The 21st century has already seen the biggest ever transfer of wealth from the poor to the rich. I refer, of course, to various government bailouts. In the US, what started as merely a transfer of wealth from the prudent to the imprudent has turned into a trillion-dollar package of political favours, not even intended to do what they claim, most not even conceivably “stimulating”, yet supported by Legion “useful idiots“.
The Wall Street Journal said “By our estimate only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus. And even many of these projects aren’t likely to help the economy immediately. The rest is pork.”
Alistair Darling is increasing taxpayer liability for bad loans and investments by £500bn under the Asset Protection Scheme, which could bring total liability up to £1.3tn, after already spending hundreds of billions of pounds. Virtually all this “stimulus” is financed by borrowing. Barack Obama just financed half of his $3.6tn budget with debt, increasing the US deficit by $1.75tn. The UK government debt is now at least 47% of GDP, though if you include liabilities which will require borrowing in the future, such as pensions, the figure is over 100%.
My purpose here is not to argue that governments should stop this futile waste of money, or to go into how governments cause recessions by setting interest rates. Instead I want to argue for something more radical: the UK government should default on its debts.
There is simply no excuse for government borrowing. It used to be claimed to be necessary for “investment”, though the vast majority of it was used to fund ordinary government expenditure. Now it’s claimed to be necessary to “spend against the economic cycle”, based on the mistaken belief that the economy is driven by consumption rather than production. (This “counter-cyclical” spending has never worked, anywhere, ever.) But we all know the real reason: governments that borrow can spend more than they tax, and thus remain relatively popular.
The problem is, things which are financed by borrowing have to be paid for eventually. In the mean-time, there are interest payments. So the total cost will always be higher. If the government always runs a deficit, the debts will never be paid off, and we’ll continue paying interest forever. This year, the government will spend £30bn on interest payments (5% of its budget). Think what that money could buy. (A much needed tax cut!) Without government debt we would be richer in the long run.
Some might say it would be impractical for the government to default on its debts, because it would destroy confidence in the UK government’s ability to pay its debts, and then no one would lend to the government again. But that’s the whole point. Since we wouldn’t intend for the government to borrow again, it wouldn’t matter, and loss of foreign confidence would hinder other future governments doing it as well. It shouldn’t have an effect on private borrowing.
More important than the practical argument, though, are the moral arguments. People should never be forced to pay debts that they never agreed to take on. Why should those born in 2050 be forced to pay for debts racked up today? Why should one government pay for debts racked up by a previous, irresponsible government? Why, indeed, should people be forced to pay for debts racked up by the state? States cannot legitimately have debt, so those people, companies, banks, sovereign wealth funds and other states who lend to states cannot legitimately expect their money back. Indeed, if we spread this meme, hopefully they won’t lend to the British state in the first place. Caveat mutuor.
The government of Ecuador defaulted on its debts in December 2008. “The Confederation of Ecuadorian Kichwas (ECUARUNARI), the powerful Andean branch of the country’s indigenous peoples movement, has long called the foreign debt illegal and illegitimate. ‘We have not acquired any debt. The so-called public debt really belongs to the oligarchy. We the peoples have not acquired anything or been benefited, and thus we owe nothing.’”
“The real issue is justice, not charity… When ‘Progressive’ outfits like Make Poverty History have noticed the problems that government debts create, their response has been, mainly, to beg ‘rich’ governments to ‘cancel’ the existing debts of ‘poor’ governments, as a sort of charitable hand-out…
In fact, discussions of government debt should not focus on mediated settlements or ‘relief’ from creditor governments, but rather on unilateral repudiation of so-called ‘public debt’ by debtor governments. Not because enforcing the collection of these debts is scroogish or because it ought to be tempered by considerations of charity, but rather because the debts themselves are completely illegitimate and enforcing the collection of these debts is absolutely unjust.”
Tags: debt
[...] run out of our money. The country as a whole is now in negative equity. Every British child is born owing around £20,000. Servicing the interest on that debt is going to cost more than educating the [...]
The reason the government borrows so much is because it knows that it doesn’t have to pay it off in the same way as a person has to pay off a bank loan – they can just get the Bank of England to print a load of money for them, which is nothing less than theft from everyone who has pounds sterling. The only way to stop this is to abandon fiat money and move to a fully convertible commodity standard (in practice, gold).
[...] for bailing out banks or “stimulating” the economy comes from taxation, borrowing (deferred taxation), or inflation (taxation by stealth), it is theft from the poor. The poor are the only people who [...]
Hayek made the point well in his pamphlet “Choice in Currency: A Way to Stop Inflation”. The pamphlet is well worth reading for the brief histories included of inflation in revolutionary France and 1920s Germany.
http://www.iea.org.uk/record.jsp?type=book&ID=409
http://burningourmoney.blogspot.com/2009/04/repaying-national-debt-not.html
“By 1946, our national debt was an humongous 250% of GDP – even worse than the 100% we’re facing now. Yet, although it took us three decades, by 1974 we’d got it down to a manageable 50% of GDP. So how did we do that?
…
Well, what do you know? Although over these three decades we reduced our debt burden from 250% of income to 50%, we actually made no net repayment at all. In fact, we doubled our outstanding debt.
The trick?
Oh, you guessed.
Over those three decades, money GDP increased nearly sevenfold, so as a percentage of GDP, debt fell sharply.
But here’s the scary bit – of that sevenfold increase in money GDP, the vast bulk comprised inflation. In fact, over the period as a whole, inflation eroded the real value of government debt by nearly three-quarters.
Or as we creditors say, HMG defaulted on three-quarters of what it owed to the poor schmucks who’d been stupid enough to lend.
In ten years time, please don’t say you weren’t warned.”
Adam Smith, right at the end of The Wealth of Nations:
“When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment. The raising of the denomination of the coin has been the most usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment.”
WoN, Book 5, Chapter 3, “Of Public Debts”
This article was inspired by a Brian Micklethwait article at Samizdata: “Another extreme meme that needs to get out there – default!”, and a link in the comments to the radgeek article I linked to, Repudiation now. That links to a Kevin Carson article at the Centre for a Stateless Society, “Ecuador Repudiates Foreign Debt: It’s About Time”.
I didn’t link to the Samizdata article because it was a tad unsavoury.
After writing this article, I came across one from Murray Rothbard in 1992, “Repudiating the National Debt”.
http://www.mises.org/article.aspx?Id=1423
http://www.lewrockwell.com/rothbard/rothbard198.html
http://www.lewrockwell.com/rothbard/rothbard190.html
Rothbard first ponders whether bankruptcy laws are just. Then he explains that government debt is unjust and wrong, using much the same reasoning as I have above.
In the comments at http://econlog.econlib.org/archives/2004/01/government_vs_p.html, someone points out some good rhetoric: “The classic republican argument is that taxation without representation is unjust. Those who have to pay the enormous deficits [people not yet born] get no say in determining those deficits and have to shoulder the interest costs and higher taxes to cover them.”
I’d really like someone to write an article arguing this for Varsity or The Cambridge Student next term.