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Compensation for Catastrophic Damage- Who Pays and Who Recovers.

May 11, 2011

The post below replaces my previous post. It is a revision of a Diary submission in the Daily Kos entitled Who Pays?”.

Given the recent news regarding the spate of catastrophes that have occurred around the world one may wonder, who pays for the costs incurred from these tragedies and who recovers. Why we pay, of course, you and me. Who are we? Some would call us the “Taxpayers”.

But, who get’s paid?

Often, those who tend to refer to the rest of us as the “taxpayers” and not “people” or “citizens” try to persuade us not to pay through a government program, since ultimately we are paying to compensate our fellow citizens for their distress and some of us who do not want to do so should have the freedom to opt out. What is also likely, is that because of the debilitating impact these catastrophes have on our economies, we will be urged also to agree to eliminate what we and our fellow citizens have relied upon for our welfare, our education, our health and yes, even our jobs to help pay for what little we finally do contribute. So be it. (See Trenz Pruca’s Journal for a discussion of the impacts of catastrophes on the economy and financing costs in general)

On the other hand, if our collective funds are not used to fully compensate the victims of catastrophe, and if we give up our desire for programs that benefit our common welfare, well, we all suffer together as a society, right? Wrong, there is a group who almost always gets paid in full. Who is it that always gets paid? Well, if truth be known, usually only the creditors get all their money back.

It has recently been reported that the Japanese government has ordered the operator of the damaged nuclear plant to pay each family displaced by the catastrophe about $12,000.

As could be expected, the people who lost their home complain that it is not enough to compensate them for the damages they suffered. Ultimately, alas the bigger concern may be will they ever receive even this supposedly inadequate compensation, or for that matter any other compensation for the damages they suffered.

One safely can assume, that in all likelihood before any money reaches the injured parties, the company or companies who constructed or operated the plants will claim they do not have the resources to fund programs of this size (after all they have to first pay off their creditors), as a result the government will probably agree to pick up the tab, then spend years trying to figure out how to do so, ultimately abandoning the program under pressure from the bond rating agencies, the business community and the conservative press claiming the nation is accumulating too much debt.

It is interesting to note how much easier it is today for a government to abandon its promises to its people but not to its creditors. In a usually vain attempt to maintain its all important bond rating and to protect the value of the capital and rate of return to the bond holders, a government will forgo its responsibilities for educating its people, or attending to their health and welfare in an often vain effort to pay off its creditors.

It is commonly argued, by those that have the most to gain, that if one does not pay off the nation’s creditors before attending to the needs of its citizens, a nation risks increasing the future cost of borrowing money for needed governmental operations. However, I expect that the supposedly low-cost of borrowing by a nation merely reflects the subsidies those governments grant to the prospective lenders in terms of, guarantees, bailouts and the host of other handouts government provides directly or indirectly to the financial industry.

It other words, the same “free market” that the financial industries and their mouthpieces, the neoclassical economists, claim are essential for a health economy, is violated by the current system of lending to nation states. I believe, if the nation states would stop subsidizing the financial industry, the cost of borrowing for those states would find its proper and efficient level through the market. I suspect that in that case, competition among the financial institutions for nation-state customers would keep the costs of borrowing lower than the bond vigilantes claim. Anyway, what is wrong with giving the financial industry a taste of competition that they so assiduously impose on the rest of us?

In Ireland, Portugal of Greece it, so far, has made no difference to the downward spiral of their economies, and the pain and suffering of their citizens whether they accept or reject the conditions imposed on them in the so-called bailouts.
If that is so, then why in heaven’s name would their governments shackle their people to penury in order to preserve the return on capital to some bankers and investors in Germany, Switzerland, England or New York?

Note: A perceptive commentor on my Daily Kos Diary, in his own posts published on that blog has made some insightful observations and analyses of the Greek debt crisis.

Before the IMF and EU had to step in with a bailout, interest rates on Greek bonds were pricing in default and by now they are totally untethered from any mathematical analysis of the Greek situation. Some 2-year notes are giving yields of 20%. In other words, market psychology is the dominant factor in determining interest rates. It’s simply amazing that Greece can have the same financial situation in January as it does in April, and yet the reactions to its problems are totally different. Greece sold over 5 billion of 10 year notes at 5.9% in February of 2010. Keynes said the market can remain irrational longer than one can remain solvent. In economics, this situation may be called “an ideological litmus test for adherence to the Efficient Market Hypothesis.” (Link)

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For related posts see Daily Kos at Catastrophic Thoughts?,The Problem with Economics Today Update and The Problem with Economics Today – Second Update and see also, Trenz Pruca’s Journal, Critique of Classical Economics, Economic Democracy and Signs and Portents.

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The goal of every business enterprise is not to maximize profit but to separate risk from reward. Trenz Pruca’s Journal.

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Quotations to ponder or ponderous quotations.

Democracy is when the indigent, and not the men of property, are the rulers. ~Aristotle

A business that makes nothing but money is a poor business.
~Henry Ford

Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains.
Thomas Jefferson

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2 Comments
  1. Hi, thanks for putting me on the blog roll. Btw.: there’s an “o” in Catastrophic in the headline that should mutate to an “a” …
    (That comment need not be published, just the easiest way to message you).
    Was impressed with the events in the White House. It doesn’t mention Hillary was called at such short notice she had to cover she forgot her dentures? 🙂

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