The Economics and Ethics of Government Default, Part II
The Nature of Government Debt
People holding public debt will list such debt among their assets, alongside other financial assets. The public debt, thus, at first glance looks like it is part of people’s capital invested in productive endeavors, and from the point of view of the individual investor, this is indeed the case. Investors do not necessarily look at what their funds are used for when making an investment. They are focused on the security of their principal and the expected return. However, the economist takes a different view of credit and can distinguish two general kinds of investment: consumer credit and producer credit.
Consumer credit is loans made for purposes of present consumption. Investors transfer saved funds to people who spend them on present consumption. The saved-up capital is thus destroyed or transformed into durable consumer goods such as houses and cars. Producer credit, on the other hand, is lent to entrepreneurs who wish to expand their production. If the entrepreneurs are successful, the result is a lengthening of the structure of production and an increase in the general productivity of the economy. Both kinds of loans need to be repaid out of present income. Entrepreneurs, if they are successful, repay the loans out of the increase in revenue made possible by the additional investment, while consumers must reduce their savings and consumption to repay the loans. Producer credit therefore leads to additional capital accumulation and increased productivity and wealth for all of society, whereas consumer credit reduces the amount of capital for productive investment below what would otherwise have been available. Consumer credit is a form of capital consumption, in other words.
When it comes to evaluating the public debt, the question is whether it is a form of producer or of consumer credit. Murray Rothbard argued cogently that all government spending, including what is called government investment, is in fact at best a form of consumption spending. While it might seem that government spending on fixed assets such as dams or roads constitutes a kind of investment, this is not in fact the case:
In any sort of division-of-labor economy, capital goods are built, not for their own sake by the investor, but in order to use them to produce lower-order and eventually consumers’ goods. In short, a characteristic of an investment expenditure is that the good in question is not being used to fulfill the needs of the investor, but of someone else—the consumer. Yet, when government confiscates resources from the private economy, it is precisely defying the wishes of the consumers; when government invests in any good, it does so to serve the whims of government officials, not the desires of consumers. Therefore, no government expenditures can be considered genuine “investment,” and no government-owned assets can be considered capital.
Government “investment” must therefore really, concludes Rothbard, be considered a form of consumption, and an antiproductive form of consumption at that. This is true also for expenditures that are initially financed by loans to government, since the repayment of such loans invariably depends on future tax receipts, not on the productive employment of government “assets.”
We must therefore conclude that the public debt is a kind of consumer loan contracted to finance the consumption spending of politicians and bureaucrats. Repudiating it thus does not interfere with and disarrange the production structure of socie
Article from Mises Wire