The New Republic on the “wildly important” infrastructure bank proposal:

A well-designed infrastructure bank’s benefits could go even farther, says [Brookings infrastructure expert Emilia] Istrate. “The current type of investment is … more like spreading peanut butter,” she says. “It’s not really based on strategic economic criteria.” She argues that, assuming the bank is truly independent and decisions are actually made by experts, it will lead to a projects being selected “based on a cost-benefit analysis,” and their “national and regional importance.”

That’s how the system’s supposed to work now, isn’t it? Well, yes, but that hasn’t been how things have actually turned out in Congress. Remember the infamous “bridge to nowhere” we almost funded or the even more senseless “road to nowhere” that got built with some of the money that had been intended for the bridge? They were a result of the appropriations process and pork-barrel politics run amok, not any kind of reasonable economic analysis.

A national infrastructure bank would, in theory, mean less money spent on these projects—and more spent on investments that actually make the country productive. Even Republicans can get behind that idea. Or so you would think.

About that, two thoughts:

First: Another way of saying this is: The bank will work better the more robustly and pitilessly undemocratic it is. The problem with the appropriations process is that it is too democratic, dominated, as it is, by the House, our most democratic organ of government. I do not disagree with that analysis. In fact, I’d like to extend that line of thinking to all sorts of other sectors of economic and national life, too: Really, why should the gentleman-scholars in Congress be making decisions about energy policy, what kind of jobs Americans should have, how we manage schools, the agriculture markets . . . management of banks, hedge funds, health insurance? If Alexander C. Hart of The New Republic believes that it is best to keep democracy’s grubby paws off of infrastructure decisions — and I’m with you, Hart! — why not these other areas as well?

Second: “Assuming the bank is truly independent and decisions are actually made by experts . . . .” Who wants to place a bet on whether that happens? How much of your own money, as opposed to the taxpayers’ money, would you wager on that being the outcome? And what if it isn’t? The SEC and Fannie and Freddie and the Fed and the banks and the hedge funds and the REITs and such were just chock flippin’ full of experts — including a lot of highly paid genius quants in the private sector — which did what, exactly, for the housing/CDO bubble? (Don’t worry, I’ll wait. Cue Jeopardy! theme: What is absolutely nothing, Alex?)

The FDA is full of experts who make extraordinarily stupid and destructive decisions on a regular basis. They don’t do it because they’re bad people or because they are being corrupted by corporate money or because they are closet Maoist revolutionaries. They do it because you cannot repeal the fatal conceit. Is there any reason — a single one — that makes us think that the infrastructure bank experts will be immune to the defects that plague experts on Wall Street, experts in Washington, experts in the federal agencies, experts in the states, the experts to which Congress has all the access it could possibly desire?

The answer to this question is not: In the ideal world, things work out ideally.

If only there were a process by which economic decisions could be made on economic criteria, by the parties with the most knowledge about the questions at hand and the strongest incentives to seek rational financial outcomes. What might such a process look like? Somebody should write a book about that. (Or, at least, a book about the opposite.)

I really hope that Cory Booker is as great as he seems. Who would have thought that New Jersey would have a governor as good as Christie, and Newark a mayor as sensible as Booker? These guys need to do some kind of bipartisan seminar on how to govern from the edge of disaster. Call it The Jersey Guys’ Guide to Governing.

Just a reminder: We are in trouble.

I have argued that the real national debt is about $130 trillion. Let’s say I’m being pessimistic. Forbes, in a 2008 article, came up with a lower number: $70 trillion. Let’s say the sunny optimists at Forbes got it right and I got it wrong.

For perspective: At the time that 2008 article was written, the entire supply of money in the world (“broad money,” i.e., global M3, meaning cash, consumer-account deposits, checkable accounts, CDs, long-term deposits, travelers’ checks, money-market funds, the whole enchilada) was estimated to be just under $60 trillion. Which is to say: The optimistic view is that our outstanding obligations amount to more than all of the money in the world.

Global GDP in 2008? Also about $60 trillion. Meaning that the optimistic view is that our federal obligations outpace the entire annual economic output of human civilization.

So, John Boehner wants to roll spending back to where it was in the last year of the Bush administration. Okay, great. Nice start.

Now, what else have you got?

Rep. Gerry E. Connolly, a Northern Virginia Democrat facing a tough re-election challenge, has come out against letting the Bush tax cuts expire — even for the top brackets. This puts him right up in the teeth of the Obama administration and Nancy Pelosi. Why would a Democrat resist ORP’s (ORP = Obama-Reid-Pelosi) soak-the-rich agenda? Have a look at Connolly’s district: Fairfax County, part of the vast, soulless suburbs of Washington, D.C., is pretty high-income.

As our Battleground blogger Andrew Stiles reports today, the average household income in Connolly’s district is more than $100,000 a year. And there are a lot of families with incomes over $200,000 a year and over $250,000 a year. In Washington, it’s not that hard to end up with a family income over  $250,000 a year: Mr. $130,000 Bureaucrat  marries Miss  $130,000 Bureaucrat, and they join the ranks of “the rich.”

And under Obama, official Washington is getting a lot richer, with average federal compensation packages now worth about $120,000 a year — more than twice the going rate in the private sector. And it’s not just high salaries, pensions, and generous benefits: It’s private-sector-level bonuses, too:

Under the Obama administration, the government is doing such a good job that it’s decided to reward itself. Last year, Uncle Sam paid out $408 million in bonuses to 1.3 million federal workers, according to the Asbury Park Press, which obtained the information through a Freedom of Information Act request. That’s about $80 million more than the previous year. About one in four federal workers received a bonus, and awards ranged from $25 to, in the case of one lucky State Department worker, $94,500. . . .

