MarketWatch – Extra Credit
How the wealthy use debt ‘as a tool to screw the government and everybody else’
An interview with the professor who coined the term ‘Buy, Borrow, Die,’ and a look at how debt destabilized Haiti.
Hello and welcome back to MarketWatch’s Extra Credit column, a weekly look at the news through the lens of debt.
This week we’re tackling the economic forces luring borrowers into debt and how a centuries’-old debt imposed on Haiti is still affecting the country today. But first up, how the rich use borrowing to their advantage.
Debt can mean a tax advantage for some and jail for others
ProPublica’s investigation into billionaires’ tax returns has more people paying attention to the strategies wealthy Americans use to avoid paying taxes. As it turns out, one of those tactics involves the advantageous use of debt. There’s even a catchphrase for it — Buy, Borrow, Die — that was the subject of a recent Wall Street Journal article.
In both the ProPublica and Wall Street Journal articles, I was struck by the way the wealthy opted to use debt as a strategy, when many borrowers I encounter in my reporting are relying on loans because they have to. I called Edward McCaffery, a professor at the University of Southern California’s Gould School of Law, who says he coined the phrase Buy, Borrow, Die decades ago, to learn more about it.
McCaffery said he first started thinking about the idea a few years into his tax law teaching career, when he noticed how certain tax law doctrines could benefit the wealthy. For example, the realization requirement, which means you don’t pay taxes on an asset until it produces cash.
That allows for the wealthy to build up their assets tax free. To most of us, it would seem that the problem with that method is that “sooner or later you’re going to have to sell,” he said. But that’s actually not the case. As long as someone is wealthy enough to live on a percentage of their assets, they never have to sell.
Instead, they can borrow against those assets at an interest rate that’s much lower than the rate at which the assets will appreciate over time, McCaffery said, and use those funds as spending money. But unlike the wages and salary most people use to pay for living expenses, the borrowing isn’t taxed, so they face a relatively low tax bill. Once they die, the assets pass to their descendents tax-free or with minimal tax treatment.
‘Need debt, you get screwed, don’t need debt you can use it as a tool to screw the government and everybody else.’
When McCaffery first started talking about Buy, Borrow, Die, 25 years ago, he said many were skeptical. For one, there wasn’t evidence that wealthy people were engaging in this behavior. In addition, the approach runs so counter to the way the 99% think about borrowing that it was hard to believe.
“They’ve been trained since birth, they’ve been trained in the womb, never a borrower nor a lender be, debt is bad, debt will cripple you,” he said.
And indeed, middle-class borrowers face higher interest rates than what billionaires are offered and they have bills coming due now; that means they have to tap their assets or earn money from work, which is taxed. For the poor, debt can often come in the form of loans that prey on their need for funds quickly. “Need debt, you get screwed, don’t need debt you can use it as a tool to screw the government and everybody else,” McCaffery said.
What the News Means for You and Your Money
For some, the consequences can be even more pernicious than high interest rates. Just ask Charles Anderson, who spent 28 days in jail over $2,500 in fines and unpaid court fees, AL.com reported this week. He was only freed after his mother took $1,000 from her Social Security check and put it toward his debt.
“In my opinion, it’s debtors’ prison because I owe money and you’re gonna lock me up for it,” he told AL.com. “How is this the United States, where we’re supposed to have more freedoms than anywhere else in the world, and we’re incarcerating people for not having money?”
Society’s focus on credentials is fueling student debt
The Wall Street Journal published an excellent article last week highlighting the debt students take on for graduate degrees offered by elite universities and the money those degrees make for the schools.
Though the focus was largely on film, acting and other arts programs — which typically don’t require licenses — the story also had me thinking about President Joe Biden’s recent executive order that would clamp down on occupational licensure requirements. Stay with me here.
As many on Twitter pointed out, the prestigious schools that were the focus of the WSJ piece are using some of the same tactics and benefiting from the same economic forces as for-profit colleges offering the certifications, education for licensure and degrees that students need — or at least think they need — to get a job or boost earnings.
A big driver of this trend is credentialization, or the idea that jobs require higher levels of education than they used to even though workers are performing the same tasks as in the past. In some cases, that can mean a license that didn’t used to be necessary to perform a job, in others, it means a graduate degree is a ticket to standing out because bachelor’s degrees are increasingly common.
Over the past several years, this phenomenon has pushed students towards more schooling, research indicates. And the higher education industry is capitalizing on it. Douglas Webber, an associate professor of economics at Temple University, said it’s not uncommon to see schools using buzzwords like “jumpstart your career” in marketing materials.
Those messages are “trying to get at people who, they have some job, but it’s maybe not the job that they envisioned,” he said. “You definitely see that, and not just from for-profit, or typically predatory institutions, you see that type of marketing from virtually everywhere, even publics.”
Students see accruing another degree as a way to improve their prospects in part because employers are demanding extra credentials at all levels of the labor market, Webber said.
“There’s just been this trend over time of firms and industries that have been trying to shift the cost of training to higher education and that is occupational licensing and that is also graduate education,” he said.
Biden announced last week that he would ban burdensome occupational licenses, as a way to improve workers’ ability to switch jobs, even when it requires moving across state lines. That could make it easier for workers without the funds to pay for school to get into those fields, said Kim Weeden, a sociology professor at Cornell University.
“If it takes you $400 to get a license and you have to sign up for very expensive continuing education courses every year, that’s a barrier to entry into either acquiring the skills, or keeping the skills up to date, or applying the skills that you already have,” she said.
There are some questions as to how getting rid of occupational licenses, or at least tamping down on them, could impact inequality. Occupations with licenses typically have a wage premium, even at the lower paying end of the labor market. Other research indicates that women and racial minorities who have occupational licenses experience smaller wage gaps than those without the licenses.
The debt forced onto Haiti centuries ago
Debt is not only a force in individuals’ lives, it can also destabilize an entire country. The recent turmoil in Haiti in the wake of the assassination of the country’s president, Jovenel Moïse, highlights the role financial exploitation by the international community has played in Haiti’s political and economic challenges.
Haiti declared its independence from France in 1804, after a slave-led rebellion wrested power from colonial occupiers. But in 1825, France, backed by the threat of war, ordered Haiti to pay 150 million francs in exchange for recognizing the country’s independence. To make the payments, Haiti had to borrow money from French banks — a debt it didn’t pay off until 1947.
That weight prevented Haiti’s economy from taking off. The economist Thomas Piketty has said France should repay Haiti a minimum of $28 billion to cover the debt and its consequences.
“We are talking about 122 years that a young nation had to pay money for the only crime it committed: To fight and to get its independence in order to lead a free life, a dignified life,” said Jean Eddy Saint Paul, the founding director of the Haitian Studies Institute at the City University of New York.
The debt owed to France was followed by decades of economic and political meddling into Haiti by the international community that laid the groundwork for today’s turmoil, Saint Paul, a professor at Brooklyn College, said. For example, The United States began a nearly 20-year occupation of Haiti in 1915, following the assassination of Haiti’s president, in part out of fear that the money owed to France would tie Haiti too closely to the country. The U.S. also moved Haiti’s financial reserves to the United States.
In more recent years, Haiti’s economy has been victim to, among other things, a neoliberal economic program “on steroids” that pushed the country to open its economy to the world, allowing goods to flood in and devastate the agricultural sector, said Robert Fatton Jr., a professor of politics at the University of Virginia.
“We have a long history of foreign involvement in Haiti,” said Fatton, who has written multiple books about the country. “You can’t understand Haitian politics without understanding foreign entanglements in Haiti’s affairs — not only in terms of the politics of the place, but also in terms of the economy.”