What is now proved was once only imagined.
William Blake
State Bankruptcy to Shed Pension Deals and Other Debts? Thumbs DOWN!
Any regular reader of this blog knows I am not a fan of union leadership; we generally recognize that corrupt deal making of Democratic politicians generally results in a bad deal for the citizens: as Dennis Byrne points out in his current post "The Worst is Yet to Come in Illinois: "Compare that with Illinois, where state and local officers have stood weasel tall in controlling labor costs - handing out job guarantees (Gov. Quinn) and signing 10-year contracts (Mayor Richard M. Daley)." Byrne then adds: "Nationally, public pensions are facing a collective deficit of more than $3 trillion."
Some Republican leaders, notably former Florida Governor Jeb Bush and former Speaker Newt Gingrich, argue that state bankruptcy, just like local/county bankruptcies are handled, would avert what many see as almost inevitable federal bailouts of Democratic-controlled and mismanaged states of California, Illinois and New York--and allow states to break out of bad contracts (such as Quinn's and Daley's unconscionable deals). The co-authors then describe some procedural steps to enable the bankruptcy process but then give probably the best reason behind the option: knowing that the courts have the right to set the collective agreements aside gives the states leverage to force unions back to the bargaining table to renegotiate.
House Majority Leader Eric Cantor quickly dashed water on the idea, but columnist James Pethokoukis immediately read this as a sellout to Wall Street (which would stand to lose say, if state bondholders found themselves ripped off for pennies on the dollar, like Obama's corrupt auto company bankruptcy dealings).
No, I don't think we have to resort to yet another conspiracy theory. The US Constitution (Article 1 Section 10) says "No State shall...make any...Law impairing the Obligation of Contracts." Besides, the ability to do bankruptcy may actually result in perverse circumstances. Think of how Barack Obama, who will now preside over the third consecutive $1.3T or more budget deficit this coming September, voted against raising the debt ceiling when the national debt was half of its current size; now as President, he has members of his Administration crying Chicken Little. What restraint does a Democratic governor have to keep the budget in balance, to demand painful concessions from the unions? Why not let the federal judge take the heat? In short, moral hazards. If you think you've seen this movie before, you have, e.g., the S&L crisis and, of course, the real estate bubble. If the government was going to guarantee depositors, this allowed the S&L's to take on riskier loans; if the bank could pass mortgage notes with little collateral to the GSE's, which in turn had the implicit backing of the US Treasury (and, of course, the American citizen), the bank was really reaping the short-term rewards for doing the deal but left the American taxpayer holding the risk and losses...
No, the states have a statutory requirement to balance their books already. Maybe as citizens see their state services shrink while taxes go up, they'll think twice about electing spendthrift governors and state legislators in the future...
Even the
I just wanted to highlight a couple of posts where both authors seem to wax enthusiasm over Obama's "leadership" and "intelligence" since taking over, fully buying into the fiction that Obama found himself in over his head with an economic tsunami. I do not accept, for instance, that an earlier bankruptcy and reorganization for GM and Chrysler would have caused any more problems than the Obama effort. I hardly think a President whom will likely run his third consecutive $1.3T or more deficit is smarter than the CEO's whom, unlike Ford's, ran their car companies into a ditch.
As I read Megan McArdle's "The President as Micromanager", I know what my concept of a great manager is--and it's not Barack Obama. By any objective standard, Obama failed to lead; he basically let Harry Reid and Nancy Pelosi craft legislation on their own terms: he only outlined some general goals and then got out of the way and let the legislative heads go cook some nasty sausages, with fillers (e.g., earmarks, corrupt deals like the Cornhusker Kickback). Remember how he was against individual mandates for insurance while he was running for his party's nomination but threw individual liberty under the bus of last year's bill? This was NOT an accident; imagine the spin that the opposition could have made over some of the President's specific target goals getting voted down. But anyone who has ever had to impose discipline over undisciplined kids or students know: what happens when you take away freedoms they have taken for granted (e.g., curfew or detention)? So look at former Speaker Pelosi, absolutely furious that Obama cut a deal extending all the Bush tax cuts for 2 years in the lame duck session; she was so angry, she didn't even attend the signing ceremony. And, most currently, Harry Reid is sniping at Obama's promise to veto bills with earmarks; never mind a $14T debt: he doesn't like anyone infringing on his divine right to insert Nevada goodies into bills.
