US Economy

[a_majoor]

Kind of like riding the brakes while driving....

http://online.wsj.com/article/SB10001424052748704188104575083520811873704.html?mod=djemEditorialPage_h

Obama's New Investment Tax
A sneaky Medicare levy on dividends and capital gains.

The White House's new health-care proposal promises the "largest middle class tax cut for health care in history," which is a creative way of describing a vast taxpayer-subsidized insurance entitlement. Naturally, the fine print goes on to describe one of the largest tax increases for health care in history, too.

This new ObamaCare bargain would for the first time apply the 2.9% Medicare payroll tax to "interest, dividends, annuities, royalties and rents," so-called passive income that we are told includes capital gains, though the latter wasn't explicitly mentioned in the proposal. This antigrowth investment tax would apply to singles earning more than $200,000 and joint filers over $250,000 and comes on top of the Senate's 0.9-percentage-point increase in the payroll tax, which would bring the combined employee-employer share to 3.8%.

The rate hike on investment income would presumably take effect at the same time the 2001 and 2003 Bush tax cuts are due to expire next year, bringing the top rate to 22.9% as the current top capital gains rate would also rise to 20% from 15%. That's a 52% jump, and the last time investors were slammed with anything comparable was 1986 when the capital gains rate bounced to 28% from 20%—or a 40% increase—as part of the Reagan tax reform that reduced income tax rates.

In part this is a sneaky way of waging the House's war on "the rich" by other means while appearing to compromise. Speaker Nancy Pelosi's 5.4-percentage-point "surcharge" on modified adjusted gross income above $1 million—which also includes capital gains—was supposedly too extreme for the Senate, but the White House is trying to smuggle in its 2.9-percentage-point cousin. Of course, $250,000 is a lot lower income threshold than $1 million, and the rate can always be inched up later once the tax is already in place.

The House surcharge is certainly destructive but it is at least above-board. The White House levy muddies up both the tax code and Medicare financing.

The Medicare payroll levy was designed as a social insurance program with some connection, however attenuated, between taxes paid and benefits received. When Medicare passed in 1965 it was modelled after Social Security and the tax was supposed to be equivalent to a "premium" for guaranteed health-care insurance for seniors; everyone "contributed" at the same rate. Until 1993, the payroll tax was assessed only on the first $135,000 of wages, until the Clinton Administration and the Democratic Congress lifted the Medicare cap entirely.

The Clinton move was bad enough but Mr. Obama's plan fundamentally changes the nature of the government's health-care financing. Medicare's liabilities mean that it must receive injections of general revenue, but never before have Medicare's own "dedicated" revenues been siphoned off to fund another entitlement. Essentially, it turns Medicare financing into a wealth transfer program at a stroke.

This will be sold in the name of "fairness," if anyone else in the press corps notices, but the worst implications are economic. The 0.9% increase is another tax on job creation, though Democrats claim they want more jobs. The devious 2.9% hike on investment income will raise the cost of capital, though Democrats claim to want more capital investment. Sometimes we wonder if Democrats even listen to their own rhetoric, or if they assume voters are too dumb to notice their contradictions.

If Americans need another reason to oppose ObamaCare, or more evidence of its destructiveness, here it is.

Printed in The Wall Street Journal, page A16

 

[Edward Campbell]

part 1 of 2

Here, reproduced in two parts under the Fair Dealing provisions (§29) of the Copyright Act from Reuters via the Globe and Mail web site, is a thought provoking article on the US dollar:

http://www.theglobeandmail.com/report-on-business/economy/why-the-us-dollar-may-be-heading-for-a-slow-fall/article1478413/

Why the U.S. dollar may be heading for a slow fall
Investors seen choosing the ‘least ugly' contestant among currencies for now


Steven C. Johnson, Kristina Cooke and David Lawder

New York and Washington — Reuters

Wednesday, Feb. 24, 2010

The only time the U.S. dollar ever took a serious shellacking in the marketplace, the wounds were almost entirely self-inflicted.
Facing mounting inflation and the escalating cost of the Vietnam War, President Richard Nixon, on Aug. 15, 1971, took the United States off the gold standard, which had been in place since 1944 and required that the Federal Reserve  back all dollars in circulation with gold.
The move amounted to a made-in-America double-digit devaluation, shocking the country's foreign creditors.

