In an article in Newsweek, Niall Ferguson argues that, the main reason why Americans should care about the European debt crisis is that “what is happening in Europe today could ultimately happen here.”
I have news for Professor Ferguson. He has his diagnosis the wrong way around.
An important reason why Europe is in its current debt crisis is because for decades it has been emulating the US example of creating a permanent “culture of debt”.
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I use the term “culture” here deliberately. The global debt crisis is not just about the growing government debt burdens of economies, nor about the financial liquidity crisis plaguing banks. The true debt crisis is much deeper than that. It involves entire economies and societies evolving towards a mind-set in which more and more benefits are expected today – but any costs are either increasingly postponed to the future, or preferably, dumped on others.
The problem with such a mind-set is that it ultimately leads to economies creating debt rather than wealth.
In a previous blog post (Can’t Pay? Won’t Pay!) I posed the question: What do the worldwide debt crisis and global warming have in common?
They both represent economies drawing down assets faster than they can replenish them.
In the case of the debt crisis, economies are spending more wealth than they are accumulating. In the case of global warming, we are using up nature’s capital and its vital services at an alarming rate. Rather than adding to wealth – both financial and natural – economies are squandering it. This is not a new problem but has occurred throughout history, as I pointed out in Scarcity and Frontiers: How Economies Have Developed Through Natural Resource Scarcity, although this tendency has accelerated in recent times.
Which economy has led the way in creating both types of debts?
The United States, of course. For decades.
Until recently overtaken by China, the US economy was for years the number source of global greenhouse gases, followed closely by the European Union. US households have carried the largest debts of all consumers, although evidence suggests that UK households may now be the biggest debtors. Other European consumers have been quick to imitate this pattern, too. The US economy has been running chronic trade deficits since the 1960s, and paying for it by selling financial assets, property, US government bonds and any other domestic economic assets available to foreign investors. And, we all know what that global financial deal led to in 2008-9!
Our culture of debt also extends to management of our other two vital economic assets – human and natural capital.
Average student loan debts incurred by US graduating college seniors in 2010 $25,250, which is 5% more than the previous year. Yet, 2010 graduates experienced an unemployment rate of 9.1% , and the average pay for those with jobs is $50,034. A highly skilled workforce is valuable to the US economy and its prospects for growth. But higher tuition costs, lower funding and expensive student loans means that we are forcing our most skilled laborers – university graduates – to go into debt before they even begin to put their human capital to work and collect any rewards for it. Now, of course, the Europeans are also emulating the same student loan system that is at the heart of the human capital problem. Caveat emptor!
We are also running down our natural capital rather than protecting or restoring it. As I argue in my book Capitalizing on Nature: Ecosystems as Natural Assets, we are quickly entering into an Age of Ecological Scarcity. Over 60% of the world’s major ecosystem goods and services have been degraded or used unsustainably. The demise of key global ecosystems include mangroves (35% either lost or degraded), coral reefs (30%) and tropical forests (30%). Over the next 50 years, global biodiversity loss will accelerate, leading to the extinction of at least 500 or the 1,192 currently threatened bird species and 565 of the 1,137 mammal species. Given these trends, it is unlikely that the world is ever going to “balance its budget” when it comes to managing ecosystems, biodiversity and other critical natural assets.
The “culture of debt” is certainly not just a European problem. Nor is it solely an American disease – although the US is clearly its main poster child.
The culture of debt has become a global issue, and it is not just financial, but defines how every society and economy now interacts with respect to their fundamental economic, human and natural assets.