Federal bonuses are being doled out liberally, even as federal salaries are exploding. From December 2007 through June 2009, the number of federal workers earning six figures increased from 14 to 19 percent. In 2008, average federal compensation, including pay and benefits, was $119,982 — considerably more than the $59,909 average in the private sector, according to the Commerce Department’s Bureau of Economic Analysis. In the midst of a brutal economic downturn that saw millions of jobs lost and unemployment soar above 10 percent, the Office of Personnel Management data shows the federal workforce actually added nearly 100,000 jobs from December 2008 to December 2009.

This is how Obamaism eats itself: Fattening the federal workers who are his natural constituency, Obama has helped to create a lobby for tax breaks for “the rich,” now defined as those who earn about the same income as a married couple consisting  of two federal middle managers. Federal workers already receive a big piece of their compensation tax free (through extraordinarily generous benefits that are not taxed as income) and they are not eager to pay the taxes that fund their own inflated salaries and those of their colleagues. Taxes are for you serfs in the private sector, and Rep. Connolly  is one Democrat who can be counted on to defend the tax preferences of the new ruling class in the Washington suburbs.

Jon Chait over at The New Republic has what he apparently supposes to be a rigorous and clever takedown of Gov. Mitch Daniels’s brief outline of an economic plan spelled out in the Wall Street Journal. Writing with the characteristic humility for which we have all come to appreciate him, Chait proffers, among other gems, the observation that Daniels is being held to standards that might be applied otherwise to the mentally retarded or severely disabled – his piece is headlined “Mitch Daniels Wins The Fiscal Special Olympics.”  “A proposal that seems remotely close to reality will be widely praised,” he writes, “as if we were watching a person with severe disabilities manage to finish a race. Wow, look at that! You have a plan! With numbers! Hooray for you!”

Chait has made a classic error here: Before one attempts to condescend, one must ensure that one is in the proper position from which to condescend. Chait is not. Let us count the ways.

At the core of Daniels’s plan — and Chait gets at least this much right — is a proposal to suspend or reduce the payroll tax for a year, and, because Daniels is not a naïve supply-sider, not only offset those lost revenues, but offset them twice over. This gets Chait into a bit of a huff, and there is nothing quite like a New Republic huff for pure amusement value:

Okay, let’s look at Daniels’ plan. He says we should suspend or reduce the Social Security tax for a year. In order to compensate for the lost revenue, Daniels proposes to make it up “twice over.”

The Social Security tax is projected to bring in $934 billion next year. If we “suspend” the tax, that means we need $1.8 trillion in savings to meet his target. If we merely reduce it, we need less. Keep that in mind while we go through Daniels’ proposed savings, which are these:

And then he quotes from Daniels’s WSJ piece:

• Impoundment power. Presidents once had the authority to spend less than Congress made available through appropriation. On reflection, nothing else makes sense. Plowing ahead with spending when revenues plummet is something only government would do. In Indiana, we are still solvent, with no new taxes, money in reserve, and a AAA credit rating only because our legislature gave me the power to adjust spending to new realities. I promise you that a president who wanted to could put the kibosh on enormous amounts of spending that a Congress might never vote to eliminate, but the average citizen would never miss.

• Recall federal funds. Rescind unspent Troubled Asset Relief Program (TARP) funds and any unspent funds from last year’s $862 billion “stimulus” package, as well as large amounts of the hundreds of billions of “unobligated funds” unspent from previous appropriations bills.

• Federal hiring and pay freeze. Better yet cut federal pay, which now vastly outstrips private-sector wages, by 10% during the emergency term, and freeze it after that.

• A “freedom window.” Might we try some sort of regulatory forbearance period in which the job-killing practice of agonizingly slow environmental permitting is suspended, perhaps in favor of a self-certification safe harbor process? Businesses could proceed with new job creation immediately based on plans that meet current pollution or safety standards, or use best current technology, subject only to fines and remediation if a subsequent look-back shows that the promised standards were not met.

Chait’s objections are these: 1. Daniels does not specify what spending he would impound, and such discretionary power resembles the line-item veto that has been thrown out by the courts; 2. There’s only $200 billion or so in unspent TARP and stimulus funds; 3. Federal workers are not actually overpaid (ho, ho, ho!); 4. The regulatory holiday is not a revenue plan.

Let’s take the low-hanging fruit first.

As evidence that federal workers are not overpaid, Chait cites a study from an organization whose board of directors is composed entirely — without exception — of representatives from government-employees’ retirement associations and their money managers: the president of the National Association of State Retirement Administrators and treasurer of the North Carolina Retirement Systems, the executive director of the National Council in Teacher Retirement, the executive director of the National Association of State Retirement Administrators, The CEO of the California State Teachers’ Retirement System, the executive director of the Minnesota Teachers Retirement Association, the secretary of the Kentucky Teachers’ Retirement System, and, drum roll, a guy from the Council of Institutional Investors, i.e., the guys who handle money for government-employee retirement systems.

Even if we were to assume that these guys are an entirely disinterested bunch, the study Chait cites is (pay attention, now!) not a study of federal employees’ compensation. It is a study of state and local government compensation. Mitch Daniels proposes to cut federal pay, a subject about which the study Chait cites tells us what is known in technical economic jargon as approximately squat.

Chait’s take is: But government workers have college degrees! Lots of them! Well, raise my rent! There’s a big difference between the sorts of people who have masters’ degrees and work in local government and people who have masters’ degrees in the private sector: No doubt the high-school career-guidance counselor who set Chait on his woeful course in literary life had a very impressive piece of sheepskin on his office wall. He is still overpaid, I will wager. What all this is supposed to tell us about the economics of federal government compensation — rather than about the entitlement mentality of the precious middle-class snowflakes turned out by our universities each year — is a mystery.

