Normally, when you slide deep into debt, you reach a point where your IOU's become worthless because nobody believes you'll repay them. That's why so many consumers these days have lousy credit ratings. And also why, given America's huge budget and trade deficits, the U.S. dollar has been dropping relative to foreign currencies.
The other thing that happens as you slide deep into debt is your creditors start repossessing what you've bought. Banks foreclose on houses, lenders repossess things like cars and dining-room tables. It's happening all over America, at a record pace.
Same with companies. The creditors of debt-ridden US Airways may well take over its assets -- its planes, terminals, and landing slots -- and sell them off to the highest bidder. It's called "liquidation."
There were about 1.6 million personal bankruptcies last year -- a new high. Meanwhile, more and more companies are using the threat of bankruptcy as a business strategy to cut payroll costs. They warn their employees that unless they agree to wage and benefit cuts, financial creditors will liquidate the company. And once in bankruptcy, companies are whacking away at pensions and health benefits. US Airways just started out its second bankruptcy by seeking to skip a $110 million contribution to its employee pension plan. United, another troubled airline, says it may default on pension obligations.
But wait a second. Aren't employees with contracts for certain wages and benefits also creditors? A company that renegs on paying them what's owed, or refuses to make pension contributions or provide the health insurance it's agreed to, is breaking a promise. It's no less a broken promise than failing to pay financial lenders what's owed.
Of course, promises to employees can be broken far more easily. After all, financial creditors who don't get paid have a right to sell the company assets. They can also write off their losses and get a tax break. Employees don't have these alternatives. The endgame for them is they lose their jobs, which is usually a far bigger hardship.
But tell me: Why shouldn't bankruptcy laws be changed so employees have a higher priority in bankruptcy than financial creditors? That way, if worse comes to worst and the business is liquidated, employees -- whose labor helped build it -- take home some of the value of those company assets. Think of it as a kind of severance pay.
Robert B. Reich is co-founder of The American Prospect.
