Sunday, January 13, 2013

Against Government Debt

Against Government Debt:
The last time the debt-ceiling controversy arose, it occurred to
me that if the raising the "ceiling" is a mere formality—if in fact
the sky's the limit to government borrowing—it's no ceiling at all.
Hence, I dubbed this charade the "debt sky."
Those who favor automatic increases in the "limit"—or no limit
at all—give the game away when they argue that the borrowing
authority must be increased because the full faith and credit of
the United States is on the line. After all, they say, the money is
needed to pay bills already incurred, not for new spending. Obama
makes this claim routinely, as though the case for raising the
limit is open and shut.
Who knows if that is true? But if it is, think about what it
means. Congress has been incurring bills the payment of which
depends on a future increase in the debt limit that theoretically
could be rejected. It's bad enough that Congress can incur
financial obligations under the statutory authority to borrow; it's
intolerable that Congress can incur financial obligations based on
a possible but not certain future expansion of its authority to
borrow. This is truly government run amok.
You and I can't force banks to raise our credit-card limits
merely because we have bills to pay. Why should Congress be able to
do the equivalent? The road to fiscal responsibility would begin
with an end to this practice. Better yet, no more raising of the
debt limit—cut spending and live within the current limit. And even
better: No more borrowing. Government borrowing is a source of many
evils, not least of which is that for decades it made big
government appear cheaper than it is. Could the federal government
spend nearly $4 trillion a year if it had to raise every penny
through taxation? Unlikely. A tax revolt would have been ignited.
But let the government borrow a trillion dollars a year, more than
40 cents of every dollar spent, and government looks relatively
inexpensive—or it did before things got so out of hand that
everyone could see the looming danger. Most people pay no attention
to how much interest the government must pay each year to its
creditors, but interest payments have been running at over $400
billion a year. December's payment alone was $95.7 billion.
That money represents resources that were previously diverted
from the productive private sector to the government for purposes
chosen by politicians looking out for their careers. The interest
payment goes back into the private sector, but since government
continues to borrow to pay its debts, it's still taking resources
from the productive sector. Also, when the Federal Reserve buys up
government debt, it remits the interest (minus overhead) to the
Treasury. Such interest-free borrowing might make credit look
inexpensive, except for the fact that the Fed creates money when it
buys the debt, which threatens potential price inflation, an
implicit tax on the people's cash balances, distorts relative
prices,and depresses interest rates, skewing investment
decisions.
The American people were not always so tolerant of government
debt. It was expected to be the exception in an emergency, not the
rule, but bad economic theory enthusiastically embraced by
self-serving politicians changed all that. It became fashionable to
say, "What's to worry about? We owe it to ourselves."
Thomas Jefferson's favorite economist, Destutt de Tracy
(1754-1836), had some harsh things to say about government
borrowing, and we'd do well to rediscover Tracy's wisdom. In 1817
the Frenchman Tracy published a book on economic principles, which
Jefferson liked so much, he oversaw its translation into English
as A
Treatise on Political Economy
. Like many economists of his
day, Tracy understood that the free market was a process rooted in
human action, with which government spending interfered. And he
grasped that such spending is not investment, the politicians'
self-serving statements notwithstanding, but rather consumption,
which deprives the private sector of scarce resources that would
have been used to raise living standards.
Yet Tracy was willing to ask, "When [government] expenses are
very considerable, ought we to felicitate ourselves on being able
to meet them by loans, rather than taxes?" He thought not.

Borrowing appears to be a voluntary form of funding government,
but Tracy wrote that "this an illusion [because the lenders] force
the government to raise, one day or other, a sum equal to that
which they furnish and to the interest which they demand for it.
Thus, by their obligingness, they burthen without their consent not
only the citizens actually existing, but also future
generations...."
Such burdening of people yet to be born offended Tracy, and he
proposed that "whatsoever is decreed by any legislature whatsoever,
their successors can always modify, change, annul; and that it
should be solemnly declared, that in future this salutary principle
shall be applied, as it ought to be, to the engagements which a
government may make with money lenders. By this the evil would be
destroyed in its root: for capitalists, having no longer any
guarantee, would no longer lend."
There, indeed, was a balanced-budget rule with force!
Next Tracy addressed the claim that the borrowed money would
have remained idle, hence there was no opportunity cost in the
state's using it. To this he responded: "It is certain that if the
[lenders] had not lent it their money they would have lent it to
industrious men. From that time these industrious men would have
had greater capitals to work on." Unlike government spending,
private investment in a free market would raise living standards in
accordance with consumer preferences.
Finally, he took on the assertion that loans "furnish in a
moment enormous sums, which could only have been very slowly
procured by means of taxes, even the most overwhelming." He looked
on this "pretended advantage as the greatest of all evils." In
other words, because borrowing gives politicians
access to huge sums of money that they could not acquire through
taxation, it should be forbidden.
To those who claim that the danger of borrowing lies only
its abuse, Tracy had this reply: "First, that the
abuse is inseparable from the use, and experience proves it... I
maintain that the evil is not in the abuse; but in the use itself
of loans, that is to say that the abuse and the use are one and the
same thing; and that every time a government borrows it takes a
step towards its ruin. The reason of this is simple: A loan may be
a good operation for an industrious man, whose consumption
reproduces with profit. By means of the sums which he borrows, he
augments this productive consumption [investment]; and with it his
profits. But a government which is a consumer of the class of those
whose consumption is sterile and destructive, dissipates what it
borrows, it is so much lost for ever [sic]; and it remains burdened
with a debt, which is so much taken from its future means. This
cannot be otherwise."
In this day of trillion-dollar annual budget deficits, a
national debt—closing in on $16.5 trillion—that exceeds the value
of all the goods and services produced by the American people in a
year, rising taxes, and out-of-control spending, it's time to
rediscover the wisdom of Destutt de Tracy.
This article
originally appeared
at The Project to Restore
America.