Tuesday, 24 August 2010

The immorality of government debt

Governments are in the unique position of being able to extract wealth from citizens on pain of imprisonment. Like Gods of old, they also visit the sins of the fathers upon the children.

In a comment thread over at CentreRight, Denis Cooper wrote:
In a nominally democratic state such as the UK it can be held that ultimately it was the citizens, through their successive governments, who promised themselves future benefits which it will be impossible to provide in full, and if they agree to forego part of those benefits to avoid state bankruptcy then that is their own business as the body of citizens, in effect an internal compounding between themselves as debtors and themselves as creditors.
This is muddy thinking, as the great Murray Rothbard explains
Before the Reagan era, conservatives were clear about how they felt about deficits and the public debt: a balanced budget was good, and deficits and the public debt were bad, piled up by free-spending Keynesians and socialists, who absurdly proclaimed that there was nothing wrong or onerous about the public debt. In the famous words of the left-Keynesian apostle of "functional finance," Professor Abba Lerner, there is nothing wrong with the public debt because "we owe it to ourselves." In those days, at least, conservatives were astute enough to realize that it made an enormous amount of difference whether – slicing through the obfuscatory collective nouns – one is a member of the "we" (the burdened taxpayer) or of the "ourselves" (those living off the proceeds of taxation).
Government debt is fundamentally different from a private contract:
Most people, unfortunately, apply the same analysis to public debt as they do to private. If sanctity of contracts should rule in the world of private debt, shouldn't they be equally as sacrosanct in public debt? Shouldn't public debt be governed by the same principles as private? The answer is no, even though such an answer may shock the sensibilities of most people. The reason is that the two forms of debt-transaction are totally different. If I borrow money from a mortgage bank, I have made a contract to transfer my money to a creditor at a future date; in a deep sense, he is the true owner of the money at that point, and if I don't pay I am robbing him of his just property. But when government borrows money, it does not pledge its own money; its own resources are not liable. Government commits not its own life, fortune, and sacred honor to repay the debt, but ours. This is a horse, and a transaction, of a very different color.

For unlike the rest of us, government sells no productive good or service and therefore earns nothing. It can only get money by looting our resources through taxes, or through the hidden tax of legalized counterfeiting known as "inflation."
The public debt transaction, then, is very different from private debt. Instead of a low-time preference creditor exchanging money for an IOU from a high-time preference debtor, the government now receives money from creditors, both parties realizing that the money will be paid back not out of the pockets or the hides of the politicians and bureaucrats, but out of the looted wallets and purses of the hapless taxpayers, the subjects of the state. The government gets the money by tax-coercion; and the public creditors, far from being innocents, know full well that their proceeds will come out of that selfsame coercion. In short, public creditors are willing to hand over money to the government now in order to receive a share of tax loot in the future. This is the opposite of a free market, or a genuinely voluntary transaction. Both parties are immorally contracting to participate in the violation of the property rights of citizens in the future. Both parties, therefore, are making agreements about other people's property, and both deserve the back of our hand. The public credit transaction is not a genuine contract that need be considered sacrosanct, any more than robbers parceling out their shares of loot in advance should be treated as some sort of sanctified contract.
There is a strong analogy between government creditors and slave owners, with the Government acting as slave trader. One generation, operating according to the tyranny of the majority [1] sells itself into debt slavery. Not only are unwilling participants of one generation held liable for the debt chosen by their peers, but so too are millions of people not yet born. The next generation is bound to the "public" debt, just as the children of slaves were bound to the slaves' owners. As Kevin Dowd put it,
a UK citizen born in 2011 will inherit, on birth, a debt of perhaps £200,000, and it could easily be much more
The uncomfortable moral question then naturally arises: at what point does the debt become so large that our future children will be born into a new form of slavery, entering the world shackled by the debts of their forbears?

This highlights the underlying moral as well as fiscal bankruptcy of the system. For years, politicians yielded to the temptation to increase spending commitments and put off the costs of those decisions into the future.
Denis Cooper also wrote:
The government of a sovereign state can promise to pay certain sums of money to individuals and organisations, domestic and foreign, in such amounts and at such times as may be determined by agreed contracts, and although it could have the domestic law changed to deny its obligations under those contracts that would have very serious consequences for the future creditworthiness of the state.
As we have seen, the contract in question is not legitimate. But what of the effects of breaking it? I replied as follows:
Would it really be such a bad thing if people were unwilling to lend to us again, following repudiation of the national debt?

Sadly, as Argentina and other countries have found, it seems likely that people would lend to us again even if we were to default on our debt. We would need a strict constitution to forbid future governments from running up new debts, and eternal vigilance to avoid corruption of the constitution.

Private debts cannot be inherited, and for good reason: it is unreasonable and immoral to hold a son responsible for the profligacy of his father. It is likewise immoral for the government, in pursuit of the votes of one generation, to run up debts which will be serviced by generations to come.

I'm amazed that the socialists commenting here fail to realise the hideousness of this practice. Argue for forced redistribution of wealth if you must, but confine your theft to the present generation. Let voters feel the true cost of our welfare state, rather than passing the burden to their children and grandchildren. If the majority still opt for thieving tyranny, at least it will be plain for all to see.

[1] In first-past-the-post systems like our own, our profligate compatriots need not even form a majority in order to run up debts on our behalf. As I've noted previously, the past three Labour governments have led us ever more quickly down the road to ruin with the consent of less than half of the population (43.2% in 1997; 40.7% in 2001; 35.3% in 2005). Moreover, we are held liable for the actions of our representatives even when they renege on their campaign promises. In practice, we are subject to the tyranny of the tiny minority of our compatriots who make up the cabinet, and every 5 years we have the opportunity to vote in an alternative clique which is substantially the same in its outlook.

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