Mises Wire

Should Local Municipalities Default on Their Debts? Seems Like a Good Idea

Most Americans do not understand debt default. When it is explained, debt default comes off as immorally reneging on the financial obligations of the government. In contrast, libertarians have demonstrated that it is, in fact, moral and beneficial. However, when default is brought up, it is hardly ever discussed in terms of local governments. So, here is why your local government should leave their creditors in the dust.

Government issued debt is essentially immoral. Government debt issuance is an aggressive action and should be rejected as such. It involuntarily transfers money from the taxpayer to the government’s creditors. There is no positive obligation to pay back the creditors because the creditors are fully aware of where the payments come from—involuntary transfers from the taxpayer. The creditors are about as morally culpable as the government. Local government debt is only different in one way: it is easier to repudiate.

Ask yourself: how much control do you have over whether the Federal government defaults on their debt? If you are sane and honest, your answer should be “no control whatsoever.” Your congressman or senator has little to no control as well. The Federal debt is a monster that we have just about no control over. However, rejecting local debt can be relatively easy. All it takes is a majority on a local government board to pass an ordinance stating, “Government X will only pay zero dollars for every one dollar owed on bond Y.” It is that simple.

Additionally, local government debt default will restrict the spending activities of future administrations because the creditworthiness of the local government will be wrecked. Some might say this is a bad thing—“You are restricting our future”—but this is exactly what you should want. You kill two birds with one stone. You get out of present obligations and, to some extent, you prevent future board members from taking the town into more obligations. They are unable to pay for more of their pet projects.

One might say, “Local debt is only the tip of the iceberg. The national debt is the real problem.” Au contraire! Local and state governments owe just over a total of $3 trillion. This roughly comes out to $9,700 per person. They owe even more in other obligations—$5 trillion to be exact.

For example, my local government was loaned over a million dollars in 2005 and has been paying it back for nearly two decades (it is a twenty-four-year loan). The taxpayers never consented to this massive burden, and they would be right to throw it away. The loan could potentially be defaulted on, and the citizens of the small town in Pennsylvania where I reside would no longer be saddled by the financial stress the loan presents.

School districts can be even worse. The school district where I live had more than $9 million in outstanding debt. Of course, the school board has a plan to pay off the debt, which I am sure will be offset by more debt acquisition in the future, but all payments are funded involuntarily by the taxpayer. Apollo-Ridge, my school district, is relatively small compared to other districts, so other districts in the United States more than likely have a more dire debt situation.

This is a relatively untapped opportunity for libertarians across the country. We are infatuated with the national debt when we could be pushing debt default on a local level. Of course, state laws might get in the way, but municipalities have done it before. States have done so in the past (throughout the nineteenth century, many states defaulted on loans for infrastructure projects) but are now prohibited from doing so according to federal law.

However, municipalities (cities, school boards, boroughs, etc.) are free to do so. Even if a state law prevents a local municipality from defaulting, try it anyway. Reassert local power; nullify government debt.

All the cases of local government defaults I have read were due to financial problems with government-sponsored enterprises. A departure from historical trends, an ideologically driven debt default would be immensely dangerous to the local government agendas, and that is a good thing.

This policy was once proposed by Thomas Jefferson, so not only is debt repudiation beneficial and moral, one of the most proliberty founding fathers was in favor of it. It is not a foreign concept but an idea that is linked to the conception of the country.

Furthermore, if one municipality does it, then others may follow. If there is a mass reneging on financial obligations, it will signal to the financial sector that local governments are no longer good investments. Ultimately, there will be fewer government projects soaking the taxpayer, fewer boondoggles, and less overreach. They will be forced to engage in the unpopular action of raising taxes, an action that is much harder to justify.

Of course, a movement to default might spur action by state governments or the Feds, but pressing the issue is better than not pressing it at all. It does not matter if the Feds step in and mandate local governments to pay off their debts. It would be no better than the status quo.

Municipal debt default would ultimately be a good thing, so put it on your local government official’s radar or run for office with it as an agenda item. Just like anything else, if you want to get rid of government debt, start at the lowest level.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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