Lincoln * Institute

Dr. Paul Kengor

Dr. Paul Kengor

Executive Director
Center for Vision & Values
at Grove City College


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Kengor's Corner

V&V Q&A: Outrageous Public Debt

by Paul Kengor

Editor's Note: The "V&V Q&A" is an e-publication from The Center for Vision Values at Grove City College. In this latest Q&A, Dr. Paul Kengor, executive director of the Center, interviews Dr. Guido Hülsmann, chairman of the economics department at the University of Angers in France and author of an acclaimed biography of Ludwig von Mises, "Mises: The Last Knight of Liberalism." Hülsmann will be speaking at Grove City College tonight (7 p.m. at Sticht auditorium in the Hall of Arts and Letters) on the topic of "Outrageous Public Debt."

Dr. Paul Kengor: Dr. Guido Hülsmann, you're speaking at 7:00 this evening at Sticht auditorium in the Hall of Arts and Letters at Grove City College. Your topic is "Outrageous Public Debt." Give is a glimpse of your thesis.

Dr. Guido Hülsmann: Public debt helps politicians to pretend that they are solving problems, while in fact they create more problems. It shifts decision-making into the future, while burdening the present and the future. It reduces the funds available for investment and entails excessive consumption. When public debt is high, it makes the economy more prone to be hit by financial crises, and it also poses a great threat to the stability of all savings. But even when it is low, public debt undermines the economic foundation of a free republic and thus paves the way for tyranny.

Kengor: Tell us about the European debt problem. Perhaps you can start with some data.

Hülsmann: In all European countries, public debt has greatly increased in the past two years. But already before the outbreak of the present crisis, public debt was as high as 1.5 trillion euros or 65 percent of GDP in Germany (2007), and 1.3 trillion euros or 68 percent of GDP in France (2008). Similar conditions existed, in 2007, in Portugal (64 percent) and Hungary (66 percent). In other places, public debt was even higher, in particular, in Belgium (83 percent), Greece (95 percent), and Italy (104 percent). Compare these figures to those of the United States (80 percent in 2008) and of Japan (150 percent in 2007). Notice that all of them do not include off-budget liabilities such as social-security payments and credit guarantees. Thus the public debt on record is just a part of the actual total, and in some cases it is just the tip of an iceberg.

Kengor: What are the reasons? To what extent have massive social-welfare systems contributed to this?

Hülsmann: The basic reason is that governments like to spend money, and that they will spend unlimited amounts if nobody gets in the way. Thus your question boils down to asking why there was no effective opposition. Here we touch upon a very important and fundamental political problem that plagues all western democracies. In the traditional conception, parliament was supposed to be the opposition that controls executive spending. But Members of the European Parliament have their own expensive agendas. As a consequence, there has emerged some connivance between the legislative and executive, at the expense of those who were not sitting at the table, that is, the taxpayers. This general tendency is very pronounced in Europe, where government spending is heavily focused on social welfare, but you also see it in the United States, where we have a greater focus on military spending.

Kengor: Are these social-welfare systems sustainable, especially given Europeans' unwillingness to reproduce and give birth to a subsequent generation of producers? Who, or what, will produce the revenue to pay for, say, the pension systems of France and Italy?

Hülsmann: This is a good question, and politicians in Europe have no convincing answers. Unlike private insurance schemes, our public social-security systems operate on a pay-as-you-go basis, that is, there is never any capital accumulation out of which future payments could be made. These systems work only as long as there are enough workers paying their dues. However, as you point out, their number is steadily declining, and they already pay very high rates. In France, each employee pays some 21 percent of his gross income into the social-security system, and his employer has to match this sum.

Kengor: Some of these nations had debt ratios so high that they should have been disqualified from the European Union, or, more specifically, the single currency. This seemed true for a country like Greece. How were they able to squeeze in despite their incredibly high debt ratios?

Hülsmann: To join the European Monetary Union, and to remain a member thereof, countries have to fulfill three criteria defined in the 1992 Treaty of Maastricht: (1) total public debt no higher than 60 percent of GDP; (2) annual new debt no higher than three percent of GDP; and (3) annual inflation rate no higher than two percent. These criteria have been violated by most member countries ever since the inception of the EMU in 1999. For example, France and Germany have been violating the first criterion since 2003, and also the two other criteria for several years. Moreover, some countries have joined the EMU without ever having fulfilled all three criteria. This is most notably the case of Greece. Her government has forged the national accounts, sometimes omitting important expenditures while at other times concealing the true amount of public debt. Clearly, the case of Greece is blatant, but all in all it is also representative of politics in the European Union.

Kengor: On the plus side, is there any country in Europe that has done well in terms of debt? Can others learn from this country?

Hülsmann: Luxemburg has done very well, with a debt ratio of some 10 percent (2007), and Estonia even better (five percent in 2007). A straightforward explanation of this fact is that both countries are small. Therefore, the political negotiation tables are not that much removed from the taxpaying population.

Kengor: Let's bring this to America. President Bush, in his final year in office, left an all-time record budget deficit of at least $400 billion. That's not the overall debt, but the budget deficit, which, of course, feeds the debt. President Obama, in just one year–actually, mainly in his first weeks–quadrupled that deficit to some $1.4-1.6 trillion. We in American have never seen anything like this kind of spending, especially in peacetime.

Hülsmann: Crises of any sort–whether economic or military–are a mainspring of government growth, and thus of strongly increasing government expenditure. This is unavoidable as long as the public perceives government intervention as a suitable means to address the crisis. President Bush might have increased his spending if he himself, or the wars in Afghanistan and Iraq, had been more popular, but that was not the case. President Obama has benefitted from widespread veneration of his person and from the perceived gravity of the economic situation. Congress has authorized him to spend so much more than his predecessor.

Kengor: The U.S. Congress recently approved a higher debt ceiling in light of this inconceivable debt accumulated by President Obama and the Democratic Congress in only a year. What's your response to that move?

Hülsmann: This is a symptom of a general tendency. Parliaments all over the world have degenerated into handmaidens of the executive. Congress is no exception. Its members are not representatives of the people against the government, but part of the governmental decision-making process.

Kengor: On the night of the November 4, 2008 election, Congressman Paul Ryan (R-Wis.) was asked what he feared most. He replied "the Europeanization of America." By that, he meant social policy, economic policy, secularization, the culture. I don't know if Ryan had debt in mind, but America seems like it might be on that "European" path, too, especially if it follows Europe's social-welfare model. Agree?

Hülsmann: As far as public debt is concerned, the United States is long-since on a par with Europe. More generally, you cannot adopt European ideas about government and hope to keep the minimal government cherished by the American revolutionaries.

Kengor: Dr. Guido Hülsmann, it's a pleasure to once again have you at Grove City College. I hope some of our readers will come to your lecture. This is a critical topic, one that involves–literally–national bankruptcy. Thanks for talking to "V&V Q&A."

Hülsmann: You're welcome, Dr. Kengor. It's my pleasure to stay at your wonderful college.

– Dr. Guido Hülsmann is chairman of the economics department at the University of Angers in France and author of an acclaimed biography of Ludwig von Mises, "Mises: The Last Knight of Liberalism." Dr. Paul Kengor is professor of political science at Grove City College and executive director of The Center for Vision Values.

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