PUBLIC DEBT AND DEMOCRACY
Public debt is only tolerated because creditors allow it to exist. This means that the level of public debt and domestic savings should broadly correlate, as foreign creditors could otherwise impose a natural limit on any country's borrowing capacity.
The question then is the type of political system which excessive debt breeds. In other words, where does a nation’s headlong rush into public indebtedness lead? The answer no doubt lies between two possibilities: creeping state ownership of the entire economy and/or a collapse in purchasing power caused by fiat money inflation. The two interact in a complex chemistry to produce what could be termed a Hayekian “inflationary state ownership”.
The free-market economist Friedrich Hayek argued that public debt leads to restrictions on individual freedom and therefore to a covert state takeover of the economy.
Some thinkers would say the answer to the first question is a plutocracy, a political system in which the richest govern because they are the nation's biggest creditors. This strand of thinking advocates debt repudiation as an alternative to the fiscal coercion required by debt repayment. Other economists would argue that the demographic make-up of our communities points to a gerontocracy, since only the older sections of the population have sufficient savings to lend to the government. The younger generation could be an alternative answer, advancing a new social and fiscal contract to avoid suffocation by debt. But that would mean revolution!
In Belgium, public debt is indirectly held by the middle class who invest a significant proportion of their savings in bank and insurance savings products.
A further group considers public debt to be a tool of social solidarity. They would argue that public debt should never be repaid and that over the years it should be diluted by constant refinancing. Seen in this light, public debt could appear completely natural. It would resemble a gigantic, permanent social-security transfer from a state’s creditors to the public sector. Public debt would be of little importance, being to private savings what tax is to professional income.
It could even be considered the very embodiment of government solidarity by a state, as fiscal policy and wealth redistribution are conditioned by debt refinancing. Ironically, public debt in these circumstances would be a nation's financial capital. Taking this reasoning to its logical conclusion, it could be argued that public debt is the ultimate expression of democracy, or certainly of egalitarian collectivism. For, it is not creditors who dictate their terms to debtors when public debt becomes too great, but debtors, or the people, who impose debt write-offs on rent-seeking creditors.
The exercise of democracy funded by a state overburdened with debt is nevertheless a challenge. The danger is that public debt deprives citizens of democratic debate and dialogue. Public debt is a mortgage on the prosperity of future generations and as such is a clear denial of democracy. Public debt is guaranteed by a state’s capacity to levy taxes on future professional income among others. A state which takes on debt effectively asks creditors to lend it funds on the grounds that it will be able to levy money from its tax payers in the future. Excessive public debt is therefore the main obstacle to efficient capital flows and reduced labour costs. Labour inevitably bears the brunt when public debt is refinanced by tax.
Marx (1818-1883) considered that public debt was not fundamentally linked to the generation of capital and that it did not represent a title of ownership to any real capital. He treated it as fictional capital destined to be eliminated in the revolution, the preliminary stage before the victory of the proletariat. For Marx, public debt was merely the fleeting expression of sovereignty, in other words, a bet on the stability of the political order. In Marx's view, public debt would be cancelled because private property, an obstacle to social equality, would be outlawed. The nihilist, Proudhon (1809-1865), held similar opinions. The message is the same as that of the German political authorities who today rightly highlight the conflict between a public debt mountain and the hoped for stability of the debt repayment currency. An unbearably high public debt undermines confidence in the state and its currency.
Our European communities now have to face robust ideological debates which the favourable economic conditions of the past 30 years hid from view. Here are the real questions of the day. Which majority or generation will impose its will on which minority? Who will guarantee private property? How will the markets come to terms with sovereign powers? What will be the wake-up call? Social unrest? Sudden inflation? A geopolitical phenomenon? A tax revolt? A societal shock challenging the concept of private property? Nobody knows.
The coming years will be marked by growing tension between the free trade camp and collectivist forces pursuing repressive financial, fiscal and inflation policies. Unrest will be accentuated by social tensions stemming from generational breakdowns already observable in many countries. The younger generation is sacrificed in all the potential scenarios as it cannot accept the legacy of public debt even reduced by offsetting state assets.
In the last pages of his ground-breaking work "The Wealth of Nations", Adam Smith (1723-1790) warned: “The progress of the enormous debts which at present oppress, and will in the long-run probably ruin, all the great nations of Europe, has been pretty uniform.” and “When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid.” thereby concurring with… Karl Marx.
Marx’s point of view is valid only if public debt elimination also means confiscation of private property, equivalent to antimatter for a market economy. To avoid lapsing into this sort of madness, over-indebtedness should become the only problem on which our leaders concentrate, paying due attention to social solidarity and economic competitiveness. That is why our leaders’ sole objectives should be economic growth and recovery and not economic austerity and rigour.
