Why Rand Paul Is Wrong About Government Default

Senator Rand Paul yesterday introduced the Default Prevention Act as a response to the latest iteration of the "debt ceiling debate".  Of course we've seen this show before, and we know how it ends: with the debt ceiling being raised after some sort of "compromise" is reached, where both sides cross-their-hearts-and-hope-to-die promise to fix the budget problems the country is facing next time.Since the U.S. government technically reached the current legal debt limit on December 31, 2012, the government must rely on the funds it has and the funds it takes in to pay the bills.  Those bills include everything and anything the government spends money on, from funding the overseas military empire to Social Security payments and of course, the interest on the debt itself.  According to the press release from Senator Paul's office:

In order to remove any chance of government default, Sen. Paul’s legislation spells out which government-funded programs should be held at the highest priority to continue funding, while paying down the interest and principal on debt held by the public.“Some of my Republican colleagues in the House have decided to surrender to the Democrats’ annual plan to increase the debt ceiling. I believe we should stand and fight for a Balanced Budget Amendment to the Constitution before we raise the debt ceiling. My legislation takes the possibility of default off the table so we can continue to push for fiscal restraint. There is no reason the government would – or should – responsibly consider the idea of default,” Sen. Paul said.

Senator Paul has the wrong idea here when it comes to the national debt. He buys into the idea that the debt of the U.S. government belongs to the "public" i.e. every single person in the United States.  This falsely equates private debt - where a person willingly takes on a debt and signs a contract to pay it back in a set amount of time with an agreed upon interest rate - with public debt.  Conversely, the debts of the United States government are not contractually agreed to by anyone, and will not be paid through honest means.  Instead, they will be paid through continued coercive taxation of the public.Here's is Murray Rothbard on the issue of public debt:

Most people, unfortunately, apply the same analysis to public debt as they do to private. If sanctity of contracts should rule in the world of private debt, shouldn't they be equally as sacrosanct in public debt? Shouldn't public debt be governed by the same principles as private? The answer is no, even though such an answer may shock the sensibilities of most people. The reason is that the two forms of debt-transaction are totally different. If I borrow money from a mortgage bank, I have made a contract to transfer my money to a creditor at a future date; in a deep sense, he is the true owner of the money at that point, and if I don't pay I am robbing him of his just property. But when government borrows money, it does not pledge its own money; its own resources are not liable. Government commits not its own life, fortune, and sacred honor to repay the debt, but ours. This is a horse, and a transaction, of a very different color.The public debt transaction, then, is very different from private debt. Instead of a low-time-preference creditor exchanging money for an IOU from a high-time-preference debtor, the government now receives money from creditors, both parties realizing that the money will be paid back not out of the pockets or the hides of the politicians and bureaucrats, but out of the looted wallets and purses of the hapless taxpayers, the subjects of the state. The government gets the money by tax-coercion; and the public creditors, far from being innocents, know full well that their proceeds will come out of that same coercion. In short, public creditors are willing to hand over money to the government now in order to receive a share of tax loot in the future.

Note that Rothbard does not let the creditors off the hook here. They know full well where the money they expect to receive in the future is coming from and are more than happy to participate in the game, as long as the U.S. government can keep those payments coming.  To concede that the national debt is "owed" by the actual individuals in the government is as ridiculous as the notion that taxes are "voluntary".  They are both part of a system that uses violent coercion to extract money from the taxpayer.The phrasing of Rand's bill would give priority to the crony bankers that work with government as part of the grand scheme to loot money from the taxpayer.  According to Rand, paying the banks and keeping this scheme going is more important than even getting money back to the taxpayer that was looted in the first place!According to the U.S. Treasury Department, the U.S. government paid a total of $19,263,743,085.57 in interest payments in December 2012 alone. That's almost $20 Billion in one month simply to service the "public debt", all the while not paying off a single dime and actually increasing it. Meanwhile, Social Security recipients are due $61 Billion in payments between February 15 and March 15, the first period in which current payees are at risk if a debt ceiling agreement is not reached.  Now we certainly aren't in favor of Social Security or any other socialist program, but we certainly favor paying the people who have been looted their whole lives with the expectation of receiving Social Security money over the ones doing the looting.  Based on Rand Paul's statement, he would ensure that the banks which hold U.S. debt would receive every last dime of their $20 billion before a single Social Security recipient is paid.This is all done in the name of preserving the "credit rating" of the United States government.  But the only thing that maintaining the U.S.'s credit rating accomplishes is encouraging the government to spend more, go further into debt, and ultimately tax or inflate the wealth of the citizenry.  The continual propping up of government debt is what prevents market forces from imposing stricter discipline on government spending.  Instead, Rand's proposal serves to help protect debt holders and further ease any fears they might have about holding U.S. debt.The fact is that when future unfunded obligations are taken into account the current debt level is an astounding $86 Trillion and climbing. Even if all of the wealth in the United States were taxed, this debt could not be repaid. The United States government will default at some point, it is just a matter of how and when.  Protecting the "credit rating" of the U.S. government only further discourages acceptance of this undeniable truth.If Rand Paul truly wants to stand up for liberty, he should stop worrying about how to make sure the looters get their loot, and try to prevent the looting all together.  Continuing to refuse to agree to raise the debt ceiling and demand the budget be balanced is great, but the only way to force the government to actually shrink is to make the creditors sweat and force the government to live off of the funds it is currently looting.  Only then can we hope to force the conversation of drastically slashing government and allowing the people to keep what they earn in the first place.Or, he could be even more bold and take Murray Rothbard's suggestion, and call for repudiating the debt all together:

I propose, then, a seemingly drastic but actually far less destructive way of paying off the public debt at a single blow: outright debt repudiation. Consider this question: why should the poor, battered citizens of Russia or Poland or the other ex-Communist countries be bound by the debts contracted by their former Communist masters? In the Communist situation, the injustice is clear: that citizens struggling for freedom and for a free-market economy should be taxed to pay for debts contracted by the monstrous former ruling class. But this injustice only differs by degree from "normal" public debt. For, conversely, why should the Communist government of the Soviet Union have been bound by debts contracted by the Czarist government they hated and overthrew? And why should we, struggling American citizens of today, be bound by debts created by a past ruling elite who contracted these debts at our expense? One of the cogent arguments against paying blacks "reparations" for past slavery is that we, the living, were not slaveholders. Similarly, we the living did not contract for either the past or the present debts incurred by the politicians and bureaucrats in Washington.

Rothbard goes on to detail how debt repudiation has been a big part of American history.  And yet, we are still here, alive and well.Contrary to what many politicians -  seemingly including Rand Paul - believe, repudiating the debt would not be the end of the world.Quite the contrary,  it would be a great first step to restoring a more free and robust society, with less government looting getting in the way of the market.Receive access to ALL of our EXCLUSIVE bonus audio content – including “Conspiracy Corner”, “Degenerate Gamblers” and the “League of Liberty Podcast” by joining the Lions of Liberty Pride and supporting us on Patreon!