Chait calculates that Daniels only accounts  for about 10 percent of the double-offset he proposes, which is true — if you only count the stuff Chait counts. Daniels has his eye on hundreds of billions in unobligated funds and as much, possibly much more, in spending offsets through his impoundment proposal. These are the big-ticket items: Chait’s take only makes sense if you ignore them.

Likewise, Chait’s protestation that the regulatory holiday is not a revenue program ignores the fact that what Daniels is most interested in — as his op-ed makes abundantly clear — is achieving higher levels of economic growth, which will contribute to tax receipts (and also help to head off economic catastrophe!). Chait, no doubt a college graduate himself, should be able to identify the thesis statement here: “A time-limited, emergency growth program aimed at triggering new private investment should be a primary goal of the next Congress.”

Also, unless I’ve missed something, there is nothing in Daniels’s plan that indicates he thinks we need to achieve that double-offset in a single year, which makes Chait’s exercise in arithmetic totally meaningless. Presumably, Chait does not believe that each year’s federal borrowing needs to be offset fully in the following year; I’m not crazy about the logic behind stimulus borrowing, but the process of paying back borrowing for a spending program is precisely the same as the process for paying back borrowing to finance a tax holiday. Taxing is taxing, spending is spending.

So, other than ignoring the fiscal timeline, conflating federal and state/local workers, and leaving out the biggest pieces of the economic picture — other than getting every single aspect of the proposal wrong that it is possible to get wrong – Chait wins the gold medal.

Pres. Barack Obama’s plan for yet another round (!) of stimulus spending, this time focused on highway infrastructure work, is, like so many products of this administration, something other than what it seems. What Obama is proposing is another backdoor bailout for spendthrift states, such as his political home state of Illinois, giving them large injections of federal money so that they can redirect spending that would be dedicated to highway projects to other areas—e.g., to the government-employees’ unions that are Obama’s most loyal constituency. Call it “No Blue-State Appropriator or Union Goon Left Behind, Part Whatever.”

The highway system in particular (and the transportation racket more generally) is a source of endless financial shenanigans and a rich seam of political patronage to be mined by Obama’s allies at the state and local levels. The federal highway system is maintained by a combination of federal and state spending (in a few cases, local spending as well) with the bulk of the states’ money coming from gasoline taxes and fees levied on car owners. Illinois, for example, levies a 39-cents-a-gallon tax on gas (the sixth highest in the nation, according to the Tax Foundation), and it also applies its general sales tax (another 6.25 percent) to gas. Once you figure in the total tax burden, government levies are probably a bigger contributor to the price of a gallon of gas in Illinois than is the crude oil from which it is distilled. So, what does Illinois get for its money?

Part of what it gets is the Illinois Department of Transportation (IDOT), one of those wonderfully, comically inept state agencies that does things that make political analysts laugh and taxpayers weep: things like deciding to suddenly stop doing roadwork because they are out of gas money (irony!) or threaten to start leaving roadkill on the highways unless the state gives them another $20 million.

Highway maintenance is important, of course. But that’s not all that IDOT does with its money. For instance, IDOT helps to maintain a vast network of full-employment programs for petty bureaucrats, called “regional planning agencies.” Every region in the state has one, and they are not small: The Chicago version lists 94 staffers on its website. Its budget of $16.7 million comes mostly from IDOT ($3.8 million) and the Federal Highway Administration ($11.5 million), with money reshuffled from other government agencies, local levies, and our friends over at the Environmental Protection Agency (no, really!) kicking in another $1 million or so. Nearly a hundred bureaucrats spending state transportation money, FHA money, and EPA schmundo, doing . . . what? Overseeing roadwork? Not exactly.

Because our entire government is turning into a bank, IDOT is in the business of making low-interest loans and grants for business-related projects that it likes under its Economic Development Program (EDP). These are supposed to be transportation-oriented projects, but “economic development” is a famously elastic definition under which to operate.

May I give you a little flavor for how carefully this economic-development business is managed? Here’s an excerpt from the minutes of a recent meeting of the Chicago Metropolitan Agency for Planning, or CMAP. Mr. Blankenhorn is CMAP’s executive director, Ms. Powell its chairman:

Mr. Blankenhorn said IDOT’s FY2010-11 budget includes $5 million to fund Metropolitan Planning Organizations statewide, with CMAP due to receive $3.5 million of that. He said the drawback is that all the money is supposed to be used for transportation planning, and while some of CMAP’s programs, such as community and economic development, can be tied in, most cannot. He said IDOT has promised to be flexible in what spending it will allow, but it’s really up to the General Assembly to provide funding for an agency it created to do more than transportation planning. He urged CAC members to mention the need for funding other areas if they meet with their legislators or people in leadership roles at other state agencies. Mr. Mellis asked if this means CMAP is fully funded for next year. Mr. Blankenhorn said the funding is buried in IDOT’s budget, but it’s in there. Ms. Powell said CMAP is technically not fully funded if it has programs it can’t pay for. Mr. Blankenhorn agreed and said he will no longer use the term‚ fully funded.

Buried in its budget, but they’ll be flexible! Sweet.

So, what does CMAP spend money on? Personnel, mostly — more than half of its budget goes to salaries and compensation: Just over $9.3 million is budgeted for FY2011, or about $100,000 for each of the 94 staffers listed. (I’m looking to see how lavishly compensated the top staffers are and will update you when I get the information.) If you start pumping billions of dollars into bridges and highway resurfacing, you free up a lot of money for the CMAPs and such of the world. But given the sorry record of previous “shovel ready” stimulus programs, don’t be surprised if the bridge-and-blacktop stuff is skipped altogether and the money goes straight into “community development” projects.

