Against Government Debt

Thomas Jefferson's favorite economist had some harsh things to say about government borrowing

The last time the debt-ceiling controversy arose, it occurred to me that if the raising the "ceiling" is a mere formality—if in fact the sky's the limit to government borrowing—it's no ceiling at all. Hence, I dubbed this charade the "debt sky." 

Those who favor automatic increases in the "limit"—or no limit at all—give the game away when they argue that the borrowing authority must be increased because the full faith and credit of the United States is on the line. After all, they say, the money is needed to pay bills already incurred, not for new spending. Obama makes this claim routinely, as though the case for raising the limit is open and shut.

Who knows if that is true? But if it is, think about what it means. Congress has been incurring bills the payment of which depends on a future increase in the debt limit that theoretically could be rejected. It's bad enough that Congress can incur financial obligations under the statutory authority to borrow; it's intolerable that Congress can incur financial obligations based on a possible but not certain future expansion of its authority to borrow. This is truly government run amok.  

You and I can't force banks to raise our credit-card limits merely because we have bills to pay. Why should Congress be able to do the equivalent? The road to fiscal responsibility would begin with an end to this practice. Better yet, no more raising of the debt limit—cut spending and live within the current limit. And even better: No more borrowing. Government borrowing is a source of many evils, not least of which is that for decades it made big government appear cheaper than it is. Could the federal government spend nearly $4 trillion a year if it had to raise every penny through taxation? Unlikely. A tax revolt would have been ignited. But let the government borrow a trillion dollars a year, more than 40 cents of every dollar spent, and government looks relatively inexpensive—or it did before things got so out of hand that everyone could see the looming danger. Most people pay no attention to how much interest the government must pay each year to its creditors, but interest payments have been running at over $400 billion a year. December's payment alone was $95.7 billion.

That money represents resources that were previously diverted from the productive private sector to the government for purposes chosen by politicians looking out for their careers. The interest payment goes back into the private sector, but since government continues to borrow to pay its debts, it's still taking resources from the productive sector. Also, when the Federal Reserve buys up government debt, it remits the interest (minus overhead) to the Treasury. Such interest-free borrowing might make credit look inexpensive, except for the fact that the Fed creates money when it buys the debt, which threatens potential price inflation, an implicit tax on the people's cash balances, distorts relative prices,and depresses interest rates, skewing investment decisions.

The American people were not always so tolerant of government debt. It was expected to be the exception in an emergency, not the rule, but bad economic theory enthusiastically embraced by self-serving politicians changed all that. It became fashionable to say, "What's to worry about? We owe it to ourselves." 

Thomas Jefferson's favorite economist, Destutt de Tracy (1754-1836), had some harsh things to say about government borrowing, and we'd do well to rediscover Tracy's wisdom. In 1817 the Frenchman Tracy published a book on economic principles, which Jefferson liked so much, he oversaw its translation into English as A Treatise on Political Economy. Like many economists of his day, Tracy understood that the free market was a process rooted in human action, with which government spending interfered. And he grasped that such spending is not investment, the politicians' self-serving statements notwithstanding, but rather consumption, which deprives the private sector of scarce resources that would have been used to raise living standards.

Yet Tracy was willing to ask, "When [government] expenses are very considerable, ought we to felicitate ourselves on being able to meet them by loans, rather than taxes?" He thought not.  

Borrowing appears to be a voluntary form of funding government, but Tracy wrote that "this an illusion [because the lenders] force the government to raise, one day or other, a sum equal to that which they furnish and to the interest which they demand for it. Thus, by their obligingness, they burthen without their consent not only the citizens actually existing, but also future generations…." 

Such burdening of people yet to be born offended Tracy, and he proposed that "whatsoever is decreed by any legislature whatsoever, their successors can always modify, change, annul; and that it should be solemnly declared, that in future this salutary principle shall be applied, as it ought to be, to the engagements which a government may make with money lenders. By this the evil would be destroyed in its root: for capitalists, having no longer any guarantee, would no longer lend." 

There, indeed, was a balanced-budget rule with force! 

Next Tracy addressed the claim that the borrowed money would have remained idle, hence there was no opportunity cost in the state's using it. To this he responded: "It is certain that if the [lenders] had not lent it their money they would have lent it to industrious men. From that time these industrious men would have had greater capitals to work on." Unlike government spending, private investment in a free market would raise living standards in accordance with consumer preferences.

Finally, he took on the assertion that loans "furnish in a moment enormous sums, which could only have been very slowly procured by means of taxes, even the most overwhelming." He looked on this "pretended advantage as the greatest of all evils." In other words, because borrowing gives politicians access to huge sums of money that they could not acquire through taxation, it should be forbidden.

To those who claim that the danger of borrowing lies only its abuse, Tracy had this reply: "First, that the abuse is inseparable from the use, and experience proves it… I maintain that the evil is not in the abuse; but in the use itself of loans, that is to say that the abuse and the use are one and the same thing; and that every time a government borrows it takes a step towards its ruin. The reason of this is simple: A loan may be a good operation for an industrious man, whose consumption reproduces with profit. By means of the sums which he borrows, he augments this productive consumption [investment]; and with it his profits. But a government which is a consumer of the class of those whose consumption is sterile and destructive, dissipates what it borrows, it is so much lost for ever [sic]; and it remains burdened with a debt, which is so much taken from its future means. This cannot be otherwise." 

In this day of trillion-dollar annual budget deficits, a national debt—closing in on $16.5 trillion—that exceeds the value of all the goods and services produced by the American people in a year, rising taxes, and out-of-control spending, it's time to rediscover the wisdom of Destutt de Tracy. 

This article originally appeared at The Project to Restore America.