Grassroots Default Movement and Questions on Contract Morality

“Give to everyone what you owe them: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor.” – Romans 13:7

A few days back we discussed the 60 minutes story on the crushing debt burden faced by states and local municipalities (mostly from over-promised benefits to state and local employees). Today an article came out about Prichard, Alabama, which has defaulted on its pension obligations. It’s worth a read.

There are a lot of points to make here. First, we note that cities defaulting on pensions may become the new grassroots movement. It almost has to start that way. The federal government subsidizes the states, and if it were ever forced (haha) to balance its budget it would conceivably start by ending the state subsidies. Likewise, the states subsidize cities and counties. When the states are forced to balance their budgets (a day that is coming fast & furious), they too will likely begin by cutting off subsidies. This leaves cities and counties to start the process of unwinding the unpayable debts. That process, quite naturally, is bankruptcy.

This, of course, sucks if you are a retired public employee living on a pension. As the article notes, retirees in Prichard saw their checks disappear. Many of them couldn’t continue to pay the bills and are in serious financial straights. So how do we go about finding a “fair” solution?

Those who read this blog know that I have, from time to time, made the point that in any sort of democracy or elected government, “the government” is just an organized structure of “the people.” When someone says “the government should pay for [insert service, function, or benefit here]” what they are really saying is that the people, my neighbors should pay for those benefits. Likewise, when the government has made a contractual agreement with employees, they have done so on behalf of the people. So what is the moral obligation of those people?

Before sounding like a collectivist, let me note that contracts ratified by the city council are rarely so simple as good faith business agreements. Mike “Mish” Shedlock notes frequently that the government ought to provide the most services for the least cost. This is not the way the governments tend to operate though, often handing out lavish benefits guarantees. When a city council supports an unsustainable contract with union employees – firm in the knowledge that the union can now be counted on to support their reelection – it is a conflict of interest to say the least. One might reasonably argue that they have violated some fiduciary responsibility and all contracts are of questionable validity (from a moral standpoint).

OK, fine, we can pin the blame on politicians. That’s a game as old as democracy itself, and it doesn’t help the retired teacher or police officer who has no other options at this point.

The option of insisting on continued payment isn’t valid either. If there is no money, there is no money. Prichard had the option to discontinue existing services (schools, police, etc.) in order to make the retirement payments. Obviously this is a non-starter. They would basically be asking citizens to work hard and pay taxes for no current benefit, just so retirees can have what they were promised. This actually brings clarity to the nature of over-promised benefits packages. Governments have promised more than they can pay, and leveraged the productivity of future generations in the process. Thus, it is logically consistent to have those future generations (the future is now!) continue to pay without receiving any services in return.

Economically this won’t work though. As we’ve noted in the past, your ideas are not good ones if they can only survive in the absence of competition and choice. (Much of the liberal agenda in the US is to eliminate options by mandating one rule for everybody at the federal level.) If a government did eliminate services, or even increase taxes to pay for both, they would soon find people leaving. Whatever the implied contract between a citizens and public employees, it is always subject to a participation choice by the citizenry. We may not be able to void the contract in the courts (though bankruptcy has provided just that avenue) – but we can certainly leave town.

This doesn’t help the retirees either. If many citizens opt-out of the contract there will once again be no money – and no retirement benefits.

What else can we do? How about bailouts? Shifting the burden of unsustainable promises out to a broader group is hardly moral – those people didn’t even make the promises (directly or indirectly) in the first place.

But, all hope is not lost. Despite the commonly held view amongst progressives that “free market capitalism” leads to self-centered behavior where people will take advantage of their neighbors at any turn, we may well find that compassion amongst the average American is alive and well. I’m not at all interested in having my retired neighbor tell me that I have a responsibility to work my fingers to the bone so he can have lavish benefits he was promised by some politician 20 years ago. But I’m also not interested in seeing my neighbor go belly-up. There is certainly room in the hearts and minds for compromise.

Thus far though, compromise seems hard to come by. Public unions appear to have chained themselves to the ship and are willing to ride it down to avoid surrender on any points. I suspect the public is more than ready to strike a deal. But, the unions still deliver votes and can still convince city councils not to move forward on any compromise.

That sentiment will only last so long though. Vallejo, California has declared bankruptcy. Prichard, Alabama was refused bankruptcy by the courts and just ended up defaulting (and may end up dissolving as a corporate entity). Many other cities have outsourced services to lower bidders. If this trend continues, the implications will be clear. It’s either make a deal or lose everything. Making a deal is better. I’ve noted on a number of occasions, I’d rather take a 10% pay cut instead of a 100% pay cut.

Who knows exactly how this all will unfold. We may move toward socialization and just spread the burden out to all – though the recent surge of the Tea Party would suggest public will does not support such a solution. Perhaps the cities do start to topple, with a large metropolitan city eventually declaring bankruptcy. At that point the dominoes will fall quite quickly.

What is more certain is that quite a few retired public employees are more concerned about the future today than they were yesterday. There are also quite a few current public employees who are wondering if their retirement plans have any validity at all anymore. Regardless of what the economic cheerleaders are saying – the uncertainty for individuals in this economy has not lessened.

As for the moral issues, we will see what Americans are made of. The whole thing could devolve into every man claiming that he rightfully owns his neighbor’s property and future productivity. Or, we could choose reasonable but difficult solutions to difficult problems.

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