September 29, 2011
September 8, 2011
Don't be shocked if Obama plan increases U.S. debt
"Everything in this bill will be paid for. Everything," says President Obama. Perhaps it won't shock you if this turns out to be wrong.
The job of paying or not paying for things will almost certainly be left up to the joint panel known as the supercommittee, which faces a Nov. 23 deadline. But Obama kept saying to Congress, you should pass this stimulus now. And there is a decent chance that the Republican-flavored components of the Obama plan will be passed by the full Congress in the next few weeks.
UPDATE: cf. Eric Cantor's comments here (WP) on tax cuts, reforming regulation. "We could do these right away."
Extend and expand the payroll tax cut. Give tax credits to companies that hire the unemployed. Throw in some public infrastructure spending and you could get a $300 billion or $400 billion stimulus passed by Congress and signed in to law by mid October. Then you tell the supercommitee: OK, go pay for it with future program cuts and tax increases.
And what are the chances of that? Given what we saw this summer it seems highly likely that the supercommitee will fail to get a deal by Thanksgivingl, setting off the $1.2 trillion "trigger" of automatic spending cuts. That's a decent amount of reduction in projected spending, but wouldn't pay for the Son of Stimulus proposed tonight by the president. He's asking the supercommitee to make its cuts required in this summer's debt-ceiling pact and then pay for the new stimulus on top of that.
There seems to be at least a better-than-even chance that tax cuts will be extended and expanded -- and then we'll return to gridlock, with the long-term fiscal situation looking even worse.
September 7, 2011
Ruppersberger's fund for U.S. debt-reduction gifts
Rep. Dutch Ruppersberger said yesterday he'll introduce a bill to set up a separate federal fund to protect donations from people who give the government more than they owe in taxes to reduce the federal debt. It's a quaint idea for a noble-hearted but quaint practice. According to Ruppersberger's press release, people make donations averaging $500 almost every day to pay down the federal debt, which now is pushing toward $15 trillion. But the checks are deposited in the Treasury's general fund, where they could be spent on a bridge to nowhere or anything else.
The idea of sequestering debt-reduction dollars is appealing, just like the "lock box" for the Social Security trust fund. It's nice to know that dollars with "my" name on them are being spent on what I intended. But money is fungible. A dollar in Washington is a dollar in Washington no matter what account it's in. Congress negates debt-reduction donations with new deficit spending every day. Perhaps Ruppersberger's Restoring Integrity to Public Debt Donations Act would encourage more donations and thus marginally reduce the national debt that way.
But any genuine debt reduction will require the force of tax and spending law passed by Congress, a much tougher proposition.
UPDATE: Ruppersberger Press Secretary Jaime Lennon says:
Hi Jay – just a quick correction to your blog item. Donations on average are UNDER $500, many are much less. Some people donate spare change. Also, there isn’t a box you can check on your tax return to donate. Citizens send in checks to the Bureau of Public Debt or can make donations via the bureau’s website.
The point of the bill isn’t to encourage donations – just to make sure the donations are used for their intended purpose. I am sure the patriotic Americans who donate their hard-earned money to this cause don’t see this bill as purely symbolic!
August 1, 2011
Congress left the hard work to triggers, the future
I'm trying to figure out what the debt deal means for Maryland, which is more dependent than almost any other state on federal spending. A lot of the cuts look back-end loaded, meaning they wouldn't take effect for years. And the cuts as now written are very defense heavy, which would hurt borth Maryland and Virginia but might hurt Virginia more.
I urge anybody trying to understand this to read Ezra Klein's brilliant analysis at the WP, published near midnight last night. Both sides avoided making hard choices but left a default mechanism in place that would impose both effective tax increases and large spending cuts later if nothing else is done. Both sides basically imposed Schelling-esque precommitment to strengthen backbones when the time comes to really negotiate. But that doesn't mean future negotiation will happen. Klein:
Perhaps this deal signals the end of the need to actually reach an agreement, however. If the Joint Committee fails, the trigger begins cutting spending. If negotiations over taxes fail, the Bush tax cuts expire and revenues rise by $3.6 trillion. Neither scenario is anyone’s first choice on policy grounds. But you can get to both scenarios without Republicans explicitly conceding to higher taxes or Democrats explicitly conceding to entitlement cuts in the absence of higher taxes. Politically, that’s the lowest-common denominator, and that might mean it’s also the only deal the two parties can actually make. But that’s because it’s the only deal that doesn’t require, well, making a deal.
July 29, 2011
McArdle: Obama bluffing on veto threat
I'll start by saying, however, that I have no idea whether we'll get a deal or not. There is one thing I'm sure of: Obama is indeed bluffing with the veto threat, and badly. They could send him a repeal of Obamacare attached to a debt ceiling increase, and he'd sign it. He is not going to endanger our credit rating, or social security checks, in order to prove a point.
July 28, 2011
Future historians ask: Why was Congress so stupid?
Dan Drezner tries to explain to future, post-apocalyptic historians how the world's most powerful country made an entirely optional, catastrophic decision. He wrote this July 17. It seems even more apropos this evening. When he says "human beings," of course, he's talking about certain Republicans of the Tea Party persuasion.
