencies gave high ratings to MBSs.
According to Taub, rating-agency em-
ployees who tried to actually assess
the risk of MBSs were verbally attacked
by their supervisors.
Finally, there was a political prob-
lem. In 2008, Senator Richard Durbin
(D-Ill.) proposed allowing mortgage
modifications by changing the bank-
ruptcy code. The Congressional
Budget Office estimated that this
would have helped more than one
million homeowners at no cost to tax-
payers. Finanical-industry opponents
screamed “moral hazard.” (This is the
economic term for a situation in
which insurance makes someone less
careful. For example, people with car
insurance may be a little more likely
to leave their car unlocked because
Go
l !
Save —
they know that they are protected
against losses from theft.)
Taub correctly notes that there is
Dig
trees
i t a
no moral-hazard problem with mort-
gage write-downs because lenders
do not have to make risky loans in the
first place. In fact, the Durbin
Amendment would have prevented
the moral hazard of irresponsible
lending using government-insured
deposits. Candidate Obama opposed
mortgage write-downs during the
2008 election; President Obama has
honored this pledge.
Things remain precarious today.
Homeowners cannot discharge or
reduce mortgage debt through bank-
ruptcy. Banks are over-leveraged, in-
Do you really want us to keep deposit-
sufficiently regulated, and remain too
ing ink on flattened wood pulp and
big to fail. The government still sides trucking the results clear across the
with banks rather than consumers. country? Please consider going
And things may soon get worse. paperless with a Dollars & Sense
Homeowner-relief measures devel- e-subscription! We’ll send you a full-
oped shortly after the fall of Lehman color pdf of each issue, as soon as it’s
Brothers and the start of the Great published. (Note: non-U.S. subscribers
Recession were inadequate, accord- can use the U.S. rates for e-subs.)
ing to Taub. However, Taub does not E-subs also help reduce our expens-
mention that much of this support is es. It costs much more than $23.95,
about to end. our renewal subscription rate, to
Home Affordable Modification produce, print, and ship six copies of
D&S to you each year.
Program (HAMP) modifications re-
duced mortgage rates to as low as 2% And please consider becoming a D&S
for struggling homeowners, with the Sustainer. The sustainer rate—$60 for
government paying the difference to one year, $120 for two years—more
closely reflects the real cost of produc-
financial institutions. One million
ing the magazine. By subscribing
HAMP loans will reset at higher rates
at this rate, you’ll help us keep the
over the next four years. After a de- subscription price low so we can
cade of stagnant incomes, the home- provide our unique and incisive eco-
owners will not likely be able to make nomic analysis to more people.
higher mortgage payments. And with
You can subscribe or renew online
close to 40% of homeowners under- at dollarsandsense.org/subscribe.
water or nearly underwater on their If you’re currently a subscriber and want
mortgages, and the Federal Reserve to switch to an e-sub, just e-mail us at:
ready to raise interest rates, housing dollars@dollarsandsense.org.
looks ARM’d and dangerous. The U.S.
DOLLARS
economy sits in its crosshairs. D&S
&SENSE
S T E V E N P R E S S M A N is a
professor of economics and finance at
Monmouth University and author of Fifty REAL WORLD ECONOMICS
Major Economists (Routledge, 2013).
  MAY/JUNE 2015  l  DOLLARS & SENSE  l  29
< Ask Dr. Dollar
What Would Full Employment Cost?
Dear Dr. Dollar:
What is the cost, the minimum budget the U.S. government could spend, to
ensure everybody who wants a job can have one with decent pay and benefits?
How could that be paid for? —Brett O’Sullivan, Denver, Colo.
B Y A R T H U R M ACE WA N
T he barriers to change of this mag-
nitude—creating good jobs for
everyone—are not so much economic
as political. We can imagine arrange-
ments by which the economy could
function well and would achieve full-
employment, good jobs, and benefits.
It is, however, hard in the present cli-
mate to think that steps in this direc-
tion would be politically possible (at
least at the national level, though
there are political possibilities in some
states and localities).
There are things that could be
done to move the economy in this
direction without significant costs to
society. Examples of steps that could
improve pay and jobs without major
government expenditures include
raising the minimum wage and short-
ening the work week (e.g., requiring
time-and-a-half pay for more than 30
hours of work per week). The former
would improve workers’ pay, and the
latter would lead many employers to
hire more workers to avoid the higher
overtime rates. Also, the rules sur-
rounding unionization could be im-
proved; indeed, simple enforcement
of existing rules (e.g., protecting
workers trying to form a union) would
be a significant step toward improv-
ing workers’ opportunities.
Also, in terms of providing bene-
fits, a major step forward would be
the establishment of a single-payer
(“Medicare for All”) healthcare system,
which would pay for itself by reducing
the large overhead costs and profits
of the private insurance companies
while providing everyone with a
prime benefit. Because a single-payer
system would cost less than the cur-
rent system, the payments (taxes) that
30  l  DOLLARS & SENSE  l MAY/JUNE 2015
the government would need would
come from and be less than the cur-
rent insurance premiums. The costs
would go through the government,
but there would be savings for soci-
ety. Because this benefit would be for
everyone, it would remove the prob-
lems that arise when health care is
tied to employment.
Yet, full employment would also
require government spending to
stimulate job growth. While the econ-
omy operates as it has over the last
several years, deficit spending is nec-
essary to move us toward full employ-
ment. Especially in the current cir-
cumstances, with the economy far
from full employment and with inter-
est rates on U.S. government bonds
extremely low, deficit spending would
not impose large costs (i.e., the costs
of paying the interest on the govern-
ment borrowing to cover the deficit).
It is not hard to figure out what
kinds of jobs should be created with
government stimulus spending. Prime
examples include environmental re-
pair and preservation (including ener-
gy conservation), education and train-
ing, and infrastructure repair and
extension (e.g., especially in public
transportation).
Further, stimulus through deficit
spending could be used be used for
the government to directly create
jobs. The quickest and most effective
way to do this would be for the feder-
al government to provide funds to
the states to reverse the tens of thou-
sands of layoffs of educational work-
ers in the last few years. Also, there is
an increasing need for workers in uni-
versal early childhood education, as
has been instituted in New York City
and a few states. Like expenditures on
physical infrastructure, these expendi-
tures on social infrastructure would
have both short-run multiplier de-
mand impacts and long-run impacts
by raising productivity.
Such actions by the government
would not require large tax increases,
though higher taxes on people with
very high incomes would help.
Moreover, as the economy approached
full employment, the bargaining pow-
er of workers would improve and
unionization could be facilitated. As
the economy moved back to full em-
ployment and incomes rose, taxes
would increase without tax rate in-
creases—thus preventing a continuing
increase of the government debt.
There would certainly be objections
to these sorts of changes. Defenders of
the status quo would argue that stimu-
lation of the economy would cause
inflation and that raising the minimum
wage and facilitating unionization
would harm businesses’ profits and
lead them to cut back on investment
(a “capital strike”). The inflation and
cutbacks would, the argument goes,
mean fewer jobs, and especially fewer
good jobs.
With plenty of slack in the labor
market, however, there is no reason to
believe that government deficits
would bring inflation, and as the econ-
omy approached full employment,
deficit-based stimulus would no lon-
ger be needed. The real concerns
of those opposed to stimulation of the
economy are their opposition to the
social programs that would probably
grow with larger stimulation and their
fear that the growth of those programs
might ultimately lead to higher taxes
on people with high incomes—prime
defenders of the status quo.
As to the fear that business profits
would suffer with the sorts of reforms
proposed here, that would also be
likely. Yet, weaker profits, while a real
loss for those at the top, need not be
bad for the rest of society. It is only
necessary to look at the relatively re-
 $?

