Puerto Rico Edges to Default

Greece is expected to default on its government debts tomorrow as its bailout package from the European Union (EU) expires. The country will also hold a referendum on Friday on whether to accept the latest round of terms from its EU funders. Greece continues to grab all the headlines, but there is another government closer to home that is in a similar situation: Puerto Rico. Over the weekend, the governor of the island announced that Puerto Rico is unable to repay its $70 billion in debt.

The Washington Post describes the situation:

A U.S. commonwealth with a population of 3.6 million, Puerto Rico carries more debt per capita than any state in the country. The island has been staggering under the increasing weight of those obligations for years as its economy has tanked, triggering an exodus of island residents to the mainland not seen since the 1950s.

Meanwhile, the government has raised taxes, cut government employment and slashed pensions in a futile effort to get its debt burden under control. Those actions have only slowed the acceleration of debt creation, while harming efforts to reignite the economy.

The island has several sources of debt comprising the $70 billion. Its debt-to-GDP ratio is 70 percent. The average U.S. state is closer to 15 percent. Rhode Island, the state with the highest debt-to-GDP ratio, is just under 20 percent. This infographic from the Wall Street Journal shows the magnitude of Puerto Rico’s outstanding debt.

The Washington Post reports that its debt is compromised of several large types:

The island’s web of debt includes general-obligation bonds, which Puerto Rico’s constitution says must be repaid even before government workers receive their pay.

But billions of dollars more in bonds were floated by public corporations that provide critical services on the island, including providing electric power, building roads and running water and sewer authorities. Beyond the bond debt, the island owes some $37 billion in pension obligations to workers and former workers.

The island’s electricity company is expected to miss a payment this week, according to the Wall Street Journal.

A larger challenge for Puerto Rico is that federal bankruptcy code prevents the island (and states) from filing bankruptcy. That gives Puerto Rico two choices. It can continue to work out a deal with creditors to refinance its outstanding debts, or it could push Congress to provide some sort of bailout.

The idea of state bailouts was discussed some in Congress in 2010 and 2011 as state budgets struggled to handle the effects of the Great Recession. The idea is just as bad now as it was then. Providing a bailout would reward Puerto Rican policymakers for their years of irresponsible choices and should be a non-starter in Congress.

Instead, Puerto Rico should continue to limit its spending to help lower its outstanding debt obligations. It will be an incredibly tough road to manage, but that is the cost of years of mismanagement and failing to acknowledge the realities of the island’s fiscal situation.

Greece: A Financial Zombie State

Banks in Greece will not open their doors Monday morning. Greece has been moving towards this dramatic final act ever since it was allowed to enter the Eurozone with cooked fiscal accounts in January 2001 – two years after the euro was launched. One Greek government after another embraced the idea that it did not have to rein in fiscal expenditures to match revenues because Brussels would cover any shortfalls. That idea appeared to have worked, until other members of the Eurozone realized that the entire European project would fall apart if it became a transfer union.

This realization was brought into sharp focus by the bailout demands of Prime Minister Alexis Tsipras and his left-wing coalition government. Brussels finally realized that if the demands of the Tsipras government (read: Europeans must pay for Athens’ largesse) were met, the Eurozone would morph into a giant moral hazard zone. So, Brussels was forced to throw down the gauntlet: enough is enough.

Where does Athens go from here? Well, to quote former President George W. Bush, as he observed the unfolding financial crisis in 2008: “If money doesn’t loosen up, this sucker could go down.” Well, “W” had a point. Changes in the money supply, broadly determined, cause changes in nominal national income and the price level.

Since October 2008, until the Syriza party took power, the broad measure of the Greek money supply (M3) contracted at an annual rate of just over 6%. And as night follows day, the economy collapsed, shrinking by over 25% since the crisis of 2008.

Since the Tsipras government took the helm, the monetary contraction in Greece has accelerated. This means that a Greek depression of even greater magnitude is already baked in the cake.