Deep inside the New York Federal Reserve Bank's fortress in lower Manhattan, Scott Pardee, then 34, was fielding frantic calls from central bankers around the world. They were demanding the United States cover the foreign exchange  risk on their reserves.
“The whole roof came in on us,” recalled Mr. Pardee, a former New York Fed staffer who is now an economics professor at Vermont's Middlebury College. “That is the kind of situation the U.S. doesn't want to be in.”

Nearly 40 years later, the dollar still dominates world trade. At the height of the financial crisis in 2008, investors fled to the dollar as a temporary haven. But the dollar has been falling steadily since 2002, and as the world economy recovered last year, dollar selling resumed, reviving doubts about how long it could remain the world's unrivaled reserve currency.

The Greek debt crisis, which has sent investors stampeding back into the U.S. currency, has provided a reprieve. The dollar has gained some 10 per cent against the euro since December. And following the Fed's decision last week to hike the discount rate it charges banks for emergency loans, the dollar rose even higher as some investors bet it would benefit from the eventual end to the Fed's post-crisis regime of easy money.

But a number of economists, investors and officials here and abroad interviewed for this story say the longer-term prognosis is far from rosy.

“There'd be hell to pay for the dollar”

As the United States racks up staggering deficits and the center of economic activity shifts to fast-growing countries such as China and Brazil, these sources fear the United States faces the risk of another devaluation of the dollar. This time in slow motion - but perhaps not as slow as some might think.

If the world loses confidence in U.S. policies, “there'd be hell to pay for the dollar,” Mr. Pardee said. “Sooner or later, the U.S. is going to have to pay attention to the dollar.”

French President Nicolas Sarkozy, at January's World Economic Forum in Davos, proposed, to scattered applause, creating a new version of the Bretton Woods currency accord, which set up the very gold standard that Mr. Nixon brought crashing down.

Most economists doubt a return to the gold standard is feasible in today's interconnected world, with so much capital crossing borders at the click of a mouse.

Yet, as Gian Maria Milesi-Ferretti, a foreign exchange expert at the International Monetary Fund in Washington, put it: “Post-crisis, a lot more things are on the table. It is true among policymakers and in the markets that people are much more willing to look at unconventional proposals and even some proposals that may seem antiquated.”

Some argue the dollar's recent rally against the euro and yen (it's up almost 6 per cent against the Japanese currency since December) is less a vote of confidence than a realization that it's simply the best of a bad bunch.

Per Rasmussen, a retired currency trader who worked at Chase in the late 1970s in London, called it a “reverse beauty pageant” in which investors pick the “least ugly” contestant.

Since rising above $1.50 in November, the euro has tumbled more than 10 per cent and was last changing hands around $1.3550, near a nine-month low.

The currency has been battered by doubts about whether Greece and other wobbly euro zone economies can manage the spending cuts needed to rein in out-sized budget deficits. The worries have weakened confidence in the whole concept of European monetary union.

Thomas Kressin, who helps manage PIMCO's $100-million GIS FX strategy fund, said the euro is in danger of entering into an extended downtrend that takes it as low as $1.22 - which he described as fair value - over the next three to five years.

But the euro's lurch lower has done nothing to change traders like Axel Merk's dim view of the dollar's future.

Based in Palo Alto, California, Mr. Merk has been trading for 16 years and is currently president and portfolio manager of Merk Investments, the biggest mutual fund manager dealing exclusively with currencies.

He acknowledges he has had to scramble in his short-term funds to avoid being on the wrong side of the euro's nosedive. But over the next decade and beyond, Mr. Merk said the dollar has nowhere to go but down.

Investors will balk at “reckless U.S. fiscal and monetary policies” and start looking for alternatives to the U.S. currency, he said.

Others might take refuge in commodities. A recent U.S. Securities and Exchange Commission filing showed billionaire investor George Soros' New York-based firm more than doubled its bet on the price of gold during the fourth quarter.

