Economist Robert Kuttner visited AFL-CIO's book club earlier this week to discuss his forthcoming book, Debtors' Prison: The Politics of Austerity Versus Possibility. In the book, Kuttner argues that policymakers are focused on the wrong kind of debt in making laws and attempting to fix the economy. Rather than a heavy emphasis on reducing the public debt, which leads to misguided policies of austerity, Kuttner says, reducing personal debt would go much further toward improving the economy and spurring job growth.
 

Kuttner says the conventional wisdom in Washington, D.C., creates a double standard toward the idea of debt. Corporations that make bad decisions or face a bad economy can file Chapter 11 bankruptcy and get help in the form of bailouts, the TARP program, aid from the Federal Reserve and various other policies that eliminate debt from their books. Meanwhile, individuals who face the bad economy, caused by the actions of many of those same corporations, have little recourse, and policymakers have actually made it harder to escape that debt in recent years. Kuttner argues that heavy private debt is a significant drag on the economy, as Americans spend much of their income paying off previous debts and not spending it on consumption, which drives the economy.

The roots of this double standard and its negative effect on the economy can be traced back to the 1700s, according to Kuttner. The problems arising from such a double standard have been exacerbated in recent decades in the United States. As wages stagnated, consumers lost purchasing power. At the same time, the housing bubble inflated the value of homes, and people stopped paying for consumption with income and started paying for it with debt. When the bubble burst, many people were left in dire straits. And policymakers have done little to fix that problem, one that Kuttner says they played a big role in creating. If it hadn't been for deregulation, many of these problems could have been avoided or limited.

Kuttner believes the problem is fixable, however, and says the U.S. faced a similar situation in the Great Depression. The recovery from that crisis was successful because of a combination of factors: Free market capitalism had disgraced itself with the Depression, and the business community lost clout in the policy arena; there was a strong union movement; and a Democratic president seized the moment and increased spending during World War II. To re-create that solution, Kuttner says, we have to take back politics and put better people in charge of making policy.