The Public Deficit Debate as a Conflict Between Ethical Systems

Hinted at in the introductory post on ethical dynamics in economics, the debate between deficit hawks, both sincere and hypocritical, and the defenders of deficit spending can be very clearly understood as a competition between two orientations that use different ethical tools to understand the world.  The competition is on the level of the tools (meta-ethics) and the content of professed and/or real ethical commitments, so therefore on two levels of abstraction within ethics.  To analyze the ethical dynamics that either underlie or coexist with conventional economic arguments, I believe one has to assume something like a meta-economic stance, a stance that sees economics as embedded in a larger scientific and philosophical enterprise.

To underline the point above, the most contextually well-grounded economic arguments did not win the day in setting the terms of the policy debate or the development of an academic economic consensus; economic arguments were supplemented or supplanted by what I would describe as statements of ethical probity.  These ethical orientations may either be open to or immune to empirically grounded arguments either for or against fiscal austerity, so an ethics does not necessarily undermine rational or scientific understanding.  It appears now that increasing numbers of economists are realizing that empirical evidence supports continued deficit spending.  Nevertheless, I would submit that the power of this meta-ethical conflict was triggered first within academic economic and political circles without a primary reference to empirical or relevant historical comparative study and has set the debate on a course that makes it relatively immune to evidence-based discussion.

Ethical Conflict and Old and New Class Conflict

A competing and not necessarily contradictory explanation of the debate, popular on the political left, is that the deficit debate is motivated by a form of a narrowly-defined class conflict, a conflict of economic interests between “haves” and “have nots” and that it is therefore not premised on a conflict between universal ethical orientations.  In terms of a conventional class conflict, on the one side of the conflict, those who want to cut deficits are attempting to prevent a re-distribution of wealth downward via deficit- and tax-funded social and economic stimulus programs.  The cutting of deficits in this view functions as a means for the wealthiest to hold onto a concentration of money and power that has dramatically increased since the advent of supply-side economics in the 1980’s.  On the other side of this conflict, those who are attempting to maintain deficit spending as a public policy tool do so as defenders of the middle and working classes or as defenders of the social contract that emerged from the Great Depression and Second World War, in which the wealthiest would accept higher tax levels, government regulation of business and government-funded social programs in exchange for social stability.

An alternative or emerging view of classes that has its clearest theoretical grounding in post-Keynesian economics is that the fundamental class conflict in contemporary capitalism is between a new financial class and almost all the other classes in society, including the traditional owners of productive assets.  It is striking how many popular and economic discussions now refer to this division without using the still unfashionable “class” moniker.  As in traditional class conflict this is not exclusively an argument between ethical world views but a power struggle between interest groups.

While this class or distributional conflict may or may not be the primary cause in the conflict over deficit spending, it is not the field upon which the political conflict over policy has been fought, at least in the United States.  I would submit that the arena of conflict is public debate about and internal ethical struggle over ideals of individual and social economic probity and the ultimate purposes of economic activity.

Debt as Sin; Fiscal Austerity as Virtue

The urging to cut deficits, with or without empirical grounding, has been couched in terms of personal and/or national virtue as regards debt and repayment of loans.  This virtue, based on the simple transactional morality of loan and repayment, has been generalized to the situation of a number of governments around the world, including the United States, as these governments face mounting public debt in the aftermath of the financial crisis of 2007-8.  The complexity of the situation and its historical context for many, who did not bother or wish to think through the economics, was distilled down to a simple morality play of the debtor attempting to reclaim virtue for him or herself by repaying loans.  As it is difficult to appear as though one is ignoring this simple, seemingly basic morality, those who advocated a more nuanced response were drowned out or have been, until recently, politically marginalized.

Furthermore a generalized discourse about debt both private and public has perhaps spurred deeper social and individual psychological dynamics in which many people around the world seem to be at times blindly seeking to purify themselves of the “pollution” of debt.  In this effort, government is held up at the avatar or scapegoat for a sometimes personal or motivated effort to get out of a world of “bailouts” and what appears to be economic and political corruption.  While it is convenient for those in the private sector that lived off and helped spur this debt crisis for the focus to shift to government debt, the popularity of the discourse of cutting public debt draws upon the simple ethics of debt repayment and the worries about personal moral pollution and self-disgust that may be stirred up by the economic crisis.  The “qui bono” (who benefits) approach to explaining the stirring and deployment of this morality tale does not explain its popularity, the depth of feeling or the apparent rationale with which governments around the world and various individuals attempt to purge themselves of debt and, in so doing, may make their economic situation worse.

