Monday, February 21, 2011

the truth in obligations amendment

I've seen several proposals lately for Constitutional amendments to fix problems with the current political system. Frankly, no constitution will ever fix the problem of greedy people who go into government to gather power and force their will on others. This should be obvious to anyone who can read our Constitution and see how blatantly and unapologetically the federal government violates it. Still, it is useful at times to put in specific amendments to fix specific abuses.

My idea focuses on the current financial crisis that we are facing and the fact that the crisis is lergely due to two factors: entitlements (at the federal level) and the wages and benefits paid to public employees (at the state and local level). These separate problems have something in common: they are ways for a current set of elected officials to get support by obligating future elected officials to give away money. This creates a perverse incentive for future elected officials. If they show responsible stewardship by trying to reduce the scope of these obligations then they create enemies among the people who expect the money. If they expand the irresponsible obligations then they make supporters among those same people.

In politics no one is more highly motivated than someone with money on the line, and politicians do not want highly-motivated political enemies. They love highly-motivated supporters. Even people who go into politics with the best of intentions have a hard time fighting this very simple equation: create irresponsible obligations for the future and you win; show fiscal responsibility and you lose.

My proposal is to reduce the power of this dynamic by a Constitutional amendment. The amendment would prevent any federal, state, or local official from doing anything that would create financial obligations for the government other than by normal borrowing against bonds, and all bonds must be equal --that is, it would be unconstitutional to pay off some bonds in preference to others. Any default on bond payments would have to be done in the same percentage across all bonds.

If this had been in place when Social Security was created, then this would have prevented it from being done in its current form (assuming that Congress didn't simply ignore the Constitution as they so often do). The could not legally have taken money from your paycheck on the premise that they were going to pay you back after you retire. They would have to have issued you federal bonds for your retirement and your bonds would be as good as anyone's.

Similarly, pensions for public employees would be unconstitutional. Governments would have two options for setting up pensions: they could make payments to private pension-providers with clear contractual provisions that the pension provider was solely responsible for payment of the pension. Or they could issue bonds that mature after retirement.

Now it might seem that this would make things worse because it takes away any discretion on the part of current governments to fix debt problems created by previous governments. For example, there would be no way to reduce payments to social security recipients as a way of balancing the budget because all of the recipients would own bonds, but that is a feature, not a bug.

What this amendment would do is give the bond market and the voters a clear and unambiguous idea of what obligations are being made when they were being made instead of years later when the bill comes due. Part of the reason that the US has the good credit rating it does is because of speculation by bond holders that the US will stiff retirees before they stiff bond holders. Politicians have been cynically relying on this perception and have been cynically kicking the pending disaster down the road to future politicians.

If retirees had instead been bond holders equal to all other bond holders then the bond market would have taken into account the real financial obligations that the US was accumulating instead of sequestering off the bond debt as the "real" obligation. And why shouldn't Social Security recipients get equal treatment to bond holders? Do they rely any less on payment of the federal government's obligations than bond holders do?

In addition, if all government financial obligations were in the form of debt then politicians and the news media would not be able to lie to voters about the obligations that are accumulating. The voters would be able to see a single national debt number as a percentage of GDP. They would be able to see the rising interest that the US would be paying for debt (as the bond market took into account the real obligations), and voters would be able to make more informed choices in voting.

When Roosevelt began Social Security, he immediately began making payments to people who were already retired and immediately incurred obligations to people who had already worked a large part of their life without paying into the system. If Roosevelt had been required to issue billions of dollars in bonds, I don't think he could possibly have created such outrageous obligations. I don't think he would have even tried.

I call this the "truth in obligations" amendment because it makes it more difficult for governments to hide, distort, or downplay the financial obligations that they make. This not only prevents them from deceiving voters about what they are doing, but also prevents them from deceiving the people that they are making the obligations too.

I am one of those people who is likely to bear the brunt of the corrections needed on social security and medical programs. It isn't fair to me that I've been paying in huge amounts of money my whole life into a system that never had any real legal obligation to pay me back, and where I most likely will not be paid back. Congress should have been forced to issue me bonds in return for my payment so that their obligations to me would be as legally solid as their obligations to China.