Mass Bankruptcy and the Contracts Clause of the Constitution

A revision to the U.S. Constitution requires a two-thirds vote of each house of the Congress, the signature of the President, and the approval of three-quarters of the states. It is something that is virtually impossible to achieve.  And yet if we had a functioning government, it is something that would probably be attempted immediately.  Right now there are millions of contracts outstanding that require people, businesses, and property owners that suddenly have no revenues to pay someone else money.  Leases and mortgages, for example.  Money those who owe do not have, thanks to coronavirus-related shutdowns.

As it stands the result will be a wave of bankruptcies and foreclosures that leave everyone — those who owe, those who are owed, and third parties — worse off.  Or renegotiations, in bankruptcy or out, that take time, lawyers and money to complete, and may not succeed.  Or mass bailouts that benefit existing interests — and benefit them more the better off they already are — at the expense of less well off later-born generations and the future of the United States.

I propose a fourth option.  Allowing the government to, in effect, suspend contracts en masse for people and organizations that have lost their income due to government-mandated shutdowns during a pandemic.  The contracts would remain in place, but would be frozen.  No money would be owed during the shutdown or for a month thereafter, and the contracts would be extended for that length of time.   It would be as if the time of the shutdown and the month after had not occurred.  Financial asset holders would, in effect, be forced to provide zero interest loans during the shutdown.  Frankly, right now that’s a pretty good rate of return compared with the alternatives.  The problem with this proposal is that it is unconstitutional.

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Imported Oil: American Gutlessness Means Perpetual Slavery

Did you hear about the United States finally becoming energy independent again thanks to our great President Donald Trump, the guy who has essentially declared war on mass transit and alternative energy?  Actually, he didn’t just promise energy independence. He promised energy “dominance.”

Here’s how Energy Secretary Rick Perry explained energy dominance to the White House press corps on Tuesday: “An energy dominant America means self-reliant. It means a secure nation, free from the geopolitical turmoil of other nations who seek to use energy as an economic weapon.”  “An energy dominant America will export to markets around the world, increasing our global leadership and our influence.”

You might have missed it, but the Saudis didn’t.  So OPEC has done it again. Jacked up production and sold below cost so the price of oil and gasoline plunge to $20 per barrel. They can count on the neediness, whining and shortsightedness of the generation that is still in control of the United States, the Baby Boomers, and the gutlessness of U.S. politicians, to stand aside yet again as the domestic fossil fuel industry, alternative energy companies, and conservation are wiped out and replaced by cheap foreign oil. And then, when our dependence and vulnerability have been fully re-established, OPEC will again slash production and jack up the price of oil to $100 a barrel, causing another recession and another avalanche of U.S. dollars out of the country.  As they did in 1973, and 1981, and 1990, and 2008, and 2011-14.   Ah, but that’s the future, and we can’t think about that now!  What about my need for cheap gasoline!  I want for me now, and now, and now, and again now!

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Annual Average CES Employment Data for 2019: Before the Coronavirus New York Had A Growing Budget Crisis Despite A Massive Boom

The Bureau of Labor Statistics released rebenchmarked Current Employment Survey data, with 2019 annual average data (the average of all 12 months), last week.  While it seems as if it were ancient history, it is worth looking at this data now, because it shows how New York State benefitted from a massive employment boom from the peak of the prior economic upturn in 2008 to what seems certain to be the peak of the expansion that just ended in 2019.  An employment boom that dwarfed the increase from 2000 to 2008, and exceeded the U.S. average in percent gains, even though New York is a slow population growth state.  A boom that was concentrated in New York City.

And yet by the end of 2019 the City of New York, the State of New York, and the MTA were already facing budget crises.  Service cuts, tax increases, fee increases and deferred maintenance to the point of a future drastic infrastructure decline were already on the table.  And now, no doubt our elected officials and the special interests they represent will use the coronavirus and an excuse for all of the above.  They should not be allowed to get away with it.  Just as the business crisis was caused not by the virus, but rather by all the debts businesses piled up to pump up stock prices and executive pay, as everyone across the ideological spectrum seems to be saying (the subject of my prior post).  So the fiscal crisis was coming one way or the other, due to similar heists over the past 25 years.

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Federal Reserve Z1 Data for 2019: The Debt-Driven Party Had to End Eventually, Coronavirus or No Coronavirus

“If something cannot go on forever, it will stop,” Herbert Stein

“Markets can stay irrational longer than you can stay solvent,” John Maynard Keynes

Federal Reserve Z1 data for 2019 was released on March 12, and it shows a continuation of the post-1980 trend.

For the past four decades businesses have paid most Americans less and less, working its way up the income and education scale.  With progressively lower pay and benefits by generation, and Millennials paid 25 percent less, on average, than Baby Boomers had been at the same point in life.  But for most of that period Americans still spent more and more, with the difference between lower labor costs and higher sales showing up as higher profits, converted to higher executive and financial sector pay, and inflated asset values.  That difference was bridged by more household members in the labor force, then by reduced retirement savings, then by soaring personal debt, then by soaring government debt. The result has been a global crisis of demand, and an unsustainable debt-driven economy.

