by

Morgan Reynolds

On December 1, 2018 I gave a talk to the Libertarian Party of Garland County, Arkansas.  Here are my notes:

1. Trump has promised to pay off the national debt 

Quote: “I’m the king of debt…cut agency waste, eliminate trade deficit, blah, blah”

U.S. Gov’t Balance sheet of $3.5 TR assets, e.g., $1.4 TR in student loans, $1.0 TR in net property, plant and equipment; real assets are ability to tax, borrow and print $

2. Official Deficits and Debt versus Kotlikoff’s Fiscal Gap Measure

First look at “Enron accounting” (= official gov’t numbers which hide ‘off-the-books’ obligations) as Professor Laurence Kotlikoff puts it: 

Chart 1: Federal government budget surplus or deficit (-)

Chart 2: Federal Debt: ‘Total’ Public Debt 

Chart 3: Federal Debt: ‘Total’ Public Debt as Percent of Gross Domestic Product

Then look at a comprehensive measure of the obligations of the gov’t: Laurence Kotlikoff, “The US is dead broke and the tax cut does nothing to help matters,” The Hill, December 22, 2017, which explains ‘fiscal gap’ accounting.  TheInformAct.org

Q: How do you go bankrupt?

A: Two ways: gradually, then suddenly.

So what about default?  Rescheduling debt (= partial default or ‘repudiation’).  Hard vs. soft stiffing of the bond holder/lenders?  

Reinhart and Rogoff, This Time is Different: Eight Centuries of Financial Folly, Princeton U. Press, 2009, p. xxxii: “On average, government debt rises by 86 percent during the three years following a banking crisis.”  US ‘total public debt’ 2009-2011 9.5 TR to $14.0 TR, or +51% increase in debt.  

III. The Political Truth courtesy of Ayn Rand:

“A ‘mixed economy’ is a society in the process of committing suicide…a country in the process of disintegration, a civil war of pressure-groups looting and devouring one another.”

…no principles, no rules, or theories…a chaos of robber gangs looting—and draining—the productive elements of the country.”

…the only hope to preserve its precarious semblance of order…is compromise, compromise on everything and in every realm…so that no group would step over the line by demanding too much and topple the whole rotted structure…controls breed more controls, and…the proliferation of controls breeds the proliferation of pressure groups.  Today, you see political manipulators setting up new conflicts, such as ethnic minorities against the majority, young against old…women against men…new groups clamor for ‘a bigger slice of the pie’ (which you have to bake)…a legislator’s job…No matter what choice he makes, no choice of this kind can be morally justified (and never has been).”

Today, we are seeing a ghastly spectacle: a magnificent scientific civilization dominated by the morality of prehistoric savagery.” [AARP 50 million members ‘strong’]

Source: Harry Binswanger, ed., The Ayn Rand Lexicon, 1986

IV. The Fundamental Economic Truth courtesy of Ludwig von Mises, Human Action, 1949

p. 226 “The state, this new deity of the dawning age of statolatry, this eternal and superhuman institution beyond the reach of earthly frailties, offered to the citizen an opportunity to put his wealth in safety and to enjoy a stable income secure against all vicissitudes…he was a partner of the gov’t which ruled the people and exacted tribute from them.  What the gov’t paid as interest was less than the market offered.  But this difference was far outweighed by the unquestionable solvency of the debtor, the state whose revenue did not depend on satisfying the public, but on insisting on the payment of taxes.

In spite of unpleasant experiences with public debts in earlier days, people were ready to trust freely the modernized state of the 19th century.  It was generally assumed that this new state would scrupulously meet its voluntarily contracted obligations…tired entrepreneurs and lazy heirs of other people’s profits preferred bonds of the public debt because they wanted to be free from the law of the market…if the gov’t invests funds unsuccessfully and no surplus results, or if it spends the money for current expenditures, the capital borrowed shrinks or disappears entirely, and no source is opened from which interest and principle could be paid.  Then taxing the people is the only method available for complying with the articles of the credit contract.  In asking taxes for such payments the gov’t makes the citizens answerable for money squandered in the past…[with] no present service rendered by gov’t…pays interest on capital consumer…treasury is burdened with the unfortunate results of past policies.

In the heyday of liberalism some Western nations really retired parts of their long-term debt by honest reimbursement.  But for the most part new debts were only heaped upon old ones…Nobody believes that states will eternally drag the burden of these interest payments…sooner or later all these debts will be liquidated in some way or other, but certainly not bey payment of interest and principal according to the terms of the contract.  

[Nonsense] about ‘we owe it ourselves.  If true, obliteration of the public debt would be an innocuous operation, mere act of bookkeeping and accountancy.  Yet debt involves claims of people who in the past entrusted funds to the gov’t versus those daily producing new wealth…so akin to collecting the taxes required for the [bond] payments exclusively from the bondholders.  But this means undisguised repudiation…the confused ideas of people yearning for a stable income not dependent on the productive processes of man. [Intergenerational redistribution of income = Ponzi scheme].

p. 843 Saving…the investment operations of the banks and insurance enterprises is cut off.  [Say] a saver buys a $100 bond which goes to Social Security, which results in a current expenditure of $100…no additional capital comes into existence and no increase in the productivity of labor results…The whole system is the acme of the short-run principle…The Santa Claus fables of the welfare school are characterized by their complete failure to grasp the problems of capital…a fabulous world of plenty…based on there implicit assumption that there is an abundant supply of capital goods…[welfarists] invent new chimerical notions such as ‘the self-perpetuating character’ of useful things…the doctrine which blames oversaving and underconsumption for all that is unsatisfactory and recommends spending as a panacea…the problems of capital preservation and accumulation of additional capital become the main issue of political antagonisms…[gov’t as a ‘giver’ rather than a ‘taker’]…Spending and unbalanced budgets are merely synonyms for capital consumption…doctrines which aim at substituting the Santa Claus conception of gov’t for the night watchman conception derided by Lassalle…History does not provide any example of capital accumulation brought about by a gov’t [on net]…what individuals had saved was dissipated by the gov’ts…Saving, capital accumulation, and investment withhold the amount concerned from current consumption and dedicate it to the improvement of future conditions.

The policies advocated by the welfare school removes the incentive to saving on the part of private citizens…funds of social security institutions consist in titles to the public debt…does not result in capital accumulation…the gov’t steps in and removes the socially beneficial effects of the individuals’ conduct…what counts in life and reality is—whatever Kant may have said—not good intentions, but accomplishments.  

Wikipedia: Professor Martin Feldstein revealed that Social Security results in individuals deciding to save less for retirement and to retire earlier (1974). “Social Security, Induced Retirement, and Aggregate Capital Accumulation.” Journal of Political Economy. 82 (5): 905–926.