Why, why did these human beings maintain these beliefs in the face of massive evidence to the contrary? Why did these people continue to insist that default wasn't that big a deal when Federal Reserve Chairman Benjamin Bernanke (a Republican first appointed by Republican president George W. Bush) insisted that there would be a "huge financial calamity" if the debt ceiling wasn't raised? Why did their belief persist when Moody's, Standard & Poor's, and Fitch Ratings all explicitly and repeatedly warned of serious and expensive debt downgrades if the ceiling wasn't raised?
Why did they stick to their guns despite news reports detailing the link between the rating of federal government debt and the debt of states and municipalities? Why did they stand firm despite the consensus of the Republican Governors Association and the Democrat Governors Association that a failure to raise the debt ceiling would be "catastrophic"? Why did they refuse to yield despite bipartisan analysis explaining the very, very bad consequences of no agreement, and nonpartisan analysis explaining the horrific foreign policy consequences of American default? Why did they not understand that even a technical default would cost hundreds of billions of dollars**, thereby making their stated goal of debt reduction even harder?
Most mysteriously, why did these people throw their steering wheel out the window despite witnessing the effect of the 2008 Lehman Brothers collapse, which revealed the complex interconectedness of financial markets?
July 27, 2011
John McCain says do a debt ceiling deal
“It’s time we listened to the markets,” he said. “It’s time we listened to our constituents. But most of all, it’s time we listened to the American people and sit down and seriously negotiate something.”
July 19, 2011
Theory: Geezers want government debt default
From an article by Ali Alichi of the International Monetary Fund. The title: Geriatric Deadbeats:
Studies have shown that a country's willingness to repay is as important as whether it has the resources to repay. This willingness deteriorates as voters age because they have a shorter period to benefit from their country's access to international capital markets and become more likely to opt for default on current debt. Moreover, older voters generally benefit more from public resources—such as pension and health care benefits—which could shrink if debt is repaid. If the old are a majority, they might force default, even if it is not optimal for the country as a whole.
The idea is that, consciously or not, senior citizens realize they have less to lose and more to gain from an unsustainable increase in their country's debt. Seniors typically enjoy more government benefits than younger folks, so they favor continued borrowing to keep this up. And they're not going to live as long as their children, so they're less worried about the long-term consequences of overborrowing and eventual default.
HT Big Picture.
July 13, 2011
Martin Wolf: It's simple. Taxes must rise
Martin Wolf, chief economics commentator for the Financial Times, is hardly a wild-eyed socialist. He was once influenced by influenced by Hayek's Road to Serfdom, which has become a bible for some Tea Partiers, although he seems to have moved back to the middle. From his point of view the U.S. budget situation (paywall) is not that complicated, nor is the solution.
The astonishing feature of the federal fiscal position is that revenues are forecast to be a mere 14.4 per cent of GDP in 2011, far below their postwar average of close to 18 per cent. Individual income tax is forecast to be a mere 6.3 per cent of GDP in 2011. This non-American cannot understand what the fuss is about: in 1988, at the end of Ronald Reagan’s term, receipts were 18.2 per cent of GDP. Tax revenue has to rise substantially if the deficit is to close.
July 5, 2011
Wolf: US default would create biggest crisis ever
This is a year old, but it still holds up as a sobering, scary economic and political analysis of the debt showdown in Washington. From Martin Wolf, the Financial Times' chief economics commentator:
Moreover, since the Republicans have no interest in doing anything sensible, the Democrats will gain nothing from trying to do much either. That is the lesson Democrats have to draw from the Clinton era’s successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts. In practice, then, nothing will be done.
Indeed, nothing may be done even if a genuine fiscal crisis were to emerge. According to my friend, Bruce Bartlett, a highly informed, if jaundiced, observer, some “conservatives” (in truth, extreme radicals) think a federal default would be an effective way to bring public spending they detest under control. It should be noted, in passing, that a federal default would surely create the biggest financial crisis in world economic history.
May 24, 2011
To dream the impossible budget dream
Slate's Jacob Weisberg gets snarky.
Like the White Queen in her youth, the contemporary Republican politician must be capable of believing as many as six impossible things before breakfast. Foremost among these is the claim that it is possible to balance the federal budget without raising taxes.
"Let me see: Four times five is twelve, and four times six is thirteen, and four times seven is -- oh dear! I shall never get to twenty at that rate!"
May 12, 2011
Just cut the deficit, dammit
Which of course means raising taxes and cutting spending. Here's is Megan McArdle's gloss on her Atlantic column on Pimco's Bill Gross, who famously said he's bailing from Treasuries. He doesn't believe tax increases or spending cuts are catastrophic, or at least not as bad as the alternative. (He's also the guy who said America's invasion of Iraq put us in danger of losing a piece of our soul. So he has many sensible statements to his credit.)
Cutting the deficit will involve tax increases and spending cuts. But few in either party can admit that. McArdle:
But over the longer term, of course, he's [Gross] worried about the deficit. But unlike many deficit hawks, he doesn't care how we close it. I asked him specifically whether he though it mattered whether we closed the deficit using tax hikes or spending cuts, and though he said he personally thinks we ought to raise taxes on people like him, he professed himself basically indifferent between higher taxes or lower spending--he doesn't think that the economic effects of one are obviously worse than the other.
Keep that in mind when you hear people arguing about austerity:. People like Bill Gross are the ones we ultimately need to convince, because they're the ones whose defection will precipitate a crisis. And he's not buying either supply-side claims that tax hikes will cause disaster, or the super-Keynesian argument that we can't cut spending because the economy will contract so fast that we'll actually end up with a bigger deficit. All he cares about is the math: do the numbers add up, or not?