It would have collapsed in 2008 without massive government intervention. That intervention meant the fundamental problems were never solved. Instead, asset prices were re-inflated, to the benefit of older asset holders and the rich, and to the detriment of younger people saving for retirement or seeking to buy a home. Even as most people became worse off, and U.S. life expectancy began to fall.  The global economy has been poised at a precipice ever since, with only interest rates near zero and soaring public debts deferring collapse, even as aging populations seemed sure to cause the whole thing to deteriorate eventually.  In 2019, total non-financial U.S debt increased 4.8%, and federal debt soared 6.7%, but nominal GDP increased just 4.1%, and inflation-adjusted GDP increased just 2.3%.  Not the 3.0% to 8.0% real growth The Donald has claimed yet another tax cut for the rich and corporations would produce.  The question for 2020 is whether the coronavirus will change eventually to immediately.

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Medicare, For All, and the Coronavirus

Last year, I wrote a couple of posts asserting, on both economic and equity grounds, that the federal payroll tax, which funds Medicare and Social Security, should be repealed and replaced by a value added tax (VAT) for the same purposes.

Since I tend to put a great deal of information into each post, some may not have read, or might have forgotten, what I wrote at the end of that one.

In fact, I would go further than just having the VAT replace the payroll tax for Social Security.  I would increase the level of exemptions from the federal income tax to the point where only the affluent even have to bother with it, and use the VAT to pay for all federal programs intended to improve the public welfare.  Including food stamps, Medicare, Obamacare, etc.

Furthermore, although the Democratic Party-controlling public employee unions, the rich, and the Republican-voting generations now benefitting from Medicare, are all opposed to a single, equal federal system to provide for everyone’s health care.  On “I’ve got mine jack and am not willing to have others get the same benefits” grounds.  Perhaps a VAT could at least provide the additional revenues required to pay for everyone to have basic preventive health care, for the prevention and treatment of infectious disease (which threatens everyone, not just the sick person), and for the health care of children.

These types of health care provide broader social benefits, not just benefits for the individual beneficiary, and have a high level of bang for the buck.  That is why 100 years ago these types of health care were imposed on the poor by the better off whether they wanted them or not – recall “Typhoid Mary” — to protect the rich from the spread of disease and ensure healthy workers. It is these basics that have been neglected in the U.S., which is why our average life expectancy is lower than other counties despite such high health care spending.

And now here we are, facing a disease that — if it infects the young and poor — could spread to, and kill, the rich, retired public employees and those with seniority, and the old in general.  Our society is about to get audited.  Anyone in the mood to revisit that suggestion?

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MTA Signals: Can Technology Save Us From Politics?

Most of those who will read this post know the financial issues with New York’s Metropolitan Transportation Authority.  Decades ago, funding for the agency’s capital plan was cut, and some capital funds were diverted to the operating budget as “reimbursable expenditures.” At the same time, effective fares were cut when the Metrocard was introduced, and current and – in particular former – MTA workers benefitted from a huge pension increase in 2000. The cost of capital construction contracts soared, due to pension increases for union construction workers and managers, and construction union pension underfunding, at about the same time.  It was a political win for everyone – who is no longer around.  The cost of all of this was borrowed or deferred, and today much of the money being paid to the MTA, in taxes, tolls and fares, is being sucked into the past.

As the years pass, meanwhile, major systems and components of the subway and commuter rail network continue to age, and eventually reach the point where they will either have to be replaced or start to fail and disrupt service more and more frequently.  Perhaps to the point where entire lines have to be abandoned for years or decades, as two tracks on the Manhattan Bridge were.  Or permanently, as the West Side Highway was.  One of those systems is the signal system on the New York City subway, which is aging even as the cost of replacing the signaling on a line has exploded.  The plan had been to gradually replace conventional railroad signaling with Communications Based Train Control (CBTC).   But after decades of borrowing the MTA Capital plan came to a near halt after the Great Recession, and compared with the plans in place 17 years ago the MTA is way behind, without any hope, at recent prices, of ever being able to catch up.  Can technology provide a way out?

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Trying to Be Bezos, Ending up Bozos

In recent posts, I’ve explored the way the concentration of investment in just a few huge companies, and their high-end economic activity in a few superstar cities and metro areas, have warped regional economies and commercial real estate.  In addition, the example of those few hugely-valued firms has apparently warped the practice of business management in general.  One characteristic of information technology software is that it costs very little to replicate.  Once an app, a program, a website is built, it doesn’t cost much more to serve 50 million people than it does to serve 50 people.  As a result, the valuation of the largest internet-based and software-based firms have rocketed to insane heights, and provided their founders and early backers with unprecedented wealth.

One consequence is that just creating and operating a middle-sized firm with solid profits, and being normally rich, isn’t good enough anymore.  Not for founders, and not for venture capital investors, all of whom want the next Amazon or bust.  As a result, firms that could have been solidly profitable on a modest or mid-sized scale have expanded to the point where there are only two possible outcomes:  predatory monopoly, and bankruptcy.  Including two in the so-called “prop-tech” sector.

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