ONE REACTION TO FOUNDING BROTHERS

            From Founding Brothers, by Joseph J. Ellis.

An “Alarmingly Sinister Idea”

On page 57 , we find these lines:

            Hamilton’s proposal looked seductively simple.  The federal 

            government would take on – which is to say, assume – all the

            accumulated debts of the states, most of which had their origins

            during the war.  Instead of thirteen separate ledgers, there would

            be but one, thereby permitting the fiscal policy of the new nation

            to proceed with a coherent sense of its financial obligations and

            the revenues required to discharge them.

            But “this apparently sensible proposal called ‘assumption’ struck him [Madison] as an alarmingly sinister idea.”  Why?  For several reasons, Mr. Ellis explains.  One of the reasons was economic.  Again, from page 57,

            Most of the southern states, Virginia among them, had paid off

            the bulk of their wartime debts.  The assumption proposal

            therefore did them an injustice [as Madison saw it], by “compelling

            them, after having done their duty, to contribute to those states who have

            not equally done their duty.”

            So at this point in the book I’m thinking, Hey, I like this guy Madison.  He’s my kind of guy.  He was concerned about responsibility.  And he didn’t believe in shifting it from those who had done their duty to those who hadn’t.  Neither do I.  This issue of shifting responsibility is a significant matter.  It is a timeless issue.  Let me illustrate.

            As I was eating breakfast this morning (September 2, 2003), I listened to the business news.  The announcer told his listeners that one of the major topics that the politicians in Washington, D.C would be wrestling with soon is underfunded pension plans.

            Many companies in the United States have what are called defined-benefit pension plans.  Under these plans, employers make pension promises to their employees.  And, if employers do their duty, they put money into their pension funds so as to be able to deliver on those promises.  Of course, the money is invested.  Since no one knows for certain how the investments will perform, it’s difficult, if not impossible, to determine exactly how much money to put into the funds.

More responsible employers make conservative assumptions about the rates of returns they will earn on their investments.  So they put more money into their pension funds.  They have done their duty.  Less responsible employers make unrealistically optimistic assumptions about the rates of returns their investments will earn.  They put less money into their pension funds.  They have failed to do their duty.  A number of  employers in the latter group currently have a problem, viz., investments that aren’t  worth enough to cover their pension promises.

                                    Another “Alarmingly Sinister Idea”

This problem is not a new problem.  We’ve had it before.  Federal politicians previously used this problem to justify expanding their power over the private sector.  They adopted a public policy called the Employee Retirement Income Security Act (commonly know as ERISA).  This act created the Pension Benefit Guaranty Corporation (PBGC).  The purpose of PBGC is to deliver on pension promises that private businesses have made but can’t keep.  Private businesses can’t keep their pension promises, for example, if they go bankrupt at a time when those pensions are underfunded.

But from where, you are probably asking, does PBGC get the resources it needs to perform its role?  The answer is from “premiums.”  All companies with defined-benefit pension plans are required to pay “premiums” to PBGC.  (I put premiums in quotation marks, by the way, because I think of paying a premium as a voluntary act.  I voluntarily pay the premiums on my homeowners insurance.  I voluntarily pay premiums on my life insurance.  Companies with defined-benefit plans do not have a choice.  They are legally forced to pay money to PBGC.  They are taxed!)

            Given the present number of companies with defined-benefit pension plans and the present rate at which they are taxed by PBGC, there is some doubt if PBGC itself has sufficient resources to do what it was designed to do.  That’s the reason, as I learned this morning while listening to business news, that our politicians in Washington, D.C. have underfunded pension funds on their current agenda.  I fear their “solution” to the problem will entail further expansion of our federal government.

            See how this ties in with Hamilton’s proposal for the federal government’s assuming the debts of state governments?  And with Madison’s response to that proposal?

            Some states, such as Virginia, “had paid off the bulk of their wartime debts….  According to his [Madison’s] rough calculations, Virginia would transfer about $3 million of debt to the federal government [if Hamilton’s proposal were adopted], then be charged about $5 million in new taxes.”  Wouldn’t this be unfair be unfair, Madison argued, be unfair to taxpayers in Virginia?