The new millionaires: Retired baby boomers
So calculates John Cogan in the WSJ. Thanks, Generations X and Y and Millennials!
...the typical husband and wife who reach age 66 and qualify for Social Security. Starting next year, this typical couple, receiving the average benefit, will begin collecting a combination of cash and health-care entitlement benefits that will total $1 million over their remaining expected lifetime.
According to my calculations based on government data, such married couples will begin receiving monthly Social Security checks that will, on average, total about $550,000 after inflation. They will receive health-care services paid for by Medicare that, on average, will total another $450,000 after inflation. The benefactors will be a generation of younger workers who are trying to support themselves and their families while paying taxes to finance the rest of government spending.
We cannot even remotely afford to make good on these promised benefits.
May 4, 2011
Counting to a trillion: Think eons, ages, epochs
The national debt is $14 trillion. That is a lot of money. Even a trillion is a lot of money. I learned how much after reading this calculation by former math teacher Edward Hopkins, husband of my colleague Jamie Smith Hopkins. You could win trillions of bar bets by asking: How long would it take to count to a trillion?
How much is a trillion?
It's not easy to understand large numbers like billions and trillions, yet we hear about them all the time when people are discussing the economy.
What would happen if you tried to count to one trillion out loud?
Assuming five syllables per second and accounting for the fact that larger numbers have more syllables, I came up with an estimate.
Counting to 10 will take two seconds.
April 18, 2011
Ritholtz: S&P contributed to Treasury downgrade
If ever there was an organization more corrupt, incompetent, and less capable of issuing an intelligent analysis on debt than S&P, I am unaware of them. Why do I write this?
A huge part of the reason the US is in its awful financial position is due to the fine work of S&P.
Consider what Nobel Laurelate Joseph Stiglitz, economics professor at Columbia University in New York observed:
“I view the ratings agencies as one of the key culprits. They were the party that performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.”
February 16, 2011
F-35 vote gives Tea Partiers deficit-cutting cred
From the NYT:
WASHINGTON — In a sign that some freshman Republicans were willing to cut military spending, the House voted 233-198 on Wednesday to cancel an alternate fighter jet engine that the Bush and Obama administrations had tried to kill for the last five years.
The vote marked another instance in which some of the new legislators, including members of the Tea Party, broke ranks with the House speaker, John A. Boehner, a Republican from Ohio, where the engine provided more than 1,000 jobs.
There are also encouraging amendments from southern and western Republicans that would cut some types of ethanol welfare. Now if Republicans could also slash Medicare while they're at it, they might gain some credibility as people who really want to save the country from insolvency. (You can't cut the deficit without cutting Medicare, but nobody will admit this.)
Then if they could cancel the Bush income-tax cuts for the rich and also OK a national sales tax to take effect in 2015... Oops. Got carried away.
(Ending crippling deficits without canceling the enormously popular Medicare program requires big spending cuts AND modest tax increases, but Republicans won't admit this, either.)
February 11, 2011
New evidence of Republican cognitive dissonance
Entitlements, especially Medicare, are the biggest threat to U.S. fiscal solvency. Cutting the budget without paring Medicare and rationalizing Social Security will do next-to nothing to fix the country's problems. Even if taxes are raised -- and they will be -- big adjustments must be made to Medicare if the country is to avoid the worst.
But Republicans refuse to acknowledge this. The leadership knows it but won't state it publicly because Medicare is so popular. Some of the biggest opposition to Obamacare -- the evidence showed up in my emails, among other places -- came from seniors who were afraid a new government entitlement would jeopardize their government entitlement. And the Republican base doesn't get it.
This is from the American Enterprise Institute, the conservative think tank. When self-identified conservatives -- Fox News and talk radio fans, rock-ribbed enthusiasts for low taxes -- were asked how to fix the deficit, only 3 percent mentioned Medicare and Social Security.
Do you think the message is getting through to voters that entitlement reform is a critical part of long-term deficit reduction? If you answer “nope,” you’re right. Conservative voters—the ones who sent a large, fresh crop of Republicans to Washington to cut spending—still don’t quite get deficit control... That was pretty revealing. Social Security and Medicare will drive our long-term structural deficits and crush our economy along the way. But even though the issue is getting some play in the media, it doesn’t seem to be getting through to the grassroots.
Or to the leadership, which is happy to yap on about socialism to gain seats but seems intent on doing nothing about fixing socialized medicine for seniors.
January 21, 2011
O'Malley pension & retiree health fix is modest
While some states are talking about throwing out traditional, "defined benefit" pensions altogether for state employees, O'Malley would preserve the bulk of the present setup. While some talk about switching state employees entirely to a 401(k)-like, "defined contribution" plan -- the kind that is common in the private sector, that doesn't guarantee a specific benefit -- I see no indication from the online material that O'Malley is talking about beefing up these supplemental programs -- which already exist for state employees -- to take the place of a traditional pension.
More on this next week, but here are a few thoughts. (Your mileage may vary, depending on exactly which plan you're in. These proposals appear to apply to "teachers/employees" generally, but there will be a lot of fine print.)
-- Participants in the system -- retired and current -- should get ready to pay more for prescription drugs.