This is the sort of horsepucky upon which President Obama proposes to lavish another $50 billion. Stop him.

– Kevin D. Williamson is deputy managing editor of National Review.

Dino LaVerghetta, a 28-year-old New Yorker, does not outwardly seem to be the least bit retro, but he might be a generation or two out of place, with one of those stories that you sometimes forget are still happening every day: He’s the child of Italian immigrants, and his father ran a pizzeria — “total Italian stereotype,” he grins — before getting into real estate. LaVerghetta married his high-school sweetheart, and, just as the children of immigrants have for generations, advanced through higher education and a profession: Today, he’s a securities lawyer at a prominent international firm. He probably wouldn’t call it a white-shoe firm, but it’s a white-shoe firm.

LaVerghetta is a throwback in another way, too: He’s an Upper East Side Republican, an increasingly rare urban species whose habitat has been decimated — the formerly Republican-dominated expanse of middle Manhattan populated by financial professionals has largely abandoned the GOP — and whose political leadership is endangered, if not quite extinct. LaVerghetta has his eyes on New York City’s 14th Congressional District, which encompasses eastern Manhattan, Roosevelt Island, and part of Queens, a seat that has been occupied by Democratic incumbent Carolyn Maloney for 16 years. From the pizzeria to Congress in one generation: It won’t surprise you to learn that LaVerghetta talks about the classic American values of free enterprise, limited government under the Constitution, and fiscal responsibility. 

What might surprise you is his take on the Glass-Steagall Act. The 1999 repeal of Glass-Steagall, the Depression-era law that had prohibited the combination of regular deposit-taking banks with investment banks, insurance companies, or other kinds of financial operations, has long been cited by the Left as the root of all bankster evil. Democrats have framed it as another case of deregulation-mad Republicans acting as the running dogs of their corporate masters to the general detriment of the Republic. The real story is, of course, more complicated than that: The repeal of Glass-Steagall was signed into law by a Democrat, Pres. Bill Clinton, after every Democrat in the Senate voted for it, along with 155 Democrats in the House — three-quarters of the Democratic caucus at the time. One of the Democrats who voted for the repeal of Glass-Steagall was Carolyn Maloney, and LaVerghetta intends to remind voters of that fact, often.

“The 1999 repeal of the Glass-Steagall Act, which was supported by Carolyn Maloney, was a mistake,” he says. “It is no coincidence that the nation faced a near financial meltdown within ten years of its repeal. The financial system would be far better off if we tossed out the 2,300-page Dodd-Frank Act and simply put the 34-page Glass-Steagall Act back on the books.” As a securities lawyer, LaVerghetta knows a little something about financial regulation, and he’s under no delusion that Glass-Steagall would have prevented all of the financial turmoil that rocked the world following the subprime meltdown. It is difficult to say what Glass-Steagall would have changed at Bear Stearns or Lehman Bros., to say nothing of AIG.

What it would have done, LaVerghetta argues, is establish a pretty good firewall around the depository banks, the places where Americans park their paychecks and savings accounts. With those insulated from the shenanigans that the investment banks were up to, he believes, we could have avoided the bailouts. “The only way to avoid the need for future bailouts is to ensure that our depository-banking system is insulated from speculative investments,” he says.

The Democrat in the race is not exactly Larry Kudlow when it comes to understanding Wall Street. Her ideas on financial reform are utterly conventional ORPism, (Obama-Reid-Pelosi-ism), but the GOP is not girding its loins to do political battle in Manhattan. LaVerghetta knows he has a tough race ahead of him. “It’s a shame that the party of free enterprise has abandoned the center of the financial universe,” he says.

LaVerghetta’s main primary opponent is Ryan Brumberg, who advertises himself as the “true fiscal conservative” in the race and whose candidacy is supported by, among others, the libertarian investor Peter Thiel, who founded PayPal. Like LaVerghetta, Brumberg comes from an archetypal New York background, although one of a different sort: He’s a McKinsey management consultant.

Brumberg is popular with New York conservatives (both of them), and his program for financial reform — winding down Fannie and Freddie, a “pre-commitment for the government to never bail out the banks” — is orthodox Republican stuff. Asked what kind of guarantee mechanism would be necessary to make that “pre-commitment” against bailouts credible, he was unable to produce a convincing answer — which is understandable, because there is not one. The only way to head off future bailouts is to elect to Congress men who will not vote for bailouts. TARP passed the Senate 74–25 and the House 263–171. You do the math.

And it still is far from clear that our government was capable of implementing a superior plan, even if anybody had offered one.

Brumberg scoffs at the idea of reinstating Glass-Steagall. Judge Richard Posner, the eccentrically libertarian legal and economic critic, has endorsed reinstating it, for reasons similar to those articulated by LaVerghetta. As is often the case — on issues ranging from drug legalization to financial regulation to health-care reform — the real intellectual action is on the right, but the operational politics are moving things to the left. LaVerghetta is a Ron Paul guy arguing for the reinstatement of an FDR-era body of banking regulations so that the next time around the markets can destroy the investment banks but not grandma’s passbook account. Brumberg is a libertarianish conservative who will talk your ear off about capital-requirement rules and pre-packaged bankruptcy plans. Clueless Carolyn is not exactly bubbling with innovative thinking on the financial issue that matters most to her constituency.

Thirty blocks uptown, Charlie Rangel is probably taking a nap and thinking nothing of it, his slumber troubled, if at all, by financial matters touching Wall Street only incidentally.

– Kevin D. Williamson is deputy managing editor of National Review.

Here’s a prediction: In the final analysis, Bush’s wars will come closer to meeting their goals and will cost far less than Obama’s stimulus.

