Quotulatiousness

October 8, 2017

Despite the rhetoric, Trump can’t just “wave goodbye” to Puerto Rico’s debt

Filed under: Government, Politics, USA — Tags: , , , , — Nicholas @ 05:00

Megan McArdle on the financial plight that Puerto Rico was facing even before the hurricane season began:

… the fact remains that Puerto Rico is not going to be able to pay all of its debts. Prior to the hurricane, the territory had $73 billion in outstanding debt, and a population of 3.4 million people. That’s approximately $21,500 for every man, woman and child on the island – just about enough to buy each of them a brand new Mini Cooper, provided that they don’t insist on the sport package or the heated seats.

Puerto Rico couldn’t afford to buy 3.4 million Mini Coopers before; they certainly can’t now that Maria has washed out so many roads. Even before the hurricane, Puerto Rico’s GDP was around $100 billion, meaning that repaying its debt would consume nearly nine months of everything the island earned. And while there will probably be a brief bump in economic activity as disaster relief funds pour in and the destruction is cleared away, over the long term the hurricane represents a huge setback: businesses destroyed, people killed or injured, funds that could be generating economic growth instead diverted to simply replacing what has been lost.

So whatever President Trump does, or does not do, investors in Puerto Rican bonds are going to have to take a substantial haircut. The problem is, we’re not going to wipe out the debt entirely. And even if we could, it wouldn’t be enough to get Puerto Rico back to economic or fiscal health.

“If it’s that bad,” you may be thinking, “surely we ought to simply wipe out the debt holders? After all, they’re investment professionals. They can afford to take the loss; ordinary Puerto Ricans can’t.” The problem is that most of the folks holding Puerto Rico’s debt aren’t vulture hedge funds sitting on wads of ill-gotten gains; the overwhelming majority of the debt is held by ordinary folks who buy bonds or bond funds. Like, say, your parents. Or maybe you. And also, a lot of Puerto Ricans, who would be hit very hard if the value of their investments were wiped out.

How did Puerto Rico get so deeply into debt? Step forward the federal and Puerto Rican governments to take a bow:

The operations of the Puerto Rico Electric Power Authority, for example, defy belief: It essentially gave unlimited free power to municipalities and government-owned entities, which used it to do things like operate skating rinks in the tropics. Everywhere you look, you see signs of a government struggling to perform basic tasks: collect taxes, maintain the infrastructure, improve the health system. In the jargon of development economists, the island lacks “state capacity”: It is simply unable to exert the amount of power over its operations that we on the mainland mostly take for granted.

But you can’t entirely blame the Puerto Rican government for the state of the underlying economy, which is what had plunged the island into a bankruptcy crisis even before the hurricane. For that you have to look to the federal government, which eliminated a tax break that had given companies incentives to locate in Puerto Rico, and then oversaw a financial crisis that sent them into an even deeper spiral. We also made sure that a relatively poor island was forced to adopt the federal minimum wage, which was too high for the local labor market. That has contributed to the 11.5 percent unemployment rate. And Puerto Rico uses the U.S. dollar, leaving it unable to adjust monetary policy to overcome economic stagnation.

Electricity – Wright Brothers – Hip Firing MGs I OUT OF THE TRENCHES

Filed under: Europe, History, Military, USA — Tags: , , , , — Nicholas @ 04:00

The Great War
Published on 7 Oct 2017

Chair of Wisdom Time! This week we talk about the advancements of electricity during the war, the Wright brothers patent wars and hip/shoulder firing MGs. Oh and Italian Spiderman.

Limited liability isn’t magic

Filed under: Economics, Humour, Law — Tags: , — Nicholas @ 03:00

John Hasnas has a Princess Bride problem:

In the much-beloved movie, The Princess Bride, Inigo Montoya has spent his life seeking revenge against Count Rugen, the man who murdered his father. When he finally confronts Count Rugen, he keeps repeating, “Hello. My name is Inigo Montoya. You killed my father. Prepare to die.” Finally, in utter frustration, Count Rugen yells, “Stop saying that!”

I know just how Count Rugen felt.

Everywhere I go, people begin arguments for a wide variety of normative conclusions with the premise, “Corporations have the special privilege of limited liability.” Thus:

  • “Corporations have the special privilege of limited liability; therefore, they have social responsibilities that individuals and other businesses do not.”
  • “Corporations have the special privilege of limited liability; therefore, government regulation is required to level the competitive playing field.”
  • “Corporations have the special privilege of limited liability; therefore, they are obligated to manage their company in the interest of all their stakeholders.”

I encounter this statement in so many contexts, both inside and outside the academy, that, like Count Rugen, I want to yell. “Stop saying that!”

However, in my case, it is not because I fear death, but because the statement is so patently false.

Corporations Do Not Have Limited Liability

Shareholders have limited liability. If a corporation contracts a debt that it does not pay or is found liable for a tort, one hundred percent of its assets are available to satisfy the debt or judgment. If it does not have enough cash on hand to pay what it owes, its creditors may force the firm to liquidate and sell off its physical assets to discharge its debt. The corporation is fully liable for all the debts it incurs and all the torts it commits.

It is the corporation’s shareholders who have limited liability. They are liable to lose one hundred percent of their investment in the firm, but no more. The firm’s creditors may not collect the corporation’s debt or judgment out of the shareholders’ personal wealth. Thus, the shareholders’ liability for the debts of the firm is limited to the size of their investment in the firm.

How to Care for Your Introvert

Filed under: Humour — Tags: , — Nicholas @ 02:00

exurb1a
Published on 26 Sep 2017

Knock knock. Who’s there? Introvert. Introvert who? I’m so sorry to have bothered you, goodbye.

QotD: Excess officers

Filed under: Bureaucracy, Military, Quotations, USA — Tags: , , , — Nicholas @ 01:00

Excess? The German Army of WW II somehow managed to fight off for six years – that, or beat the ever loving crap out of – nearly the whole world with under three percent commissioned officers. Roman legions, perhaps the most formidable fighting machines of human history, got by with six to eight. Six to eight percent? Not on your life; six to eight, period, six military tribunes, a legate, and – arguably – the praefectus castrorum, who was more in the line of a late entry officer, as per the British system. Think about that one, one officer per every eight hundred men. And it was plenty.

What have we got? As of 2013 we had over eleven percent commissioned in the Marine Corps, seventeen percent in the Navy, almost nineteen percent in the Army, and nearly twenty percent of strength being commissioned officers in the Air Force.

The problems with having this many officers are multifold. I can only cover some of the more important ones.

This high a percentage of officers almost certainly means that there are people running around with bars and leaves and even eagles and perhaps stars who probably should have been non-coms. They may have the education and intelligence to be officers, but as a matter of attitude, outlooks, values, and approaches to things, they’d have been happier if they’d been wearing multiple stripes. I used to see a lot of this among lieutenants who decided to go Special Forces. In almost every case I have seen, these were guys who really wanted to be squad leaders which, in SF, they could be. The effect of commissioning so high a percentage of people has tended to be having an NCO corps weaker than it should have been and weaker than it needs to be. This tends to exacerbate another problem, officers will tend to micromanage if they’re allowed to. They will be allowed to, if there is a common perception that the NCO corps needs to be micromanaged, which, because some numbers actually do need to be micromanaged, casts them all in a questionable light in some circles. There’s another reason, one having little or nothing whatsoever to do with NCOs, for that kind of micro-management.

Tom Kratman, “There Are No Bad Regiments…”, Everyjoe.com, 2015-10-12.

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