WEBVTT NOTE Appendix A: Government Borrowing 1 00:00:00.000 --> 00:00:04.000 Appendix A, Government Borrowing 2 00:00:04.000 --> 00:00:09.000 The major source of government revenue is taxation. 3 00:00:09.000 --> 00:00:12.000 Another source is government borrowing. 4 00:00:12.000 --> 00:00:17.000 Government borrowing from the banking system is really a form of inflation. 5 00:00:17.000 --> 00:00:22.000 It creates new money substitutes that go first to the government 6 00:00:22.000 --> 00:00:27.000 and then diffuse with each step of spending into the community. 7 00:00:27.000 --> 00:00:45.000 Inflation has been discussed. This is a process entirely different from borrowing from the public, which is not inflationary, for the latter transfers saved funds from private to governmental hands, rather than creates new funds. 8 00:00:45.000 --> 00:00:56.000 Its economic effect is to divert savings from the channels most desired by the consumers, and to shift them to the uses desired by government officials. 9 00:00:56.000 --> 00:01:03.640 Hence, from the point of view of the consumers, borrowing from the public wastes savings. 10 00:01:03.640 --> 00:01:10.000 The consequences of this waste are a lowering of the capital structure of the society and 11 00:01:10.000 --> 00:01:15.800 a lowering of the general standard of living in the present and the future. 12 00:01:15.800 --> 00:01:21.560 Diversion and waste of savings from investment causes interest rates to be higher than they 13 00:01:21.560 --> 00:01:28.560 It might be objected that lending to the government is voluntary, and is therefore equivalent to any other voluntary contribution to the government. 14 00:01:51.560 --> 00:01:58.560 The Diversion of Funds is something desired by the consumers and hence by society. 15 00:01:58.560 --> 00:02:03.560 A recent objection of this sort has been voiced by James M. Buchanan. 16 00:02:03.560 --> 00:02:08.560 Yet the process is voluntary only in a one-sided way. 17 00:02:08.560 --> 00:02:15.560 For we must not forget that the government enters the time market as a bearer of coercion 18 00:02:15.560 --> 00:02:23.200 Coercion and as a guarantor that it will use this coercion to obtain funds for repayment. 19 00:02:23.200 --> 00:02:29.840 The government is armed by coercion with a crucial power denied to all other people on 20 00:02:29.840 --> 00:02:31.040 the market. 21 00:02:31.040 --> 00:02:37.160 It is always assured of funds, whether by taxation or by inflation. 22 00:02:37.160 --> 00:02:43.320 The government will therefore be able to divert considerable funds from savers and at an 23 00:02:43.320 --> 00:02:46.900 The 24 00:02:46.900 --> 00:02:56.540 interest rate lower than any paid elsewhere, for the risk component in the interest rate paid by the government will be lower than that paid by any other borrowers. 25 00:02:56.540 --> 00:03:09.480 It is incorrect, however, to say that government loans are riskless, and therefore that the interest yield on government bonds may be taken to be the pure interest rate. 26 00:03:09.480 --> 00:03:16.960 Governments may always repudiate their obligations if they wish, or they may be overturned and 27 00:03:16.960 --> 00:03:22.480 their successors may refuse to honor the IOUs. 28 00:03:22.480 --> 00:03:29.360 Lending to government, therefore, may be voluntary, but the process is hardly voluntary when considered 29 00:03:29.360 --> 00:03:30.860 as a whole. 30 00:03:30.860 --> 00:03:38.200 It is, rather, a voluntary participation in future confiscation to be committed by the 31 00:03:38.200 --> 00:03:39.200 government. 32 00:03:39.200 --> 00:03:46.860 In fact, lending to government twice involves diversion of private funds to the government. 33 00:03:46.860 --> 00:03:53.400 Once when the loan is made and private savings are diverted to government spending, and again 34 00:03:53.400 --> 00:04:01.960 when the government taxes or inflates or borrows again to obtain the money to repay the loan. 35 00:04:01.960 --> 00:04:08.840 Then once more, a coerced diversion takes place from private producers to the government. 