Daniel Gross, he of “bubbles are good for the economy!” fame, says not to worry about a possible bubble in U.S. Treasury bonds.

Worry.

Treasury bonds, Gross’s argument goes, are one classy class of asset — not like the snake-oil securities that often indicate the presence of bubbles in other markets. It’s not a bubble, he says, just “frothy.”

First, one of the features about bubbles is that, toward the end of them, the people selling assets—shares in telegraph companies in the 1840s, railroad bonds in the 1880s, dotcom stocks in the 1990s, Miami condos in 2006 — are hawking pipedreams and fantasies. They’re making financial promises that can’t be fulfilled, or that simply don’t add up. When reality finally catches up with the hype, the crash can wipe out some investments entirely and the bubble-prone sector can slump 70 percent or more. But that’s not what is happening in the government bond market. The people selling Treasury bonds—that is, the U.S. government — are making extremely modest promises and have a long record of living up to much more extravagant promises. On Monday, Aug. 30, according to the Wall Street Journal, Treasury will sell $30 billion in 13-week bills and $30 billion in 26-week bills. I’d be willing to wager my next paycheck that those bonds will perform exactly as advertised: Buy those bonds and hold onto them, and you’ll get your principal back plus a bit of interest in a few months. In the interim, the market value of those bonds may rise and fall. But they won’t double, and they won’t go to zero.

That’s what passes for bullishness on U.S. debt these days. Okey-dokey. It’s worth noting that those Miami condos and dot-com stocks looked like good investments to a lot of smart people — and our real-estate regime sounded  like a good idea at the time, and Iraq was chock full of WMD all the smart guys said — and we could very well find ourselves saying the same thing about Treasuries in the near future: What in hell were we thinking? Surprises happen.

How much foam is there on top of this fiscal frappe? Treasury bond yields are down about 40 percent in the past six months, as Gross also notes — a frothy market indeed. But I do not think Gross is showing much guts in his proposed wager: True, the U.S. government probably is not going to default on its debt in the near future. (Probably.) And, sure, he’s right that the values of the bonds will fluctuate but “won’t double, and they won’t go to zero.” But here’s the thing: They don’t  have to. The government doesn’t have to default, and the value of the bonds doesn’t have to double or go to zero to cause all sorts of havoc in U.S. finances. Interest rates are very, very low — but even as low as they are, we’re still piling on debt so quickly that any serious uptick in the government’s cost of borrowing — and no, it does not have to double — could send us into a Greek-style fiscal crisis, especially if it should coincide with, say, the second and even more painful decline in a double-dip recession. Or a financial shock caused by an international crisis in, oh, Iran. Those are the kinds of risks that the Leviathan-on-a-leash guys never really account for: “Oh, everything will be fine, so long as everything is fine.”

And Treasuries are only one part of a larger and inherently interconnected government-debt market. You start to look at the shenanigans going on at the state and local levels — shenanigans that could end up resulting in federal bailouts for the states and union-goon pension funds, putting those obligations on the federal books — and there’s ample cause for insomniac nail-gnawing. I’ve been writing about those Build America Bonds — the financial instrument by which Uncle Sam bribes states to go even deeper into debt by subsidizing the interest on construction bonds. President Obama’s political home state of Illinois has been pushing a whole bunch of those bad boys out into the marketplace (which has received them enthusiastically — contrarians take note) even as it looks desperately for other sources of borrowing to meet its various obligations, which includes a pension-funding shortfall that is the worst in the nation.

Interesting thing about those Illinois Build America Bonds, or BABs:

[Bond-fund manager Craig] Brandon points to an A1-rated state of Illinois BAB issued last week with a yield of 7.11% and a maturity date of 2035. By comparison, an Abbot Labs corporate bond due in 2039 and trading in the secondary market has the same rating but a yield of just 5.16%.

Translation: Even though Illinois’s credit score is comparable to Abbot Labs’ credit score, and even though Illinois is a state, with all the power that implies, it has to pay more to borrow money. Why? Because the markets do not really believe that A1 rating. Always remember the case of Enron: Its share price had declined more than 80 percent before the credit-raters ever got around to downgrading it. Listen to the markets.

But the risks with which U.S. public finance is shot through are tied up in more than simple bond ratings: Sovereign investors, such as our friends the ChiComms, aren’t waiting around to hear what Moody’s has to say about things. They have their own incentives, which are different from Bond Trader Joe’s.

AP:

China reduced its holdings of U.S. Treasury debt for a second straight month in June while the holdings of Japan and Britain rose.

China’s holdings fell by $24 billion to $843.7 billion, a decline of 2.7 percent, the Treasury Department said Monday in a monthly report on debt holdings.

Total foreign holdings of Treasury securities rose $45.6 billion to a total of $4 trillion, an increase of 1.2 percent.

The debt figures are being closely watched at a time when the U.S. government is running up record annual deficits. A drop in foreign demand would lead to higher interest rates in the United States. The yield on Treasuries rises when fewer people invest in them.

It would start with the U.S. government paying more interest on its $13.3 trillion national debt and then ripple through the economy. Consumer loans such as home mortgages and auto loans track the yields on Treasurys, so they could rise, too.

Say what you like about the aged autocrats in Beijing, they know how to count. And they are worried about the dollar. In that, they are not alone.

Leading up to that much-awaited Bernanke speech, the dollar was feeling a little Chinese pressure, too:

“Onshore banks are selling dollars because the dollar is a net risk position for them given the uncertainty over Bernanke’s remarks and revised second-quarter U.S. GDP data tonight,” said a Shanghai-based trader at a foreign bank.

