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Sunday, July 31, 2011

Liberties Response to Government Debt: Pay Back or Repudiate?

The recent debt ceiling debate is a glaring example of the legacy left by Keynesian economics. Debates over America’s debt are certainly nothing new either. We have become overly dependent upon government, which is unreliable itself, and we need to recognize this. For example, today’s document is a short clip from, what appears to be a magazine in 1957 asking, “Is America bankrupt?”

What is clear, in anytime, is that our options with debt are simple. As the clip states, “There are only two answers—repudiate our enormous debt—and be the disgrace of the world. Or pay off the debt and be self-respected again.” But there is another option missing here, which seems to be the route taken by our government over the years, namely, to maintain the debt in perpetuity. This latter option seems to be politically popular because citizens, shockingly, don’t like tax increases and politicians and bureaucrats don’t like to reduce spending. This realization should, however, make such a crisis a perfect time to stand up for principles in order to force the system to real change.

Where should the classical liberal stand on such an issue? Clearly, maintaining the debt is out of the question; we cannot keep spending more than we take in, as it is simply not sustainable. So, instead the classical liberal is left with the options to either repudiate or pay the debt back. What to actually do is a big debate even amongst classical liberals. Today’s document clearly makes a brief case for the need to pay the debt back but others have made the case for repudiation. There are, of course, cases to be made for both.

The case for repudiation stands on the desire to reduce the power and size of government. The disgrace of repudiating the debt would fall on our government, drastically reducing the government’s ability to continue such spending behavior. Historically, repudiation brought a widening circle of benefits. Governments became wary in investing and spending money, investors are cautious to deal with government borrowing. Negative consequences to repudiation certainly exist but tend to be short lived as the market, if allowed to operate, would sort these out relatively quickly.

Repudiation, however, could be called a breach of contract and therefore unjust. But if we wish to pay back the debt we have two options. The first is to increase taxation and the second is to cut spending. Certainly we could achieve this through a mix of the two but the former is inconsistent with classical liberalism. Why? Taxation is coercive and the tax money is being taken from individuals who have a legitimate claim over the money. Cutting spending is perfectly consistent, albeit difficult, means of paying back the debt.

Both options have their problems, as they are both politically infeasible. Public choice issues stand as a roadblock for achieving either. This, however, makes now the perfect time to stand up for radical position and force a real change to the system.

What do you think? Would you choose to pay back or to repudiate the debt? Or would you choose a different option altogether?

Download “Is America bankrupt?” here.

  • Nicholas Snow is a Visiting Assistant Professor at Kenyon College in the Department of Economics, and previously a Senior Lecturer at The Ohio State University Economics Department. His research focuses on the political economy of prohibition.