Mises Wire

Defaulting on the Debt Is the Moral Thing to Do

The US is in the midst of yet another “debate” over the debt ceiling. In the twenty-first century, this is a ritual that Washington politicos and journalists go through every few years when the prospect of default and government shutdown is used as a way to hold Americans hostage until they cave to a debt-ceiling hike. I won’t bore you with the details of which politicians are voting against a higher debt ceiling this time around. Outside a tiny handful of principled eccentrics of the Ron Paul variety, virtually everyone in Washington favors more deficit spending. The fact that the leadership from one of the parties currently pretends to oppose higher debt levels tells us nothing about what the regime really wants.

What it wants, of course, is sky-high spending, forever, and it wants to borrow huge amounts—at rock-bottom interest rates—to do it. A default—brought about by a stable debt ceiling—would complicate that goal. A failure to hike the debt would also limit the power of the regime, so we can expect most everyone inside the Beltway to be deeply opposed.

So, it was not exactly a surprise when Janet Yellen took to the pages of the Wall Street Journal earlier this month to call for an immediate increase to the debt ceiling. She doesn’t hold back when it comes to predicting sure and immediate doom if the debt ceiling is not increased.

“Our current economic recovery would reverse into recession, with billions of dollars of growth and millions of jobs lost,” Yellen insists, and she predicts that

failing to raise the debt limit would produce widespread economic catastrophe. In a matter of days, millions of Americans could be strapped for cash. We could see indefinite delays in critical payments. Nearly 50 million seniors could stop receiving Social Security checks for a time. Troops could go unpaid. Millions of families who rely on the monthly child tax credit could see delays.

And if a financial crisis weren’t enough, Yellen claims the US “would emerge a permanently weaker nation” (emphasis added), supposedly because the US government would no longer be able to borrow more cheaply than its unnamed and ominous “economic competitors.” 

Needless to say, this is quite the laundry list of ills all stemming from the fact the US government would have to live with spending only the $3.4 trillion or so that it collects in taxes. Not piling on an extra $1 to 3 trillion in debt on top of that every year? Why, that would just be madness! 

Raising the debt ceiling is presented as a moral choice. Do it, or you favor poverty and “calamity.” But here’s the problem with Yellen’s position—and the prodeficit position in general: she’s not actually offering a choice between pain now or pain never. It’s only a choice between pain now or even more pain in the future. 

The moral policy here is to hold fast on keeping the debt ceiling stable. Raising the debt ceiling only perpetuates the status quo and paves the way for future fiscal chaos. By kicking the can down the road yet again, those who favor raising the debt ceiling merely encourage another decade of historically weak growth and employment, while bringing higher borrowing costs, instability, and cuts to social programs. By doubling down on all this, Yellen is courting the very outcomes she claims to oppose. Meanwhile, approving yet another increase to the debt ceiling only rewards the regime for its profligacy.

Rising Interest Levels Will Force Cuts to Government Programs

Huge debt loads are already cutting into social programs and military spending. For example, American taxpayers are now being fleeced annually for around $350 billion just to pay interest on the debt. And that’s with ten-year Treasurys at a measly 1.5 percent. That’s $350 billion that can’t go to families or seniors or soldiers. It’s certainly money the taxpayers will never see again. And what if interest rates double to a still low but historically more normal 3 percent? This isn’t exactly an outlandish prospect. We’re then looking at interest payments of many hundreds of billions more, which would mean substantial cuts to those programs Yellen claims she’s saving. 

Moreover, a continuation of the current debt-to-infinity “strategy” will also lead to increasing borrowing costs—although Yellen implies an increase in the debt ceiling will somehow avert that fate. In reality, as even the Congressional Budget Office admits:

Debt that is high and rising as a percentage of GDP boosts federal and private borrowing costs, slows the growth of economic output, and increases interest payments abroad. A growing debt burden could increase the risk of a fiscal crisis and higher inflation as well as undermine confidence in the U.S. dollar, making it more costly to finance public and private activity in international markets.

So all that stuff about a stable debt ceiling making America “a weaker nation”? That’s exactly what the current deficit-spending tactic is already doing. It drives up borrowing costs, and endangers the dollar’s status as the global reserve currency. Yes, the Fed has made it seem for now that borrowing costs are stable by buying up trillions in US bonds. But the Fed can’t keep buying up huge amounts of government debt forever. With asset price inflation already sky-high and with goods price inflation mounting, the Fed is facing the limits of its monetization of the US’s federal debt.

There is no end game here that avoids the fate Yellen seems to think can be magically made to disappear with more debt. She’s only offering a short-term placebo.

Rewarding the Regime

An additional problem is the fact that constantly raising debt limits rewards the regime for its profligacy, and also impoverishes the private sector by giving the government an advantage over the private sector in terms of borrowing. States have long benefited from the fact that it is presumed states can always just tax more to pay off their creditors. Or, failing that, states can just inflate the currency.

Every time the taxpayers buckle to yet another demand to increase the debt limit, another new pile of government debt continues to suck the air out of private sector debt markets. But states keep getting away with doing it because of the misplaced belief that regimes must never be allowed to default. This only perpetuates the exalted position of the regime’s debt and borrowing privileges above the people who actually create the wealth and pay the bills. 

If anything, the voters and taxpayers have a moral obligation to threaten to force default at regular intervals. It’s an obligation to future generations and to all those who are squeezed of tax dollars every year to pay a few hundred billion more in debt service on old loans piled up to pay for the regime’s wars and other boondoggles. That is, with this more realistic view of government debt, the regime would be forced to live within its means far more often. There would be a far more real and immediate chance of default. As Lew Rockwell has noted, government debt would be priced more realistically, and the power of the regime would be curbed:

[A] permissive attitude toward default … should be extended to … the federal government. All bonds issued by governments should have a default premium, just like those in the private sector.

Among all the privileges the government sector enjoys, the most coveted is its ability to print itself out of any financial crisis. That is also the one that is most dangerous because it generates ongoing incentives to choose financial socialism over fiscal soundness.

Yes, bringing back the default would create short-term instability, but that is a far better choice than the current path.

Don’t We Have a Moral Obligation to Pay Our Debts?

And as a final note, let’s not be fooled by the mistaken claims that the US government has some sort of moral obligation to its creditors. It doesn’t. Public debt is paid off with tax dollars from taxpayers who had no choice in the matter and were not parties to the contracts between the creditors and the borrowers. Or, as David Henderson put it in the form of a question: “It’s worse to default on creditors who took a risk than to forcibly take money from taxpayers who have no choice?” The implied answer, of course, is “no, it’s not worse.” Rothbard sums it up

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. 

The moral policy? Default. 

[Read More: “Repudiating the National Debt“ by Murray Rothbard]

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