Mr. Merk, whose $550-million Hard Currency Fund is designed to profit from a steady dollar decline, said he believes Washington is banking on a gradual dollar devaluation to shrink its monstrous debt and fuel an export boom to propel the economy.

“Now I am convinced that (U.S. authorities) consider a weaker dollar the solution to many of their problems. But you can't turn your policies upside down and expect the rest of the world to put up with it forever.”

That view is at odds with the official line from U.S. policymakers. They insist that “a strong dollar is in the U.S. interest,” a phrase repeated so often by former Treasury Secretary Robert Rubin in the 1990s it became his mantra. The person in the job today, Timothy Geithner, has made this mantra his own.

What's clear is that America's debt-holders aren't the passive, pliant bunch they used to be. Some of the biggest holders of U.S. dollar assets are also among the fastest growing economies and they are hardly bashful about criticizing U.S. policies, particularly now that the financial crisis has eroded America's influence and its reputation for sound economic management.

China alone holds $2.3-trillion in foreign exchange reserves, with nearly $800-billion in U.S. Treasury debt. And at a press conference last year, Premier Wen Jiabao did not mince words: “We have lent a massive amount of capital to the United States and of course we are concerned about security of our assets. To speak truthfully, I do indeed have worries.”

Terrence Checki, who has acted as the Federal Reserve Bank of New York's chief international trouble-shooter for two decades, warns that the U.S. cannot afford to ignore such concerns.

“We are no longer alone as the central axis for the global economy,” he told a gathering of influential bankers and policy-makers during a Foreign Policy Association dinner at New York's St Regis hotel in December.

That, he added, implies “recognizing that our leverage will not be what it once was. We also need to be attentive to the messages we receive, such as rumblings about the dollar and our policies and priorities, even when we disagree with them.”

History suggests that a currency is supplanted the same way Ernest Hemingway said a man goes broke: gradually, then suddenly. In terms of economic might, the United States surpassed Britain in the late 19th century. But it took another 60 years and two world wars to strip sterling of its reserve status.

Even so, some worry time is not on the United States' side. Emerging markets already account for roughly half of global output and that share is rapidly increasing. In 2003, Goldman Sachs said the size of China's economy would surpass that of the United States by 2041. Five years later, it revised the forecast to 2027. China is expected to surpass Japan as the world's second largest economy this year.

“We are plainly overextended in our budgetary terms and in our dependence on foreign capital”

All of which would be fine were it not for the fact that the United States continues to live beyond its means. The recent spike in borrowing and spending following the financial crisis is creating a debt burden that, in the word of Moody's Investors Service, is trending “clearly, continuously upward.”

For the last 60 years, reserve currency status has conferred upon the United States what former French President Valery Giscard d'Estaing, during his time as finance minister, called “the exorbitant privilege.”

Because the dollar is in high demand, U.S. borrowing costs remain low. That makes it easier for the government to fund domestic priorities and military commitments and the average citizen to buy a home or start a business.

It also means the United States need not borrow or repay debts in foreign currencies, making the value of its currency a less urgent concern than it would be for other borrowers who borrow and pay for imports with dollars.

But such easy access to capital has led to huge deficits. With Americans spending more than they save, the money to finance the shortfalls has to come from abroad.

“We are plainly overextended in our budgetary terms and in our dependence on foreign capital; we resort to the kindness of strangers to meet our deficits,” said former Federal Reserve Chairman Paul Volcker at an Economic Club of New York speech last month. Volcker is now head of President Barack Obama's Economic Recovery Advisory Board.

That kindness probably has a limit.

China and Russia have both talked publicly about long-term alternatives to the dollar. Some central banks, including Russia's, have said they intend to hold a greater amount of their foreign exchange reserves in other currencies.

Chinese central bank governor Zhou Xiaochuan also made waves last year when he said the dollar should one day be replaced, perhaps by a “super-sovereign” reserve currency based on Special Drawing Rights, the IMF's in-house unit of account.

