If this is "our" debt, isn't it a little odious?

In a post Glenn Reynolds linked the other day, John Hinderaker touches on something which has long intrigued me: whether or not debts created by governments are in fact owed forever by the taxpayers:

The injustice is obvious. Yet the retired or soon to be retired public employees have a point: the law of contract. They took their jobs and worked for years or decades in reliance on promises by taxpayers (in effect) to, among other things, fund lavish pensions. Forever. Public employees all across America will sue to force taxpayers to make good on those obligations. The result could be significant demographic shifts, as taxpayers flee jurisdictions that have massive liabilities to former government workers. The result, presumably, will be municipal, county and state bankruptcy.
While I am not an expert on the subject, I did take contract law in law school, and I am not at all sure that the taxpayers are necessarily the contracting party. Not only do most taxpayers have no say in these matters, but many of them were not even born when the contracts were entered into, many more were not of voting age, and still more did not live in the jurisdictions in which the contracts were made. Moreover, considering that the funding of these lavish pensions is agreed to by people in the government, for other people in the government including themselves, I would argue that they have not behaved in good faith towards the taxpayers who entrusted them with their money. In legal terms, they have breached their fiduciary duties to the taxpayers, and by any fair standard (either at law or in equity), the taxpayers are relieved of any obligation to continue such funding.

But what fascinates me even more than contract law is something Thomas Jefferson touched on when he said this:

The question, whether one generation of men has a right to bind another, seems never to have been started either on this or our side of the water. Yet it is a question of such consequences as not only to merit decision, but place also among the fundamental principles of every government. The course of reflection in which we are immersed here, on the elementary principles of society, has presented this question to my mind; and that no such obligation can be transmitted, I think very capable of proof. -- I set out on this ground, which I suppose to be self-evident, that the earth belongs in usufruct to the living: that the dead have neither powers nor rights over it. The portion occupied by any individual ceases to be his when himself ceases to be, and reverts to the society. If the society has formed no rules for the appropriation of its lands in severality, it will be taken by the first occupants, and these will generally be the wife and children of the decedent. If they have formed rules of appropriation, those rules may give it to the wife and children, or to some one of them, or to the legatee of the deceased. So they may give it to its creditor. But the child, the legatee or creditor, takes it, not by natural right, but by a law of the society of which he is a member, and to which he is subject. Then, no man can, by natural right, oblige the lands he occupied, or the persons who succeed him in that occupation, to the payment of debts contracted by him. For if he could, he might during his own life, eat up the usufruct of the lands for several generations to come; and then the lands would belong to the dead, and not to the living, which is the reverse of our principle.

[...]

...by the law of nature, one generation is to another as one independant nation to another.

So how far do these so-called taxpayer "obligations" go? Are taxpayers supposed to sit around passively and watch the government go bankrupt? And what if it does go bankrupt? Whose bankruptcy is it? If we analogize to a corporation, when it fails, the shareholders' stock becomes worthless, but they are not personally liable for its debts. As to the corporation's bondholders, they have to stand in line and collect whatever they can of whatever assets remain. If the U.S. goes bankrupt, bondholders will be SOL, and so will the rest of the country's creditors. But if a corporation can go belly up, I don't see why a country can't. Sure, it would be very tough, and the currency would be worthless, but the idea of holding American citizens personally liable for the previous actions of its political classes after the bankruptcy of the country would be so violate basic standards of legal fairness as to be morally egregious. (That's what drove the Weimar Germany into the hands of Hitler, BTW.)

Besides (and I know we're nowhere near "there" yet), there is plenty of historical precedent for telling the country's creditors to go pee up a rope:

A politically unstable state is anything but risk-free as it may, being sovereign, cease its payments. Examples of this phenomenon include Spain in the 16th and 17th centuries, which nullified its government debt seven times during a century, and revolutionary Russia of 1917 which refused to accept the responsibility for Imperial Russia's foreign debt.[3] Another political risk is caused by external threats. It is most uncommon for invaders to accept responsibility for the national debt of the annexed state or that of an organization it considered as rebels. For example, all borrowings by the Confederate States of America were left unpaid after the American Civil War. On the other hand, in the modern era, the transition from dictatorship and illegitimate governments to democracy does not automatically free the country of the debt contracted by the former government. Today's highly developed global credit markets would be less likely to lend to a country that negated its previous debt, or might require punishing levels of interest rates that would be unacceptable to the borrower.
In extreme cases, there's also the legal doctrine of odious debt. The idea is that it is unfair to hold citizens responsible for debts to which they did not consent and which were not for their benefit.

