Conversations with Murray Rothbard: Can the State incur debt without anyone paying the bill?

Public debt is often presented as an alternative to raising taxes. If the state needs to spend more than it collects, it can borrow and repay the money in the future. In this way, the current taxpayer seems to be safe. But this operation raises a prior question: if the state does not generate the resources with which it will repay the debt, who has really assumed the obligation to pay it?

This was the topic I “discussed” for the first time with Murray Rothbard, because he approached public debt from an unusual perspective. For him, borrowing allows the government to postpone the moment when coercion appears, but does not eliminate it: behind the promise of payment are future taxes.

—Professor Rothbard, isn’t borrowing preferable to raising taxes?

—It depends on what you mean by preferable. As I explained in “Conceived in Liberty,” borrowing allows postponing the moment of coercion. The state obtains resources today through an apparently voluntary operation, because someone agrees to lend them, but promises to repay them with income it will obtain in the future through taxes. Coercion did not disappear; it was postponed.

—But no one forces an investor to buy a government bond.

—Not the investor. That is precisely the appearance of voluntariness in the operation.

—Who is being compelled then?

—The taxpayer who will have to finance the payment. In “The Ethics of Liberty,” I took this reasoning to its consequences: whoever buys public debt is acquiring a right over income that the government expects to obtain later through taxation.

—Your critics would say that all states go into debt.

—That a practice is common does not change the economic nature of the operation. The question remains where the resources will come from to repay what was borrowed.

—But if the state borrows from savers, it is not creating money.

—Correct. In “Man, Economy, and State with Power and Market”, I explained that borrowing from the public is not inflationary in itself. The problem is another: savings that could be directed towards private investments end up in the hands of the government.

—And why should we be concerned about that?

—Because capital is scarce. The government competes for those savings with those who want to allocate them to productive investments. This diversion reduces the resources available for capital formation and can raise interest rates compared to what they would have been otherwise.

—And what if the government finances itself through the banking system?

—Another problem arises there. When the government obtains financing by creating new monetary substitutes, borrowing also becomes an inflationary mechanism. The new money first reaches the government and then spreads through the economy.

—In a word, is there no free way to finance a deficit?

—Exactly. We can change the timing and the mechanism. We can collect taxes today, absorb savings through debt, or resort to the monetary system. What we cannot do is turn scarce resources into free resources.

—So, when a government announces that it will finance certain spending with debt and not with taxes, what should our first question be?

—I wouldn’t just ask how much it plans to borrow. I would ask something more fundamental: who will ultimately pay for what today seems to be paid by no one.

—Thank you very much, professor. See you next Tuesday.