Economists have interpreted the comments as an attempt to give the yuan, China's currency, a more prominent role in global finance, in keeping with the nation's growing clout on the world stage.

Of course, that won't happen overnight.

“There might be some progress towards multi-polarization of the international monetary regime, but there will be no immediate change to the dollar's role as the main international currency,” said Zhang Zhigang, chief economist with the China Center for International Economics Exchanges.

But over the last year, China has voted with its pocketbook. It quietly struck currency swap accords worth some 650 billion yuan ($95-billion) with central banks in Asia, Latin America and Eastern Europe that allow importers to pay for Chinese goods in yuan instead of dollars.

That could set the stage for greater use of the yuan for offshore financial and investment purposes. And that is a precondition if the currency is to achieve greater international status.

For now, however, central bank reserve managers have few options beyond the dollar. No country is close to outranking the United States - economically, militarily or politically.

The euro, which many see as the dollar's most immediate rival, is tied to an economic area with no common political or fiscal policy. That's part of what makes solving Greece's debt woes so difficult.

It also lacks a common bond market. Veteran Brown Brothers Harriman currency strategist Marc Chandler likens Europe's sovereign bond markets to those for U.S. municipal debt - lots of issuers of varying size and credit quality, but none that on its own can rival the deep, liquid U.S. Treasury market.

The U.S. Treasury, in an addendum to its October 2009 currency report, cited the disparate sovereign debt markets as the key reason the euro doesn't take an equal share of global reserves, even though the eurozone approximates the United States in economic power.

But other rivals will likely continue to gain strength. Ten years ago, China “was hardly even on the radar screen” in Washington, said Jeffrey Garten, a professor at the Yale School of Management and a former undersecretary of commerce during the Clinton administration.

“So people who say their currency is nowhere near an international currency and that it's going take at least 20 or 30 years -- I think they're living in a dreamworld,” Mr. Garten said.

As they open up and develop their capital markets, emerging economies such as China, Brazil or India could see their currencies occupy a larger portion of central bank reserves in coming decades, according to the October U.S. Treasury report.

It also asserts that as long as the United States maintains sound macroeconomic policies and open, deep and liquid financial markets, the dollar will remain “the major reserve currency.”

Some worry, however, that the parlous state of U.S. public finances makes betting on long-term dollar dominance dicey. The White House this month said the 2010 budget deficit would reach $1.565-trillion - at nearly 11 percent of output, the largest shortfall since World War II.

But America was running large trade and budget deficits before the financial crisis. “We went into the crisis in a weak fiscal position,” said C. Fred Bergsten, a former assistant Treasury secretary and current director of the Washington-based Peterson Institute for International Economics.

Dean Baker, co-director of the Center for Economic Policy Research in Washington, said U.S. finances are still manageable and a weaker dollar is necessary to boost exports, cut the trade deficit and end a multi-decade spending binge.

Provided America invests in education and infrastructure, maintains high output and productivity and keeps people employed, he said it can overcome the challenges it faces.

“We are moving to a world that's going to be multi-polar, a world where the dollar is not going to be as dominant as today,” he said. “But if we do things to keep the U.S. economy strong, we will be able to finance ourselves going forward.”

The United States found ready buyers for roughly $1.7-trillion in new debt issued in fiscal year 2009, which brought total debt held by the public to $7.89-trillion, some 55 per cent of output.

 

[Edward Campbell]

Part 2 of 2

“The bottom line is that we can't keep borrowing at this pace forever”

There are, however, some early signs that buyers may be growing sated. Treasury plans to issue another $1.5-trillion to $2-trillion this year - a record $126-billion this week alone. Yet auctions for $41-billion in long-dated debt earlier this month attracted only modest interest. The yield demanded by buyers of fresh 30-year debt was the highest in more than two years.

The United States still pays less than 4 per cent on its 10-year Treasury notes - well below an average of 7-9 per cent in the 1980s and 1990s. But economists also worry about the government's unfunded pension and health care liabilities.

Last year, Dallas Fed President Richard Fisher estimated that the United States may be on the hook for as much as $99-trillion, much of it tied to Medicare. That's about seven times the size of the entire U.S. economy.

