Posted on 05/07/2016 5:30:23 AM PDT by Kaslin
On Monday, Puerto Rico missed a payment on $422 million worth of bonds. If the United States doesn’t come to the rescue, this will be only the first of many defaults to come. In all, the island has $72 billion in debt and an additional $46 billion in unfunded pension liabilities – totaling more than the country’s annual GDP. As debt mounts, potential taxpayers are fleeing: 84,000 Puerto Ricans moved to the United States just last year alone.
Puerto Rico is experiencing what I call a “democracy’s death spiral.” The same thing happened in Detroit. And more recently in Greece. It could happen next to the state of Illinois. And even in California.
It works like this: Politicians find it in their self-interest to take from Peter and give to Paul, whenever Paul can offer more political support than Peter – in the form of votes, campaign contributions, get-out-the-vote efforts, etc. But as tax rates rise to pay for these political acts of theft, some of the Peters begin to emigrate to other jurisdictions. As more taxpayers leave, the tax rates needed begin to rise – leading to a greater exodus. Eventually there are no Peters left to tax to pay for all the benefits the Pauls were expecting.
In the United States I associate this general approach to politics with Franklin Roosevelt, who had two important insights.
First, Roosevelt realized that people are far more aware of the impact of public policy in their roles as producers than in their roles as consumers. For example, most consumers of sugar probably have no idea what sugar quotas are costing them (answer: they pay about twice the world price), but sugar producers are very much aware of how important those quotas are to their incomes. Also, the sugar consumers are not organized, they have no trade association and no PAC, while the sugar producers do have all those things.
Roosevelt capitalized on this insight in spades. Had he not been stopped by the Supreme Court, his National Industrial Recovery Act (modeled after Italian fascism) would have allowed every industry and every trade to fix wages and prices, control output and act as a monopolist – at the expense of consumers everywhere. Think of all the reasons why businesses and trade associations pay lobbyists to roam the halls of Congress. Under the NIRA, such lobbying would no longer be needed. Roosevelt would have given them the power to do for themselves everything they wanted from politicians.
Even though the NIRA was quashed, the Roosevelt legacy continued in some major industries. The Department of Agriculture largely acted as a cartel agent for the farmers. The lCC acted as a cartel agent for the trucking and railroad industries. The CAB acted as a cartel agent for the airlines. And so forth.
The general principle is that it is often easy and politically profitable to take from the general public and reward concentrated interests – even when the exercise is harmful for the country as a whole.
Roosevelt’s second insight was that it’s much easier to rob Peter to pay Paul, if Peter isn’t old enough to vote. It’s easier still, if Peter isn’t even born yet. That’s why Social Security and later Medicare and Medicaid’s long term care benefits were organized as Ponzi schemes. Every dollar these programs collect in taxes is spent – the very minute, the very hour and the very day it comes in the door. Promises of future benefits will only be as good as the government’s ability to collect from future taxpayers.
Puerto Rico has taken all these insights and applied them with abandon. How much do you think the electricity would cost to power an ice skating rink in the tropics? It doesn’t cost the city of Aguadilla, P.R. anything. That’s because the government has been giving free electricity to all 72 of its municipalities. It also supplies free power to government-owned enterprises and some for-profit business.
Even though the unfunded pension liabilities are huge, the government has been giving public sector retirees Christmas, summer and medication “bonuses.” Public sector employees can borrow from their pension funds – up to $100,000 for a mortgage on a home and $5,000 to take a vacation. In fact about one-quarter of the pension system’s investment portfolio consists of such loans.
Making things worse, the Puerto Rican government (just like Greece) does a poor job of collecting taxes. The income tax evasion rate is estimated to be 60 percent.
What lesson can we take away from all of this? That’s easy.
When politicians take from citizens generally and give to special interests, they are not promoting the general welfare – something they are obligated to do under the Constitution.
See also my previous post on why the United States enjoys relative political stability, while many other nations do not.
In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."
Puerto Rico has financial problems. There’s a movement afoot in Congress to help them out. Paul Ryan has said he’s all for it.
The problem is that, traditionally, states and municipalities have had to take care of their own financial bankruptcies.
More importantly, help for Puerto Rico would be a camel’s nose under the tent event, providing precedent for socializing the government employee-pension driven debt of such sinkholes as Illinois, New Jersey, and Detroit. It would be a milestone on the path to creating a permanent government-favored aristocracy and client class.
Think about it... long retired Teachers, police, firemen... those whose unions have aggressively played the short-term election drivent weaknesses of our elected representatives... would be given opulent pensions for the rest of their lives.
They’ve been promised that already, of course, but inadequate funding and unrealistic promises should not be dumped on the non-governmental taxpayer, the payer of last resort.
Puerto Rico: Camel’s Nose Under the Tent.
The author is correct, but isn’t going deep enough.
The problem is the lying and thieving.
Just because a person has a $40,000 a year government job doesn’t mean that he/she doesn’t think they deserve a Mercedes and a condo in Hawaii.
They just have to steal to get it.
47% of our citizens think that it’s OK to steal if it benefits them.
[Democracy’s Death Spiral]
And the Democratic Party is in full blown panic mode.
Terror and slaughter.
They’ll return.
Rounding the bend right now.
360 Million years ago? The Carboniferous Period? I missed it altogether. No such thing as the Carboniferous Epoch.
“And the Democratic Party is in full blown panic mode.” Unlike the Republican Party which is busily eating its own.
There’s no “Feminian Sandstones”, either, but they’re in the poem too.
I think the fix for this is to allow people to vote based on the share of taxes they pay. The higher someone’s taxes, the more their voting clout. Just like no taxation w/o representation, then no representation w/o taxation.
Crappy “poem”
[ Unlike the Republican Party which is busily eating its own.]
Can’t argue with that, the old status quo republicans are doing just that since Trump blew the whistle on them and revealed to the country what they REALLY are.
While eating one’s own is one solution, it will lead to decades of liberal judgements on SCOTUS and Dem rule for lifetimes. Thanks.
Call it “crappy” if you want, but it was written a year after the end of the Great War, and foretold the next century.
Crappy poems are crappy poems by gd awful “poets” whenever they are written. Read what you want into it or just read Nostradamus who “foretold” centuries of history.
I didn't realize Puerto Rico was a country. I always thought it was a territory. And no, we do not need to subsidize its economic dysfunction.
The world is awash in massive levels of debt that will never be repaid, and the perpetrators’ only hope of keeping this fraudulent game going is zero interest rates, eternal debt rollovers, widespread delusion or suspension of disbelief, and endless money creation to produce more and more liquidity to use as serial short term makeup applied to hide burgeoning insolvencies.
GAAP accounting is long dead, and amplifying this disaster is a mountain of opaque unbacked derivatives with notional values in the hundreds of trillions of $, corrupt and unregulated shadow banking, repetitive rehypothecation of skimpy, crappy, over-valued assets as loan collateral, global regulatory capture, and increasing dominance of once market-based stock and bond exchanges by central banks playing the role of pied pipers run amuck. Former leading western Democracies have become statist structures that are now run increasingly by global monied interests and their parasitic political dupes and shills.
The only questions are how long can this financial house of rotten cards be kept standing, and how one best protects one’s assets in this worsening situation. Oh, and did I mention the many trillions of $ in underfunded pension liabilities and other unfunded public and private liabilities that grow worse each day with ZIRP and non-performing markets cannot address?
Happy Mother’s Day.
Roosevelt’s approach, federal intervention and micromanagement of markets and businesses, was endorsed as constitutional by SCOTUS in Wickard v. Filburn.
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