Monday, October 14, 2013

Contract Keeping, Part I

One of the key requirements for a successful economy is honoring contracts.[i]  The uncertainty inherent in a society that is careless about contracts leads directly to refusal to risk wealth. So I’m concerned when I see the president’s cavalier treatment of contracts.
Contract, Word clipart
The president postures on a pro-contract argument when he insists we must raise the debt ceiling so that we don’t default on our debts. And he insists we must not allow Congress to control the funding of Obamacare—it’s a matter of principle. Yet he, himself, is arbitrary and capricious about any sort of contract keeping.
We’ll get to the fun part eventually—the long list of government shutdown consequences. But first let’s take a look at debt repayment integrity.
If you have a list of bills you pay, because of contracts you’ve made (home mortgage, car payment, electric bill, etc.), and you find yourself suddenly with a reduction in income, does that mean you will default? Only if you don’t pay the bills.
Normally, during your search for additional income (better job, second job, etc.), you’re prioritizing. If you’re living in your dream home, you might put it on the market and downsize. If you’re driving a luxury car, you might sell it or trade it in for something that fits in the budget. If you’ve already economized to the limit in those areas, you’ll do whatever you can to meet those debt deadlines and economize on something more elastic (entertainment, clothing, travel, even food).
Lower income means less spending. But except in sudden dire circumstances, it doesn’t automatically mean you default on your contracts.
A debt ceiling rise is not even a lower income; it’s more like reaching your limit on a credit card. You don’t threaten to default on your mortgage if your credit card company says you’ve spent enough without repayment so they’re not going to grant you additional credit. What happens in real life is you cut back your spending and begin paying off the credit card bill. That’s how you keep your credit rating good and make it possible to get a comparable or higher credit limit later. You prove yourself to be a good risk.
But the president is equating a refusal to raise the debt ceiling limit with a failure to pay our debts and the resultant downgrading of the nation’s credit rating. He’s used this tactic the last several times the debt ceiling has been raised—and twice during this presidency the credit rating was downgraded even though the debt ceiling was raised (August 2011 by S&P and April 2012 by Egan-Jones—both agencies suffered government investigations in retaliation). The reason for the downgrades? There’s no effort to cut spending; the increasing debt can’t go on endlessly, so there’s a risk of creditors not getting repaid.
The point here is, the president is willing to threaten default on contracts if he doesn’t get his way.
That is exactly what we’re seeing in response to the continuing resolution battle as well—the situation that has led to the current partial federal government shutdown.
Quick definition: a continuing resolution is a temporary short-term response to the lack of a budget. The resolution is to continue government services at the most recent base budget plus annual increase. We have not had a budget since Harry Reid took over in the Senate (January 2007); continuing resolutions have been misused in lieu of actual efforts to pass a budget.
Budget bills, however, always start in the House, so we can't completely blame the Senate. However, we didn’t get a budget in the years Nancy Pelosi ruled the House (also from January 2007). We started getting budgets from the House after the 2010 midterms gave the majority back to Republicans—but the Senate has never put to a vote any House budget bill. (Note: while the president doesn’t get to create a budget, he can submit suggested budgets, which he has sometimes done. However, his budgets have been rejected unanimously in the Senate, including every member of his own party. Maybe because they’re ridiculously unworkable.)
This month the continuing resolution battle coincided with the implementation of Obamacare.
What has Obama done relative to the Obamacare “law”? He has, without any adjustment to the bill from Congress, extra-legally exempted or postponed implementation for big businesses, favored unions and any crony that has lobbied for exemption (his own family is, of course, exempt, while Congress is not). He has failed to get equipment in place to allow the remaining small businesses and individuals to comply. In other words, keeping the contract is much less important to him than wielding the power.
It is becoming ever clearer that the president is free and easy about contract keeping, whenever he sees an opportunity to exert power instead. The pain he is inflicting on the US people during the shutdown has a couple of purposes. Ostensibly, it is to point out how much we all need the federal government. In reality, it is to exert unchecked power. And he’s very willing to break contracts while exerting power.
When we look at the shutdown infliction of pain in the next post, I’d like to do that with the view of contracts vs. arbitrary power wielding.

[i] This is one of the principles covered at length in Poverty of Nations, by Grudem and Asmus, a book I wrote about in three posts, September 2, 4, and 6.

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