Appendix A: Government Borrowing

0:00Appendix A, Government Borrowing The major source of government revenue is taxation. Another source is government borrowing. Government borrowing from the banking system is really a form of inflation. It creates new money substitutes that go first to the government and then diffuse with each step of spending into the community. 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.

0:45Its 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. Hence, from the point of view of the consumers, borrowing from the public wastes savings. The consequences of this waste are a lowering of the capital structure of the society and a lowering of the general standard of living in the present and the future. Diversion and waste of savings from investment causes interest rates to be higher than they It might be objected that lending to the government is voluntary, and is therefore equivalent to any other voluntary contribution to the government.

1:51The Diversion of Funds is something desired by the consumers and hence by society. A recent objection of this sort has been voiced by James M. Buchanan. Yet the process is voluntary only in a one-sided way. For we must not forget that the government enters the time market as a bearer of coercion Coercion and as a guarantor that it will use this coercion to obtain funds for repayment. The government is armed by coercion with a crucial power denied to all other people on the market. It is always assured of funds, whether by taxation or by inflation.

2:37The government will therefore be able to divert considerable funds from savers and at an The 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. 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. Governments may always repudiate their obligations if they wish, or they may be overturned and their successors may refuse to honor the IOUs.

3:22Lending to government, therefore, may be voluntary, but the process is hardly voluntary when considered as a whole. It is, rather, a voluntary participation in future confiscation to be committed by the government. In fact, lending to government twice involves diversion of private funds to the government. Once when the loan is made and private savings are diverted to government spending, and again when the government taxes or inflates or borrows again to obtain the money to repay the loan. Then once more, a coerced diversion takes place from private producers to the government.

4:08The proceeds of which, after payment of the bureaucracy for handling services, accrues to the government bondholders. The latter have thus become a part of the state apparatus and are engaging in a relation of state with the tax-paying producers. Hence, despite Buchanan's criticism, the classical economists such as Mill were right. The public debt is a double burden on the free market, in the present because resources are withdrawn from private to unproductive governmental employment, and in the future when private citizens are taxed to pay the debt. Indeed, for Buchanan to be right and the public debt to be no burden, two extreme conditions Funds would have to be met, one, the bondholder would have to tear up his bond, so that the loan would be a genuinely voluntary contribution to the government, and two, the government would have to be a totally voluntary institution, subsisting on voluntary payments alone, not just for this particular debt, but for all its transactions with the rest of society.

5:29The ingenious slogan that the public debt does not matter because we owe it to ourselves is clearly absurd. The crucial question is, who is the we and who are the ourselves? Analysis of the world must be individualistic and not holistic. Certain people owe money to certain other people, and it is precisely this fact that that makes the borrowing as well as the taxing process important, for we might just as well say that taxes are unimportant for the same reason. In the same way, we would have to assert that the Jews killed by the Nazis during World War II really committed suicide.

6:16They did it to themselves. Many right-wing opponents of public borrowing, on the other hand, have greatly exaggerated the dangers of the public debt and have raised persistent alarms about imminent bankruptcy. It is obvious that the government cannot become insolvent, like private individuals, for it can always obtain money by coercion, while private citizens cannot. Further, the periodic agitation that the government reduce the public debt generally forgets that, Short of outright repudiation, the debt can be reduced only by increasing, at least for a time, the tax and or inflation in society.

7:04Social utility can therefore not be enhanced by debt reduction, except by the method of repudiation, the one way that the public debt can be lowered without a concomitant increase in Fiscal Coercion. Repudiation would also have the further merit, from the standpoint of the free market, of casting a pall on all future government credit, so that the government could no longer so easily divert savings to government use. It is therefore one of the most curious and inconsistent features of the history of politico-economic Ludwig thought that it is precisely the right-wingers, the presumed champions of the free market, who attack repudiation most strongly, and who insist on as swift a payment of the public debt as possible.