noun_project_19538As the US federal government sidled up to the debt ceiling earlier this week without quite running into it, one of the key arguments in favor of raising the debt ceiling was that it is immoral to breach a contract. The federal government has creditors, both from whom it has borrowed money and to whom it has promised transfer payments, and it has an obligation to fulfill those promises.

As Joe Carter argued here, “Member of Congress who are refusing to raise the debt ceiling (or raise taxes) until their ancillary demands are met are acting immorally, since they are refusing to pay the debts they themselves authorized.”

But as Connie Cass writes, the idea that the United States has never defaulted isn’t quite true. As she writes,

America has briefly stiffed some of its creditors on at least two occasions.

Once, the young nation had a dramatic excuse: The Treasury was empty, the White House and Capitol were charred ruins, even the troops fighting the War of 1812 weren’t getting paid.

A second time, in 1979, was a back-office glitch that ended up costing taxpayers billions of dollars. The Treasury Department blamed the mishap on a crush of paperwork partly caused by lawmakers who — this will sound familiar — bickered too long before raising the nation’s debt limit.

So if it is immoral to default, then America has done so at least twice.

But these are only a couple of times that such default has happened explicitly. There are other ways to default on the obligations of a contract without flagrantly refusing to pay or meet the terms of the deal. As James Alvey observes in the a piece on “James M. Buchanan on the Ethics of Public Debt and Default,” according to Buchanan as well as Ricardo and other classical economists, “not to make the payments, at least ‘from the perspective of those who hold the debt instruments,’ would be ‘fraudulent.’”

But this fraud can be perpetrated in a number of ways: “Two obvious means are open declaration of default and concealed default through inflation.” If we add concealed default through inflationary policy to the open defaults, there would be far more precedent for functional defaulting on obligations by the US government. As Alvey writes, “Buchanan says that the U.S. government did ‘default on a large scale through inflation’ during the 1970s.” And as Alvey concludes, the probability of open default is much lower than that of concealed default through inflation: “The likelihood is that there will be concealed default again.”

In this way, Alvey’s conclusion to the article rings true in relation to this week’s passage of a debt ceiling increase: “Even though the prospect for open declaration of default by the United States is now receding, there should be debate about the possibility and method of default.”

Simply calling default fraudulent or immoral isn’t enough. We have to recognize that there are different ways of defaulting, and some are preferable to others. In addition, we should consider the reality that not all contracts are morally binding. Just because politicians have promised something doesn’t necessarily create a moral obligation on the part of society to fulfill that promise in perpetuity. Perhaps politicians have promised something they had no right to promise in the first place. Or perhaps there are intergenerational dynamics, which Alvey also points to, that mitigate the moral force of a particular set of entitlements or debt obligations.

It’s obvious to many given the fiscal realities of government spending, particularly with respect to entitlements, that reform is necessary and that what has been promised to previous generations is going to be impossible to deliver to current and future generations. This will necessarily mean “default” in some sense in relation to the specific terms of this particular social contract. But it isn’t immediately obvious that open default is more morally suspect than concealed default through inflationary policy.

More discussion and consideration is needed, as Alvey writes: “The bondholders in the United States and around the world deserve to know how much they will suffer and what action will be taken to prevent it happening again.” The same is true for American citizens who have been paying into entitlement programs for decades.

Economics in Christian Perspective: Theory, Policy and Life Choices

Economics in Christian Perspective: Theory, Policy and Life Choices

There is considerable debate in the public square these days about a number of issues that have significant economic components. Globalization, environmental protection, and aiding the poor are just a few. Decisions we make in our personal lives are influenced by our assumptions about economic realities as well. So how might mainstream economics connect with Christian values and principles?

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  • Jay W. Richards

    Jordan: In the current case, we simply weren’t at risk of default in any significant sense (despite the relentless parroting of this line by the media). Servicing of debt doesn’t (yet) equal one hundred percent of revenues, and there is still far more than enough revenues to cover debt payments. If we’d missed the deadline, the government would simply have to have made some radical prioritizing of expenditures (radical by Washington standards). The last thing not to pay would be debt servicing. When we do arrive at that day when the government can no longer service the debt, it still probably would not explicitly default. It would almost surely monetize the debt.

    • http://www.jordanballor.com/ Jordan Ballor

      Right. And changing the nature of our obligations is better than failing to meet them, either openly or through concealment.

  • David

    Thank you Jordan. You are sooo right. Citizens of the future, not even born yet, are under no moral obligation to pay off all of the promises made by the politicians of today. What ever happened to “No taxation without representation.” There was a time in America when working for the benefit of others was called “Slavery”, now it is called a “Patriotic duty.”

  • riw777

    QE1, QE2, and QE3. The government has been dodging its debt for the last 10+ years through inflation –in fact, it’s been dodging its debt since somewhere around WWII. Inflation is not only immoral from the perspective of repaying debts with money that’s worth less than the money you borrowed, it’s also immoral in being a hidden tax on savers and producers.

    The main problem here is that inflation of this sort is like a drug; you never come out of the addiction to “easy money,” without a major crash.