An article by economists Seema Jayachandran and Michael Kremer discusses the doctrine in more detail:
Our analysis is related to the legal doctrine of odious debt, which holds that debt should not be transferable to successor regimes if (a) it was incurred without the consent of the people and (b) was not for their benefit (Alexander N. Sack, 1927; Ernst Feilchenfeld, 1931).1 The underlying principle is that just as an individual does not have to repay money that someone fraudulently borrows in her name, and a corporation is not liable for contracts that its chief executive officer enters into without authority to bind the firm, a country should not be responsible for debt that was incurred without the people's consent and was not used for their benefit. The doctrine arose after the Spanish-American War when the United States contended that neither the United States nor Cuba should be responsible for debt that Cuba's colonial rulers had run up in Cuba's name. The concept attracted considerable attention in 2003 when the Secretary of the Treasury and other senior U.S. officials suggested that debts incurred by Saddam Hussein should perhaps be considered odious and not the new Iraqi government's obligation to repay.2

Yet this doctrine remains a minority view among legal scholars, and U.S. policymakers eventually backed away from the odious-debt rationale when arguing for debt relief for Iraq. This is largely out of concern that the concept of odious debt could prove a slippery slope. Countries could claim that previous debt was odious as an excuse to renege on legitimate debt. More generally, any adjudicating body that had the power to declare debt void might nullify legitimate debt if it placed a high value on the welfare of the debtor country. If creditors anticipated being unable to collect on legitimate loans, the debt market would shut down. We argue that this time-consistency problem could be addressed if loan sanctions applied only to future debt contracted by a country, not existing debt.

The Cato Institute has another piece on odious debt:
Most debts created by Saddam Hussein in the name of the Iraqi people would qualify as "odious" according to the international Doctrine of Odious Debts. This legal doctrine holds that debts not used in the public interest are not legally enforceable.
Far be it from me to compare people like Chris Dodd, Barney Frank, Nancy Pelosi and Harry Reid to Saddam Hussein. They didn't build huge palaces or massacre their political enemies. But how can reckless policies which are certain to bankrupt a country ever be considered to be in the public interest? Saddam Hussein would say that his were, and I think all tyrants would make the same claim. As to consent, once again, all the Saddams would argue that of course the people consented. Just ask Mahmoud Ahmadinejad; I am sure he will say that the people love him and he is acting in their interest.

But tyranny is tyranny. It doesn't have to reach the bloodthirsty levels of a Saddam Hussein. Tyranny is arbitrary power, especially illegal and unconstitutional power.

Which raises the question of the day: Are we now living under tyranny?

I sometimes get myself worked up into emotional states, and when I do I try to avoid writing about the topic that upset me, because I find I am more capable of being logical, analytical, and rational when I am calm. And it is really easy to get all worked up and scream that these people who want to invade our privacy, steal our money, and run every last aspect of our lives are tyrants.

But the other day I was calm, collected, unemotional, relaxed, you know, completely sober in every sense of the word, and I concluded that, yes, it is beyond question that the United States government has become tyrannical.

On sober reflection, I still agree with my sober and reflective thought.

(I should probably be more emotional about such a disturbing thing. Maybe it's a sign of age.)

posted by Eric on 08.10.10 at 01:24 PM










Comments

To me the question is: should elected officials have the power to make promises that will forever bind future elected officials and the voters.

If your answer is "yes" then don't complain about a ^&*()( thing they do.

If your answer is "no" then you haven't been paying attention. The obligations to public employee pensions are as close to immutable as anything man ever made. The total promised only goes up and the needed money has never been put into the funds.

Our governments, local and state, have trillions of $ of debts besides the pension fiasco. Phony accounting and simple denial has hidden much of it.

And while you might expect such a crisis to introduce reality into government spending and conduct it is actually doing the opposite. The spending increases and the phony accounting escalates.

Soon governments must resort to outright confiscation of private assets or the public debt can never be serviced.

For the moment the Feds are simply printing more money, and handing it to the state and local governments. This will gradually add to the misery by ruining the dollar and the credit of the Federal government.

KTWO   ·  August 10, 2010 2:50 PM

Remember, the Chrysler/GM bondholders had contracts, too. I consider the public "servant"s' contract to be equally as valid.

alanstorm   ·  August 10, 2010 5:42 PM

This problem has arisen in the past and the federal government has chosen to inflate the currency, thereby spreading the cost of the debt out over the entire economy. Everyone loses and politicians avoid direct culpability. We are going to have to be more imaginative if we want hold the bastards accountable.

TomA   ·  August 10, 2010 10:52 PM

Hard question, and no easy answers. My wife is a retired school teacher. She did not make great pay for 25 yr of her 30 yrs teaching. The pension was to make up for some of that. The invested money was to pay for the annuity pension. Changes have been made in the plan to hopefully make it viable for the future. Many are gleefully saying stop funding the pensions. So what happens to the pensioneers? Out in the street? They do not qualify for SS, and in most cases will not receive a spousal SS. This is a real concern of mine. We worked hard, saved as much as we could. Yes our combined income from her pension, my SS and an annunity funded by 401/IRA fund is good. My worry is what happens when I die. Will she be provided for? Will you take her pension? You might just stop and think that these "govt workers" are people. They too pay taxes.

