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Tags: Fiscal Armageddon

Jon Chait Cannot Read: An Ongoing Series -- Mitch Daniels Edition



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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.

Tags: Debt , Deficits , Fiscal Armageddon , General Shenanigans

Another Stimulus, Another Bailout



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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.

Tags: Bailouts , Debt , Deficits , Democrats , Despair , Doom , Fiscal Armageddon , Illinois , Obama , Stimulus

A Prediction



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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.

Tags: Fiscal Armageddon , General Shenanigans , Obama , Stimulus

(Even) More Trouble at Citi: Is Obama Paying Attention? Is Gillibrand?



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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.

Tags: Banks , Financial Crisis , Fiscal Armageddon , General Shenanigans , Obama , TARP

Never Mind Putting Republicans in Congress . . .



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. . . 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.

Tags: Debt , Despair , Doom , Fiscal Armageddon , Municipal Bonds , Politics , Unions

Public-Pension Criminals



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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.

Tags: Angst , Debt , Deficits , Despair , Fiscal Armageddon , General Shenanigans , Illinois , New Jersey , Pensions

No Inverted Yield Curve = No Double Dip?



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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. 

Tags: Bonds , Double Dip , Economy , Fiscal Armageddon , Recession

Illinois Fiscal Meltdown: A Continuing Series



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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.

Tags: Angst , Despair , Fiscal Armageddon , General Shenanigans , Illinois , Obama , Rip-Offs

Listen to the CBO, Learn from the Greeks



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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.

Tags: Debt , Deficits , Fiscal Armageddon , General Shenanigans , Greece , Paul Krugman

And the Answer Is ....



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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.

Tags: Debt , Deficits , Despair , Fiscal Armageddon , Pop Quizzes

Pop Quiz



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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

Tags: Angst , Debt , Deficits , Fiscal Armageddon , Pop Quizzes

Bobby Bailout: Casey to Put Taxpayers on Hook for Teamsters’ Shenanigans



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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.

Tags: Angst , Bailouts , Democrats , Despair , Fiscal Armageddon , General Shenanigans , Pensions , Unions

Social Security Is Not Risk-Free



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I was struck by a particularly interesting stream of nonsense emanating from the mouth of the head of the Democratic Congressional Campaign Committee, Rep. Chris Van Hollen of the extraordinarily poorly governed state of Maryland. If we were to privatize or partially privatize the nation’s public-pension system, he argued, that would be the equivalent of “gambling.” Not investing, but gambling.

“If you privatize Social Security,” he said, “the end result will be that that money is not there. There is not a stable source of retirement money because we’ll be literally gambling it on Wall Street.”

Gambling. Literally?

Representative Van Hollen, as a pampered member of Congress, one day will enjoy a very nice pension funded by taxpayers. But he’s also an alumnus of a powerful Washington lobbyist/law firm, the well-connected son of an ambassador, and, even though he is not particularly well off by the standards of congressional Democrats (his ethics filings show his net worth to be considerably less than the price-tag on John Kerry’s yacht or Charlie Rangel’s sundry real-estate holdings) he’s not going to starve to death. If ever he leaves Congress, he will have a very lucrative career ahead of him. Chances are, he’ll retire a rich man. Is he going to invest all the money he makes in Treasury bonds? Does he invest all of his money in Treasury bonds today?

Presumably not. Most wealthy people invest their retirement savings in a mix of stocks, bonds, and other investments. The smart ones start off investing aggressively when they are young, getting more conservative and more liquid as they get older. That’s how you retire rich. That is not gambling. That is investing.

But many Americans, particularly Americans of modest means, find it difficult to save and invest. One of the reasons that they find it difficult to save and invest is that Uncle Sam skims 12 percent off the top of their paychecks and forces them to “invest” in Social Security — which, for most Americans, is an investment that provides embarrassingly low returns; for many Americans (such as black men, who are relatively short-lived), Social Security is a money-losing proposition.

Americans should keep this in mind: There is risk when investing in stocks and bonds. But there is also risk — real, terrifying risk — when “investing” in Social Security. Social Security’s unfunded liabilities are $108 trillion; if it were a bank or an insurance company selling retirement annuities, it would have been shut down long ago, and its executives probably would have been charged with crimes.

There is no corporation in the world that I am aware of with $108 trillion in net liabilities.

If you invest in a diversified basket of corporate bonds, there exists a possibility that some of them might go bad and default. (Speaking of which, junk bond issues are at an all-time high; what is it going to take to get Ben Bernanke’s attention? A giant flashing neon sign in the sky? A personalized message from God? An unexplainable rash in the shape of Milton Friedman?) Stocks and bonds go bad sometimes; that’s why you don’t put all of your money into one company. But for people of modest means, who will be almost entirely dependent on Social Security, all of their eggs are in a red, white, and blue basket — and they’re about to get scrambled by Congress and the Obama administration. When the time for choosing comes, and Washington has to decide whether to pay its bondholders in Beijing or little old blue-haired ladies in Muleshoe, Texas, waiting for their Social Security checks, who do you think is going to get shorted? The bond markets have the power to end Congress’s ability to borrow money on amenable terms — and that prospect scares the political class more than anything short of manual labor.