Megan McArdle's analysis, comparing Obama to a CEO whom is heading a ship that everyone knows is sinking but decides to put his best foot forward, brought to mind the Clayton Williams 1990 campaign for Texas Governor. Williams was a wildcatter and businessman with no prior political experience and had a certain good-old-boy charisma that connected with voters and he blew past his competition and had a 20-pt. lead over Democrat Ann Richards. Caught in a sudden rainstorm that briefly delayed his schedule, Williams said he would try to make the best of the inconvenience, "joking" that if you know you're going to be raped no matter what, you might as well sit back and enjoy the experience. It would be difficult to think of any reasonable person joking about rape--not to mention the fact he was running against a woman. Richards was able to come from behind and narrowly defeated him. (To a certain extent, Clayton Williams was much like Barack Obama and Sarah Palin in being a political novice (on a statewide basis) with plenty of charm and charisma, a breath of fresh air from business as usual--but sometimes one makes mistakes or lapses in judgment that experienced politicians would almost never make.)
McArdle then comments:
[Obama] understands the broad parameters within which the fixes will be carried out. But he can't make Congress do it before there's an actual crisis. And saying all of this is all too likely to trigger the crisis--a crisis he'd much rather would happen during someone else's presidency. So he tells us what we want to hear: that we need to find a way to fix Social Security without, y'know, changing it in any way. And will you look at those green jobs! I think we're going to have a bumper crop!I definitely disagree. After all, tax cutter President Ronald Reagan, with an opposition Congress, did agree to an increase in payroll taxes--before the 1984 election--to fix social security almost 30 years ago. If there was ever a time Obama could have fixed social security on his terms, it was with a super-majority in both houses of Congress. After all, Obama sold the health care legislation based on a few million uninsured--whom are not poor (because they would qualify for an existing program Medicaid). Many of those are uninsured because they prefer to pay a la carte; others lack it briefly between jobs (and have a COBRA option). But 60 million people collect social security--which is directly paid by the government.
But I do agree with Megan that the President is putting lipstick on a pig and punting the issue to another administration down the line.
Robert Samuelson (i.e., not economist Paul) does a good job of summarizing some inconvenient truths, not discussed in the State of the Union Address:
- "In fiscal 2010, the deficit -- the gap between government spending and revenues -- was $1.3 trillion. Of that, about $725 billion was a "structural" deficit, says Mark Zandi of Moody's Analytics. That is, it would exist even if the economy were at full employment (5.75 percent by Zandi's estimate)." Samuelson then notes this understates the problem because we are paying historically low interest rates and then will explode quickly.
- "The real issue isn't the deficit. It's the exploding spending on the elderly -- for Social Security, Medicare and Medicaid -- which automatically expands the size of government..." Samuelson implicitly rebukes Harry Reid and other "don't worry--be happy" Democrats insisting there is no real problem. There is no free lunch. Running deficits costs interest and raising taxes shrinks disposable income (with a negative effect on GDP)--never mind bailing out the elderly whom are getting paid more than they paid into the system.
- "The Republican Study Committee -- 176 House members -- recently proposed $2.5 trillion of cuts over a decade in non-defense, non-elderly programs...But this budget category covers only a sixth of federal spending." Obviously we have to broaden budget cuts to include defense and entitlements.
- "The elderly have "earned" their Social Security and Medicare by their lifelong payroll taxes, which were put aside for their retirement. Not so." No, the 15.3% (including employer contribution) is paid out to current beneficiaries, many of whom, living longer than expected, are receiving 2 to 3 times what they paid into the system. Any leftover goes into reserves, which are used to help finance the government deficit. As we baby boomers retire, it'll shrink the labor pool propping up entitlements. Oh, and the latest news from CBO? We expect a $600B deficit on social security spending over the coming decade if we don't fix the system.
Oh, and the NY Times leaves us with this warning tonight:
S.& P. lowered its sovereign credit rating for Japan to AA- from AA. That is three levels below the highest possible rating, and S.& P.’s first downgrade of Japanese government debt since 2002. With the lower grade, Japan’s debt rating is now on par with China’s...S.& P.’s move came just weeks after both it and its rival ratings agency, Moody’s, cautioned that they might take a more negative stance on the United States.
Political Humor
For the State of the Union address last night, Republicans and Democrats sat next to each other, instead of on opposite sides. The press called it "date night." How come they go on a date, but we're the ones who get screwed. - Jay Leno
[Well, the Democrats were all upset because they spent all that money, and the Republicans STILL said 'No'.]
An original:
- President Obama in the State of the Union Address mentioned our country is facing another Sputnik moment. He was, no doubt, making reference to the imminent retirement of our space shuttle program and Obama's cancellation of the Constellation program. [Maybe if Government Motors had been building spacecraft...] Now we'll be paying for Russian technology to transport our astronauts to outer space. We're #1! We're #1!
Musical Interlude: One-Hit Wonders/Instrumental
Lawrence Welk, "Calcutta". My maternal grandfather was a big Lawrence Welk fan.
