A reader points to a fresh post on the Mises.org web site of a decade-old piece by Murray Rothbard arguing that the Federal government should not be allowed to create obligations for future taxpayers. One solution he proposes:
I would advocate going on to repudiate the entire debt outright, and let the chips fall where they may.
I think that it would be consistent with the letter and the spirit of this article to repudiate the obligation to pay Social Security and Medicare, also, since these represent claims on future taxpayers.
There are many peculiar things about Rothbard’s suggestion. What is most striking to me is that the people who really have an interest in repudiating the debt are too young to vote or not even born. On the other hand, the people who have the most to lose from debt repudiation (but not from repudiation of entitlements) are foreign lenders. The people who have the most to lose from repudiation of entitlements are dominant in the electorate. I don’t think that they would let the “chips” fall on them.
For Discussion. Has Rothbard identified a genuine moral problem with the government issuing debt?
READER COMMENTS
dook
Jan 20 2004 at 9:23pm
um, wasn’t that the rationale for social security!? placing the burden on future generations because they can’t vote on it. that’s what they taught us in my public finance class anyway 😀
so i mean, i don’t think rothbard’s identified anything new per se, except perhaps common-sense politics! which admittedly, i know is sometimes tough for economists to grasp but c’mon, hardly a revelation 😀
Bernard Yomtov
Jan 20 2004 at 9:54pm
“the people who have the most to lose from debt repudiation (but not from repudiation of entitlements) are foreign lenders”
I don’t think that’s right, Arnold. It’s all debtholders, and I think that most US govt debt is still held by Americans.
More to the point , I think this is silly. After all, a lot of what government buys benefits future generations also. Aircraft carriers last a long time; scientific research has long-term payoffs. We simply have to make decisions today that affect future generations, and sometimes the wisest choice involves borrowing money.
eric krieg
Jan 20 2004 at 11:15pm
Bernard is right in that we are beneficiaries of past spending. But I am not comfortable saying that I owe anything to past generations for the infrastructure that they paid for. I can’t say that future generations owe us anything either.
Future generations could always default on the debt.
Wild Pegasus
Jan 21 2004 at 12:52am
There are two good arguments:
1. The classic republican argument is that taxation without representation is unjust. Those who have to pay the enormous deficits get no say in determining those deficits and have to shoulder the interest costs and higher taxes to cover them.
2. The modern libertarian argument is that taxation is unjust, period, since it forcibly extracts property. It’s a form of theft. Therefore, borrowing means more costs and therefore more theft in the future.
– Josh
Boonton
Jan 21 2004 at 2:29pm
Implicit in this argument is that assumption that the next generation will simply pop into existence and owe nothing to the current generation for their prosperity (or poverty).
Barry Posner
Jan 21 2004 at 3:16pm
I think what works for household debt also works for government debt: borrowing to pay for capital expenditures, especially those that generate long-lived utility in excess of their repayment costs makes sense, whereas going into debt to pay for consumables, operating expenses and maintenance is foolish and unsustainable. It’s usually not the lowest time-weighted opportunity-cost option, unless the borrower isn’t the one repaying. But intergenerational equity is one of those tricky questions, right?
Of course, Rothbard is just being consistent: under his model, the state does basically nothing. If bridges and battleships are privately financed, then there’s no government debt.
IMO, It makes as much sense for a single cohort of taxpayers to pay for bridges or battleships as it does for a family to pay for a house in one fell swoop, or for all companies to finance all capital expansion out of retained eanings.
Clearly, the subset of things I think government should be going into debt for is much, much smaller than the set of all things they are going into debt for.
Boonton
Jan 21 2004 at 4:04pm
Even in the case of consumption, if the deficit allows taxes to be lower today than what they otherwise would have been…today’s parents will have more money to spend on their children. Tomorrow’s adults, therefore, cannot say their hands were totally clean from the debts that their parents voted to place on them.
I’m not saying this is a wise policy, I’m saying the argument that debt repudiation is morally justified because ‘we’ didn’t have anything to do with our parents’ policies is bogus.
