FRED WOLFERMAN: Too Many Unfunded Liabilities: Default May Be Our Best Way Out
How broke do you have to be before you start over, and how do you start over, anyway?
These are no longer idle think-tank questions, if they ever were. They are now the subtext of American politics.
Thanks to modern social consensus, if you or I go bankrupt we are not thrown into debtors' prison; we get to stiff our creditors and rebuild our lives, hopefully becoming sadder but wiser. Our creditors, if they are smart, have a reserve account for people like us, and their profit-and-loss statements remain unaffected. In any event, this is microeconomics, and hardly anybody cares.
Now, however, we not only have a federal government, which can print money, out of fiscal control, but also have an increasing number of states, which can't, in the same condition.
California is, as usual, the bellwether. With a current budget deficit of something like $28 billion, it has now resorted to issuing IOUs in lieu of good checks to various creditors, saving actual money to pay state employees and bondholders.
Other states are headed down the same road. Illinois, $9 billion; Florida, $6 billion; New York, $18 billion; New Jersey, $9 billion; North Carolina, $5 billon. I could go on -- the list is 48 states long in varying amounts.
These are merely current account deficits. The icing on the cake, or rather the cake itself, is unfunded liabilities. The federal government's unfunded liabilities, which consist primarily of Social Security, Medicare and Medicaid, but also of generous congressional and employee pensions, have been estimated as high as $101 trillion -- that's trillion -- dollars. A trillion is a thousand billion, in case you've lost track.
Illinois' unfunded state employees' pension fund is $75 billion. Little Maryland's is about $25 billion. Almost all states and municipalities have been promising unfunded retirement benefits to employees for decades, paying out of current revenues, just like Social Security and Medicare.
So, you ask, now what?
Conservatives would say we must cut spending and balance budgets. Liberals would say we must cut spending, increase taxes, and balance budgets. It is all hogwash. No body of elected representatives in modern times, or probably any other, has ever accomplished this.
That is why all the democratic social-welfare states in the world, and we are one of them, are in deep financial trouble.
There are some possible solutions that take the outcome out of the hands of politicians. One option is the good old-fashioned military coup. A bit messy and unpleasant perhaps. Still, if you want a fast change of government policy, it is hard to beat.
More civilized transitions would include hyperinflation or outright default. The example of needing a wheelbarrow full of money to buy a loaf of bread in the Weimar Republic makes hyperinflation sound pretty difficult, especially if you don't have a wheelbarrow. So, after some deliberation, I'm coming down on the side of default.
Default is sort of like that personal bankruptcy. You stiff your creditors and move on; shame on them if they don't have adequate reserves.
Jeffrey Rogers Hummel, who takes a very libertarian view of all this, has perhaps put it best: "The moral argument for repudiation is perhaps easiest to follow. ... Treasury securities represent a stream of future tax revenues, and investors have no more claim to those returns than to any investment in a criminal enterprise. I favor total repudiation of government debt for the same reason I favor abolition of slavery without compensation to slaveholders."
You can't put it much more simply that that.
Really, all this palaver about balancing budgets is a waste of hot air that could probably be converted into energy by some subsidized program. Forget about it. Just go on spending like crazy, then default. I'm going to sleep much better, now that I can see where we're headed.
Fred Wolferman lives in Southern Pines. Contact him by e-mail at email@example.com.
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