“The bottom line is that we can't keep borrowing at this pace forever,” said Kenneth Rogoff, Harvard University economist and former chief economist at the IMF. “That only works if the Chinese are willing to lend us unlimited amounts of money at near-zero interest rates, and that just isn't going to last forever.”

When it ends, Mr. Rogoff said the U.S. will have to deal with higher interest rates, higher taxes and slower growth, all of which will further undermine its economic might.

Of course, much as the United States depends on Chinese savings to finance its deficit, China depends on U.S. consumers to keep buying its exports.

Few think this mutual dependence can last indefinitely. U.S. authorities and a number of economists claim the problem is China's inflexible exchange rate that pegs the yuan to the dollar, thus keeping it undervalued to support exports.

Analysts at the Washington-based Peterson Institute say that given China's massive growth, the yuan may be undervalued against the dollar by as much as 40 per cent.

Since President Barack Obama assumed office, the U.S. has twice declined to label China a currency manipulator, a move that could trigger trade sanctions. But the administration has repeatedly complained of China's unfair trade advantage.

Recently, the White House even pledged to double U.S. exports in five years, a goal that economists say would require a significantly weaker dollar.

It's not clear how much other nations, particularly China, will go along.

In the post-Cold War era, currency talks are the rough equivalent of nuclear arms reduction negotiations. In language evocative of the U.S.-Soviet face-off, Chinese military officers have proposed punishing Washington with “a strategic package of counter-punches” that includes dumping U.S. government bonds.

While the military plays no role in setting China's foreign exchange holdings, the comments underscored the rising level of tension and mistrust between the two powers.

“The Chinese are in the classic dollar trap”

Nicholas Lardy, a senior Peterson Institute fellow, dismisses such threats, noting that China's vast dollar wealth would start to evaporate and its currency to rise if it started unloading Treasuries.

“The Chinese are in the classic dollar trap. They have so many dollars that they can't diversify,” he said.

Marc Leland, head of Leland & Associates and deputy undersecretary of the Treasury during the first Reagan administration, said: “It's only leverage if one thinks they can pull the trigger. I don't think they can.”

Morgan Stanley Asia chairman Stephen Roach isn't so sure. He said that if the U.S. eventually resorts to trade sanctions against China - not unthinkable in a U.S. election year, with the unemployment rate near 10 pe rcent - Beijing would likely retaliate.

China might boycott a Treasury auction, he said, which could cause the dollar to plummet and interest rates to spike.

“I spend a lot of my time talking to the Chinese about that, and if it happened, I think they would feel compelled to stand up and take strong retaliatory actions, even though, yes, there would be consequences for them as holders of Treasuries and other dollar-denominated assets,” Mr. Roach said.

Mr. Merk, the investor who is betting against the U.S. currency, said the dollar's future may depend on Washington assuming a more humble attitude.

“Once you believe that you are better and greater than everyone else, you have a problem,” he said, “because today, the competition is right around the corner.”

That may be especially true for any winner of a reverse beauty context.

Like it or not, our economic future is tied, closely, some argue too closely (but they fail to offer realistic alternatives) to the US and to the fate of the US dollar.

We, the whole world, were accustomed to a bipolar world, in strategic military terms, from the ’50s through to the end of the ‘80s but this is the first time in a very, very long time that we have experienced anything but a unipolar monetary world – for 500 years we have depended upon silver or gold backed currencies, most lately the pound and, now, the dollar. We may have to get used to a world in which there is no single, national, reserve currency with all the economic leverage that provides. 

 

[a_majoor]

An 8.8% reduction in spending is a "nightmare scenario"? Considering the deficits are running in the trillion dollarrange, I would suggest these "austerity program" cuts are only 1/3 of what is actually needed (to reach a balanced budget so no new interest charges are accrued), and since the writer uses the "cut the musical ride" approach but does not look at exploding entitlements very closely, even this proposed program would have only a limited impact.