The thing about our Chinese creditors is this: Governments make calculations along nonfinancial lines. Profit and loss is not the end of the game for Beijing — or for central banks and governments in other countries. We are taking risks that are very difficult to calculate, because they are political as well as economic. Mr. Gross may be right: Maybe we will come through this without a hiccup. But going out on the ledge of the Empire State Building is still a stupid and risky thing to do, even if you do not, in the end, fall. We should get off the ledge.

– Kevin D. Williamson is deputy managing editor of National Review.

You know that bank we own? No, not that one, this one. There seems to be some trouble:

An all-out war has broken out between Citigroup CEO Vikram Pandit and a prominent securities analyst who is saying that the big bank may be cooking the books by inflating its earnings through an accounting gimmick, FOX Business Network has learned.

The analyst, Mike Mayo, of the securities firm CLSA, has been telling investors that Citigroup (C: 3.70 ,+0.04 ,+0.96%) should take a writedown, or a loss on some $50 billion of “deferred-tax assets,” or DTAs. That is a tax credit the firm has on its financial statement that Mayo says is inflating profits at the big bank by as much as $10 billion.

For that critique, Mayo has been denied one-on-one meetings with top players of the firm, including CEO Vikram Pandit, Chief Financial Officer John Gerspach, and any other member of management, while other analysts enjoy full access to the bank’s top executives, FBN has learned.

In fact, Mayo hasn’t had a meeting with Pandit or anyone in Citigroup management since around the time of the financial crisis, in the fall of 2008, when Citigroup was on the verge of extinction and needed an unprecedented series of government bailouts to survive.

You know who ought to be able to get a meeting with Vikram Pandit? Tim Geithner. And if not Tiny Tim, then his boss, Barack Obama, who was the top recipient of Citigroup campaign contributions in the last election cycle, having taken in more than $730,000. You know who else might be able to get a meeting? New York Sen. Kirsten Gillibrand, who is the biggest recipient of Citigroup money in this election cycle so far.

Obama and Gillibrand should know: If you’re going to bail out the bank and take the bank’s money, then when it’s time for due diligence, you need to make sure that somebody steps up.

Salon has an article today predicting the future of an economic commodity. I have a recollection that they are not always very good at predicting such trends. What was that earlier article headlined? Ah, yes: You Really Should Buy a House. I Mean It. Highlight: Foreclosure is no big deal for the banks!

. . . city hall is where they might do some good. Union goons, meet Exchequer’s new favorite mayor, Tomás Regalado of Miami. (Technically a non-partisan election; he’s a Republican.)

Miami commissioners are likely to impose contracts on the city’s employee unions that will cut wages and pensions to ease a projected $96.5 million operating- budget gap next fiscal year, Mayor Tomas Regalado said.

“Probably in two weeks the commission will impose a contract whereby we will be reducing salaries and pensions, which is what’s responsible for the deficit,” the first-term mayor said in an interview on Bloomberg Television outside City Hall today.

Miami faces a pension payment exceeding $100 million in the fiscal year that begins Sept. 30, Regalado said, which will consume a fifth of its operating budget. Moody’s Investors Service and Standard & Poor’s both cut the city’s general- obligation bond ratings in the past two months, citing the deficit and pension costs.

Get that, taxpayers and bond-market watchers: Government workers’ pensions alone will consume 20 percent of the city of Miami’s operating budget. For many states and municipalities, it is going to get a lot worse than that very soon.

Miami has been playing catch-up on its pensions since the Carter administration, when it came to light that the city was using pension funds for general operating expenses. But with a city attorney who is paid $380,000 a year and a deputy — deputy! — fire chief who is paid $353,000 a year, Miami has a long way to go achieving fiscal sanity. (Would you like a list of Miami’s city salaries? It is here. Read it and retch.)

Mayor Regalado does not want to increase taxes; Miami, already among the cities hardest hit by the real-estate crash, really cannot be jacking up property taxes with tens of thousands of vacant condos languishing on the market. So, he’s biting the bullet, cutting the fat where it’s found — in the paychecks of overfed city bureaucrats — and, apparently, trying to do the right thing.

Hope he has an exit strategy.

So now that the state of New Jersey has been charged by the SEC with lying to bond investors about the (desiccated, horrific, probably insolvent) state of its pension funds, the guessing game begins: Who is next? Exchequer readers will not be surprised to learn that Illinois, the place where Barack Obama developed his famous financial acumen, is on the list of potential targets.

When Illinois passed its pension “reform” law a few months ago, it decided it could skip an additional $300 million in pension contributions this year, and many millions more in the future. This, for a pension system that already is less than half funded. The New York Times asked a few actuaries about that decision, and the bean-counters are crying foul:

Paradoxically, even though the state will make smaller contributions, the report forecasts that Illinois will get its pension funds back on track to a respectable 90 percent funding level by 2045. It projects that costs will increase slowly and an economic recovery will make cash available for the state to make the contributions it has failed to do in the past.

Whether that is even possible is contested by some actuaries who note that its family of pension funds is now only 39 percent funded. (If a company let its pension fund dwindle to that level, the federal government would probably step in, but federal officials have no authority to seize state pension funds.)

Some actuaries who have reviewed the state’s plans said that shrinking contributions would make the pension funds shakier, not stronger.

Indeed, one of them, Jeremy Gold, called Illinois’s plan “irresponsible” and said it could drive the pension funds to the brink.

Further, Mr. Gold pointed out that Illinois’s official disclosures said that its pension calculations used an actuarial method known as “projected unit credit,” but that the pension reform report used another method, which had not been approved for disclosure.

“According to Illinois statute, the prescribed contributions are determined under a method that may not be in compliance with the pertinent actuarial standards of practice,” Mr. Gold said.

The Wall Street Journal has more on state pension shenanigans here.

