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Friday, July 22, 2011

Bondholders and Victims

Who's less worthy of compensation?

The raging debt limit controversy raises myriad moral issues that are of interest to libertarians but hardly anyone else.

It is assumed almost universally that the U.S. government must make its interest payment and cover its other financial obligations on August 3, the day after the drop-dead date for a debt limit increase, or suffer a severe economic and moral blow. Even a late interest payment would be economically catastrophic, we’re told. (That strikes me as fear-mongering.)

Thus the debate is over how not if the debt limit is to be raised — as if a $14.3 trillion debt is not enough. Some would simply raise the limit. (President Obama wants it raised by $2.4 trillion.) Most want the new limit combined with a plan to reduce the budget deficit over the next decade.

Shrinking that deficit can be accomplished theoretically by cutting spending, increasing tax revenues, or both. I say “theoretically” because a plan to raise revenues would likely fall short of its target: Taxpayers are adept at tax avoidance, which is why for the last several decades total federal revenues have been fairly constant as a share of GDP (at just under 20 percent) regardless of tax rates. (They are lower now because of the recession.)

Lost Dimension

Throughout the political hullabaloo something important – the moral dimension — has been lost. (Now there’s a first!) It is not just that the government’s commandeering of even more resources from the private sector is regarded as the “grownup” thing to do. It’s also that most people assume the government is something noble and its word must be kept at all costs. The pundits and politicians go beyond claiming that missing the deadline would bring economic calamity; they also say that a late payment  — not a default, not a repudiation, but merely a late payment — would be a moral calamity. This is laughable, considering the endless list of lies presidents, members of Congress, and other government officials have peddled for years. Politicians have been the butt of American humor from the beginning precisely for that reason. These are the people who gave us budget cuts that are actually only reductions in the rate of increase, off-budget financing, and other creative accounting. Need I cite more examples? (If you want more, check the statements made in the run-up to any of America’s wars.)

In truth a late payment would expose government for what it is, in case anyone forgot. The lesson would be instructive. Government is not some higher super-competent entity like the man pretending to be the Wizard of Oz wanted the people to think he was. It’s a coercive organization of limited, flawed, and essentially ignorant men and women who, having been anointed in an election after campaigns hawking snake oil, are presumptuous enough to think they are capable of making wise decisions on our behalf.

There’s also a forgotten moral dimension with respect to those who receive government payments. Not all of them are of equal moral stature. While no one (except the actual owners) can deserve government largess because it originates in taxation, some claims are superior to others. Someone who lends money to the government does so freely, knowing that taxation will make repayment possible. (If you doubt this, ask yourself how many bond buyers there would be if government had no power to tax.) In contrast Social Security/Medicare recipients were financially raped all their working lives and pushed into dependence on government at a stage of life when earning an income is difficult or impossible.

Weaker Claim

If the government is going to pay somebody, whom should it be? It’s clear to me that the coerced creditors should be favored over the willing creditors. Back of the line, bondholders.

I am not justifying taxation to pay welfare state beneficiaries — quite the contrary. I am saying only that victims of the State have a stronger claim to resources in its possession than those who freely speculated in and hoped to profit from its power. (The low interest rate assumed obeisant taxpayers.) No one is punished for not buying bonds. Alas we can’t say the same for those who attempt to opt out of Social Security or Medicare.

Finally, if the government suddenly refused to pay its willing creditors (and wasn’t merely late with its payment), the world economy could be disrupted in the short term (though with big benefits later). That potential for disruption, which would surely harm innocents, might justify paying the bondholders for now — but not out of any real moral obligation to them. Among the many offenses of the political class is that finally cleaning up its economic mess is not likely to be painless.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.