Recently by Tom Mullen: Can Ron Paul Really Be Right AboutEverything?

While it is likely that the two parties in Congress will reach a deal before the August 2 deadline, I cant help reflecting on how wonderful it would be if they didnt. While Congressman Ron Paul has correctly pointed out that the government has already defaulted at least three different times in its history, and continues to default every time it prints new money, it is not quite the same as an on-the-books failure to make a timely payment. That is exactly what America needs.

Politicians, mainstream economists, and the media tell us that a U.S. government debt default would be catastrophic. Treasury bonds would be downgraded, interest rates would soar, and the massive government spending that has supposedly fueled the present (jobless) recovery would be severely curtailed, plunging the U.S. and possibly the world back into a deep recession.

Perhaps that is true. However, a debt default by the federal government would still be a blessing to American society for several reasons.

First, one must remember that all government spending represents a redistribution of wealth (what we regular folks call stealing). The government forcibly confiscates money from those who have earned it and spends it for the benefit of someone else. The most insidious way that the government does this is by borrowing. When it borrows, it is confiscating money from people in the future  some of whom are not even born yet  to hand out to their special interest supporters today. To the extent that it would prevent or decrease this, a default would result in a more just society.

However, even if one doesnt care about justice or property rights, a default would help correct the very malinvestment that has caused the crisis in the first place. As Ive said before, the entire U.S. economy is really one, huge bubble of misallocated resources, caused by at least a century of government intervention. Most people recognize that the governments backing of mortgages, together with monetary inflation by the Federal Reserve, were the primary causes of the housing bubble. However, most people fail to recognize this same dynamic in almost every sector of the economy.

The government also backs student loans for people to go to college. Just like it did to the housing industry, this has inflated the price of higher education far beyond what could be supported by real demand. That in turn has led to the creation of millions of jobs in the education sector that only exist because the government redistributes wealth to back those loans. When the government funds are no longer there, the price of education will plummet, just as housing prices did. All of those people will be out of work.

Healthcare is another sector with all of the same intervention-related problems. Government subsidy creates artificial demand, inflating the price and driving the misallocation of resources to the healthcare sector. The industry is not forced to innovate in terms of delivering its services in more efficient ways because the customers are forced to buy its products (if you doubt this, just withhold the Medicare portion of your payroll taxes and see what happens). This also directs employees into the healthcare sector that would not be supported by natural market forces. When the government can no longer subsidize it, the bubble will pop, just like housing and education. Again, massive unemployment for misallocated human resources.

Banking, research, agriculture, energy, automobile manufacturing  there is not one sector that anyone can name where government is not overriding the voluntary transactions that market participants would otherwise engage in. Wherever the government is spending taxpayer money, it is overriding the choice that the taxpayer would have made if he had been allowed to keep his money and spend it as he pleased. As F.A. Hayek pointed out in The Road to Serfdom, the government has never and can never make better choices than millions of market participants acting in their own self-interest. They simply lack the information necessary to do so.

So, wherever the government is spending money to try to boost some aggregate statistic, it is making the problem bigger, not smaller. If government spending is creating jobs, they are not real jobs. A real job is a voluntary contract between a buyer of services (an employer) and a seller of services (an employee). If that job is created because of government spending, then a third party is introduced into the transaction who is not acting voluntarily. Government-created jobs force taxpayers to purchase services from employees because it is not profitable for the employers in that sector to purchase them. Forcing taxpayers to purchase them doesnt make those jobs any more profitable. It just depletes the capital available to create profitable jobs elsewhere.

The prospect of perhaps tens of millions more people unemployed may seem frightening, but that day is coming regardless of what politicians do in Washington. Economic laws are like the laws of nature. They will assert themselves in the end. Any job that requires the government to borrow more money to subsidize it is also a job that depends upon the lenders continuing to lend. As we have seen in recent Treasury bond auctions, those days are coming to an end. Raising the statutory debt ceiling only allows more phony jobs to be created, setting up more employees for the painful correction.

However, the most important reason that a debt default will be beneficial is a philosophic one. It will force a complete paradigm shift in the way Americans think about the role of government. For at least a century, there has been no area of life that some special interest has not appealed to government to manage or subsidize. From the way we conduct commerce to the way we make personal decisions on food or healthcare to the way we coexist with our neighbors in other countries, nothing has been off limits. Complacency about our liberty has been one reason. The other has been the perception of infinite financial resources. The great wealth that the United States generated in its freest period provided a tax base and borrowing collateral that has always been perceived as unlimited. A debt default would shatter that foolish perception.

The default would be a bucket of cold water in the faces of a drowsy and compliant populace. It would wake people up to the reality that Thomas Paine was aware of over 200 years ago, when he wrote that government is at best, a necessary evil. People would realize that the government doesnt have our back, other than to stick a gun in it to loot our liberty and wealth. We would no longer hear that horrid refrain from media pundits after some new government incursion or heist: Well, the government had to do something. Instead, we would hear the resigned chorus, Well, the government couldnt do anything. And perhaps, in some glorious, enlightened future, The government shouldnt do anything.

Reprinted with permission from Tom Mullen’s blog.

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