About three months ago I was listening to Max Keiser on Russia Today talking about his participation in the Kilkenomics conference in Ireland. Max is a former stand up comedian, turned Wall Street broker and now a TV commentator on the markets. What he brings to the role is a large dollop of cynicism as to the subjective integrity of the bankers and brokers drawing on his past experience, his collective name for them is ‘banksters’ or ‘financial terrorists’
In this particular show Max went into his cynical routine and the target was the STUPID IRISH. Max was especially indignant with the attitude of the young Irish people attending the economics seminar who consistently said it was the ethical duty of the Irish taxpayers to make good the debts stacked up by the zombie Irish banks. In the world of capitalist finance where Max used to work it is established lore that the only law that really matters is the law of the survivor, the law of the advancement of the strong and the elimination of the weak. Max finished with the sarcastic quip ‘so much for the fighting Irish.’
The truth is that these young Irish have not been educated in a global financial culture that is based on the perspective of the law of the economic jungle. When ordinary folk think about the debt burden it is usually in terms of subjective feeling.
Let us go back to the most basic subjective transaction. If I need 1000 Euro to do something urgent and I don’t have the money I will have to borrow from someone else. If I borrow from a family member or a good friend I might expect to not pay any interest on the loan and I may even expect to overshoot the pay back date, say a year. But no decent person thinks that having borrowed it is right to not pay the debt.
If I have to borrow the money from a creditor rather than a friend I will expect to pay an interest on the loan, say 10 percent. If I honestly can’t make the loan and the interest on the due date then I will try to delay the terms of payment schedule. But I would still think I have an ethical obligation to pay back what I had borrowed.
There are various reasons why I might think that way, one reason being that I might not ever be able to borrow again if I defaulted. This would be a rational reason but the ethical reason is that if I entered an agreement based on a promise to pay then I feel honour bound to keep to the word of the promise. This is a way of thinking that does not belong to the law of the jungle, it is ethical but it might also be inappropriate for the present context.
Some of the young Irish are following a rational way of thinking when they contemplate the country’s debt and they infer that if the debt is not honoured the country won’t be able to borrow again. Others are following the subjective ethical way in their thinking, that is, if a financial promise or agreement is made then it ought to be kept.
Yet there is a big flaw in the way of thinking in the above. The problem is that the young Irish do not see that there is a distinction in kind to be made between private debt and the public debt and a moral rule generally applicable to the former does not necessarily carry over to the latter.
One way of approaching the matter is to argue there is a difference in kind between private debt and public debt. If this is the case then we might be more able to drop our previous adherence to subjective ethical feeling. There is a ready made version of this argument on the Mises web site (Mises Daily Feb 26, 2013).
Making use of the thought of the Austrian economist, Murray Rothbard, the author argues that it would not be unethical for the American President to repudiate the now 17 trillion dollar public debt pile because the people as private citizens had no part in the making of the debt encumbrance; that was all the work of Congress . He quotes an earlier essay by Rothbard from 1992 when the debt pile was thought to be too high at a mere 4 trillion dollars. The argument is directed against those economists who say that it would be a grossly immoral act and in fact a theft on a grand scale to refuse to honour the loans granted to the Federal Government in good faith
‘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…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 honour to repay the debt but ours’.
The argument continues that the contract between the private creditor and the public authority is an inherently disingenuous one from the beginning. This is because the political authority is not borrowing in its own name but in the name of the taxpayer and secondly the creditor is not taking any risk with his friendship or his promise, for they know the government will always seek to pay the debt because it can expropriate somebody else’s money, and even worse they know in advance that governments will always come asking for another loan unlike the private individual who will eventually realises they have to stop borrowing.
The conclusion is that private borrowing and lending is something honest and is guided by an ethical code whereas public borrowing and lending is inherently crooked.
This is not a bad argument as far as it goes especially if it shocks the subjective ethical feeling out of its subordination to the public debt. In fact repudiating the public debt because it is not our subjective debt is a position that all too easily unites the left and right of the political spectrum. The economists of the Austrian school do provide arguments why the public debt should be repudiated in certain circumstances but it comes with a lot of heavy social baggage. This is the sort of economic thinking that is the basis of the Tea Party movement in the United States. It serves as a useful reminder that the slogan ‘repudiate the debt’ is a slippery one. It is important to know the reasons why we should repudiate the debt.
