Sunday, May 3, 2009

How the Government is defaulting private contracts

Per report in today's Sunday Times, the Government 1% levy on life insurance products might be deemed illegal. You can read the details of the saga in the paper - cover of Business section, but the matter is important for several reasons.

First a foremost, governments routinely default on implicit contracts they create with their own citizens. For example, you might naively believe that there is a promise from the state to pay an old-age pension (however meager it might be) in exchange for your social security contribution. Alas, you are wrong. Courts in US, UK, Australia and elsewhere around the world have stated time and again that what we term 'Social Contract' (we pay taxes, they - the Government - provide service) is not a contract at all, hence it cannot be enforced.

Secondly, the Governments are created at least in part to safeguard the legality of private contracts. This is why we have a state-run judiciary. No party to the contract or any third party can alter the conditions of a private contract without consent of the contracting parties. Force majeure conditions apply, but these are extraordinary - reserved for the time of war, arbitrary acts of oppressive regimes etc. You just don't expect these to be a norm in a mature democracy.

Thirdly, what Irish Government is doing with the insurance levy is exactly that - it arbitrarily decided to alter the terms and conditions of the private sector contracts between the insurer and the insured. Nothing less, nothing more.

Gary Becker (of Nobel fame) once started our lecture in Microeconomics by writing words "Theft", "Taxes" on the board and then setting an equation identity: "Theft=Taxes" to illustrate the concept of involuntary exchange. I took this example from him and use it in some of my lectures - as some of you might have witnessed. But from now, we can generalise this beyond the narrow function of the state to collect taxes. Post Supplementary Budget 2009 the new equation should read "Irish Government=Theft" for our Government is now engaged in full-out forcefull conversion of private contracts to its own benefit.

It is a sad day for democracy when the courts become the last line of citizens' defense against the abuse by the State.

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