Belmont Club

Time Bandits

American Interest’s article on the collapsing Rhode Island pension system makes many of the same points featured on past Belmont Club posts. That’s not surprising. The ideas are self-evident. They should occur to anyone.

In particular, it describes how the RI pension system collapsed based on bad information. The predicted payouts were based on unsustainable or unrealistic inflows.  Now its turning out that its promises are hollow and much of the money has in reality already been spent.

But how can this be? The key insight is to realize that the financial industry is the closest thing society has to a working time machine. It routinely creates intertemporal transactions; it moves money across time. It can give you money now on cash income you expect later. It can advance you the value of future incomes.

But it works only for as long as the financial system is true to the physical reality.  Once that correspondence is destroyed, the time machine goes haywire and bad things happen. In the case of Rhode Island the politicians fixed it so that people in the present could stick people in the future with a bill.  Retirees were promised a generous schedule of future payouts, but in fact the benefits largely accrued to people in the present.  It’s a real life example of being a Time Bandit; about how actual people can travel — “virtually” of course — into the future and return with treasures taken from there for consumption in the today.

Rhode Island is one of the bluest states in the country, and one where public sector unions have long worked with sympathetic politicians to create a true blue system of well paid public employees retiring comfortably on generous pensions with cost of living raises automatically thrown in.

The only problem is that the state could never afford the beautiful utopia it was crafting, and so politicians and union leaders chose the path of systemic deceit. Taxpayers weren’t told what the bill for the system would be; public service workers weren’t told that the pension guarantees they’d been sold were worthless because taxpayers would not and could not foot the bill. …

The Ponzi-scheme quality of the retirement system is becoming more and more obvious: current employees have to pay more and more into the system but instead of being set aside to pay their pensions, the money is going to current retirees.

J. Wellington Wimpy understood the process perfectly. “I’ll gladly pay you Tuesday for a hamburger today.” He travels to Tuesday, gets the money for a hamburger and buys it today, when he eats it. Except that when Tuesday comes around, Wimpy might be gone. But he’ll have eaten the hamburger in the meantime. Of course Popeye doesn’t care. He can take the grief.

But the public is now stuck with trillion-dollar hamburger bills. In the RI case, it is stuck with promises — liabilities — it can’t keep. The American Interest quotes Thomas Carlyle on the revenge of the truth upon people who’ve relied on the lie.

Great is Bankruptcy: the great bottomless gulf into which all Falsehoods, public and private, do sink, disappearing; whither, from the first origin of them, they were all doomed. For Nature is true and not a lie. No lie you can speak or act but it will come, after longer or shorter circulation, like a Bill drawn on Nature’s Reality, and be presented there for payment, — with the answer, No effects. Pity only that it often had so long a circulation: that the original forger were so seldom he who bore the final smart of it! Lies, and the burden of evil they bring, are passed on; shifted from back to back, and from rank to rank; and so land ultimately on the dumb lowest rank, who with spade and mattock, with sore heart and empty wallet, daily come in contact with reality, and can pass the cheat no further.

One solution is to tell a further lie. “I’ll pay you next, next Tuesday for a hamburger today.” Raise the debt limit. Give me more money and let me raise the taxes. But when you do the sums it turns out that people are spending more than they can possibly collect. At that point you may be called a Tea Party terrorist because you’ve discovered the rigged nature of the game.

The Time Bandit problem would not have happened without the alliance of finance with government. Without the money Time Machine government could never have looted the future.  The advances of modern finance were the key technological breakthrough that enabled such monstrous and useless organizations like the EU to rise up.

This fact fundamentally illustrates why “giving government more power over the banks” may never work. It doesn’t solve the moral hazard because government is the chief abuser of the magic intertemporal deficit machine. Put them in charge of the Time Machine and nothing may change.

The only group with a real interest in an honest Time Machine is the taxpayer. Why? Because they’re going to pay for the hamburger. They’ll be the first to know if Wimpy doesn’t come across Tuesday. The voters and taxpayers represent the political system at the most fundamental level. They, not the bureaucracy, are the principals. It is in the broad political system’s interest to control the financial system and see to it that it is used for the proper purpose: to smooth out intertemporal flows; not to distort it.

But why should it be in anyone’s interest to limit the power of government. Because negative acts are often useful. To limit the scope of what the money Time Machine can do and government’s access to it is like implementing one of those firing interrupts on the B-29 turrets which disable the defensive guns when they line up with the wings or tail. They keep you from shooting yourself down.

Government can never be entrusted to make all the rules. There are certain meta-rules to which it must itself be subject. Otherwise the incentive to lie and the incentive to loot the future becomes too great for even the moral giants of both the Republican and Democratic parties to resist. So when Maxine Waters says the President should throw a trillion dollars at jobs by essentially borrowing it from the future the answer should be ‘no’. The account of the fictional Time Traveler come to mind:

At first, I pushed the lever forward very slightly… …and the laboratory grew faint around me. I stopped. No change. Everything exactly as before. No! The clock said : when I started, and now it was… : ? And the candle, shorter by inches. Yet by my watch, which was with me, only a few seconds had passed. It was disconcerting to see the sun arc in less than a minute. To see a snail race by. Flowers flinging wide their petals to embrace the day. The hours speeding across my sundial. Flowers closing their eyes for the night. It was wonderful! …

What if I went faster? It became intoxicating. I pushed the lever on toward even greater speed.

And so the Time Traveler sped on, but still no J. Wellington Wimpy.

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