7 - The Political and Socioeconomic Consequences of Credit and Debt

Summary

This chapter introduces a new theoretical framework that helps explain how access to credit and indebtedness shape social policy preferences. Credit markets privatize both risks and opportunities. They enable individuals to self-insure against social risks and to opt out of publicly provided social services, reaping the benefits of private, credit-funded alternatives in human capital (e.g., education) and financial assets (e.g., housing) with the expectation of economic gains and upward mobility. But indebtedness can also increase economic risks by making borrowers vulnerable to income volatility and income losses that threaten debt repayments. Using original survey data, this chapter documents considerable divergence of social policy preferences across countries (depending on the structure of the welfare state and credit regime), across households (depending on whether they borrow for consumption or investment), and across the political ideology spectrum (depending on people’s relative belief in personal responsibility and market efficacy).