Debts, public and private

There is a group on Facebook called “Cancel Student Loan Debt to Stimulate the Economy.” The group has just under 200,000 members (!). Its arguments are absurd, but no more so than any other arguments for bailouts.

At best, public stimulus is inefficient. At worst (which is where government decision-making normally resides), it’s downright destructive. Not only does it remove private savings that would’ve been used to create or expand real enterprises, it’s used for handouts to groups that stifle innovation, that regulate, that create bureaucracies, etc. We’d be better off as a country if the government just printed up all the stimulus money and drove it off a cliff.

I was reminded of this great old article by the late, great economist Murray Rothbard. Rothbard posited that the the answer to an unpayable public debt is outright repudiation. He distinguished between public and private debt:

If I borrow money from a mortgage bank, I have made a contract to transfer my money to a creditor at a future date; in a deep sense, he is the true owner of the money at that point, and if I don’t pay I am robbing him of his just property. But when government borrows money, it does not pledge its own money; its own resources are not liable. Government commits not its own life, fortune, and sacred honor to repay the debt, but ours. This is a horse, and a transaction, of a very different color.

What about the savers, the elderly fixed-income holders, and the foreigners hold these IOUs? Rothbard’s words were stern:

The public debt transaction… 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 (my exmphasis).

I for one had never really thought of it that way. Why hold ANY government debt? First, there’s no way they’ll ever pay it all back, and so, for example, the kids out there with unpayable college debts will likely make off with cheap and probably worthless educations (the government is the “creditor” for most college loans, but it borrowed that money from someone else). Second, why should I loan the government the means to extend its own power? Third, and most important, isn’t it immoral to hold debt in hopes of receiving interest that is forcibly extracted from others? I’ve concluded that yes, it is immoral. (That said, there’s no real way to get around holding some government debt since every Federal Reserve note i.e. dollar in your pocket is debt courtesy of the government’s counterfeiting operation, and legal tender laws force us to hold these false weights and measures. We have to swim to some extent in the cesspool.)

To those who argued that no one would loan to the government again if they repudiate the debt, Rothbard responded with a thumbs-up:

Apart from the moral, or sanctity-of-contract argument against repudiation that we have already discussed, the standard economic argument is that such repudiation is disastrous, because who, in his right mind, would lend again to a repudiating government? But the effective counterargument has rarely been considered: why should more private capital be poured down government rat holes? It is precisely the drying up of future public credit that constitutes one of the main arguments for repudiation, for it means beneficially drying up a major channel for the wasteful destruction of the savings of the public. What we want is abundant savings and investment in private enterprises, and a lean, austere, low-budget, minimal government. The people and the economy can only wax fat and prosperous when their government is starved and puny.

Anyway, it’s a great article on a topic that will be increasingly prominent in coming years.

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