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Violating the Rule of Law Without Violating Any Laws

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Todd Zywicki:

The close relationship between the rule of law and the enforceability of contracts, especially credit contracts, was well understood by the Framers of the U.S. Constitution. A primary reason they wanted it was the desire to escape the economic chaos spawned by debtor-friendly state laws during the period of the Articles of Confederation. Hence the Contracts Clause of Article V of the Constitution [sic! Seriously, you think that the framers threw a restriction on state governments’ authority to impair the obligation of contracts…in the section dealing with constitutional amendments? Might you want to look that up?], which prohibited states from interfering with the obligation to pay debts. Hence also the Bankruptcy Clause of Article I, Section 8, which delegated to the federal government the sole authority to enact “uniform laws on the subject of bankruptcies.”

This would seems to be a roundabout way of saying that the Obama bankruptcy plan somehow violates the “rule of law” without violating any, er, laws. The framers could have stopped the federal government from “impairing the obligation of contracts.” They didn’t. And even if Zywicki doesn’t know where to find the contracts clause you’ll note if you read carefully that he doesn’t actually claim otherwise.

This isn’t to say that there aren’t serious public policy concerns with the bailout. Unlike the other two Detroit companies, whose product has (for understandable reasons) become if anything somewhat underrated, Chrysler’s product line is genuinely horrible, not only skewed towards anachronistic gas-guzzlers but not even making good cars in those categories. And Fiat seems not much better. And (without endorsing most of the rest of what he says) I also agree that there are real problems with keeping a zombie Chrysler alive to cannibalize market share from the two potentially viable American auto companies. The economic context (and the supply problems that would result) makes it more difficult than it would otherwise be, but there are good arguments against the bailout.

But the good argument is just that: a policy argument. The Obama policy doesn’t violate the “rule of law,” and the government subsidies that have propped up the value of what the company would get in a liquidation make arguments about sacrosanct contracts or “distribution” moot. If the government pays the piper it call the tune. (And talk to me about the UAW getting too much of a break after you start talking about the violations in the “rule of law” inherent in much larger direct subsidies to inept banksters that would otherwise be out of a job.)

…see also here.

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