30 July 2011

"Whom Should the Treasury Department Pay First?"

The Volokh Conspiracy | Russell Korobkin | Whom Should the Treasury Department Pay First?

One approach is to approach the problem like a business or individual that has a serious cash flow problem but isn’t insolvent. This would suggest ordering payments based on how much the government is likely to need particular creditors on an ongoing basis going forward. [...]

If government officials think in terms of which creditors are most important to them personally rather than to the government as an entity (think managers who serve their own interests rather than those of the corporation’s shareholders), the calculus changes drastically, and the question is not how keep the loyalty of the nation’s most important business partners but how to keep the loyalty of the greatest number of voters. [...]

A very different approach would be to allocate incoming revenues based on the principle of equality. Rather than paying some in full and others not at all, this approach would counsel toward paying everyone to whom the government has a moral obligation — as a result of contract, promise, or reasonable reliance on the expectation of payment — the same amount. This approach would lead the government to pay bondholders, social security recipients, Medicare and Medicaid providers, etc. etc. 60% of what they have been promised (they get an IOU for the rest).

A third approach is to pay in order of the recipients’ need. [...]

Yet another approach is to try to pay those with the strongest moral claim to receive money from Uncle Sam first. [...]
There's is another guiding principal you could use which is worth mentioning: the max-min fairness algorithm. Yes, yes, I normally eschew the word "fair," but in this case it is given an actual definition so I'll make an exception.

You line up all the creditors. You pay everybody however much you owe to the person you owe the least. Then you cross that smallest creditor off the list. Then you take the new smallest creditor, and pay them the rest of what they are owed, and pay the same amount to everyone else in line. Cross them off the list. Repeat until you run out of money.

I'm not advocating actually doing it this way, but if "pay everyone 60% of what's due to them" is an option, then this is an option.

This would obviously work easier (better?) for some categories than others — payroll for full-time employees and social security recipients are easy to rank in the necessary way, but how to line up all the creditors who have sold you staplers and trucks and jet engines is more difficult because they haven't done the same things to incur the debt.

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