Every January people purge. They curb their excesses, and save some money. But this year there’s an oddity: people are urging their governments to purge too. The UK’s government, egged on by many voters, is slashing its debt. “We are looking at the longest, deepest sustained period of cuts to public services spending at least since world war two,” Robert Chote, the then director of the Institute for Fiscal Studies, said last June. Similarly, Germany has refused to stimulate the global economy by taking on more debt. And Americans polled by Gallup in July named “federal government debt” as the biggest threat to “future US well-being”.
Economists were already discovering that the individual isn’t a rational economic actor. However, the crowd isn’t either. Sometimes, whole nations get their irrational economic ideas from ancient folk beliefs. Government debt looks like a case in point.
Stephen Gudeman, a leading anthropologist of economy at the University of Minnesota, has spent years examining folk beliefs about economy among Latin American peasants. That helps him understand the angst about the government debt now pervading many rich countries. The peasants he studied, he explains, tended to understand the national economy as a house writ large. “In the everyday experience of the house you have to not go into debt, otherwise you go broke,” says Gudeman. “People are using their experience of the house, and projecting it on to the economy. That’s what the Tea Party is doing. The house is used as a metaphor or model for the economy. Historically, that kind of image was used by economists in Europe right up to Adam Smith.” Here Gudeman pauses to point out an irony: “The desire to own a home, the desire for a settled place, is part of the problem with the economy now.” It’s what helped get us into debt.
Still, the ancient fear of debt persists. It is reinforced by a thousand proverbs, from St Paul (“Let no debt remain outstanding, except the continuing debt to love one another”) to Hamlet (“Neither a borrower nor a lender be”). Debt is often considered sinful. In fact, as Joris Luyendijk pointed out to me, the German and Dutch word for debt – Schuld – also means guilt.
Many voters actually like austerity. They will accept almost any amount of personal pain if it means government debt falling as a proportion of gross domestic product. A recent paper by the economists Alberto Alesina of Harvard, Dorian Carloni of Berkeley and Giampaolo Lecce of New York University studied 19 rich countries between 1975 and 2008, and found that the most aggressively debt-slashing governments got re-elected about as often as the average government. In fact, governments that cut spending – as distinct from raising taxes – had a better survival rate than average.
The popular anxiety about government debt baffles many economists. They don’t think the state is like a household. For a start, the state is effectively immortal and can print money. Many economists, notably the Nobel laureate Paul Krugman, see no need for the US or UK to cut debt sharply now. Public debt is “a much smaller issue than people think,” says Krugman. After all, he notes, it’s almost unprecedentedly cheap for these countries to service their debts. Even after all the recent borrowing, 10-year UK bond rates are still only about 3.5 per cent.
At these low rates, Krugman believes, governments should borrow to tide us through the current crisis. He and others warn that if states slash spending now, it could stifle the recovery. Jim O’Neill, chairman of Goldman Sachs Asset Management, pointed out to me that Italy, Belgium and Japan had had debt worth more than 100 per cent of GDP for years (compared with, at most, 65 per cent for the UK now) without anyone worrying they would default. He said, “The first country I ever analysed was Italy. Their debt-to-GDP ratio is pretty similar today to 29 years ago. So they’ve sort of managed to get away with it. Large debts and the connection to damage is undetermined.” Perhaps O’Neill and Krugman are wrong, but the point is that respected economists are offering voters a plausible alternative to pain. Yet many voters are choosing pain instead.
Why? O’Neill agreed with Gudeman: “There’s the purity issue: everybody’s been influenced to think a lot of debt’s bad. ‘It’s just not the proper way.’” Even some government ministers were prey to that view, he added.
These sorts of folk beliefs about the economy hardly get studied. Economists typically treat the individual as an isolated figure in a void. They used to think this figure was a rational economic actor. Now, with “behavioural economics”, they increasingly think of him or her as an irrational actor. But, as Gudeman complains, even behavioural economics “still focuses on the individual, not on the larger system, the rules and norms.”
Folk beliefs shape the way many people think about economics. Perhaps economists could take notice.