Don’t fall for the false-choice argument: There is risk to investing in stocks and bonds, but there is risk — probably greater risk — in counting on Social Security. You own your stocks and bonds, but Social Security can be taken away from you at the whim of Congress — or its value diluted by inflation when we start printing money to pay for all of the spending that Obama & Co. have been up to for the past couple of years.

Americans understand this, I think. Let me ask you to engage in a little thought experiment: Imagine that you are 25 years old. Given a choice between having the value of your future Social Security benefits in-hand today, either in the form of cash or in the form of a soberly diversified investment portfolio, or the promise of a Social Security check in 40 years, which would you choose? Why? Once you answer that question, you will know that Representative Van Hollen is talking through his hat.

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

Tags: Democrats , Fiscal Armageddon , General Shenanigans , Social Security

Only Suckers Pay Their Mortgages ...



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… with their own money, anyway. Uncle is now handing out $50,000 checks to homeowners threatening to default on their mortgages.

The Treasury Department says it will send $2 billion to 17 states that have unemployment rates higher than the national average for a year. They will use the money for programs to aid unemployed homeowners. Some of those states have already designed such programs.

Another $1 billion will go to a new program being run by the Department of Housing and Urban Development. It will provide homeowners with emergency zero-interest rate loans of up to $50,000 for up to two years.

A check for fifty grand? That’s got to be the biggest welfare payment not made to a farmer that I ever have heard of.

Notice this is another TARP tumor: In spite of the new financial-reform bill’s promise to roll up TARP, we’re still using “saved” TARP funds for spending shenanigans of every stripe.

Tags: Fiscal Armageddon , Housing

Subprime Nation: The High Price of Cheap Money



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It’s a great time to buy a house: Mortgages are at record lows — 4.4 percent for a 30-year loan.

It’s a terrible time to buy a house: Real-estate is still overpriced and likely to decline at least 5 percent — or as much as 20 percent if the double dip we’re apparently heading into turns out to be a deep one.

So the question is: How cheap does the money have to be before you decide to pay too much for the asset? That dilemma is the U.S. economy in miniature. Government borrows tons of money to get monkeys high on cocaine and other (economically, un)stimulating projects, but it gets to print all the money it wants and thus to repay the debt in devalued dollars. When the dot-com bubble turned out to be built more on gee-whiz tech enthusiasm than on real profits, we flooded the system with cheap money in the hopes that suckers investors thus armed would be up the price of those devalued assets. They bid up the price of real estate instead — and when that cheap-money bubble went south, what did we do? What are we doing? Flooding the economy with cheap money in the hopes that we can reinflate the real-estate bubble and start the whole thing all over again.

Now, with interest rates at basically zero and the economy probably headed back into recession, what is the Fed going to do? It can’t very well cut interest rates. Instead, it’s buying up Treasury debt. The Fed acquired a bunch of mortgage-backed securities as part of the bailouts. The Fed had planned to return that money to the taxpayers and let those assets disappear from its balance sheet as they were paid off. (Note: Never trust the government to do what it says it is going to do with the money it takes from you.) Instead, the Fed is taking that mortgage-bond money and investing in Treasury bonds — a subprime-for-subprime swap. The government is, in effect, buying its own debt. The Fed has a $2.3 trillion portfolio, and about $200 billion of those mortgage-backed securities will mature each year — more than the budget of the United States Army (2010 budget: $142 billion).

The problem for the economy at large is precisely the same as the problem for the housing market: the underlying assets have lost a lot of value, and you can’t make money cheap enough that paying too much for them makes sense. With our public debt headed toward Greek levels thanks to Obama & Co., and a deeply damaged financial system, we are due for a deep and intense national restructuring. There’s no way around that, and all of the cheap money that Helicopter Ben wants to throw at the problem won’t make it go away.

Tags: Fiscal Armageddon , Housing

Subprime This, Subprime That



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So now that it is basically out of monetary options, the Fed is going to keep greasing the wheels by buying up more U.S. government debt. The dollar says, Ouch!

The U.S. dollar fell against the yen and pared gains against the euro on Tuesday after the Federal Reserve said it would begin reinvesting proceeds from maturing mortgage bonds into longer-term government debt to support a flagging economy.

The euro rose to $1.3170 EUR= from around $1.3110. It was still down 0.5 percent on the day, but well off its session low.

The dollar extended losses against the yen to 85.31 yen JPY= from about 85.80 yen. It was 0.6 percent lower compared to late Monday.

The Obama stimulus is not working, it’s just eating up a gazillion dollars. Fed pump-priming is not working, it’s just devaluing those gazillion dollars eaten up by the Obama stimulus.

Is there a Plan B, guys?

Tags: Deficits , Fiscal Armageddon , National Debt

Gates Opens the Discussion on Cuts



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Secretary of Defense Robert Gates breaks the ice with a plan for some reductions at the Department of Defense.

Question: If DoD can take a scalpel to its budget, which funds an actual, legitimate federal responsibility, where are the secretaries of HUD, HHD, Education, Energy, etc? Those departments should be looking not at scalpels but at meat axes.

Tags: Budget , Fiscal Armageddon

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