-- The pension system would keep benefits for current retirees. For vested employees (with at least 5 years service) the compensation on which pension would be based would stay at the highest three years. For unvested employees and new hires it would rise to 5 years.
-- Current employees would retain benefits earned to date. For for future service they would have to choose between higher contributions or a lower multiplier.
-- O'Malley's goal is to achieve 80 percent funding for pensions (it's now in the 60% range) by 2023. This is a modest goal, perhaps too modest. It could be achieved more easily with a stock market rebound, but that's a crapshoot. The proposed changes to retiree health care would cut unfunded liability about in half, to $9 billion. But that's still $9 billion of unfunded commitments for state taxpayers.
-- This could be an important change for the Teachers' & Employees' Pension System, but it applies only to new hires: "Retiree compounded COLA capped at 3% if system achieves or exceeds its investment return target in prior year; 1% for years when rate of return is not achieved." COLA is the cost-of-living adjustment for inflation. If inflation takes off in coming decades, state retirees could see pensions fall behind the cost of living.
-- What about the governor's pension plan and that of the General Assembly? The governor's handouts say that, for these elected officials, "compensation commissions to review pensions." Will they share the pain?
O'Malley's pension reforms start to emerge
Annie Linskey reports on Gov. O'Malley's budget, including efforts to fill big holes in pension and health-care obligations for state employees. Details are supposed to emerge later today, but she says O'Malley will propose raising the retirement age for new employees and increased contributions from existing employees. He'll also propose "deep cuts to health care," which possibly includes retiree health care since retirees basically get the same plan as active employees.
Unclear what "raising the retirement age" means. Under current rules for the teachers and employees retirement system, you can retire at 55 if you have at least 15 years of service, and you can retire anytime if you have 30 years of service. Or you can retire at 62 with five years of service. Of course the size of the pension depends on the years of service.
Of course states and localities across the country are paring pension benefits. Here is HuffPost's summary of what Illinois did. See how O'Malley's plan stacks up against this:
The bill enacts many major changes to 13 of the state's pension systems that reformers have long sought. It creates what has been called a "two-tier" system, where current employees keep their existing pension plans, but new hires will join a tighter new system. They will not be able to retire with full benefits until age 67. The maximum salary on which their pension can be based is capped at $106,800. Their payout will be based on their highest salary during eight consecutive years of the last ten.
"Double-dipping," where a government employee retires, is re-hired by the government elsewhere, retires again, and collects two pensions, is officially ended as well.
January 12, 2011
Pearlstein: Public unions' day of reckoning is here
The Washington Post's Steve Pearlstein says government-employee unions need to get real.
To preserve health benefits for retirees, active workers will need to accept greater cost sharing on their health insurance policies, which will not only reduce the cost to government in the short run but slow the growth in premiums for everyone over the long haul.
And on pensions, the unions ought to get real about the dismal state of their defined-benefit plans and use their assets to finance a new arrangement. Start with enrolling government workers in Social Security. Supplement that with a defined-contribution plan that could be taken to a new job, would give workers some flexibility in how their pension money was invested and would automatically be converted into a fixed-benefit annuity upon retirement.
November 30, 2010
Anybody got a good history of federal pay raises?
Prompted by Paul West's story in today's paper and Anirban Basu's comments therein, I'm trying to find statistics on federal civilian pay over the last decade. What are the aggregate costs for each year? What are the raises awarded to General Schedule employees each year? What are costs/increases for wages and salaries only and what are they if benefits are included?
No luck so far. Can't find anything at OPM or CBO. The Labor Department's Employment Cost Index doesn't include federal employees. I want to compare raises for the federal sector over the last decade with those in the private sector. Anybody got ideas?
November 12, 2010
Kill or reduce the mortgage deduction -- but not yet
If the Tea Partiers and Paul Krugman both hate the deficit reduction plan, it must have something going for it. Good to see the commission take aim at the mortgage-interest deduction, which distorts the housing market, deprives the Treasury of more than $100 billion in annual revenue and hurts the environment. Allowing mortgage-interest deductions gives incentives for people to buy bigger houses than they need, increasing energy use, hurting smart growth and chewing up open space.
The problem with attacking the mortgage deduction now is the same problem that exists with any deficit-reduction action: The economy is terrible. Unemployment is more than 9 percent. It's unlikely to fall very quickly. And any attempts to cut the deficit -- be they tax increases or spending cuts -- will impede a recovery. Reducing the mortgage deduction would impair the process of clearing all these unsold homes off the market. I suspect political momentum to deal with deficits will still exist after the 2012 elections. That might be the more-appropriate time to take action.
October 15, 2010
Finally, a little substance on pensions
In yesterday's debate O'Malley and Ehrlich offered a little more information on how they would/wouldn't fix Maryland's pension problem. Ehrlich said he would shift new state employees away from the traditional pension, which has a multibillion-dollar unfunded shortfall. O'Malley said he opposed such a move. As I said, a little. But, as with Ehrlich's statement on how he would finance the cut in the sales tax, give the former governor credit for giving voters information on how he would handle one of the tough choices of governing.
Ehrlich said he would move the state away from traditional pensions of defined benefits for new employees, while preserving the existing system for current employees. He said suburbs would have to shoulder some of the pension burden for teachers — a shift he said would need to be undertaken slowly and carefully.
