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Tags: Angst

The Debt-Ceiling Panic that Wasn’t



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The Democrats would have you believe that the current fight over raising the debt ceiling is a game of Russian roulette with the economy at stake. But people with money on the line — Treasury bond investors — do not seem to think that a default is exactly at hand. Bond yields are in fact quite low. I do not expect that to last forever, but the idea that we are seriously at risk of defaulting as a consequence of the debt-ceiling fight is a bunch of sound and fury signifying nada, mostly intended to preempt debate and minimize Republicans’ ability to pry further spending concessions out of the Democrats.

Don’t believe the hype.

What’s Turbotax Timmy up to in the mean time? For one thing, he’s putting the ongoing bailout of state and local governments on ice. (No, it’s not an infrastructure project;  it’s a bailout.) That is a good in and of itself, and to be celebrated. Treasury has been issuing a whole lot of “State and Local Government Series Securities” (SLGS), which are kind of an interesting thing. Treasury created the SLGS in the 1970s to help state and local governments effectively break federal law. Congress passed a law that stops state and local governments from issuing tax-free bonds at one rate and then earning arbitrage profits by reinvesting the proceeds at a higher rate. Since the locals can’t do that with their own tax-free bonds, Treasury created special securities for precisely that purpose. (And you thought Congress made the laws!) State and local budgeteers are up to their green eyeshades in debt (not to mention enormous pension liabilities for ex-bureaucrats sunning themselves on retirement-community beaches), and Treasury is helping them avoid the consequences of their decisions.

Bailout Nation lives, and one of the main reasons that Washington wants to raise the debt ceiling is that it wants to continue to camouflage how bad the overall, coast-to-coast, comprehensive government-debt situation is.

Tags: Angst , Debt , Deficits , Despair

The Entitlement Bubble: The Bust Is Going to Be a Nightmare



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In the course of arguing that our real national debt is around $130 trillion — as opposed to the official number of $14.7 trillion — I have frequently encountered the argument that I’m wrong to include unfunded entitlement liabilities in the total. Here’s a typical example from the comments to this post:

Kevin Williamson, expected spending 75 years in the future, based on current policies and projects that are certain to change anyway, is NOT debt. No amount of calling it “debt” or calling it “our REAL debt” changes that fact. Project funding gaps are not debt. DEBT is debt.

About that, a few things.

The first and most obvious thing is that in much of the real world, liabilities of that type are defined as debt, as your favorite corporate accountant will tell you. One of the reasons that American companies started filing all those unhappy financial restatements after the passage of Obamacare was that they had a whole lot of new, measurable, real-world financial liabilities, and they are obliged to include those in their disclosures. As one of our commentators answered the above criticism:

Many promises to pay are categorized as debt according to GAAP and accounting body authorities. If government were required to report like public companies a lot of the promises would show as debt. So if you don’t believe that GAAP correctly classifies debt and that the thousands of SEC filings are wrong it’s your prerogative, but you’d better keep your day job and not become a CPA or one responsible to produce SEC financials.

Maybe you object to the word “debt,” but it’s still $100 trillion or so on the wrong side of the balance sheet.

But there is a more important reason to worry about the entitlement shortfall. To understand it, it’s helpful to take a look back at the housing meltdown and its effect on the current economy. While it is true that a shocking number of homeowners currently are upside down on their mortgages, it’s also true that a lot of homeowners experienced only “paper losses” — they bought houses for $100,000, saw the value rise to $200,000, and then watched as it fell back down to $100,000 (to take a simplified example). People often pretend that these paper losses are meaningless: If the money never hit your checking account, the argument goes, you haven’t really lost anything. (And it’s not just households; I recently heard the same argument made about the Harvard endowment fund and its “pretend losses.”)

Here’s the problem: Those “paper losses” were preceded by “paper profits,” meaning people thought that they had an extra $100,000 in assets, and they made consumption, borrowing, investment, saving, and working decisions accordingly. The simplest illustration: Your $100,000 house, which is paid for, has gone up to $200,000 on the market at the top of the bubble. If you took out a $50,000 home-equity loan against 100 percent equity in your (at the time) $200,000 house, you still had $150,000 of equity, no mortgage, $50,000 in cash, and a $50,000 equity loan to pay off. If the market value of your house crashes back to $100,000, you still have no mortgage, $50,000 in cash, and a $50,000 loan to pay off, and the same house; you haven’t really lost anything (other than opportunity cost), since the house is still worth what you paid for it; and you only make your paper losses real if you sell the house while the market is down.

But anybody who thinks your financial situation hasn’t changed is nuts. Your equity debt has gone from 25 percent of the value of your house to 50 percent. Your credit profile has changed. Any other debts have just become significantly larger relative to the value of your biggest asset. (And your other assets, like your 401(k), probably are not in great shape, either.)

Whatever you’d planned to do with that $50,000, you probably are going to think twice about doing. If it was straight-up consumption, you’ll probably forgo the bass boat and pay back your loan. If it was for home improvements, why sink another $50,000 into a house that’s worth half of what it was, making a $150,000 investment in a $100,000 house? Your economic decisions will change.

But it’s not just you. The bigger problem — bigger because it’s harder to solve — is that somebody was planning to sell you that bass boat and those home improvements. You can buy one bass boat, but the guy at Bob’s Bass Boats doesn’t manufacture them one at a time. He’s counting on selling hundreds or thousands of bass boats to guys like you (that is, guys who are cashing in some of the gains from their residential real-estate investments). The suppliers and contractors and workers who stock and run Bob’s factory, the container ships that bring components from around the world, the people who service them — the whole system gets thrown into disarray. The capital Bob invested in factory tooling and whatnot is lost or radically devalued, and he has to make new investments to create whatever products he is going to sell in the new economic environment, e.g., less-fancy bass boats, or maybe paddle boats. (Or, if the Democrats continue to spend us into penury, those little inflatable floaty things for your arms.) The Austrian economists call that problem “malinvestment” — capital has been dedicated to uses that appeared productive but are not actually viable — and they blame them for recessions.

The problem with the business cycle under this analysis, you’ll notice, is not the bust — it’s the boom. That’s when the bad investment decisions are made, largely because political influence in the markets (housing policy, tax breaks, artificially cheap money and other interest-rate subsidies, risk subsidies, etc.) distorts economic calculation.

Which brings us back to the entitlements. It’s easy to say: Well, we’ll just raise the retirement age, or cut benefits, or means-test them, or raise taxes on the wealthy who receive them (which amounts to means-testing, but Democrats like that version better). And, yes, that probably is what we will do, eventually. But that does not get us out of the economic pickle: People have been making decisions for years and years — decisions about saving, investing, consuming, working, and retiring — based at least in some part on what are almost certainly faulty assumptions about what sort of Social Security, Medicare, and other benefits they will receive when they retire. When those disappear, a lot of consumption is going to have to be forgone — and a lot of capital dedicated to producing those goods and services for consumption will be massively devalued. Businesses will have to retrench, probably in a way that is more disruptive and more expensive than the housing-bubble recession necessitated.

This is the boom. The bust is going to be a nightmare.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

Tags: Angst , Debt , Deficits , Despair , Entitlements , Fiscal Armageddon , Gloom , Spending

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

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

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

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