Reject the debt fetish

Adair Turner is probably the closest the British establishment has to a go-to guy on finance and much else besides. During his long career he has provided both intellectual and practical leadership on some of the thorniest problems Britain faces.

His CV is remarkable. After many years at McKinsey, one of the world’s top management consultancies, he was director general of the Confederation of British Industry and then chairman of the Financial Services Authority.

He also chaired the Low Pay Commission, the Pensions Commission and the Climate Change Committee. Anyone who has heard him speak on any of these subjects, and indeed many others, will know he is always logical and lucid.

It was with this in mind that I was particularly interested to hear him talk about his new project recently on BBC Radio 4’s Start the Week programme. Evidently he is writing a new book on Britain’s excessive dependence on debt.

Details of the book itself are not yet publically available but it is possible to get an inkling of what he is saying from radio programmes such as Start the Week as well as speeches and articles. For example, on February 2014 the Institute for New Economic Thinking, a think tank to which he is affiliated, published a paper by him on “escaping the debt addiction”.

It is important to recognise in this respect that Turner’s focus is private debt rather than government debt. His concern is that economic growth should depend less on debt. The practical measures he proposed to achieve this objective included requiring much higher bank capital, establishing constraints on real estate lending and tightening regulation on very high interest consumer lending.

The problem with Turner’s argument is precisely that it is the mainstream view. It has become almost universally acceptable to talk about the “debt crisis” or “financial crisis” as if they are synonymous with “economic crisis”. It is also common to talk in terms of addiction as if the heavy use of debt is somehow akin to becoming hooked on drugs.

Turner has simply taken the conventional intuition, that the root cause of the crisis is to do with debt, and given it more rigour. He has not investigated whether there is a causal relationship between debt and the economic crisis.

The graphs that go with his presentation make this clear. Chart after chart shows that debt levels, measured in numerous different ways, have increased in recent years. It is certainly a striking picture but it is important to remember the fundamental point that correlation is not causation. Debt levels certainly increased dramatically in the run-up to the crisis but it does not follow that they caused the economic downturn.

Turner’s approach precludes the possibility that high debt levels were a symptom, rather than a cause, of the economic problems many countries have suffered in recent years. There is no significant discussion of how they relate to the real world of production. The closest Turner gets is to talk about economic imbalances between the main economic powers.

The Start the Week programme also illustrated how pervasive the fetishisation of debt has become. All the guests on the programme accepted without question the idea that high debt levels can explain the economic problems plaguing the West.

The time is ripe for a more rigorous examination of these challenges.

This blog post first appeared today on Fundweb.