LYNNDH   ·  August 11, 2010 2:45 AM

LYNNDH,

So was your mate complaining about unsustainable pensions when she was working? Did she go after the union for demanding too much?

In cases of mass stupidity lots of innocents get hurt. Welcome to the club.

M. Simon   ·  August 11, 2010 4:10 AM

Universities are huge palaces.

Brett   ·  August 11, 2010 8:49 AM

should elected officials have the power to make promises that will forever bind future elected officials and the voters.

If your answer is "yes" then don't complain about a ^&*()( thing they do.

If your answer is "no" then you haven't been paying attention.

That's a bit of a tautology, but my answer is no, and I have been paying attention.

My disagreement is of a philosophical nature. I don't believe in debt slavery. Just as a person living in the present does not inherit his parents' past debts, nor should citizens inherit a country's past debts. I think Jefferson was right. It may be time to consider repudiating some of this onerous past debt. Unless debt should become national suicide, the same legal reasoning that applies to insolvent individuals and corporations ought to apply to governments.

Besides, national bankruptcy will be the net result either way. Why not deal with it the way bankruptcy is normally treated? Declare bust, pick up the pieces, and get on with life. At the risk of sounding like an anarchist, I disagree with the idea that we should be serfs enslaved by past mistakes.

Eric Scheie   ·  August 11, 2010 9:21 AM

M.Simon, they weren't unsustainable at the time. And the snark in your comment is very evident. And in bad times she did not get raises, as others did. I am not saying unions did right. Hers infact was very weak.

LYNNDH   ·  August 11, 2010 11:27 AM

LYNNDH: The biggest problem with the pension situation is that many plans theoretically have infinite obligations.

The obligations of a fixed pension plan can be well estimated. The average age at death of the population has been rather steady with a slow increase.

But many pensioners have been promised COLA and medical insurance. And neither is a fixed obligation. No one can say what those might cost in a few decades.

The uncertainty is higher for public employee plans because public employees often retire earlier. The retiree may very well live another fifty years.

The administrators and those funding such a pension plan have a hopeless task. They don't know how much to fund now, what the fund will earn from investments, there is more uncertainty about how long it must pay the pension, or how much.

Except for those minor difficulties the rest is simple. So the politicians endorse the terms and hope it all turns out well. And in difficult years they may skip funding and promise to make it up later.

Since the scope and time of any future disaster is vague there are few successful objections pro or con from outside groups.

The retiree shouldn't be blamed. But sooner or later the obligations cannot be met and something has to give. We seem to be at that time for many state and local governments and the pension plans they have created.

The federal government can create money and has many more ways to pretend. But social security and medicare and who knows what else are similar in that they are indexed and we should not believe the future cost projections are anything but mush.

KTWO   ·  August 11, 2010 2:01 PM

KTWO, I do understand the problem. Me "complaint" is that so many that are compaining about it seem no to understand that they are talking about real people - not "them". Here in Colorado, the COLA has been drastically - no, greatly, reduced. And the terms to get to retirement have been altered. This is to get the pension sound. So far the tax payer (which does include the current and future retirees) have not been asked to bailout anyone. The tax money going to the retirement plan is like SS employer payment - abet at a higher rate. My wife does get some offset to the health care cost, not all free. Colorado is in a better state than a lot of other states. Just before the knee jerk reaction that the retirees are "them" and therefore bad, remember they are people.

LYNNDH   ·  August 11, 2010 2:23 PM

Eric: Good observation.

My remark was not classically correct. Happens all the time and people understand the writer's intent. You did too.

If the law allows future generations to be be forever bound by laws passed years, decades, or centuries ago then the law is slavery.

OTOH no one except a few madmen will argue that we should have no continuity in law or obligations.

I think Jefferson was right too. Obligations from the past cannot enslave. The question is which ones to dump and when dumping must be done because repair is impossible.

A formal declaration of National Bankruptcy cannot be done as a bankruptcy is normally treated. There is no norm. Who would have pieces after they are picked up?

And the answer is "the strongest."

KTWO   ·  August 11, 2010 2:28 PM

I suspect there is another argument that may be offered. A reasonable case may be made that the massive campaign contribution made by public employee unions constituted a bribe. These contributions were a successful attempt to hire their own "boss" and then hit up that new boss for pay raises and pension raises. There is an inherent conflict of interest when public employee unions attempt to influence elections. Public employee unions were a bad idea to start with, but allowing them to contribute to political campaigns is a travesty.

Rick Caird   ·  August 15, 2010 3:44 PM

Rick, that is a real shocker, because they're essentially using taxpayers money to donate to political campaigns.

Sickening.

Eric Scheie   ·  August 15, 2010 5:10 PM

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