O'Malley said he would wait for a report from a commission studying the pension issue. After the debate, the governor reiterated that he does not favor defined contributions such as 401(k) and predicted that a "mix" of ideas would be needed to preserve the pension system.
October 12, 2010
What O'Malley, Ehrlich say about fixing pensions
Today's column is about Maryland's big pension problem and how the gubernatorial candidates aren't talking about it. I asked both O'Malley and Ehrlich for their thoughts on how to solve the pension difficulties. Here are the complete responses below. Neither candidate proposes specific remedies.
Pension obligations are a serious threat to Maryland’s long-term fiscal solvency. Our state has only about 65% of the funds needed to meet the current $33 billion in obligations to retirees.
Bond rating analysts recently called Maryland’s depleted retirement system a “credit challenge.” At current trends, Maryland’s teacher pension costs will soon outstrip the state’s current spending for the entire higher education system. There is no question that reforms are needed for the state to remain solvent, for our economy to improve, and for taxpayers and beneficiaries to be treated with fairness.
Sadly, politicians in Annapolis have done nothing in four years to fix the problem. In fact, they’ve delayed a task force report on pension reform until 2011 – five years after it was created.
If elected Governor, I will introduce bipartisan pension reform in the General Assembly. The measure I’ll support will have to be fair to the retirees receiving benefits and to the taxpayers financing the system. We cannot break our obligations to the state employees who have worked in good faith and accrued benefits under the current system.
I know this will not be easy, and I am prepared for serious discussions with the legislature about the fiscally responsible way forward. Most importantly, I believe all sides in this debate should be given equal consideration before a final proposal is enacted.
Many states are facing identical issues, and Maryland will be part of the discussion at the national level about creative solutions and best practices. Since my Secretary of the Department of Budget and Management and other gubernatorial appointees sit on the Board of the State Retirement Agency, we will be involved intimately with the SRA’s proposals for the future.
I am committed to finding the bipartisan way forward for the sake of Maryland’s fiscal solvency. My opponent has yet to make the same commitment.
O'Malley, being channeled by spokesman Rick Abbruzzese:
Maryland’s situation with regard to unfunded pension and other post-employment benefits liabilities is not unique. As a recent report by the Pew Center on the States indicates, only four states have fully funded pension systems and only two states have fifty percent or more of the assets needed to fund their other post retirement benefit liabilities. Our challenge in Maryland is meeting our commitments to State retirees and employees in a manner that is financially sustainable for our state and fair to our state employees.
It is important for our State retirees to know that their pensions are secure. Governor O’Malley has demonstrated his commitment to adequate funding of the pension system by fully funding the contribution rates certified by the State Retirement and Pension System in all four of the budgets he proposed. During his four year term, the State of Maryland dedicated about $5.5 billion to retirement and pension costs for public school teachers and State employees. While the national recession has forced the State to implement cumulative spending reductions totaling more than $5.6 billion over the last four years, the State has never withheld scheduled payments to the pension system. In contrast, the Governors of Virginia and New Jersey both proposed skipping pension payments during fiscal 2010 in light of the financial burdens they faced.
It the next term, developing a comprehensive solution to our long-term pension and post-retirement liabilities will be a top priority, but we must do so through a process that involves all stakeholders. To that end, the President of the Senate, Speaker of the House, and Governor O’Malley recently appointed members of the new Public Employees’ and Retirees’ Benefit Sustainability Commission. The Commission is charged with reviewing and making recommendations concerning State-funded benefits and pensions for State and public education employees and retirees in Maryland, including long-term costs, sustainability of State-only funding, and cost-sharing proposals. Commission members represent some of the State’s leading experts on fiscal, public employee, and financial investment matters, and include a former Speaker of the House as chair. The Commission is expected to issue its report later this year.
It’s important to note that because of the initial steps we have take to address pension liabilities and other post-employment benefits, Maryland continues to enjoy a strong reputation for a willingness and ability to act in a fiscally responsible fashion when faced with budget challenges. Maryland remains one of only eight states to hold a AAA bond rating certified by all three bond rating agencies. In reaffirming Maryland’s AAA status in July 2010, the rating agencies highlighted our: “…well-defined financial management policies and (a) commitment to reserves despite budget challenges” (Standard and Poor’s), our “…strong financial management” (Moody’s); and our“…commitment to maintaining budgetary balance.” (Fitch).
September 16, 2010
How to fix the state pension crisis
Here is a terrific idea (free registration required) from Joshua Rauh and Robert Novy-Marx, published in the online journal, The Economists' Voice. The state and local pension crisis is caused by 1) Generous promises of pension and retiree benefits made by states to public employees, 2) The increasing scarcity of resources to pay for those benefits, 3) The refusal/inability of state politicians to reduce the payouts, partly because they know that, 4) In the event of imminent default, the federal government would have to bail states out.
The Rauh/Novy-Marx plan solves all four problems. To finance pension deficits, they argue, the federal government should allow states to sell tax-exempt bonds explicitly for that purpose. (Under current law bonds sold to finance pensions are taxable.) That gives state governments a source of cheap money to meet their obligations.
But states would be allowed to obtain the tax-exempt status for the bonds only if they radically overhauled their retirement systems, ending defined-benefit pensions for new state employees and replacing them with defined contribution plans, similar to the 401(k) plans offered to employees by corporations. That condition gets rid of the potential for a long-term fiscal catastrophe. It gives state politicians political cover to make hard decisions; they can say they had to cut retiree benefits for future employees because Washington made it impossible to refuse.