The problem is that some of the public debt can be construed as our debt and so the Irish government is not without the appearance of a rational case though certainly not an ethical one. Some of the public debt exists to fund crucial social services.
If we try to simplify things by going back to our original loan situation. Say for instance a third party known to me but not a friend borrowed the 1000 Euro on my behalf because he knew I really needed the money and could not get it for myself, how would we stand to this kind of borrowing and debt.?
This in fact is what the Irish government’s rational case really comes down to. The government is presenting itself as the third party that is morally obligated to pay the public debt and the interest on it because the public debt is in fact just the sum of all our private debts. The government merely borrows and spends on our behalf.
In the above situation the simple ethical relation between borrower and creditor easily breaks down into the legal or the political and the moral. The honest person I think would contend that legally they were under no obligation to pay back a loan that was taken out on their behalf by a third party but they would still feel morally responsible depending on one other factor, namely the knowledge factor.
If the money was borrowed on my behalf with my tacit knowledge and approval then I still might feel morally obliged to take on the responsibility for repaying the loan. This track of subjective thought is probably what explains the thinking of those young Irish who still believe ‘we’ have to honour the nation’s public debt. To put it in a nutshell, the government borrowed money from its creditors on our behalf and with our tacit knowledge and approval so we have a moral obligation to help the government pay it back .
Of course it is evident to the not so naive that the Irish government is playing hard and fast with the private and public debt distinction. More and more people in Ireland simply want to burn the government’s creditors; are aware that the so called public debt is not the sum of private debts but the debts of only a handful of very wealthy borrowers concentrated in the private and institutional banking sector. If this is all there is to it then the public debt would I think be repudiated
It might take a while to remove the influence of the golden circle over the political parties but in a situation where the many are steadfastly set against the interest of the few the pressure would eventually count. A no frills Marxist of course would likely disagree, knowing that in a capitalist society the few in the form of the top rung of the capitalist strata do in fact have the political clout to dictate the terms any of economic settlement to a popular government. But even the capitalists have to win elections and socialists should at least concede that their control over the political process is at times precarious.
So why has it not happened yet? I can only offer a few stabs in the dark. Some people continue to look at the situation of the borrower and the creditor in subjective terms and transfer this mode of thought to the public debt situation. What this means is that they think about the public debt in terms of the feeling of the private person: if you expect to get a loan in the future you will have to pay off the loan from the past, and this rule they believe applies to whatever government we choose to elect.
What this reels out as is a way of thinking that accepts that the best the government can do is what we individuals would do in a situation of private debt ie try to roll over the debt. This tends to give the government the benefit of the doubt. Other people think of the government situation in purely subjective or ethical terms and are prepared to honour the public debt because the money was borrowed by a third party, namely the government, with our tacit knowledge and approval when they voted for the party of government .
We might like to call such people dupes but surely the bulk of the people are not STUPID. Some have even reached the conclusion that the debt should be repudiated because the government’s case for repayment is a fraudulent one, that the Irish people had no knowledge of what the government was doing in its secret dealings with the various creditors back in September 2008. They have already repudiated the government and good on them. The reservation here though is to worry over the reasons they have for repudiating the debt and what logic they will follow into the next phase.
What is missing in the present national context is an awareness of another key concept: that of class debt. When the national debate is conducted in term of private and public debt the majority of people easily falls into the trap of applying rule of thumb maxims of how private individuals think about borrowing and lending. Or they declare the government’s debt has got absolutely nothing to do with them. Both have no place for viewing things in terms of objective class debt.
The crucial point is that the public debt that should be repudiated is the debt built up by a wealthy minority and foisted onto the working class as their debt. The idea that a workers’ government should not borrow and take on expansive debt on behalf of the working class should also be repudiated.
A rational case can be made for the idea that Ireland should in fact be cancelling old debts and searching for new creditors, there is certainly no shortage surplus savings in the world, borrowing to invest in public goods and ending the artificial regime of austerity. So it is of the utmost importance to understand the class composition and derivation of the public debt and this requires special analysis, something this blog site is at least endeavouring to do.