The End Of The Rule Of Law

Back in mid November it was still unclear if we had elected a constitutional scholar or a community organizer as our President. With the fast track bankruptcy proceedings for Chrysler and a similar deal being micromanaged by the White House for General Motors, it is now clear that the community organizer won. It seems the constitutional law expert that many of us were counting on to defend the rule of law upon which our freedom, liberty and economic system are based has been driven from the scene.

So what’s wrong with having the community organizer in charge? It now appears that core decisions regarding economics, contract law and private enterprise will be made not by law, not by contract, not by precedent, not by rational economic theory and not by tradition, but rather by politic correctness, expedience, populism, campaign contributions and essentially what amounts to nothing more than the egotistical whims of a small elite group with concentrated political power who seem to think they are the smartest people in history.

We’ve been down this road before and history suggests clearly where it goes. Similar policies of various political stripes were a very common theme in the late 1930’s and early 1940’s. What they all had in common, whether in Russia, Germany, Italy, Japan and to significant degree even in  the United States, was a disregard for the rule of law, just as we are seeing today.

In “Chrysler and the Rule of Law”, law professor Todd Zywicki points out that “the Founders put the Contracts Clause in the Constitution for a reason”. He clarifies:

“The close relationship between the rule of law and the enforceability of contracts, especially credit contracts, was well understood by the Framers of the U.S. Constitution. A primary reason they wanted it was the desire to escape the economic chaos spawned by debtor-friendly state laws during the period of the Articles of Confederation. Hence the Contracts Clause of Article V of the Constitution, which prohibited states from interfering with the obligation to pay debts. Hence also the Bankruptcy Clause of Article I, Section 8, which delegated to the federal government the sole authority to enact “uniform laws on the subject of bankruptcies.”

“The absolute priority rule is a linchpin of bankruptcy law. By preserving the substantive property and contract rights of creditors, it ensures that bankruptcy is used primarily as a procedural mechanism for the efficient resolution of financial distress. Chapter 11 promotes economic efficiency by reorganizing viable but financially distressed firms, i.e., firms that are worth more alive than dead.”

“Violating absolute priority undermines this commitment”.

Bankruptcy law, while not perfect, has evolved over time with clear purpose. Along with sorting out a fair and rational distribution of the diminished assets of an organization to existing stakeholders according to established law and contracts, the asset disposal processes of normal bankruptcy procedures generally play a healthy role in our economy  by redeploying resources productively.

In “Bankruptcy is Economic Stimulus” Congressman Ron Paul explains that: “When a company makes a profit, it is a signal that it is taking resources and increasing their value while controlling costs.  When a company operates at a loss, it is a signal that it is decreasing the value of its resources or letting out-of-control costs outstrip any value it has created.  A company operating at a loss is therefore an engine of wealth destruction.   Bankruptcies are a net positive for the economy because more productive competitors are rewarded by opportunities to buy up remaining assets at bargain prices to strengthen their operations.  In an economy that allows this kind of growth and change, any jobs lost by bankruptcy are soon replaced by new ones as the most efficiently managed businesses gain access to more assets and expand.”

“Bankruptcy was the stimulus that we needed in the case of AIG. More bankruptcies would clean out malinvested resources and enable economic growth again.”

In both the Chrysler and GM deals, instead of letting the bankruptcy system do what it is intended to do, the White House is demanding that debt contracts, which under normal rule of law have precedence in bankruptcy proceedings, will be crammed down in favor of benefiting politically connected unions. In “Driving the Bond Markets To Ruin”, James Glassman describes exactly where these new economic policies will lead us as the fate of two of the world’s largest industrial companies are decided by strong arm tactic directly from the White House.

Glassman suggests that ” in strong hands, G.M. could be a going concern. Unfortunately, the new owners, with about nine-tenths of the shares, will be the government and the U.A.W. These are the same hands that shaped much of G.M.’s trouble in the first place. With substantial union co-ownership, labor costs won’t be contained; and with the government as the boss, politics may trump markets in decisions on such matters as where to put plants and whether to build big cars or small ones.”

“The deal would also put G.M.’s competitors at a serious disadvantage in the short run. Ford, which has been building better cars lately, prudently raised cash against a decline in demand, playing the ant to G.M.’s grasshopper. Now, Ford will face a G.M. buoyed by taxpayer dollars both for manufacturing and for cheap consumer and dealer financing.”

“The same holds true for the manufacturers that hold the key to future auto-making jobs: well-managed, foreign-based companies like Toyota and Honda, which, according to the automotive analysts at CSM Worldwide, will build more cars in the United States next year than G.M., Chrysler and Ford combined.”

“What lesson does federal favoritism toward Chrysler and G.M. teach other businesses that play by the rules? How will our trade negotiators keep a straight face when complaining about subsidies to Airbus or Chinese steel makers?”

While the administration’s actions may be popular policy among those who don’t want to explore the  implications too carefully, certain long term implications are unavoidable.  Having the government and unions in complete control of major industrial companies is not good for the companies themselves, their competitors, their customers or the competitive enterprise system that our economic system is based on. You can call them progressive or whatever else you choose based on the pretty rhetoric. But the administration’s economic policies are the very essence of corporate socialism, the worst of political-economic solutions.

