Opportunitistic Versus Necessary Debt

Noah Smith comments on some of David Graeber’s ideas about how debt extracts wealth (though not Graeber’s book):

Suppose poor people could borrow money for 3% if they knew where to look. but they don’t know where to look, so I lend them money at 22%. The people pay me back, but they end up paying a lot more than if they had only known they could borrow at 3%. So by tricking them into thinking that 22% was the best interest rate they could get, I extracted wealth from them.

This seems like a good scheme. Can people be tricked? Of course they can – otherwise “con man” wouldn’t be a real job.

This scheme sounds like a winner. But it makes me wax philosophical. Was it the debt that extracted the wealth, or the trick itself? If I sell people a crappy car that breaks down two days after they drive it off the lot, does that mean that cars are a tool for extracting wealth from the poor? Or does it mean that deception in general is a tool for extracting wealth from the poor, and crappy cars, like crappy loans, are just one kind of crappy product that people can be tricked into buying?

I think the usury argument isn’t the key point. Instead, the question should be “Why are people taking on debt?” If I’m doing this to get a new car, buy a house, or expand my business, that, in the long run, is making my life better. Usury can be a problem (sometimes a huge one) but, provided it doesn’t swamp out the gains of the debt, it isn’t really relevant: I’m still better off in the long run (provided I don’t lose my ability to repay the debt, etc.) for having the debt.

But for a lot of people, debt isn’t about the opportunity to improve your life, it’s something that’s taken on to simply prevent things from getting worse. Elizabeth Warren, before she became a political figure (and now politician), made her academic bones studying the causes and effects of household debt. When someone goes into debt to pay expenses or medical bills (and I would include college education too*), once one factors in interest payments and credit scores, many people are falling behind just to stay in place: this is wealth extraction. It is the 21st century equivalent of the company store or the sharecropping system. This debt doesn’t provide the possibility of making your life better in the long term, it is just someone else’s claims on your future earnings with no benefit.

Sounds like wealth extraction to me.

*Given that there was a time when most college education was affordable and that it isn’t impossible to do this today, I would argue that the increase in education-related debt is debt of necessity, not opportunity, at least relative to previous generations.

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One Response to Opportunitistic Versus Necessary Debt

  1. Tiercelet says:

    I’d argue (in fact did argue in Noah’s thread) that buying a house isn’t in the same category. Business loans are a financial investment and car loans are a hedonic one; but shelter is a necessity needed by absolutely everyone (from vagrancy laws if nothing else). The individual has three options to meet that need: 1) borrow to buy; 2) rent; 3) own something already.
    Options 1 and 2 are both inherently extractive, based on the individual’s lack of inherited wealth.
    And sure, there’s such a thing as buying “too much house” and I’m not denying that McMansions can be a hedonic purchase as much as a car is. But there really isn’t a way for someone to opt out of the housing market, making it a captive market vulnerable to extractive practices.

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