The writer also has a very implicit Keynesian bias towards the idea that only government spending can create employment, and makes no attempt to see if tax cuts or the elimination of economic distortions caused by these programs would provide investment to create new jobs:

http://www.businessinsider.com/this-is-what-the-us-government-austerity-budget-could-look-like-2010-2

The Nightmare Scenario: How The U.S. Government Would Look Under An Austerity Budget

As lending to sovereigns dries up, the world is talking about austerity budgets.

For now though, despite sky-high debts, the US can borrow at ease

But what would the United States look like under one?

The Irish have instituted a wide ranging austerity budget that has cut everywhere in order to bring the country's debt as a percentage of GDP back into line with Euro requirements.

So let's imagine for a moment...
Who would get killed in a US austerity budget >

The Unemployed Get Burned

Image: AP
Irish Money Reduction To Unemployed: 425 Million Euros ($578 million)

Similar U.S. Program: Unemployment Insurance, which has experienced significant extensions since the start of the recession.

Source: Irish Budget

Job Seekers Get Crushed

Job Seekers Get Crushed

Image: AP
Irish Money Reduction For Job Seekers: 197 Million Euros ($268 Million)

Similar U.S. Program: Unemployment Insurance: Welfare for unemployment has been reformed in America to only pay out those seeking employment.

Job Growth Spending Gutted

Image: AP
Irish Cut To Enterprise And Trade Spending: 50 Million Euros ($68 Million)

Similar U.S. Program Cut: Recovery Act and traditional Labor Department Spending.

Child Spending Gets Slashed

Image: AP
Irish Money Reduction On Child Spending: 221 Million Euros ($300 Million)

Similar U.S. Program: The Administration for Children and Families, which, under the U.S. Department of Health and Human Services, provides benefits for low income families in need of assistance for their children.

Drug Spending Gets Destroyed

Image: AP
Irish Money Reduction On Prescription Medicines: 141 Million Euros ($192 Million)

Similar U.S. Program: Medicare prescription drug coverage.

Dental Services Cut

Image: AP
Irish Money Reduction: 30 Million Euros ($41 Million)

Similar U.S. Program: Medicare and Medicaid dental services.

Retirees Ransacked

Image: AP
Retirement Age Increases From 65 To 66 Years

Similar U.S. Program: Social Security benefits begin at age 62, but full retirement for many Americans won't be until age 67. Merging the two into one date at 66 would be a similar result to the Irish plan.

Public Servant Pay Punished

Image: AP
Irish Money Reduction: 1 Billion Euros ($1.36 Billion)

Similar U.S. Program: Government wide salary reduction based upon the Irish rules of:

5% Cuts for first 30,000 Euros ($41,000) in salary.

7.5% For the next 40,000 Euros ($54,000) in salary.

10% On the next 55,000 Euros ($75,000) in salary.

Public Service Retirements Pulverized

Image: AP
Irish Money Reduction: Retirement benefits to be paid as average of career earnings, rather than final earnings in highest paid employment.

Similar U.S. Program: More across the board cuts in entitlements for retired and future government retirees.

Carbon Tax Hammers Polluters

Image: AP
Irish Money Increase Via Carbon Tax: 330 Million Euros ($448 Million)

Similar U.S. Program: Cap and Trade, but a tax has also been suggested.

Potential Increase In U.S. Tax Intake: 87.5 Billion Euros ($119.2 Billion) (interpolation; only if carbon emitters sit still and do not change their behaviour to reduce their tax exposure)

Spending on Education and Science Slashed 2.6%

Image: AP
Irish Cut In Science And Education Spending: 200 Million Euros ($272 Million)

Similar U.S. Program Cut: $4.01 Billion

Health And Children Spending Cut 3.5%

Image: AP
Irish Cut: 400 Million Euros

Similar U.S. Program Cut: $28.966 Billion

Welfare Payments Slashed by 4.1%

Image: AP
Potential Reduction In U.S. Welfare Spending for 2010: $22.837 Billion

Defensed Spending Sliced By 4.7%

Image: AP
Irish Cut To Defense Spending: 43 Million Euros ($58 Million)

Similar U.S. Program Cut: $41.633 Billion

Total Budget Gutted By 8.8%
Irish Budget Cut: 4.051 Billion Euros ($5.52 Billion)

Similar U.S. Budget Cut: $328.497 Billion

Source: Irish Budget and USGovernmentSpending.com

 

[observor 69]

To me this article is just stating the obvious, to others not so much. 