What President Obama and his minions have not come to grips with is that postponing and hoping to avoid what Joseph Schumpeter described as the creative destruction of free markets can only lead more chaotic and severe destruction later. And disregarding the rule of law will lead to the destruction of everything that the constitutional scholar who ran for president holds dear.

Are there practical implications for personal decisions in the news about the General Motors and Chrysler? The actions of the administration are a clear signal to get out of any private or corporate bond investments you may hold. Why would anyone invest in the “security” of bonds when the contracts they are based on are now going to be completely disregarded in favor of political connections. Longer term, as Glassman points out, these are not good signals for for global trade or for the future of real business of any kind.

As Professor Zywicki points out: “By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created a thousand new failing businesses. That is, businesses that might have received financing before but that now will not, since lenders face the potential of future government confiscation. In other words, Mr. Obama may have helped save the jobs of thousands of union workers whose dues, in part, engineered his election. But what about the untold number of job losses in the future caused by trampling the sanctity of contracts today?”

What is happening with GM and Chrysler pretty much sums up the fears many of us had about the new administration. It sometimes appears that the only enterprise left will be chasing government favors.

While generally too extreme in his views for my taste, in “Statism Is The Only Thing Being Stimulated” Mark Steyn pretty accurately captures the problems with the new economy we are supposed to all believe in. He relays his surprise at seeing a quarter page help wanted advertisement in a small local Vermont newspaper, essentially the only ad in the paper. The ad was from SEVCA, a “nonprofit agency, just like The New York Times, General Motors and the state of California.” The article goes on describing four of the eight jobs being advertised which are funded by the American Recovery & Reinvestment Act (ARRA): ARRA Projects Coordinator, Grantwriter – “responsible for writing grant applications to augment ARRA funds”, Marketing Specialist – “to increase public awareness of ARRA-funded services” and Job Readiness Program Coordinator – “a job coordinating the program that gets people ready to get a job.” He sums things up well suggesting: “I only hope there are enough qualified Job Readiness Program Coordinators out there, and that they don’t have to initiate a Job Readiness Program Coordinator Readiness Program.” It would be fun to just laugh at the material for comedy these new “solutions” offer if they weren’t bankrupting our nation and our kid’s futures on this senseless waste.

President Obama ran for office on a theme of Hope and Change. Things are definitely changing fast. Those who believe that the folks that brought us the wisdom of the American Recovery & Reinvestment Act are somehow qualified to instantaneously reshape all the traditions, rules and laws governing economics and commerce, as well as the ownership structures of the worlds major economic and industrial institutions, are surely demonstrating the very optimistic hope that they have placed with the Community Organizer In Chief and his team.

Sadly, it is a hope I can’t share. After eight years of Dick Cheney’s reign, the change I was really hoping for was that the constitutional scholar would be our president.

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3 Comments

Filed under Economic Policy, Fundamental Perspectives

3 responses to “The End Of The Rule Of Law

  1. Michael Barrow

    You make a lot of really good points in this well-written and researched essay.

    It all reinforces my belief that the American people are getting exactly what they want and deserve. The inability to think critically in nuanced ways, the inability to stay with a subject for more than 15 minutes, and the inability to delay gratification and invest in a long-term approach – these will be some of the more relevant areas that get the most credit when, centuries from now, the American post-mortem is taught and analyzed in someone’s world history classes.

    We have been a decaying nation and culture for over a generation. From the standpoint of the long haul, Obama is doing the wrong things right now, but he is charged with serving the American people, and what the American people want is a return to “normalcy”. That is his real mandate, and he knows it. This return will never happen. There is a perfect storm of confluences that will prevent it from happening. It is debatable, depending upon your view of life, whether that is a sad fact or not. Almost everything that the Obama administration has been doing is more mortgaging of the future to bail out the Titanic water of the current boat that he was flown in to captain as it was more than halfway sunk.

    Everything your essay argues for is the correct approach, but the pain that people would be expected to endure while these processes played out, according to proper principles of law, would be unendurable for the majority. All of this will not end well if one is attached to the “return to normalcy” that the majority so desperately clings to in these tenuous times.

    One other thought you’ve stimulated in me is a question: if a big mess is created because a group of people have no regard for the rule of law and have flouted it for all-too-long, can it be said that the proper response to cleaning up that big mess is a return to the 100% pure manifestation of that rule of law? By asking this question, I’m not advocating either a yes or no answer. I just wonder.

  2. fredunger

    Good to hear from you Michael.

    As to your question, perfection seems to me to be an ever illusive goal. So holding out for 100% of anything would be a mistake.

    But acknowledgment by those in power that the real strength of our nation has been built on a foundation of law and limited government, as enshrined in our constitution, would sure be a great change that I hope for. Unfortunately I think we will have to await the unquestionable failure of these massive interventions before we will see leaders emerge willing to argue for the end to the overbearing nanny state and the corporate socialism favored by both of the major political parties.

  3. Michael Barrow

    “unquestionable failure of these massive interventions”:

    Yeah, you are right about that. I guess it hasn’t gotten bad enough yet for real change to be demanded by the people. Too bad a drunk has to bottom out and find himself in a dumpster before he starts attending AA meetings. Isn’t that the way it always works with human nature?

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