On the level of what’s called “normative ethics” there are three generally recognized classifications of ethical system, deontological (dutiful compliance with ethical rules is good), consequentialist/utilitarian (what produces the most happiness or pleasure overall is good), and virtue ethics (what encourages the development of good characteristics in people is good).  The argument for cutting deficits now is based on both a simplified deontology (the duty of the debtor to the lender is primary) and most strikingly a virtue ethics.  Those who have worried most, or appeared to worry most, about the reaction of bond markets, are making an argument that is premised almost entirely on a virtue ethics:  bond markets, i.e. lenders or buyers of debt, need to be convinced of the virtue of a nation before they buy its debt, i.e. lend it money.  Furthermore the display of this virtue is supposed to forestall or appease the imagined or real retribution of bond markets.

Virtue ethics is not entirely irrelevant to a simplified lender-borrower relationship: the lending relationship is ultimately one that involves decisions about whether someone or some entity will repay, which involves both the borrower’s circumstances and the borrower’s will.  That a borrower is regarded as “virtuous” in the area of repayment of loans is then a key, though not the only ingredient, for determining whether money will be loaned and, if so, at what rate.  Various bond, investment, and credit ratings are modern efforts to assess the “virtue” of borrowers or sellers of debt.  These ratings can be unreliable and have an element of subjective judgment as well as motivated under- or over-rating by the raters but they are an effort to apply a number to and evaluate this type of virtue.

The repeated argument by those preaching fiscal austerity after the crash of 2008 has been that debtor nations must appear to be virtuous borrowers or sellers of debt to avoid punishment by nervous or finicky bond buyers.  For a borrower in a simplified borrower-lender relationship, virtue involves either timely or accelerated repayment of debt or a show of abstemiousness that signals an intention or capacity to do the former.  The latter however can become simple ritual self-laceration, without benefit to the lender other than maintaining a sense of moral or financial superiority.

The implicit model of a virtue ethics is that ethics is a property of actors and their identities rather than a function of rules or actions in the world.  While attaching moral valuation and judgment to the identities of actors themselves is itself highly motivating, it obscures systemic issues, complex histories and interactions.  To spur harmful actions through fear of losing virtue is not an effective financial morality.  Not all of economic “goodness” inheres in actors themselves but in a complex interaction of factors.

Richard Koo, in his description of the long Japanese “lost decade”, sketches out how the focus of individual economic actors (in this case corporations) on repaying debts simultaneously, leads overall to an exacerbation of the economic downturn for the system as a whole.  As, due to a variety of factors, each Japanese corporation focused on its own balance sheet in the period 1997 to the present and attempted to pay down debt rather than invest in productive activity led to slackening demand for services from other companies and therefore economic contraction and increased unemployment.  While in Koo’s description of a “balance sheet recession”, each actor could explain their behavior using a justifiable microeconomic rationality, their behavior was analogous to the pursuit of individual economic virtue implied by the current worldwide drive towards fiscal austerity.

Counter-Austerity:  Deontological Commitment to Addressing Human Needs

The economists and observers of the debate (including myself) who are most appalled by the rush to austerity are generally operating with a different conception of how economics and economies should work.  While those who are counseling austerity start with a rule (deontological ethical systems start with a priori rules) about duty to lenders to repay their loans, much of their argument is based on a virtue ethics, the idea that nations who borrow should demonstrate virtues to lenders to avoid an escalating spiral of debt.  The appearance of debt as a sign of a lack of virtue is as, or more, important than the ethical rule “you must repay your debts” in their arguments.

By contrast those who are pre-disposed to question the logic of fiscal austerity are often starting from an assumption that economies and economics exist to serve widely-shared human and social needs as a primary goal.  While not often discussed explicitly as such, there exists for them a duty by economists to design or steer economic frameworks so that the likelihood that these needs are either directly fulfilled or as a byproduct of economic activity are largely fulfilled is increased.   Starting from a commitment to “needs first” generally leads to favoring government intervention in markets or direct government investment to supplement the work of markets or even, though this has become unfashionable in an era in which markets have been viewed as a panacea, replacing private market activity in areas where it has become entirely dysfunctional.

Those who preach fiscal austerity would counter-argue that their position is about serving human needs better in the long run, because they feel that the inculcation of the virtues of prudence and fiscal discipline will enable prosperity for more people over a period of decades.  This counterargument however depends upon an assumption that markets and the individual relationships of buyer/seller and lender/borrower can manage themselves and produce optimal outcomes without “steering” by governments and the influence of “external” actors to these basic transaction types.  If the unregulated market economy is prone to break down, destroy its own natural basis or shrink for endogenous reasons, the basis for this counter-argument would prove to be illusory.  Koo’s “balance sheet recession” is also an uncomfortable counter-example for this argument.