cent period in our history when wag-

es—including the minimum wage—
were relatively higher, unions were
stronger, and the distribution of in-
come less unequal. Through the
1950s and into the early 1970s, these
conditions were largely met, and the
economy grew relatively strongly.
There were many economic problems
in those years (though not severe in-
flation) and many circumstances were
different from today, but the experi-
ence of that period gives the lie to the
claims that government stimulus, bet-
ter working conditions, and greater
economic equality would necessarily
result in economic disaster.
These changes are blocked by the
political power of business and the
very wealthy—the infamous 1%—who
employ specious arguments about
inflation and the undermining of em-
ployment to protect their own inter-
ests. Changes that would move us to-
ward more and better jobs would be
good for most of us. But they would
impose costs on those at the top, who
raise the fearful specter of “drastic
change of the economic system.”
Yet, these changes that would meet
the goal of more well-paying jobs with
good benefits could be accomplished
without some drastic system change
or some large increase in the costs to
society through greater government
expenditures and taxation. Could we
get more substantial improvements
with greater change? Perhaps. But let’s
first recognize that, even within the
profit system, things do not have to be
as they are today. D&S

A R T H U R M A C E W A N is professor
emeritus of economics at UMass-Boston
and a Dollars & Sense Associate.

Questions about the economy?

Ask Dr. Dollar!
Submit questions by email (dollars@
Browse our full book catalog:
dollarsandsense.org) or U.S. mail
(c/o Dollars & Sense, One Milk Street,
dollarsandsense.org/bookstore.html
Boston, MA 02109).

  MAY/JUNE 2015  l  DOLLARS & SENSE  l  31

 Connecting for impact
July 10-12, 2015
Clark University • Worcester, MA
www.east.usworker.coop

Over 45 sessions full of practical info

for worker-owners, start-up enterprises,
democratic workplaces, technical
assistance providers, community
organizers, students, and you!

Registration deadline: June 24

Interpretation, childcare, and financial aid available.