Rothbard – Government Debt Is Worse Than Private Debt

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Mandeville, LA – Exclusive Transcript – “If you are one of those that is in the employ of, as an example, one of these companies that is part of the military-industrial complex, is building bombs to destroy property in countries you can’t point to on a map while we are not at war with any country, you are partaking of this.  What is so hard to understand about this?  [mocking] “Mike, we gotta make a living somehow.”  You don’t.  No, you don’t.  You don’t have to do that.  I know this is painful to hear, painful to admit to, and I wouldn’t want to admit to it either.  You are then in on the grift.”  Check out today’s transcript & Audio/Video Clip of the Day for the rest…

Begin Mike Church Show Transcript

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In the spring of 1981, conservative Republicans in the House of Representatives cried. They cried because, in the first flush of the Reagan Revolution that was supposed to bring drastic cuts in taxes and government spending, as well as a balanced budget, they were being asked by the White House and their own leadership to vote for an increase in the statutory limit on the federal public debt, which was then scraping the legal ceiling of $1 trillion. They cried because all of their lives they had voted against an increase in public debt, and now they were being asked, by their own party and their own movement, to violate their lifelong principles. The White House and its leadership assured them that this breach in principle would be their last: that it was necessary for one last increase in the debt limit to give President Reagan a chance to bring about a balanced budget and to begin to reduce the debt. Many of these Republicans tearfully announced that they…

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Many of these Republicans tearfully announced that they were taking this fateful step because they deeply trusted their president, who would not let them down.

Famous last words. In a sense, the Reagan handlers were right: there were no more tears, no more complaints, because the principles themselves were quickly forgotten, swept into the dustbin of history. Deficits and the public debt have piled up mountainously since then, and few people care, least of all conservative Republicans. Every few years, the legal limit is raised automatically. By the end of the Reagan reign the federal debt was $2.6 trillion; [Mike: This is Rothbard writing this in 1991.] now it is $3.5 trillion and rising rapidly. [Mike: Folks, wasn’t that the good ol’ days? We’re talking about the good ol’ days, back when the debt was just $3.5 trillion. To see a debt that would only be $3.5 trillion, that’d be a mighty sunny day, wouldn’t it?] And this is the rosy side of the picture, because if you add in “off-budget” loan guarantees and contingencies, the grand total federal debt is $20 trillion.

Before the Reagan era, conservatives were clear about how they felt about deficits and the public debt: a balanced budget was good, and deficits and the public debt were bad, piled up by free-spending Keynesians and socialists, who absurdly proclaimed that there was nothing wrong or onerous about the public debt. In the famous words of the left-Keynesian apostle of “functional finance,” Professor Abba Lernr, there is nothing wrong with the public debt because “we owe it to ourselves.” [Mike: See Obama’s speech yesterday.] In those days, at least, conservatives were astute enough to realize that it made an enormous amount of difference whether – slicing through the obfuscatory collective nouns – one is a member of the “we” (the burdened taxpayer) or of the “ourselves” (those living off the proceeds of taxation).

Since Reagan, however, intellectual-political life has gone topsy-turvy. Conservatives and allegedly “free-market” economists have turned handsprings trying to find new reasons why “deficits don’t matter,” why we should all relax and enjoy the process. Perhaps the most absurd argument of Reaganomists was that we should not worry about growing public debt because it is being matched on the federal balance sheet by an expansion of public “assets.” [Mike: This has to be one of the most preposterous things I’ve ever read, folks.] Here was a new twist on free-market macroeconomics: things are going well because the value of government assets is rising! In that case, why not have the government nationalize all assets outright?

To think sensibly about the public debt, we first have to go back to first principles and consider debt in general. Put simply, a credit transaction occurs when C, the creditor, transfers a sum of money (say $1,000) to D, the debtor, in exchange for a promise that D will repay C in a year’s time the principal plus interest. If the agreed interest rate on the transaction is 10 percent, then the debtor obligates himself to pay in a year’s time $1,100 to the creditor. This repayment completes the transaction, which in contrast to a regular sale, takes place over time.

So far, it is clear that there is nothing “wrong” with private debt. As with any private trade or exchange on the market, both parties to the exchange benefit, and no one loses. But suppose that the debtor is foolish, gets himself in over his head, and then finds that he can’t repay the sum he had agreed on? This, of course is a risk incurred by debt, and the debtor had better keep his debts down to what he can surely repay. But this is not a problem of debt alone. Any consumer may spend foolishly; a man may blow his entire paycheck on an expensive trinket and then find that he can’t feed his family. So consumer foolishness is hardly a problem confined to debt alone. But there is one crucial difference: if a man gets in over his head and he can’t pay, the creditor suffers too, because the debtor has failed to return the creditor’s property. In a profound sense, the debtor who fails to repay the $1,100 owed to the creditor has stolen property that belongs to the creditor; we have here not simply a civil debt, but a tort, an aggression against another’s property.

Most people, unfortunately, apply the same analysis to public debt as they do to private. If sanctity of contracts should rule in the world of private debt, shouldn’t they be equally as sacrosanct in public debt? Shouldn’t public debt be governed by the same principles as private? The answer is no, even though such an answer may shock the sensibilities of most people. The reason is that the two forms of debt-transaction are totally different. 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.

For unlike the rest of us, government sells no productive good or service and therefore earns nothing. It can only get money by looting our resources through taxes, or through the hidden tax of legalized counterfeiting known as “inflation.” There are some exceptions, of course, such as when the government sells stamps to collectors or carries our mail with gross inefficiency, but the overwhelming bulk of government revenues is acquired through taxation or its monetary equivalent. Actually, in the days of monarchy, and especially in the medieval period before the rise of the modern state, kings got the bulk of their income from their private estates — such as forests and agricultural lands. Their debt, in other words, was more private than public, and as a result, their debt amounted to next to nothing compared to the public debt that began with a flourish in the late 17th century.

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.

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Mike:  Folks, we call this crony capitalism now.  That’s exactly what it is.  I’m going to stop right here with Rothbard.  As I said in the last hour, if you are one of those that is in the employ of, as an example, one of these companies that is part of the military-industrial complex, is building bombs to destroy property in countries you can’t point to on a map while we are not at war with any country, you are partaking of this.  What is so hard to understand about this?  [mocking] “Mike, we gotta make a living somehow.”  You don’t.  No, you don’t.  You don’t have to do that. [/private]

I know this is painful to hear, painful to admit to, and I wouldn’t want to admit to it either.  You are then in on the grift.  You are accepting payment knowing full well that a majority of what you are being paid is coming out of not only the wallets of your neighbors and your friends and family, it’s coming out of the future wallets of your kids.  They’re the ones that are going to have to pay it back.  Forty-six cents out of every dollar is borrowed.  Sometime in the future little Susie and Johnny will have to pay back what you, your company, and our government borrowed.

Look, I don’t expect that there’s going to be mass exodus from government employ.  I’m not naïve.  Were I in your position, I’d have a difficult time walking away, too, and that’s the problem.  The virtuous man would analyze the situation and would say: I choose not to participate in this.  This would include the virtuous man who’s the company owner.  We don’t have virtuous men in capitalism today.  This is why, as Wilhelm Roepke, the great Austrian who just happened to be Swiss as well, why Roepke wrote the book The Humane Economy.  Was Roepke an Austrian economist?  He was.  Would he have been a supporter or defender or promoter of any form of crony capitalism?  He would not.  He would have said: This is why there is no moral component to capitalism.  He would have been correct.

End Mike Church Show Transcript