Special Topics: econ 397Sl Debt Economics

Introduction

What is the difference between a mere obligation, a sense that one ought to behave in a certain way, or even that one owes something to someone, and a debt, properly speaking? The answer is simple: money. The difference between a debt and an obligation is that a debt can be precisely quantified. This requires money.

​Not only is it money that makes debt possible: money and debt appear on the scene [historically] at exactly the same time. Some of the very first written documents that have come down to us are Mesopotamian tablets recording credits and debits, rations issued by temples, money owed for rent of temple lands, the value of each precisely specified in grain and silver. Some of the earliest works of moral philosophy, in turn, are reflections on what it means to imagine morality as debt—that is, in terms of money.

A history of debt, then, is thus necessarily a history of money—and the easiest way to understand the role that debt has played in human society is simply to follow the forms that money has taken, and the way money has been used, across the centuries—and the arguments that inevitably ensued about what all this means. (Graeber, 2011; p. 21, emphasis added)
This course will not only be about the role of debt in the economy strictly speaking. As emphasized in the passage above by the late David Graeber (1961-2020), a history of debt is necessarily a history of money. Therefore, the practical study of debt is also necessarily a study of money and how it is created and circulates in our modern economy. You will come to learn that without debt, there is no money. As the sociologist Geoffrey Ingham once remarked, “whilst all money is credit, not all credit is money” (2013, p. 128). In this course, we will explore both credit as money, how it facilitates economic activity, the sources of its creation and distribution in the economy by the state and private financial system as well as private firms, and the ways in which excess credit creation can lead to recession and potential financial crises—the Financial Crisis of 2008 being just the most recent example of a long history of debt crises going to back to before the emergence of capitalism as an economic system. I have strived to make the approach to this course interdisciplinary, drawing on literature and methodology from historians, anthropologists, and sociologists as well as economists.

To best understand debt in our modern economy, it is also important to understand how we got to the system we have. That means we will need to engage with a fair amount of economic history. In the process, we will encounter various moral and ethical questions that will emerge again and again throughout the course as we move into the more analytical and empirical approaches to debt.
The economics of this course will be informed by a combination of orthodox and heterodox economic theory, as well as empirical evidence, which will explore the impact of debt and credit at both the macro and micro level—much of literature from scholars that you have likely not heard of before mainly in the heterodox economic traditions (e.g., Marxian, Post Keynesian). These theoretical approaches will rely heavily on balance sheet and sectoral analysis of the economy.

I will also introduce you to a more advanced modeling approach than you have likely not encountered in previous courses called dynamic systems modeling which allows us to model stocks (e.g., wealth, debt, etc.) and flows (income, expenditures, credit, etc.). Do not worry, you will not be required to build these models yourself, or do extensive calculations or complex algebra, but you will be introduced to what they are, how they work, and a couple programs (InsightMaker and Minsky) you can use to create them, and, of course, how to analyze them using simulation. This course will also introduce you to several data sources (listed in this document under the section “Data Sources on Debt and System Dynamics Software”) you can use to analyze debt in the economy.

Taking a sectoral approach to debt in the economy, we will examine how debt accumulates and when it can become a problem for: (1) the government sector by developing an understanding of currency issuers vs users, the role of taxes and bonds, and issues of debt sustainability; (2) household consumer debt, including mortgages, and its macroeconomic effects, with special focus on understanding the 2008 Financial Crisis and Great Recession, as well as Student loans and their impact on students, families, and the macroeconomy; and (3) corporate debt and its implications for financial stability and employment. Where relevant, we will also examine the role of debt and credit in the current coronavirus pandemic and economic crisis.
The course will be structured into the following five modules:
 
Module 1: The Origin and History of Debt, Credit and Money
Module 2: Theoretical Perspectives of Modern Money, Credit, and Crises
Module 3: Macroeconomic Analysis of Debt
Module 4: The Government Sector
Module 5: The Private Sector: Households
Module 6: The Private Sector: Non-Financial Businesses
 
For each module, we will have various short written assignments. These will include different formats such as a personal reflection essays on the readings and videos/films assigned. During the analytical unit of the course, module 3, you will be required to analyze actual data and simple computational models. We will cap the course with term papers for which you will be able to work in groups if desired (more on this in the next section). There will be no exams in this course.
REFERENCES
  • Greaber, David (2011). Debt: The first 5000 years, Brooklyn, NY: Melville House Publishing.
  • Ingham, Geoffrey (2013). “Revisiting the Credit Theory of Money and Trust.” J. Pixley (ed) (2013), New Perspectives on Emotions in Finance. London: Routledge, 121-139.

Required text

  • ​David Graeber, Debt: The First 5,000 Years * (free PDF of book is available here)
  • Louis Hyman, Debtor Nation: The History of America in Red Ink (free PDF of each chapter available here with your UMass University login on JSTOR)
  • William Mitchell, L. Randall Wray, and Marin Watts, Macroeconomics
  • Steve Keen, Can We Avoid Another Financial Crisis? 
  • by Richard Vague, A Brief History of Doom*
  • Gregory W. Fuller, The Great Debt Transformation
  • Atif Mian and Amir Sufi, House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again*
  • Caitlin Zaloom, Indebted: How Families Make College Work at Any Cost*

 Note: * indicates the book is available as an audiobook on Audible or elsewhere. 

Scans and soft copies of additional articles and book chapters will be provided via Google Classroom. 

Course Outline

Module 1: The Origin and History of Debt, Credit and Money
1.1 Alternative stories of the origin of money
1.2 Evolution of consumer credit during the 20th century

Module 2: Theoretical Perspectives of Modern Money, Credit and Crises
2.1 Chartalist and credit theories of money
2.2 Schools of economic thought
2.3 Theories of capitalism and crisis

Module 3: Macroeconomic Analysis of Debt
3.1 Sectoral balances approach
3.2 Data sources of debt
3.3 Dynamic systems modeling with stocks and flows
3.4 Predicting debt crises

Module 4: The Government Sector
4.1 Basics of fiscal and monetary institutions and policy
4.2 Fiscal sustainability
4.3 Government debt and economic growth debate

​Module 5: The Private Sector: Households
5.1 The Great Depression vs the Great Recession: The same underlying crisis?
5.2 The macroeconomic effects of household debt burdens
5.3 The global debt transformation: causes and consequences
5.4 Student debt, racial inequality, and the pandemic
5.5 Policy solutions and reform

Module 6: The Private Sector: Businesses
6.1 Private equity and leverage buyouts
6.2 The rise of ‘zombie’ companies, and the pandemic

​Data Sources on Debt and System Dynamics Software

Macro dataMicro dataSystems Dynamics Software