Tuesday, February 26, 2013
The Ethics of Repudiation
Do you ever get the feeling that no one in the Washington power elite is willing to seriously deal with the major economic threat to future prosperity facing the United States today: mounting government debt and the associated deficits? The problem, as pointed out by Murray Rothbard over 20 years ago:
In 1992, when Rothbard wrote the above, the US debt was approaching $4 trillion (now nearing $17 trillion) and Federal Reserve policy was relatively benign compared to the current quantitative easing, which is effectively monetizing a significant portion of newly created government debt. The “peace dividend” from the end of the Cold War and the false prosperity from two Fed-created economic booms made the problem appear less urgent and allowed politicians to kick the can down the road. A solution is now urgent, but not likely. David Henderson’s “Must Default Be Avoided at All Costs?” is a great place to start in order to reinvigorate a serious discussion on a moral approach to shrinking the size of the federal government down to a less destructive level.
Henderson sees default as likely to occur eventually and, given current trends and other alternatives, the more moral alternative. Jason J. Fichtner and Veronique de Rugy make a case that “Default must be avoided at all costs and should not be an option on the table” ("The Debt Ceiling: Assets Available to Prevent Default," January 25, 2013). But Henderson disagrees:
For a sustained case in favor of default, Henderson recommends Jeffrey R. Hummel’s “Some Possible Consequences of a U.S. Government Default.” As in many areas, Rothbard was a leader. Writing in the June 1992 issue of Chronicles (pp. 49–52), Rothbard made the case for “Repudiating the National Debt.” In this extended discussion, which I frequently used as a reading assignment for Principles of Macroeconomics during the 1990s, Rothbard clearly lays out the difference between public debt and private debt, as well as the moral case for public-debt repudiation or default.
First, there is no moral problem with private debt, and private debt repudiation is morally reprehensible. As Rothbard explains,
So far, it is clear that there is nothing “wrong” with private debt.
In essence: you borrowed it, you spent it, and you should be responsible for repayment.
What about public debt? Rothbard provides the answer:
The reason is that the two forms of debt-transaction are totally different.
How is it a different horse?
In summary, as a taxpayer, you did not borrow the funds, you did not spend the funds, and you have no moral obligation to repay the funds.
Rothbard’s recommendation: “I propose, then, a seemingly drastic but actually far less destructive way of paying off the public debt at a single blow: outright debt repudiation.” Repudiation is not only a sound economic solution to our fiscal crisis, but it is also the morally correct solution. Rothbard’s more detailed proposal, which was a “combination of repudiation and privatization,” should be considered a blueprint for an effective debt-reduction plan. As Rothbard argued, such a plan “would go a long way to reducing the tax burden, establishing fiscal soundness, and desocializing the United States.” As an added bonus, default would be as effective, if not more effective, than a balanced budget amendment, in reducing the likelihood of a future reoccurrence of the problem.
But “[i]n order to go this route, however, we first have to rid ourselves of the fallacious mindset that conflates public and private, and that treats government debt as if it were a productive contract between two legitimate property owners.” The commentary by Hummel and Henderson are evidence that some are seriously addressing this issue, alas, after over a 20 year lag.
John P. Cochran is emeritus dean of the Business School and emeritus professor of economics at Metropolitan State University of Denver and coauthor with Fred R. Glahe of The Hayek-Keynes Debate: Lessons for Current Business Cycle Research. He is also a senior scholar for the Mises Institute and serves on the editorial board of the Quarterly Journal of Austrian Economics. Send him mail. See John P. Cochran's article archives.
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