The ethics of debt default

One of James Buchanan’s most interesting papers is The Ethics of Debt Default (1987), first published in the book Deficits (a collection of public choice articles about public debt and debt financing), edited by James M. Buchanan, Charles Kershaw Rowley, Robert D. Tollison and reprinted in James Buchanan’s Collected Works, Volume 14.

As an individualist contractarian, Buchanan rejects the argument that we have a moral obligation to honor debt obligations that the government has created simply because the modern state is a ‘moral unit’ in the sense of an extended family. He has more sympathy for the conservative argument that government should not default on its debt because we all benefit from a government that honors its commitments. However, Buchanan notes that on a less abstract level of discussion “a collective decision to repudiate the debt need not, in itself, pull down the whole legal-political house of cards, especially if it is accompanied by a change in the rules designed to insure against recurrence of the necessity for repudiation.” As a contractarian, Buchanan can only endorse borrowing  to finance “genuine public capital investments” that also yield benefits to future taxpayers. After all, it would not be fair if the taxpayers that authorized public investments would have to assume the complete burden of the costs when future generations benefit from those investments, too. The situation is different in the case of ordinary public consumption expenses, which mostly accrue to the existing  generation and that push the tax burden to future generations.

In favor of the argument that there is not a persuasive moral argument against debt default in the case of debt-financed ordinary consumption he employs a Rawlsian argument that should persuade modern liberals and progressives as well. Behind a veil of ignorance where people will not know their generational position it would not be rational to endorse debt financing for the sole aim of favoring one generation over another. Or, as Buchanan puts it in welfare economics terms, “there is no multi-period Parato-superior move that can describe a shift to a regime of debt-financed public consumption.” Buchanan even characterizes debt financing for ordinary public consumption “immoral” by such contractarian criteria.

He also discusses the possibility that the risk premium for government bonds (which, in parallel with private borrowing, should be higher for consumption expenditures) attenuates the moral significance of defaulting on the debt. After all, the voluntary payment of the risk premium implies the recognition of the bond holders that such loans may not be paid back.

Buchanan’s contraction framework only allows for a moral obligation to honor debt that was issued for public investment and income-yielding assets. Incidentally, since a significant portion of debt-financing concerns ordinary consumption and special interests, the argument that Buchanan puts forward in this article could also support voting against raising the debt ceiling of the US government.

One could argue that Buchanan’s limited support of honoring debt payments rests on two controversial premisses about public goods and the binding force of hypothetical contracts.

(1) Buchanan’s argument only works if a social contract to produce public goods is necessitated by suboptimal production of public goods in “the state of nature.” But as Anthony de Jasay has so eloquently written, “People who live in states have as a rule never experienced the state of nature and vice versa, and have no practical possibility of moving from the one to the other. It is often a historical anachronism and an anthropological absurdity to suppose such movement. On what grounds, then, do people form hypotheses about the relative merits of state and state of nature?” Furthermore, a Rawlsian contractarian framework cannot apriori assume government production of public goods instead of some variant of ordered anarchy where redistribution is achieved by limiting property rights.

(2) Arguments that derive the legitimacy of  public institutions from hypothetical contracts are intrinsically unfalsifiable. Removing personal, circumstantial and generational elements from the contractarian framework may strengthen “fairness” but at the cost of reducing the possibility to arrive at objective and unambiguous results. As a consequence, hypothetical contractarianism in practice collapses into a situation of a government of experts claiming to know the alleged substance of such agreements, and citizens (understandably) objecting to the contents and terms of these “contracts.”

An alternative approach would be to only honor actual contracts. Such contracts may not be as “impartial” as hypothetical contracts but they have the distinct advantage of permitting objective verification and incorporating evolved conventions concerning person and property. It is doubtful, however, that such a strict contractarian framework can be reconciled with an obligation of all individuals to pay taxes to  “the government” to honor the debt obligations that it made. Moreover, many individuals (or groups of individuals) will have both self-interested and moral reasons to seek default on such debts.

There is therefore no persuasive moral argument why individuals are generally obliged to honor any kind of government debt. Buchanan recognizes that defaulting on the debt may close off prospects for further government financing through borrowing. But to those who believe that government lacks legitimacy, and is a dangerous imposition on the human race, that should be an additional argument in favor of debt default. Defaulting on the debt might also restore the balance of power between generations and provide an incentive to transition to less debt-driven (ans thus more robust) forms of economic interaction.

Arguments that claim that seeking repudiation of the debt will blow up the political and financial system, and produce a net-loss for all, rest on the unrealistic assumption that such views will have absolute instantaneous effects. In reality, it is more likely that as the arguments for debt repudiation will be gradually embraced, financial markets and government operations will gradually adjust as reflected by increased risk premiums and less emphasis on debt-financing of government operations.

