â€œThe whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, most of them imaginary.â€ â€" H.L. Mencken
Even the sagacious Mencken might be amazed by whatâ€™s happening these days. Wherever we look, there are hobgoblins. The latest isâ€"insert horror music stab hereâ€"DEFAULT. Oooooo.
Apparently the threats of international terror and China rising arenâ€™t enough to keep us alarmed and eager for the tether. These things do tend to wear thin with time. But good old default can be taken off the shelf every now and then. It works like a charm every time.
No, no, not default! Anything but default!
Now that a dealâ€"postponing the â€œcrisisâ€ for a few monthsâ€"has been worked out, the parts of the government that closed are open, the government credit card has a new higher limit, and the world has been savedâ€"for now. Again. The pundits will thank the â€œgrown-ups in the roomâ€ (of which there are none), and it will be back to businessâ€"which is to say, spending, taxing, borrowing, and coercingâ€"as usual.
Would default have been so bad? For all the times that word was uttered, it was rarely defined. Strictly speaking, it refers to a failure to repay a debt. A late interest payment is not a default. At any rate, the national government each month takes in roughly ten times more tax revenue than it is due to pay in interest. Itâ€™s true that, since the budget is in deficit, the government wouldnâ€™t have had all the money it would have had if it kept borrowing, but it would not have had to miss an interest payment on its bonds. Yet the night the world was saved, reporters were still talking about the danger of â€œdebt default.â€
Even when the sufficiency of funds was acknowledged, global cataclysm was predicted nonetheless. I couldnâ€™t see it. In fact, lenders might have had their confidence in the U.S. government strengthened by the fact that it put interest payments over other claims. Not that lender confidence in the government is a good thing. It would be better if the politicians couldnâ€™t borrow. Americans probably would not put up with the taxation required to balance a nearly $4 trillion budget.
There are other details that were mostly overlooked during the mediaâ€™s circusâ€"I mean, â€œcrisisâ€â€"coverage. For example, one of the biggest holders of Treasury debt is the Social Security Administration (SSA), a government agency. For years the Treasury borrowed the huge Social Security surplus, leaving the SSA with a trust fund full of â€œspecial issueâ€ nonnegotiable interest-bearing bonds. Hereâ€™s the thing: Whenever the Treasury pays off one of those bonds (now that the SSA surplus is gone), the debt level falls that much below the prevailing debt limit. So had the debt limit not been raised, the Treasury could have kept on borrowing simply by giving some current tax revenue to the SSA, which it would use to pay Social Security recipients. (David Friedman writes about it here.)
Speaking of Social Security, some commentators have used the term default for much more than nonpayment of the interest or principal on government securities. Failure to pay any government â€œobligationâ€ on time would be a default, they say. They are free to use the word that way if they wish, but that doesnâ€™t mean the world economy would have collapsed had the government paid some employees or contractors late; no one in the government was talking about repudiation (alas). So the mediaâ€™s incitement to panic was irresponsible. (The media apparently regard themselves as a branch of government.) As I said, prioritizing interest payments probably would have encouraged lenders, not shaken them.
I also note that the Supreme Court said in Flemming v. Nestor (1960) that Social Security recipients have no legal standing to sue for breach of contract if the government doesnâ€™t pay promised benefits. Why? Because there is no contract. As Justice Harlan wrote, â€œTo engraft upon the social security system a concept of â€˜accrued property rightsâ€™ would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands.â€ Nonpayment of Social Security benefits would not constitute a default. At most, it would be a nudum pactum broken.
At any rate, the government wouldnâ€™t have missed so-called entitlement payments because it has much more room to maneuver than the media led us to believe. Professor Lawrence H. White of George Mason University, using Congressional Budget Office numbers, points out, â€œIn percent-of-GDP terms, projected federal spending for 2013 is approx. 21.5% of GDP. Revenue, 17.5%. The difference, the deficit, is 4% of GDP. With no more debt-financed spending, total spending must fall by 4% of GDP to 17.5% of GDP. Discretionary spending is 7.6%, so all the cuts could mathematically come there, without touching entitlement spending.â€
Who has trouble believing that discretionary spending could be cut by that amount without being noticed?
But Iâ€™m not satisfied with leaving the matter this way. Too many dubious premises are packed into the conventional conversation. Ultimately, the governmentâ€™s ability to fulfill its financial obligations depends on its ability to use force against productive members of society. All its obligations, that is, are founded on a pledge to engage in, as Lysander Spooner would put it, criminal activityâ€"specifically, the theft we call taxation. But no binding obligation can rest on an immoral act. The governmentâ€™s courts wonâ€™t enforce such a contract between two private individuals, so why should the governmentâ€™s immoral contracts be enforceable?
Now and then itâ€™s good for the governmentâ€™s voluntary creditors to be reminded of whom they are dealing with. When the exploited industrious classes catch on to the swindle perpetrated by the politicians, those creditors will find their bonds, bills, and contracts in jeopardyâ€"and properly so. It could happen sooner than that, if Jeffrey Rogers Hummel is right and our (mis)leaders realize that repudiation of the debt is the least bad way out of the fiscal morass theyâ€™ve created.
This column previously appeared at the Future of Freedom Foundation.