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Barron’s: A Review of Robert Kuttner’s ‘Debtor’s Prison’

In the October 5th, 2013, edition of Barron’s I reviewed Robert Kuttner’s book Debtor’s Prison. That review is available here (following Bill Easterly’s review of another book); you can also read my review, in full, beneath the fold, and shared here at Cafe Hayek for the first time.

A Review of Robert Kuttner’s Debtor’s Prison

Donald J. Boudreaux

“Markets, by definition, are hardly reliable,” comments author Robert Kuttner in this examination of the causes and cures of the Great Recession and of Europe’s fiscal woes. That is, markets are definitively synonymous with error and deceit, an essential theme of this book. It is also a credo of the American Prospect, the magazine Kuttner co-founded and currently co-edits.

Since people can be unreliable, so are the markets in which they operate. The question, however, is whether the incidence of unreliability declines — or increases — when people run the economy through the system of government, rather than through the profit-and-loss system of markets.

That question is barely on the author’s radar screen. It is thus implicitly assumed, for example, that politicians can more reliably manage debt than can businessmen under the lash of profit and loss. It follows that we need what Kuttner calls “managed capitalism,” in which both public and private debt is forgiven, thereby shielding government and business from loss. Such distorted priors lead the author to blame today’s economic problems on a pair of evil “conservative” twins: an obsession with austerity and financial-market deregulation.

Especially troubling to Kuttner is the overhang of debt — private debt in the U.S. and government debt in Europe — that keeps American consumers and European governments from spending enough money to get their economies revving again. If only these debts were somehow lessened — forgiven. transferred to a solvent public agency, inflated away, whatever — then American homeowners and European governments would be free again to spend.

On top of the problem of excessive debt are the activities of speculators and other financial wizards whose deregulated machinations not only got us into this mess, but also obstruct governments’ abilities to right wronged economies.

Operators in the financial sector, Kuttner insists, fooled innocent Americans into taking out unaffordable mortgages and then fooled one another into thinking that the value of those mortgages was higher than it really was. In Europe, speculation against the value of government bonds prevents governments there from spending and inflating as freely as Keynesian-Kuttnerian economics requires.

Kuttner’s proposed solution unsurprisingly involves massive debt relief, inflation (at least 4%-6% annually), and tight reregulation of financial markets. These proposals are difficult to take seriously given Kuttner’s weak grasp of the nature of markets, the role of money, and the essence of politics.

Consider his criticisms of speculators. As Kuttner tells the tale, speculators in search of quick profits just happened to pick on the unlucky Greek government, driving up the interest rate that it must pay to borrow. But there would be no profit for speculators in betting against Greece’s creditworthiness if that creditworthiness was not in jeopardy – and it was put in jeopardy not by speculators but by government profligacy.

All the speculators did by pricing the debt was to reveal to the world more quickly just how precarious Greece’s fiscal situation was. Kuttner’s response — to rein in speculators — is the left-wing reformer’s equivalent of shooting the messenger.

He also fails to appreciate the likely role of the Fed in inflating the housing bubble, a view he shares with an unlikely ally, Fed Chairman Ben Bernanke. Since Bernanke was a Fed governor when the monetary mischief occurred, he might naturally want to absolve himself. In comical fashion, however, the Fed chairman hoisted himself with his own petard by declaring in a publicly released speech that “economists who have investigated the issue have generally found that…only a small portion of the increase in house prices earlier this decade can be attributed to the stance of U.S. monetary policy.” But so difficult was it for Bernanke to find such economists, he inadvertently cited in a footnote a scholarly study that concluded just the opposite.

Similarly, Kuttner dismisses the notion that government bears any responsibility for the crisis through sins of commission — beyond the sin of omission involving failure to regulate — as merely a “far-fetched” excuse for “blaming the victims.” Not surprisingly, then, the few pages that he devotes to addressing allegations of government responsibility are no more persuasive than Bernanke’s inept attempt to absolve himself of policies he helped foster.

For Kuttner, a government inoculated against laissez-faire ideology is the great protector of the people and the trustworthy administrator of “managed capitalism” — an inadvertent synonym for the evils of crony capitalism, in which the losses of influential companies are socialized onto the entire nation.

George Mason University economics professor DONALD J. BOUDREAUX blogs at Cafe Hayek.

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