Hey, taxpayer: How’s your retirement fund looking these days? Anything left to put in it after the state-workers’ unions are done with you? Heck, you’re probably the kind of sucker who pays his mortgage with his own money.

Bloomberg seems to think that the lack of an inverted yield curve (meaning a bond market in which long-term bond yields fall below short-term yields) means there will be no double-dip to this recession: The inverted yield curve has been a prelude to almost every earlier recession.

But . . . short-term rates are basically zilch. How do you get a long-term rate under that? Slide it under the carpet? Stuff it in a gopher hole? At least one investment manager is thinking the same thing:

An inverted yield curve has twice failed to predict a recession — in late 1966 and late 1998. The bears say bonds may be sending another “false positive.” With the Fed’s target rate for overnight loans between banks at a record low of zero to 0.25 percent, it may be impossible for long-term yields to fall below short-term debt.

“As long as the Fed continues with ultra easy policy the yield curve’s relative importance as an economic signal is diminished,” said Christopher Sullivan, who oversees $1.6 billion as chief investment officer at United Nations Federal Credit Union in New York.

As for the politics of it, the optimists at the Cleveland Fed are predicting a sclerotic 1.14 percent growth over the next year — not exactly guns-blazing, unemployment-slashing stuff. 

The Land of Lincoln (or, if you prefer, the Origin of Obama) is going broke, in a big, big way, as I have noted earlier. The main reason is it going broke is because its public-sector caste is robbing the rest of the state blind.

Have the taxpayers finally had enough? Is nearly a half-million dollars a year for a suburban Chicago parks director too much?

Dozens of Highland Park residents confronted their Park District commissioners Thursday night, demanding that they resign for approving a series of exorbitant bonuses, salary increases and pension boosting payouts to top district executives between 2005 and 2008.

. . . former executive director Ralph Volpe, finance director Kenneth Swan and facilities director David Harris were awarded bonuses that totaled $700,000 during a four-year span.

Additional salary increases during that time have or will provide the three executives with pensions that rival or surpass their total salaries to run the district in 2005. By 2008, Volpe’s total compensation topped $435,000.

Swan’s salary, which was $124,908 in 2005, spiked to $218,372 in 2008. Harris’ pay jumped from $135,403 to $339,302 during that time.

Even though Harris resigned in 2008, Park District officials confirmed that he was paid the remaining $185,120 left on his three-year contract. The district also gave him a sport utility vehicle while his compensation without the SUV in 2008 still totaled $339,302 for eight months on the job, officials said.

As Derb says: We’re in the wrong business. Get a government job.

Highland Park has 34,000 residents. Its park system is not exactly monumental. Get this: By way of comparison, the head of the Central Park Conservancy in New York City earns only  (only!) $364,000 — and the conservancy itself raises most of the park’s $25 million annual budget. New York is not exactly famous for the austerity of its public institutions. That Central Park boss must feel like he’s getting the short end compared to that Highland Park parks tycoon.

Two things to keep in mind in light of today’s news: One is that the CBO keeps ringing the alarm bells — even today, in the course of trimming, a little bit, its deficit estimate for 2010: “Continued large deficits and the resulting increases in federal debt over time would reduce long-term economic growth.”

Which is to say, Paul Krugman & Co. aside, spending and deficits can be a brake on growth as well as an accelerator of it. Today’s stimulus is tomorrow’s burden.

The second thing: Take another look at Greece. Greece is falling apart. Krugman & Co. will tell you that’s the result of too much austerity and not enough stimulus spending. But there is another lesson to take away from Greece: When you let the public sector get that big — so big it dominates the economy — then it is nearly impossible to cut back public-sector spending without creating an economic crisis. Our stimulus programs are geared, in no small part, toward achieving permanent expansions of the public sector. Which is to say, we’re stimulating ourselves into a Greek corner. Best to reverse course now before we’re locked in good and tight.

Reader Timothy checks in with the right answer: The amount of debt that the entity known as ORP (Obama, Reid, Pelosi) will pile upon American taxpayers in the year 2010 exceeds the GDP of any country on that list. Which is to say, the GDP of any country in the world except: China, Japan, Britain, Germany, France, Italy, Spain, Brazil, or Canada.

Here is a list of countries. A special prize of my choosing to the first reader who can tell me what all of them have in common:

Afghanistan

Albania

Algeria

Andorra

Angola

Antigua & Barbuda

Argentina

Armenia

Australia

Austria

Azerbaijan

Bahamas

Bahrain

Bangladesh

Barbados

Belarus

Belgium

Belize

Benin

Bhutan

Bolivia

Bosnia & Herzegovina

Botswana

Brunei

Darussalam

Bulgaria

Burkina Faso

Burma (Myanmar)