At the same time, the plan makes states shoulder the pension burdens that they created, getting federal taxpayers off the potential hook.
UPDATE: Here is basically the same idea, from former Los Angeles Mayor Richard Riordan and a co-author, in yesterday's NYT. Thanks to Jim for the pointer.
September 9, 2010
Need money? Defraud the Pentagon. It's easy
There is a contest between two of the government's biggest programs, the Department of Defense and Medicare, to see which can waste the most taxpayer money through billions of dollars in fraud and ripoffs. Conservatives love to complain about abuse of social programs but seldom pipe up about the outrageous waste at the Pentagon. Vice versa for liberals. Criticize waste in social programs and you're liable to be accused of hurting people. Point out the obvious at the Defense Department and you risk being labeled unpatriotic.
In truth both the human welfare and the war-fighting sides of the government are expensively dysfunctional, lining the pockets of fraudsters, which is especially objectionable at this time of resource scarcity. The latest evidence of the Pentagon financial morass comes from Sen. Charles Grassley, whose investigators issued a very troubling report this week that echoes some of the findings in the Washington Post's Top Secret America series.
The short story is that the Pentagon's Audit Office has basically stopped auditing! From the Grassley report:
The Audit Office appears to consistently demonstrate little or no interest in finding fraud and waste. That attitude was clearly reflected in the response given by senior management to this question raised at each interview: “How much fraud was detected by your directorate in FY 2009?” Without exception, the answer was a disinterested: “I don’t know.” That answer will not change until contract audits are “front and center” once again.
The success or failure of an audit turns on the quality of financial data available for audit by competent examiners. Unfortunately, the quality of the financial data presented to OIG auditors by DOD during the period reviewed by the staff should probably be rated as poor to non-existent. Having lost control of the money at the transaction level, DOD’s broken accounting system is incapable of generating accurate financial records. The consequences are predictable. Most of the time, OIG auditors report: “no audit trail” found.
August 10, 2010
Liberals love their country too
I don't know why liberals let conservatives monopolize the rhetoric on patriotism. Perhaps they recoil from the hooey in much of the flag talk by the right. But liberals love their country too.
Brad DeLong, one of them, makes the obvious point that long-run federal debt weakens the economy. He notes uncontroversially that the only way to reduce the long-run debt is to cut spending or raise taxes. And he suggests that those who encourage crippling debt by retaining the Bush tax cuts -- absent revenue or spending offsets to pay for them -- are anti-American. DeLong:
And I am very tired of seeing the Wall Street Journal try, yet again, to weaken and impoverish America by raising the long-term debt and its burden on the economy. I've watched this for thirty years. America is poorer and weaker because of it. And I am sick of it.
There is room for legitimate debate about the timing of the expiring tax cuts. Do their long-run contribution to solvency and the political ease with which Democrats can accomplish them (they have to do nothing) outweigh the burden the expiring cuts will put on what's likely to be a still-gasping economy?
Timing aside, the long-run solution of course involves both spending cuts and tax increases, as the NYT's David Leonhardt has shown. Wisconsin's Paul Ryan has been getting attention for his fiscal plan, but even the tea partiers looove their Medicare too much to buy what he's offering.
June 10, 2010
Govt. workers make 44% more than private workers
Here is the latest statistical data from the Labor Department on average compensation paid to private-sector workers and state- and local-government workers. Note that the figure includes cash wages AND the value of benefits, including deferred compensation such as pension benefits.
On average, private-sector workers made $27.73 per hour in March, the Labor Department says. By contrast, the average state and local government worker earned $39.81 per hour. This is not a convenient statistic for public-sector unions fighting to preserve their pensions and retirement health-care plans.
Employer costs for employee compensation averaged $29.71 per hour worked in March 2010, the U.S. Bureau of Labor Statistics reported today. Wages and salaries averaged $20.67 per hour worked and accounted for 69.6 percent of these costs, while benefits averaged $9.04 and accounted for the remaining 30.4 percent.
Total employer compensation costs for private industry workers averaged $27.73 per hour worked in March 2010. Total employer compensation costs for State and local government workers averaged $39.81 per hour worked in March 2010. Employer Costs for Employee Compensation (ECEC), a product of the National Compensation Survey, measures employer costs for wages, salaries, and employee benefits for nonfarm private and State and local government workers.
June 4, 2010
Speaking of underfunded pensions...
Adjusting pension formula not a contract violation
Government-employee unions have a long history of trying to claim that almost any downward adjustment in the FUTURE accrual of pension benefits is a contract violation. Baltimore police and fire unions, reports Julie Scharper, say adjustments proposed by the city "constitute a violation of their contract." Of course they don't. A casual glance at the private-sector landscape shows hundreds of corporations scrapping or adjusting future pension-benefit credits, including for unionized workers.
Pension sponsors have an obligation to pay employees and retirees for benefits earned under the formula up to the present. But they have no obligation to continue that formula, no matter how unaffordable, for ever and ever. Here's the language from decision by the U.S. Court of Appeals, First Circuit, in Parker v. Wakelin, a Maine case..
Finding no unmistakable intent on the part of the Maine legislature to create private contractual rights against the reduction of pension benefits prior to the point at which pension benefits may actually be received, we hold that the Maine amendments do not violate the Contract Clause with regard to any of the plaintiffs.