NO

Experimental artist and writer Boyd Rice is often identified as a social darwinist or fascist. His recent collection, NO, with short entries on various subjects resists such simplistic feel-good accusations. If there is one common thread in this collection, it is his attempt to describe reality as it is, regardless of what people would like it to be. Like Jim Goad, he often takes aim at the self-congratulatory and delusional progressive underground culture and the empty rhetoric that masks the will to power:

If a despotic form of rule wanted to keep its populace in line, only the most foolish regime would tell its people: “Do as we say, or you’ll be punished.” No, the surest way is to inform them they’re free and equal. That they are all unique individuals.

On the idea that we have “rights”:

If rights are an inalienable bestowal upon us by the Creator, how could we be deprived of of them either by men or courts? Unless, of course, they are as much an abstraction as any of the other pillars of our contemporary consciousness, such as equality, individuality, or what have -have-you.

He has little patience for the “Dreadlocks sporting young “anarchist” who lives in his parent’s home in the suburbs”, “calls police fascists”, and thinks we are living in a “police state”:

Some fear the coming of a new police state. If so, current trends don’t portend such a situation. Quite the inverse, in fact. If things proceed along their current path, there may be exponentially more laws, none of which will ever be enforced to any meaningful extent.

As a matter of fact, the transformative nature of politics is greatly exaggerated by political junkies, left and right:

Those on either side of the fence are precisely similar in their almost childlike optimism about the political process, in their faith that it has the power to transfigure both our nation and our lives…Foolhardy men wish to change the world , as a precondition to changing their lives…Any attempt at exercising  control over the world is an exercise in futility. Exercising control over ones life is the simplest of matters. And the results it yields are both immediate and demonstrable.

Boyd Rice writes that “perhaps the rarest individual is one that is genuinely apolitical.”

NO is currently sold out but an expanded edition is forthcoming.

What became of the degenerate?

In 1956, Richard D. Walter wrote a peculiar article in the Journal of the History of Medicine and Allied Sciences called What Became of the Degenerate? A Brief History of a Concept, in which he reviews the use of the term degenerate as a biological and social concept. Most of the literature on this topic was produced in the late 19th and early 20th century.

In the field of sociology the topic of social degeneration was treated by Max Nordau in his famous book Entartung [Degeneration] (1892). Naturally, when this term is used in a social context there is room for vigorous debate. Nicholas Murray Butler, who wrote an introduction to a book called Regeneration, a reply to Max Nordau (1896), considered Nordau himself “an abnormality and a pathological type.”

The subject of degeneration was also important to the early 20th century eugenicists in books such as Charles Wicksteed Armstrong’s The Survival of the Unfittest (1929).

Walter concludes that “though the original concepts of Morel, Lombroso, and Nordau have become obsolete, the phenomena that degeneracy attempted to explain are still of great current interest and far from completely understood. In today’s concepts of the etiology of psychiatric disease, the old dichotomy of nurture versus nature still appears under more subtle terms, though today’s emphasis is upon nurture. This also applies to the subject of criminology, as well as the larger areas termed race and culture.”

In a 1902 textbook of zoology the authors can still write on the topic of human degeneration:

Human degeneration. It is not proposed in these  pages to discuss the application of the laws of animal life  to man. But each and every one extends upward, and can  be traced in the relation of men and society. Thus, among  men as among animals, self-dependence favors complexity  of power. Dependence, parasitism, quiescence favor degeneration. Degeneration means loss of complexity, the  narrowing of the range of powers and capabilities. It is  not necessarily a phase of disease or the precursor of death.  But as intellectual and moral excellence are matters associated with high development in man, dependence is unfavorable to them.

Degeneration has been called animal pauperism. Pauperism in all its forms, whether due to idleness, pampering,  or misery, is human degeneration. It has been shown that  a large part of the criminality and pauperism among men  is hereditary, due to the survival of the tendency toward  living at the expense of others. The tendency to live without self-activity passes from generation to generation.  Beggary is more profitable than unskilled and inefficient  labor, and our ways of careless charity tend to propagate  the beggar. That form of charity which does not render  its recipient self-helpful is an incentive toward degeneration. Withdrawal from the competition of life, withdrawal  from self-helpful activity, aided by the voluntary or involuntary assistance of others these factors bring about degeneration. The same results follow in all ages and with all races, with the lower animals as with men.

One can only wonder what the authors would  think about contemporary society in light of such phenomena as the “withdrawal from the competition of life” and “charity which does not render  its recipient self-helpful.”