Lawrance George Lux
Jan 21 2004 at 4:36pm
What needs to be repudiated is not the Debt, but the aggregation of Government debt. Government deficit spending is easily proven to be inflationary. Paying of Government debt can be proven to be deflationary, though the argument is far more challengable. It can be proven, however, that repudiation of the Government debt will lead to devaluation of the Currency, equal to and as rapid as overprinting of Money. lgl
Barry Posner
Jan 21 2004 at 6:35pm
I have a hard time imagining a scenario whereby repudiation of US government securities by future generations would be in their best interests.
Much of the capital influx to the US is predicated upon the notion that US government securities are free of default risk.
I’m no macroeconomist, but I’m pretty sure that if US T-bonds become viewed as default-risky, then the cost of government borrowing goes sky-high, dragging all other rates up with them. I wouldn’t want to go back to 1981 interest rates. Nor do I want the US to become another Venezuela.
As it stands, the weak dollar is starting to discourage some foreign buyers. See where the Gulf oil states are hinting at selling oil for gold, and not dollars?
Bernard Yomtov
Jan 21 2004 at 7:28pm
Barry,
You are correct of course about the consequences of repudiation. But I am curious about “Rothbard’s model,” as you term it. How can battleships be run privately?
Dave Sheridan
Jan 21 2004 at 9:49pm
Rothbard has identified a systemic problem, but his solution is a bit radical. In my perfect world:
Government debt to finance improvement in the capital stock — and only in clearly defined areas where private debt and investment is impossible — permitted.
Government debt to finance ongoing government operations, including transfer payments, in excess of taxes — not permitted.
Government debt to pay for unforseen catastrophes, including war — a gray area.
Even in my perfect world, ample opportunity for mischief exists, because, per Rothbard, politicians have altruistic and selfish motivations to spend — particularly to spend the money of the nonvoting young and yet-to-be-born.
dook
Jan 21 2004 at 11:23pm
dave, you might be interested in this proposal to bring back the “1800s rule:”
works for me.
Gautam
Jan 22 2004 at 2:42pm
I think a prominent 20th century philosopher and economist would have called everyone here “Socialists”. And he would not have meant it as a compliment ;-).
Bernard Yomtov
Jan 22 2004 at 4:28pm
Dook,
having the government use a capital budget strikes me as a good idea in theory and a really lousy one in practice, for two reasons.
We already have all kinds of shenanigans around the reported numbers. Adding this element would only make it worse. For example, you need to decide what is a capital item, what the depreciable life is, what depreciation method to use, when to write off an asset. That allows for endless fudging.
The other reason, believe it or not, is simplicity. Lots of small businesses use cash accounting rather than accrual because from the owner’s point of view it presents a clearer, if less accurate technically, picture of operations. A similar case can be made for government finances. The financial statements of large businesses are mostly aimed at a sophisticated audience. Government financials are for the citizenry as well as financiers. It’s reasonable to claim, I think, that the loss of accuracy from using cash accounting is more than compensated for by the simplicity gained.
Ray
Jan 22 2004 at 10:19pm
The repudiation idea is just absurd.
Private armies are an interesting topic but not interesting enough to get into right now. A good primer for anyone curious enough; look up a book called “Strategy” by Liddell Hart. He doesn’t dwell on private armies but does go into a short history of the “professional” military man. Standing armies being the international norm is a relatively new thing (early to the mid-19 century).
Dr. James Gwartney’s work on the global economic freedom index uses the ratio of government consumption to GDP as a prime indicator of overall economic freedom.
So keeping to this line of thinking, holding the government to a certain range for that consumption to GDP ratio would be far simpler. Remembering of course that the simpler a system, the more difficult it is to cheat the system.
Jim Glass
Jan 22 2004 at 11:14pm
The debt of the US will not be repudiated. Can’t be — it’s in the Constitution.
And no Constitutional amendment is ever going to get passed saying the US doesn’t have to pay its bonds.
As for entitlement promises, they’re a whole ‘nother story. There’s not a thing binding about them.
So if the day ever comes when there aren’t enough taxes to go around, it’s pretty clear what’s going to get cut.
Boonton
Jan 23 2004 at 1:11pm
Corporate statements are also aimed at the non-financial expert audience (think 401K investors, small investors etc.). You can get a view of a company’s cash position by using the statement of cash flows. It would be criminal, though, for a large company not to use accrual accounting. The inaccuracies become too excessive.
Likewise, there’s no reason the gov’t couldn’t supplement its capital budget with a statement of cash flow for those who are interested in such things.
Comments are closed.