Proposed changes in Baltimore's police and fire pensions wouldn't change benefits for current retirees, and they wouldn't change the pension vesting that has already occurred for people still working. But the unions don't like to make that distinction.
May 6, 2010
OK, where would you cut the budget?
Here is your chance to solve the U.S. fiscal crisis. Below (HT Greg Mankiw) is a schematic of projected federal spending in 2020. As you can see, it's almost all entitlements and defense, with quite a bit of interest from the soaring national debt added in for good measure. So where will you cut spending?
March 23, 2010
Investors see less risk from Buffett than U.S.
Bloomberg reports that some private-sector debt trades at yields that are lower than yields for comparable paper from the U.S. Treasury. This is unusual, since Treasury paper is usually thought of as the "risk-free" lending against which all other debt is gauged. Tyler Cowen is skeptical -- thinks that it may be a liquidity anomaly or that the private paper contains rights that the public paper doesn't.
March 22 (Bloomberg) -- The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.
Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.
March 17, 2010
Taxes must rise: More truth telling from Leonhardt
It's an unpopular message, but the New York Times' David Leonhardt is doing a thorough, unbiased and intelligent job of delivering it while covering country's looming fiscal crisis: After the economy recovers, spending will have to be cut AND taxes will have to rise. Read today's piece, part of which says:
Yet our desire for government services just keeps growing. We added a prescription drug benefit to Medicare. Farm subsidies are sacrosanct. Social Security is the third rail of politics.
This disconnect is, far and away, the main reason for our huge budget problems. Yes, the wars in Iraq and Afghanistan, the recession and the stimulus have all added to the deficit. But they are minor issues in the long run.
For now, political leaders in both parties are still in denial about what the solution will entail. To be fair, so is much of the public.
What needs to happen? Spending will need to be cut, and taxes will need to rise. They won’t need to rise just on households making more than $250,000, as Mr. Obama has suggested. They will probably need to rise on your household, however much you make.
Also highly recommended: What really caused the deficits
And: If Americans love Medicare (and they do), their taxes have to rise
March 15, 2010
Moody's to U.S.: You're closer to a debt downgrade
Moody's says the United States and other Western nations have moved "substantially" closer to the point of losing their top-drawer credit ratings, the NYT reports today. And the countries won't be able to repay what they owe -- currently $12.6 trillion -- relying only on economic growth. That means tax increases and/or budget cuts -- and the U.S. loves its Medicare and other entitlements so much that budget cuts alone won't work.
“Growth alone will not resolve an increasingly complicated debt equation,” Moody’s said. “Preserving debt affordability” — the ratio of interest payments to government revenues — “at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.”
December 18, 2009
A deficit hawk's guide to deficits in a recession
Stan Collender, a self-described deficit hawk, says that a terrible recession is a time to be a little less hawkish.
From my perspective, rather than just being against everything all the time that increases the deficit, deficit hawks will have a much bigger impact and be far more effective if they do the following:
1. Advocate aggressively and forcefully for reducing the deficit. Pay-as-you-go rules for new proposals are important, but existing programs already in the baseline shouldn’t get a free pass.
2. But understand that there are times, like when the economy is in the tank, that reducing the deficit or running a surplus is the wrong fiscal policy.
3. Be the one that helps define when a deficit is appropriate. One of the most important contributions hawks can make will be to communicate this so that it becomes the common wisdom. Their credibility will be enhanced in the process.
4. Don’t allow the deficit to be a partisan issue. Both political parties frequently use the deficit as an excuse whenever they oppose something but don’t want to state the real reason for the opposition. That makes the deficit into more of a political football and less of a serious issue. Members of Congress, candidates, party officials, think tanks, etc. all need to know that they can’t claim to be a deficit reducer today when they advocated unwarranted deficit increases yesterday.
5. Advocate as forcefully for debt reduction as deficit reduction when it makes sense economically.
To which I would add:
6. Don't reflexively rule out some tax increases. We aren't going to do all we need to cut the federal budget deficit through growth and spending cuts alone. Carefully considered, moderate tax increases -- maybe some sort of national consumption tax -- are probably part of the solution if we want to do right by our descendents.
May 20, 2009
Borrowing from future generations to spend now
Don't get us wrong: Our nation's fiscal house is in about as much order as Tara after Sherman's march through Georgia. And, yes, the burden will fall to future generations if nothing is done (and, likely, even if reforms are enacted) but so will the benefit....
Intergenerational equity debates usually leave out the concept of intergenerational interdependence. Instead of just talking cuts - which some think need to be made - we also should talk about investing in children and young people... Some think that if we could cut entitlements for older Americans, tens - if not hundreds - of billions, in theory, could be reallocated to spending for children. But spending in Washington doesn't usually work that way. We don't take from Peter to pay Paul, when Peter wants to hold on to what he's got, Paul doesn't have powerful lobbyists, and some apostles of deficit reduction just want to cut government.
Our child policy needs to be more forward-looking and generous now; while we should reform entitlements, we shouldn't wait until that magical day when Social Security and Medicare have been transformed. So, we should reframe the discussion: Intergenerational equity is about sustainability, sharing resources, spending both humanely and with economic prudence, and providing the basics for Americans from birth to death.
