Monetary Policy

Nobody's Default But Ours

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Old-school libertarian historian Jeffrey Rogers Hummel over at History News Network has some thoughts on the unthinkable in the wake of the Fannie Mae and Freddie Mac takeovers: is defaulting on U.S. Treasury obligations in our future? And would that be a bad thing?

He thinks yes, and no, for a variety of reasons. He sallies forth with some hardcore libertarian moral arguments. ("Treasury securities represent a stream of future tax revenues, and investors have no more just claim to those returns than to any investment in a criminal enterprise.")

But he also has come economic speculations that lead him to believe a partial U.S. government debt repudiation would not be the "end of the world" that Tyler Cowen, with whom he's grappling throughout the piece, thinks it would be. (Cowen's opinion is shared by most of the world, of course.) Says Hummel:

Repudiating government debt eliminates future tax liabilities. To the extent that people correctly anticipate those liabilities, the value of private assets (including human capital) should rise over the long run by the same amount that the value of government securities falls. Thus, people will gain or lose depending how closely their wealth is associated with the State. If on the other hand, people underestimate their future tax liabilities, they suffer from a fiscal or "bond illusion" in which Treasury securities make them feel wealthier than they actually are. Debt repudiation will bring their expectations into closer alignment with reality, which should increase saving.

Hummel even thinks the political repercussions of such repudiation might be relatively sunny, considering the history of past state-level repudiations. (Most of his value judgements here rather require you to be a libertarian to see them as sunny, of course.)

A government default is certainly a balanced-budget amendment with real teeth. Moreover, government defaults in the past, when not obviated by bailouts from other governments, seem to have had positive political consequences. Compare the widespread defaults of American state governments in the 1830s, with their cascading benefits–reluctance of states to set up government-owned railroads the way they had government-owned canals, balanced-budget constitutional amendments at the state level which even today impose lingering constraints, a general state retrenchment in a period of increasing laissez faire, among others–with the baleful consequences of the failure to repudiate the Revolutionary War debt, the most notorious of which was replacement of the Articles of the Confederation with the U.S. Constitution…..

The greatest potential political benefit of a future government default would be the end of the democratic welfare state…

It's an election year, and strangely no one is yet leaping on a "repudiate the debt" platform. But with the looming social insurance catastrophe, that's a possibility that those living today may well face. Starting to think about how much of an "end of the world" it might be seems both bracing and necessary.