And that’s not all. It is going to get worse. The total money supply (M3) can be broken down into its state money and bank money components. State money is the high-powered money (the so-called monetary base) that is produced by central banks. Bank money is produced by commercial banks through deposit creation. Contrary to what most people think, bank money is much more important than state money. In Greece, for example, bank money makes up just over 84% of the total money (M3) supply.

With banks so wounded, Greece is destined to become a financial zombie state.

That Time We Presented a Bust of Hayek to Yevgeny Primakov in the Kremlin

Crane Presents Hayek Bust to Primakov

Yevgeny Primakov, a Soviet apparatchik who made a very successful transition to the post-Soviet era in Russian politics, has died at 85. He served as speaker of the Supreme Soviet, head of the Russian intelligence service, foreign minister, and prime minister. As Andrew Kramer of the New York Times writes, “With hooded eyes and a gravelly voice, Mr. Primakov struck an image of the archetypal Soviet diplomat and intelligence operative.”

I was in Primakov’s presence once, and that’s the way I remember him. In 1990 Cato held a weeklong conference in Moscow titled “Transition to Freedom: The New Soviet Challenge.” The largest gathering of classical-liberal thinkers ever to take place in the Soviet Union, the event included Nobel laureate James Buchanan, Charles Murray, and numerous Russian scholars and members of parliament. “When Cato’s president Edward H. Crane reminded the large audience that ‘the government that governs least governs best’ … hundreds of Russians clapped and cheered wildly,” the Wall Street Journal reported. “Only a handful of die-hard Communists sat glum-faced, arms folded.” As shown in the photo above, Crane presented a bust of F. A. Hayek to Primakov, then the chairman of the Council of the Union of the Supreme Soviet, as more than 1,000 Soviet citizens attended their first open forum.

Fourteen years later, at another Cato conference in Moscow, Crane reminisced about his encounter:

And it’s been pointed out on numerous occasions at this conference that for civil society to thrive, the institutions of the rule of law, constitutionally limited government, a strict respect for private property and the sanctity of contract, as well as a free and open private sector media are essential. Indeed, there are no great secrets to achieving economic prosperity and a free society, a thriving civil society.

When I was in Moscow for Cato’s 1990 conference, I made that point when I had the privilege of presenting a bust of the great economist and social philosopher F.A. Hayek to Yevgeny Primakov, then chairman of the Council of the Union of the Supreme Soviet. I concluded my remarks by saying, “It is, therefore, particularly appropriate, here in this lavish hotel built exclusively for the Communist Party Central Committee, to acknowledge through the presentation of this bust that Hayek was right and Marx was wrong.”

“It is the Cato Institute’s sincere hope that this bust of F.A. Hayek will rest in a prominent place in the Kremlin where it will remind Mr. Gorbachev and other leaders of the Soviet Union that there are answers, readily at hand, to the problems that beset the USSR.”

Mr. Primakov was gracious in accepting the award, under the circumstances, and said that when he next visited the United States he would present me with a bust of Lenin and that I put it where ever I wanted. I think I know what he had in mind.  

New Gun Study Misses the Point on Self-Defense, and Uses Bad Data to Boot

A recent report from Violence Policy Center purports to show that private gun possession results in many more criminal firearm homicides than justified killings, a conclusion that was quickly picked up by several media outlets.   But it isn’t so much a report as it is a handful of woefully incomplete data sets thrown together with a few conclusory remarks.
 
The essential thrust of the report is that, according to FBI homicide reporting figures, there were only 259 justified firearm homicides in 2012 compared with 8,342 criminal homicides by firearm.  Ergo, the authors posit, it’s clear that private gun possession does much more harm than good, and that the claims of self-defense and Second Amendment advocates of thousands of defensive gun uses annually are wildly false.

