I was recently invited to participate in the first Oxford Union debate of 2020. The Oxford Union debates were founded in 1823 and have featured presidents and prime ministers. The topic for our debate was the outlook for the upcoming decade and featured six debaters, including experts in climate change, social justice, and a number of other subjects. I was asked to address the economic and financial outlook for the decade. As is customary, this debate was framed as a proposition, and in this case the proposition was “This House has Hope for the New Decade”.
Here are the remarks I made at the debate:
Hope for the New Decade? No, I have more concern than hope.
Where there should be hope, there is instead a trap of stress and strain, a desultory phase I call the sideways economy
The reason is something you may not have focused on.
The people and the businesses of this world are drowning in debt. So too are governments, of course—but it’s the people and businesses that are drowning in more.
It’s one of the great, but largely unrecognized, problems of our time. It sits at the root of our stress, and anger. It’s the thing suppressing our economic growth, and keeps us locked in dead end jobs. It’s the thing constraining government investment. Mortgage debt, student debt, automobile loans, healthcare debt—rampant in the US, high yield corporate bonds, and much, much more.
Though economists don’t recognize the problem, the people in this room will. Much of it is the grim residue of the global financial crisis of 2008, where a burst in ill-advised private sector lending scarred the global landscape. Much of that debt still lingers—insidiously. In 1980, Britain’s private sector debt to its GDP, which is really the ratio of private debt to the income of its citizens and businesses, was 62%. Today it’s 165%. It has almost tripled in ratio to income in a mere 40 years.
That means the average business and person has almost triple the debt in ratio to their income. Student debt has grown by 83% in just five years. As we learned through the crisis, when private sector debt is growing, we get a boom, once it gets too high, there comes an aftermath where we struggle to pay those bills.
How can a small business, strapped with debt, invest to improve and expand? How can individuals, strapped with debt, make home improvements, send their kids to college; or invest in new skills training for themselves? The mounting burden of this debt has left us stressed, prone to a culture of blame, unprepared for disruption, and vulnerable to demagogues.
Don’t think lower rates make the problem tolerable. Most ordinary folks don’t pay the very low rates large corporations and governments pay. They aren’t paying one percent, if their loan is unsecured, they are paying 10%, or 30% or 60%. With hidden fees added on top.
It’s not just Britain. In the US, private sector debt to GDP has gone from 101% in 1980 to 150% today. Student debt now totals $1.5 trillion. In France, it has gone from 108% in 1980 to an eye-popping 213% today. In China, likely the next crisis hotspot, it has gone from 67% in 1985 to a now astonishing 204%.
For the world as a whole, it’s still growing. It’s gone from 129% to 151% just since 2001. Government debt, a lesser but still concerning issue, has gone from 59% to 79%. Over the past few years, both global private debt and total debt have reached an all-time high.
This high debt exacerbates one other major problem, also under recognized. Rising debt drives greater inequality. Why? Because paradoxically, rising debt is a main driver of higher asset values—real estate values, stock market values, and more. And it’s the “haves,” the top decile, that hold the vast majority of these assets.
As a result, in the last three decades in the United States, the net worth to GDP of the top decile has grown a whopping 87%, while the net worth to GDP of the middle quintile—the middle class—has declined by 17%
High private sector debt also takes from our ability to fight other big problems. It’s the thing that is behind tepid growth, and that tepid growth is the thing behind timid government spending.
I’ll give you one example. The US spent less than $5 billion last year subsidizing electric vehicles and solar energy—and has only about a million or so EVs and solar houses to show for it. Yet we spent $44 billion on wars in the Middle East, all rooted in our thirst for oil. If we spent half that on solar and EV support, the numbers of those could grow by 10 or 20 times within this decade.
Over the last two years, I’ve visited with hundreds of middle class Americans, conducting thirty group meetings in ten different states to hear first hand of their concerns. For all the talk of political division, their issues were almost always identical, whether the groups were Republican or Democrat, whether men or women, and regardless of ethnic background. Too many of them are in dead end jobs, mired in debt, with constant healthcare challenges—and no feasible near-term healthcare solution at hand. The reason they vote for the other guy, whoever that is, is that they feel the last person didn’t really address their problems—and that view has merit, because no party seems to have truly recognized or tackled the real issues faced by the middle class—they’re too busy slandering each other.
Here’s the biggest part of this high private sector debt problem: it’s not really on anyone’s agenda.
Not the economists, whose ignorance of private sector debt is the exact thing that caused them to miss the global crisis in the first place. Imagine, in the US, mortgage loans doubled from $5 trillion to $10 trillion in the 5 years leading to 2007, and the economics profession barely noticed, much less warned of the tsunami it would bring.
It’s barely on any politician’s agenda either, at least not in any form that has a chance of enactment.
There are ways to begin to address the private sector debt problem. We could give students debt relief based on community service. Lenders could give homeowners with underwater mortgages principal debt relief in exchange for upside when the house is eventually sold. We could modify our bankruptcy laws.
But practical proposals like this are not part of any agenda, and would be opposed by powerful constituencies, and thus will not get done.
You may already know that many ancient societies had debt forgiveness solutions as their own peoples’ debt oppressively mounted. The ancient scriptures attest to this, and it was referred to by the Israelites as Jubilee. This shows that those in other times have faced, and solved, this problem, and that we are not as advanced as we might think.
The future can easily be bright. We stand on the cusp of a revolution in genetic engineering. The world of the internet of things, virtual reality, and artificial intelligence hold dazzling promise. I myself am deeply involved in the work of immunotherapy, where researchers have now found what are truly cures for certain types of cancer. Doctors can now take the T-cells of children who have terminal leukemia, for whom every treatment has been tried and failed, who have only months to live—and reprogram their T-cells to attack the leukemia tumor. In just a handful of days, those children are cancer-free. And yet our best immunotherapy researchers spend as much time on fundraising as researching, and so much of this work languishes, because the government can’t, or won’t, fully support these miracles. Similar stories are now endless. Our opportunities are boundless, but we stagger under an ever growing burden of debt—so as it stands now, with this core problem under recognized and unaddressed, our outlook is tepid, and we stagger along into the sideways decade.