This isn't about a "cradle to grave" welfare state or creating new kids' entitlements. It's about re-balancing - not only our allocation of resources between the elderly and children, the haves and the have-nots, but also our talk of "intergenerational equity" as more for children, not just less for those 65 and older. And, of course, Americans between 18 and 65 also have needs that we are not meeting.
Yarrow is the guy who wrote: "If we don't control entitlement spending, coupling it with modest tax broadening, the American people will be faced with a tab that will rise so rapidly that it will be like adding endless lobster thermidors or filet mignons to a restaurant bill faster than the waiter could retally the tab."
There is nothing he wrote
in today's paper in today's Web edition of the paper that directly contradicts that. But talk of intergenerational re-balancing that doesn't also address the immediate need to restructure Medicare and health spending generally sounds like just another excuse to do nothing. The REAL rule of Washington is that it's easy to add government programs while it's hard to scale them back. We need to focus more on the second part.
His columns appear Tuesdays and Sundays.
- Electrocution risk: Much worse than terrorism!
- Don't be shocked if Obama plan increases U.S. debt
- Ruppersberger's fund for U.S. debt-reduction gifts
- Congress left the hard work to triggers, the future
- McArdle: Obama bluffing on veto threat
- Future historians ask: Why was Congress so stupid?
- John McCain says do a debt ceiling deal
- Theory: Geezers want government debt default
- Martin Wolf: It's simple. Taxes must rise
- Wolf: US default would create biggest crisis ever
Electrocution risk: Much worse than terrorism! (1)
steve wrote: It's obvious that this is based on ... [more]
Don't be shocked if Obama plan increases U.S. debt (13)
wrote: "Pass this bill now" "Pass this bil... [more]
Ruppersberger's fund for U.S. debt-reduction gifts (11)
Todd Schaefer wrote: Did any of you idiots actually read... [more]
Congress left the hard work to triggers, the future (1)
jjjackson wrote: Great comment in your column, Jay, ... [more]
McArdle: Obama bluffing on veto threat (1)
Stuart Levine wrote: Just remember, Nick Danger was not ... [more]
Future historians ask: Why was Congress so stupid? (6)
mesns wrote: They are not necessarily stupid - t... [more]
John McCain says do a debt ceiling deal (2)
MrRational wrote: Except for the reference to middle ... [more]
Theory: Geezers want government debt default (1)
DIY Investor wrote: Geezers rely on fixed income more t... [more]
Martin Wolf: It's simple. Taxes must rise (2)
Gunpowder Chronicle wrote: Jay, Let me get this straight: ... [more]
Wolf: US default would create biggest crisis ever (0)
To dream the impossible budget dream (3)
Pete from Higlandtown wrote: Republicans are crazy to think that... [more]
Just cut the deficit, dammit (5)
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The new millionaires: Retired baby boomers (7)
Patrick wrote: SS is a defined benefit program. Th... [more]
Counting to a trillion: Think eons, ages, epochs (1)
John J. Walters wrote: This kind of reminds me of the (exc... [more]
Ritholtz: S&P contributed to Treasury downgrade (1)
Mr Tea wrote: Treasury downgrade? What does that... [more]
F-35 vote gives Tea Partiers deficit-cutting cred (1)
tom beebe st louis wrote: Sorry Jay, but a sales tax ain't th... [more]
New evidence of Republican cognitive dissonance (12)
NT wrote: Social Security can be fixed. Medi... [more]
O'Malley pension & retiree health fix is modest (10)
Mar wrote: Why does the government even contin... [more]
O'Malley's pension reforms start to emerge (19)
Josh Dowlut wrote: Is there something I am misundersta... [more]
Pearlstein: Public unions' day of reckoning is here (1)
John J. Walters wrote: He's not the only one saying it, by... [more]
Anybody got a good history of federal pay raises? (7)
MrRational wrote: Aside from a few anomalies... the i... [more]
Kill or reduce the mortgage deduction -- but not yet (29)
Lben wrote: Hey Duane and MC-- you do benefit f... [more]
Finally, a little substance on pensions (11)
wrote: Speaking from the perspective of so... [more]
What O'Malley, Ehrlich say about fixing pensions (7)
jay, jay, jay. . . . wrote: implicit in all that you've said ab... [more]
How to fix the state pension crisis (3)
EscondidoSufer wrote: Here is a better solution. We absol... [more]
Need money? Defraud the Pentagon. It's easy (2)
RomanTotale3d wrote: "Conservatives love to complain abo... [more]
Liberals love their country too (0)
Govt. workers make 44% more than private workers (21)
David wrote: Mr. Macdonald, The Hancock article... [more]
Speaking of underfunded pensions... (0)
Adjusting pension formula not a contract violation (29)
F Phit wrote: Frank Rizzo...Police pay into their... [more]
OK, where would you cut the budget? (13)
Carl Hayes wrote: There is enough pork in the budget ... [more]
Investors see less risk from Buffett than U.S. (0)
Taxes must rise: More truth telling from Leonhardt (8)
Patrick K. Lackey wrote: I get confused. Which is it? Rain r... [more]
Moody's to U.S.: You're closer to a debt downgrade (4)
Dan wrote: "...The full faith and credit of th... [more]
A deficit hawk's guide to deficits in a recession (4)
Josh Dowlut wrote: Save the personal attacks for the r... [more]
Borrowing from future generations to spend now (0)
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