36 00:04:08.840 --> 00:04:15.120 The proceeds of which, after payment of the bureaucracy for handling services, accrues 37 00:04:15.120 --> 00:04:17.480 to the government bondholders. 38 00:04:17.480 --> 00:04:24.200 The latter have thus become a part of the state apparatus and are engaging in a relation 39 00:04:24.200 --> 00:04:27.720 of state with the tax-paying producers. 40 00:04:27.720 --> 00:04:35.120 Hence, despite Buchanan's criticism, the classical economists such as Mill were right. 41 00:04:35.120 --> 00:04:42.000 The public debt is a double burden on the free market, in the present because resources 42 00:04:42.000 --> 00:04:48.640 are withdrawn from private to unproductive governmental employment, and in the future 43 00:04:48.640 --> 00:04:52.640 when private citizens are taxed to pay the debt. 44 00:04:52.640 --> 00:04:59.960 Indeed, for Buchanan to be right and the public debt to be no burden, two extreme conditions 45 00:04:59.960 --> 00:05:06.320 Funds would have to be met, one, the bondholder would have to tear up his bond, so that the 46 00:05:06.320 --> 00:05:13.600 loan would be a genuinely voluntary contribution to the government, and two, the government 47 00:05:13.600 --> 00:05:21.640 would have to be a totally voluntary institution, subsisting on voluntary payments alone, not 48 00:05:21.640 --> 00:05:29.520 just for this particular debt, but for all its transactions with the rest of society. 49 00:05:29.520 --> 00:05:36.180 The ingenious slogan that the public debt does not matter because we owe it to ourselves 50 00:05:36.180 --> 00:05:38.200 is clearly absurd. 51 00:05:38.200 --> 00:05:44.960 The crucial question is, who is the we and who are the ourselves? 52 00:05:44.960 --> 00:05:50.720 Analysis of the world must be individualistic and not holistic. 53 00:05:50.720 --> 00:05:56.960 Certain people owe money to certain other people, and it is precisely this fact that 54 00:05:56.960 --> 00:06:03.400 that makes the borrowing as well as the taxing process important, for we might just as well 55 00:06:03.400 --> 00:06:07.840 say that taxes are unimportant for the same reason. 56 00:06:07.840 --> 00:06:12.820 In the same way, we would have to assert that the Jews killed by the Nazis during World 57 00:06:12.820 --> 00:06:16.140 War II really committed suicide. 58 00:06:16.140 --> 00:06:19.320 They did it to themselves. 59 00:06:19.320 --> 00:06:25.140 Many right-wing opponents of public borrowing, on the other hand, have greatly exaggerated 60 00:06:25.140 --> 00:06:32.180 the dangers of the public debt and have raised persistent alarms about imminent bankruptcy. 61 00:06:32.180 --> 00:06:38.500 It is obvious that the government cannot become insolvent, like private individuals, for it 62 00:06:38.500 --> 00:06:44.340 can always obtain money by coercion, while private citizens cannot. 63 00:06:44.340 --> 00:06:51.980 Further, the periodic agitation that the government reduce the public debt generally forgets that, 64 00:06:51.980 --> 00:06:59.180 Short of outright repudiation, the debt can be reduced only by increasing, at least for 65 00:06:59.180 --> 00:07:04.580 a time, the tax and or inflation in society. 66 00:07:04.580 --> 00:07:11.820 Social utility can therefore not be enhanced by debt reduction, except by the method of 67 00:07:11.820 --> 00:07:19.220 repudiation, the one way that the public debt can be lowered without a concomitant increase 68 00:07:19.220 --> 00:07:21.220 in Fiscal Coercion. 69 00:07:21.220 --> 00:07:27.060 Repudiation would also have the further merit, from the standpoint of the free market, of 70 00:07:27.060 --> 00:07:33.540 casting a pall on all future government credit, so that the government could no longer so 71 00:07:33.540 --> 00:07:37.320 easily divert savings to government use. 72 00:07:37.320 --> 00:07:44.140 It is therefore one of the most curious and inconsistent features of the history of politico-economic 73 00:07:44.140 --> 00:07:51.340 Ludwig thought that it is precisely the right-wingers, the presumed champions of the free market, 74 00:07:51.340 --> 00:07:58.180 who attack repudiation most strongly, and who insist on as swift a payment of the public 75 00:07:58.180 --> 00:07:59.740 debt as possible.