Hume famously explained his profound distrust of government debt in his 1752 essay Of Public Credit. Once deeply in debt, he said, governments almost always go deeper to escape the consequences of earlier excesses. This is an old wisdom, and a modern one, too – reflected in the sardonic assertion that you can always borrow enough money to pay off all your debts. There is, however, an explicit point of no return – which former U.S. Federal Reserve chairman Alan Greenspan once cited when he first experienced “the tyranny of zero,” the point at which (he suddenly realized) the U.S. “could not reduce its debt any more.”
Hume expressed it this way: “The practice, therefore, of contracting debt will almost infallibly be abused in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker’s shop in London than to empower a statesman to [borrow money] upon posterity.” He added: “Either the nation must destroy public credit or public credit will destroy the nation. It is impossible that they can both subsist.”
However pervasive personal debt becomes, especially in economies that provide loans (for all practical purposes) at zero per cent, a cautionary fear of debt remains embedded in human DNA. We have the aphorisms of the ages to prove it. Cicero: “Balance the budget.” Shakespeare: “Borrowing dulls the edge of husbandry.” George Washington: “Avoiding likewise the accumulation of debt.” Benjamin Franklin: “Rather go to bed supperless than rise in debt.” Ralph Waldo Emerson: “A man in debt is so far a slave.” John Maynard Keynes himself: “If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours.” More cynically, the anonymous slogan: “In God we trust. All others pay cash.”
As people take on debt, they ultimately sense the personal risks inherent in it. In the end, they have no quarrel with the stern wit and wisdom of the ages. They understand further the comparable risks inherent in government debt. A Gallup poll, published in June, determined that 40 per cent of Americans regard the U.S. national debt – now $13.7-trillion – as “extremely serious,” and another 40 per cent regard it as “very serious.”
On a geopolitical level, national debt influences history almost as decisively as war itself. Canadians can reflect on the historical fact that two provinces – Prince Edward Island and Newfoundland – joined Confederation primarily to escape their sovereign debts. These deals may well have been smart – but they confirm the inexorable surrender of sovereignty from heavily indebted countries to less indebted countries. Or, in contemporary terms, to the International Monetary Fund.
In the 1990s, Liberal finance minister Paul Martin acted to pay down Canada’s excessive debt with no time to spare – The Wall Street Journal had already dismissed the country as a northern banana republic. “For years, [Canadian] governments have promised more than they could deliver,” Mr. Martin lamented, “and have delivered more than they could afford.”
Next week’s U.S. midterm elections will deliver a verdict of a kind on America’s debt. By all accounts, the people want their government to restrain spending and to cut taxes. By all accounts, the White House and the Federal Reserve, and their strangely self-confident economic advisers, want another trillion-dollar, debt-financed jobs program. Championing this debt, Christina Romer, the former head of President Barack Obama’s Council of Economic Advisers, expresses perfectly the great divide: “I would never sacrifice the well-being of 300 million people for a principle.”
In this clash of wills, fought in defence of a timeless principle, an urgent question arises: Can government of the people survive the inherently expansionist instincts of the spendthrift state?
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