Wednesday, December 5, 2012

Usurious Barriers to Growth

Quote of the day from Megan McArdle (defending Ross Douthat):
We are facing an unprecedented transition, and it is going to be nasty.  All of our institutions are based around the expectation that the economy will be bigger in the future, not smaller... 
The problem with this is that our economic system revolves around a lot of debt.  Biblical and Islamic bans on "usury" (lending money at interest) strike most modern people as pretty silly.  But in the very-low-growth world of historical Palestine, they probably made a lot of sense.  These days, it's easily possible to borrow money at 5%, invest it in something productive, like an education or a car to get you to work, and end up with both parties better off: the lender gets their 5%, and the borrower has so much extra income that the 5% will not be much missed.  But at a time when economic growth was under 1% a year, this would have been extraordinarily dangerous behavior.  Many, maybe most people who borrowed money at interest, would end up dramatically worse off.  So the bible forbid it. 
In an era of economic growth, on the other hand, debt has become an integral planning tool for almost everyone.  I mean debt, broadly construed, not simply actual bonds and loan documents.  Social Security is a debt.  So are pensions, and Medicare.   And of course, savings accounts and and t-bills and municipal bonds are also debts.  They are all promises to pay folks later, out of future earnings.  And those are not per-capita promises; they are fixed.  If GDP shrinks, those promises become unpayable, which is what we've already seen it Greece.  
We face the same usurious barriers in Ireland of course.

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