Burundi

Cambodia

Cameroon

Cape Verde

Central African Republic

Chad

Chile

Colombia

 Comoros

Congo

Congo, Democratic Republic of the

Costa Rica

Côte d’Ivoire

Croatia

Cuba

Cyprus

Czech Republic

Denmark

Djibouti

Dominica

Dominican Republic

Ecuador

East Timor

Egypt

El Salvador

Equatorial Guinea

Eritrea

Estonia

Ethiopia

Fiji

Finland

Gabon

Gambia

Georgia

Ghana

Greece

Grenada

Guatemala

Guinea

Guinea-Bissau

Guyana

Haiti

Honduras

Hungary

Iceland

India

Indonesia

Iran

Iraq

Ireland

Israel

Jamaica

Jordan

Kazakhstan

Kenya

Kiribati

North Korea

South Korea

Kosovo

Kuwait

Kyrgyzstan

Laos

Latvia

Lebanon

Lesotho

Liberia

Libya

Liechtenstein

Lithuania

Luxembourg

Macedonia

Madagascar

Malawi

Malaysia

Maldives

Mali

Malta

Marshall Islands

Mauritania

Mauritius

Mexico

Micronesia

Moldova

Monaco

Mongolia

Montenegro

Morocco

Mozambique

Myanmar

Namibia

Nauru

Nepal

The Netherlands

New Zealand

Nicaragua

Niger

Nigeria

Norway

Oman

Pakistan

Palau

Panama

Papua New Guinea

Paraguay

Peru

The Philippines

Poland

Portugal

Qatar

Romania

Russia

Rwanda

St. Kitts & Nevis

St. Lucia

St. Vincent & The Grenadines

Samoa

San Marino

São Tomé & Príncipe

Saudi Arabia

Senegal

Serbia

Seychelles

Sierra Leone

Singapore

Slovakia

Slovenia

Solomon Islands

Somalia

South Africa

Sri Lanka

Sudan

Suriname

Swaziland

Sweden

Switzerland

Syria

Taiwan

Tajikistan

Tanzania

Thailand

Togo

Tonga

Trinidad & Tobago

Tunisia

Turkey

Turkmenistan

Tuvalu

Uganda

Ukraine

United Arab Emirates

Uruguay

Uzbekistan

Vanuatu

Vatican City (Holy See)

Venezuela

Vietnam

Yemen

Zaire

Zambia

Zimbabwe

News flash: This is not 1982, and Obama is not Reagan.

The important difference is this: There was a good reason for the Volcker-Reagan recession: defeating inflation. American voters may not be terribly economically sophisticated, but they sure as heck did notice when inflation went from 13.5 percent to 3.2 percent — in two years. Presidents’ effects on the economy are overstated (economies are complicated and many of the most important factors are exogenous to public policy), but tackling inflation was a matter of politics and policy. The recession was hard, but we came through with something to show for it. For instance, mortgage rates that were 7 percent instead of 19 percent.

What, precisely, will we have to show for having come through the Obama recession(s)? A gigantic new federal entitlement program? Staggering amounts of debt? Persistently high levels of unemployment? That’s the best-case scenario. The worst case scenario includes pre-Reagan levels of inflation, a debased dollar, and a deep double dip in Recession Round 2. Obama’s first-class temperament is not going to do him a lot of good with a third-class economy.

Sen. Robert Casey (D., Pa.) and Rep. Earl Pomeroy (D., N.D.) are pushing legislation that would commit taxpayers’ dollars to bailing out the Teamsters’ retirement pension fund. The financial crisis and the Great Recession may have upset your retirement plans, but that’s not reason that politically connected union thugs have to share the pain.

Here’s the deal, as former Department of Labor official Vincent Vernuccio, now an analyst at the Competitive Enterprise Institute, tells Exchequer: Under the Democrats’ plan, the U.S. Pension Benefit Guaranty Corp., which is basically a pension-insurance fund run by the federal government, would be able to receive tax dollars to bail out so-called orphan pensions — pensions for which employers have ceased making contributions, usually for reasons of insolvency. Under normal circumstances, PBGC does not use taxpayer money to bail out pensions; it charges an insurance premium to the funds it covers and uses that money to make good on pension obligations if a particular pension fund goes bankrupt. It’s like an FDIC for pension funds: If a fund is sufficiently mismanaged, PBGC can step in, take it over, and take care of its obligations.

The Casey bill would change all that, creating a “fifth fund” within PBGC that would receive taxpayer support. Currently, federal law carefully specifies that PBGC obligations are not obligations of the U.S. government. Casey-Pomeroy would reverse that, mandating that “obligations of the corporation that are financed by the [fifth fund] shall be obligations of the United States.” In other words: You, sucker, are paying the bill.

This is worrisome for a lot of reasons, as Vernuccio points out: First, it establishes a precedent for taxpayer-funded bailouts of union pensions. As galling as it would be to bail out the Teamsters and their other private-sector union buddies — whose meatheaded management of their pensions has left them with as much as $165 billion in unfunded obligations, according to Moody’s — things would immediately get much, much worse if that precedent were used to justify a bailout of the public-sector unions, whose unfunded pension liabilities run into the trillions. (President Obama’s home state of Illinois is leading the way down the toilet when it comes to state-employee retirements. California’s pension shortfall, Vernuccio notes, is larger than the GDP of Saudi Arabia.) Casey-Pomeroy wouldn’t authorize public-sector bailouts, but it would establish an all too easily expandable template.

Second, Casey-Pomeroy almost certainly would lead to a broader union bailout. PBGC already has more obligations than it can meet, and its operations already are larger and more complex than most Americans imagine. According to its web site, “PBGC pays monthly retirement benefits, up to a guaranteed maximum, to nearly 744,000 retirees in 4000 pension plans that ended. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, PBGC is responsible for the current and future pensions of about 1,476,000 people.” Unsurprisingly, PBGC already is more than $20 billion in the red — which is to say, the guys who are supposed to cover you when your pension fund cannot cover its obligations cannot cover their obligations — and its own analysis suggests it will be $34 billion short by 2019. Guess who they’ll be going to for that money?

And that is the truly worrisome part: Casey’s bill would allow for the transfer of money from the “fifth fund” to other PBGC funds. In other words, we could end up paying for the whole thing. “It takes a couple of leaps,” Vernuccio says, “but, long term, you can see this being a backdoor bailout of PBGC.” There is no statutory limit on the amount of taxpayer money that could be committed to bailing out union pensions under the Casey bill. Taxpayers already have an unlimited commitment to bailing out Fannie Mae and Freddie Mac — do we really want to offer a bottomless well of public money to the Teamsters, too?

– Kevin D. Williamson is deputy managing editor of National Review.