There is then a clear demarcation between those who reach for fiscal austerity and those who argue against it during this downturn in the area of their preferred meta-ethical systems and specific ethical commitments they endorse.  The deficit “hawks” call upon an ethics of commitment to lenders and a display of virtue to lenders and to the world at large.  Those who are opposed to the austerity campaign point out the human and other damage that would be caused by this effort and renew their call for a economists’ and broader social commitment to fulfilling basic human needs.  For them the display of virtue to lenders is outweighed by the use to which the lent funds will be put.  Furthermore, for them, any economic means should be applied to avert a human catastrophe.

Events Redefine Virtue for Government Borrowers

While this “classic” conflict has been playing out, events in the world have seemed to redefine the virtue of government borrowers, at least temporarily.  It now appears that bond markets are more trusting of debt issued by countries that continue efforts to stimulate their economies, rather than those countries, like Ireland, that have been engaging in efforts to display the virtue of a private borrower.  As Krugman has pointed out, bond ratings for countries that continue to run deficits are at very low levels.  The bond investment company PIMCO has expressed concern about governments cutting their stimulative efforts, inclusive of running more budget deficits.

That this has occurred either temporarily or for a longer term does not erase the conflict of ethical and meta-ethical systems established above.  Economists will continue to be divided by differences in their ethical commitments and the means by which they arrive at the valuation of different economic tools.  However, making these differences a matter of reflection and public discussion may enable more self-reflective consideration of which tools are appropriate and which valuations are best justified.

Addendum:  Where is Utilitarianism in the Deficit Debate?

Economics, especially the dominant neo-classical school has operated largely within the third normative ethical system, consequentialism, of which utilitarianism is the predominant school.  Utilitarianism can have an individualized or a larger social scope:

  1. for the individual, what is good is what maximizes pleasure and minimizes pain
  2. more commonly a utilitarian framework is used by ethicists and macro-economists applied to society as a whole to attempt to “achieve the greatest good for the greatest number”.   Various macro-economic indicators like GDP are efforts to create a numerical utilitarian method of evaluating “the Highest Good” for an entire economy.

While there have been criticisms of  measures like GDP in particular the fact that it hides social inequality and also endorses growth for growth’s sake,  the broad middle of economics continues to use some version of a utilitarian framework by attempting to find measures of social welfare that assign a number to some composite happiness, usually an aggregate of individual “happinesses”.

An argument can be made that critics of fiscal austerity are solidly within the utilitarian tradition, in that they are sensitive to the woes of mass unemployment and marginal employment, and the harms caused by an unsustainable overhang of household financial debt.  If they have made a case using both notions of greater social welfare through deficit spending and also now via continuing “approval” by bond buyers for the bonds of many deficit-spending nations, they would seem to have shown themselves to be “better utilitarians” (and therefore economists) than their deficit hawk opponents.

However, I would argue that while many economic arguments will necessarily take place within a utilitarian evaluative framework, these arguments are by their very nature backwards looking:  utilitarian value judgments are almost always a posteriori or after the fact.  Therefore policy advice must either contain a rule-based or virtue-based component that may derive from a utilitarian argument and analysis but nevertheless requires some a priori assumptions about what is “the Good”.   While confirmed utilitarians and those convinced that all of their beliefs are entirely based on established facts may find the reliance on a priori assumptions suspect these assumptions are absolutely necessary for anybody to act in a policy or business context under the usual or, especially under unusual, conditions of uncertainty.

As an example, to act on climate change or to structure an economy around an agenda to address energy shortages and irreversible environmental damage means to, of necessity, use some form of rule- and duty-based decision-making structure.  The endangerment of pleasures and pains in the future is highly abstract in comparison to the weight of past and present pleasures and pains that are the basis of utilitarian calculations.  It is therefore no accident that among established economists, that James Galbraith and other economists who see economics as primarily an instrument to fulfill human needs, incipiently or explicitly within a rule based ethical framework, have the clearest argument for a future effort to address as yet unknown but extremely probable disasters.  The natural scientific results upon which an argument for decisive action on climate change and oil depletion is based, are most compatible with a deontological commitment to human and planetary welfare, rather than other two major systems for arriving at “the Good”, virtue ethics and utilitarianism.   Why this is so is beyond the scope of this piece.

Much more can be written on the normative and meta-ethical dynamics that underlie social and economic conflicts and debates but this is all for now….

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About Michael Hoexter
I'm a clean energy marketing and policy strategist and consultant based in the San Francisco Bay Area.

2 Responses to The Public Deficit Debate as a Conflict Between Ethical Systems

  1. Pingback: Paradox of Thrift, the Deficit Debate and Virtue Ethics « Meta-economics

  2. Pingback: “Augustinian” Theology and the Republican/Libertarian Denial of Society « Politics 2100: Getting Down to Brass Tacks

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