Government: drop juggling tricks, repudiate debt

By Scott Beaulier and Peter Boettke

The U.S. Treasury Department will hit its debt ceiling (yet again) by year's end.

In the final chapter of “The Wealth of Nations,” Adam Smith argued that once national debts have accumulated to a certain degree, they are rarely paid. Government officials, he argues, are unwilling and unable to get serious about debt. They don't want to lose popularity by raising taxes and they will never cut spending enough. Instead, they employ “juggling tricks” to push the debt problem into the future and hide the full costs.

The most improper trick Smith forecast was currency debasement, “by which a real public bankruptcy [is] disguised under the appearance of a pretended payment.”

President Barack Obama and his team of economic advisers would do well to revisit Smith's timeless discussion of “juggling tricks.” Despite the president's exit strategies rhetoric, further debasement seems to be the inevitable policy path.

Indeed, the current administration inherited a mess from former President George W. Bush, but in his first nine months in office, Obama has done nothing to curtail the vicious cycle of economic ruin. Instead, he has accelerated it.

The tricks being played by Obama, such as his effort to distract voters from historically unprecedented deficits by talking about “halving the deficit” and shifting attention away from fiscal crisis by focusing on the environment and health care, are similar to Bush's tactics. They are tried and true schemes employed by both parties because they conceal the real costs of government excess from voters.

Our modern-day debasement has come, in part, because it is impossible to keep the Federal Reserve and Treasury separate. But as many 20th-century economists warned, so long as these institutions exist, they will remain entangled.

For example, the 1974 Nobel Prize winner in economics, F.A. Hayek, often warned of the monetary policy dance becoming an exercise of “holding a tiger by the tail.”

James Buchanan, the 1986 Nobel Prize-winning economist, warned of the political legacy of Keynesian economics as producing “democracy in deficit.”

Economists like Smith, Hayek and Buchanan have been consistent in arguing for government restraints because a government unable to constrain itself threatens to destroy the economic future of its citizens.

An alternative to such tricks exists. If truly implemented, debt repudiation could prevent people from being fooled again. Rather than incur painful, gradual inflation taxes, we would prefer to see politicians come clean. Debts would be erased once and for all.

Rather than erode debt obligations through inflation, the debt could be repudiated through bankruptcy proceedings. Like individual bankruptcy cases, the U.S. government would admit that it is unable to pay off existing debts.

The repudiation forces future politicians to credibly commit to sounder economic policies and, perhaps, would help to avoid future cycles of deficits, debt and debasement.

Scott Beaulier is department chair of economics at Mercer University. Peter Boettke is professor of economics at George Mason University. Both are research fellows at the Independent Institute (www.independent.org).