King v. Burwell: Six Humpty Dumptys Playing Calvinball

My King v. Burwell recap is up at SCOTUSblog. Excerpt:

In King v. Burwell, all nine Supreme Court Justices agreed on one thing. The King challengers claimed the Patient Protection and Affordable Care Act (ACA) authorizes the Internal Revenue Service to issue tax credits and impose the related penalties only “through an Exchange established by the State,” and not through exchanges established by the federal government. “Petitioners’ arguments about the plain meaning of Section 36B are strong,” Chief Justice John Roberts wrote, and their interpretation is “the most natural reading of the pertinent statutory phrase.” Justice Antonin Scalia agreed, finding the meaning of that phrase “so obvious there would hardly be a need for the Supreme Court to hear a case about it.”

There was no dissent about the plain meaning of the phrase “through an Exchange established by the State.” All seven of the other Justices joined one of those two opinions. Nor was there dissent about the fact that that phrase, used repeatedly in the statute, is the only provision of the Act that speaks directly to the question presented. Not a single Justice lent credence to the government’s assertions that this was a meritless case, or one that the Court should never have accepted. Nor was there dissent about the consequences of that provision’s plain meaning in the face of broad state resistance to the ACA. All agreed that withholding tax credits in the thirty-four states with federal exchanges could lead to adverse selection in those states, with premiums climbing higher and higher in a “death spiral.”

Where disagreement emerged was over the question of whether the former should alter the latter – whether the potential for adverse consequences “compels” the Court to disregard the universally acknowledged meaning of the operative text. The Court split six to three in favor of rewriting plain text, and rendering the requirement “established by the State” a nullity…

Roberts managed to conclude that “by the State” could be read to mean “by the federal government,” even though he acknowledged Congress explicitly defined “State” in a way “that does not include the Federal Government.” So perhaps spending more time with the statute would not have helped.

The King ruling is actually much, much worse than this excerpt suggests. Read the whole thing. For a reference guide to King, click here.

Greece and the Euro Stagger Towards the Brink

Negotiations in Brussels to resolve the Greek fiscal crisis appear deadlocked, with Athens heading toward default. German Chancellor Angela Merkel insisted that Greece make a deal before the markets open Monday. The Eurogroup will meet again tomorrow on the issue.

The European Union was supposed to create a de facto United States of Europe. But after last January’s Greek election it was obvious that the EU does not speak for Greece, or perhaps anyone else other than the Eurocrats, an amalgam of bureaucrats, academics, journalists, businessmen, politicians, and lobbyists who dominate Brussels.

To most EU leaders common people are an impediment. The Eurocrats reflexively intone “more Europe” in answer to every question, but voters increasingly are supporting protest parties, some populist, some worse.

Big Win for Equal Liberty, Shows How Far We’ve Come

Just because today’s opinion was expected by all doesn’t make it any less momentous. A five-justice majority writing through Justice Kennedy finds that there’s a constitutional right for gay and lesbian couples to get marriage licenses – at least so long as everyone else gets them. (We’ll set aside the question of why the government is involved in marriage in the first place for a later time.)

In sometimes-soaring rhetoric Kennedy explains why the Fourteenth Amendment’s guarantee of both substantive liberty and equality means there is no further valid reason to deny this particular institution, the benefit of these particular laws, to gay and lesbian couples.

Not surprisingly, all four conservative justices dissented. Indeed, it’s interesting that each of them wrote his own dissent, each riffing on the same theme. That is, regardless of your views of how to define marriage this is a decision that should be left to the people in their states, not to courts.

Chief Justice John Roberts in particular said that people who benefit from today’s ruling should celebrate it, should celebrate this development in our society. But make no bones about it, this doesn’t relate to the Constitution. (Where was this principled logic yesterday?)

In any event, this will be a case that is studied for generations. There aren’t clear, bright-line rules about levels of scrutiny or any other legalisms – avoiding that artifice is all to the good – and it’s a landmark ruling that shows how far we’ve come.  It was in 2003 that the Court had to invalidate the criminalization of gay sex and a mere 12 years later it commands state officials to issue marriage licenses to same-sex couples.

Good for the Court – and I echo Justice Kennedy’s hope that both sides now respect each other’s liberties and the rule of law.