NEW YORK TIMES

March 5, 2010
Op-Ed Columnist
Senator Bunning’s Universe
By PAUL KRUGMAN
So the Bunning blockade is over. For days, Senator Jim Bunning of Kentucky exploited Senate rules to block a one-month extension of unemployment benefits. In the end, he gave in, although not soon enough to prevent an interruption of payments to around 100,000 workers.

But while the blockade is over, its lessons remain. Some of those lessons involve the spectacular dysfunctionality of the Senate. What I want to focus on right now, however, is the incredible gap that has opened up between the parties. Today, Democrats and Republicans live in different universes, both intellectually and morally.

Take the question of helping the unemployed in the middle of a deep slump. What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment. That’s because the economy’s problem right now is lack of sufficient demand, and cash-strapped unemployed workers are likely to spend their benefits. In fact, the Congressional Budget Office says that aid to the unemployed is one of the most effective forms of economic stimulus, as measured by jobs created per dollar of outlay.

But that’s not how Republicans see it. Here’s what Senator Jon Kyl of Arizona, the second-ranking Republican in the Senate, had to say when defending Mr. Bunning’s position (although not joining his blockade): unemployment relief “doesn’t create new jobs. In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.”

In Mr. Kyl’s view, then, what we really need to worry about right now — with more than five unemployed workers for every job opening, and long-term unemployment at its highest level since the Great Depression — is whether we’re reducing the incentive of the unemployed to find jobs. To me, that’s a bizarre point of view — but then, I don’t live in Mr. Kyl’s universe.

And the difference between the two universes isn’t just intellectual, it’s also moral.

Bill Clinton famously told a suffering constituent, “I feel your pain.” But the thing is, he did and does — while many other politicians clearly don’t. Or perhaps it would be fairer to say that the parties feel the pain of different people.

During the debate over unemployment benefits, Senator Jeff Merkley, a Democrat of Oregon, made a plea for action on behalf of those in need. In response, Mr. Bunning blurted out an expletive. That was undignified — but not that different, in substance, from the position of leading Republicans.

Consider, in particular, the position that Mr. Kyl has taken on a proposed bill that would extend unemployment benefits and health insurance subsidies for the jobless for the rest of the year. Republicans will block that bill, said Mr. Kyl, unless they get a “path forward fairly soon” on the estate tax.

Now, the House has already passed a bill that, by exempting the assets of couples up to $7 million, would leave 99.75 percent of estates tax-free. But that doesn’t seem to be enough for Mr. Kyl; he’s willing to hold up desperately needed aid to the unemployed on behalf of the remaining 0.25 percent. That’s a very clear statement of priorities.

So, as I said, the parties now live in different universes, both intellectually and morally. We can ask how that happened; there, too, the parties live in different worlds. Republicans would say that it’s because Democrats have moved sharply left: a Republican National Committee fund-raising plan acquired by Politico suggests motivating donors by promising to “save the country from trending toward socialism.” I’d say that it’s because Republicans have moved hard to the right, furiously rejecting ideas they used to support. Indeed, the Obama health care plan strongly resembles past G.O.P. plans. But again, I don’t live in their universe.

More important, however, what are the implications of this total divergence in views?

The answer, of course, is that bipartisanship is now a foolish dream. How can the parties agree on policy when they have utterly different visions of how the economy works, when one party feels for the unemployed, while the other weeps over affluent victims of the “death tax”?

Which brings us to the central political issue right now: health care reform. If Congress enacts reform in the next few weeks — and the odds are growing that it will — it will do so without any Republican votes. Some people will decry this, insisting that President Obama should have tried harder to gain bipartisan support. But that isn’t going to happen, on health care or anything else, for years to come.

Someday, somehow, we as a nation will once again find ourselves living on the same planet. But for now, we aren’t. And that’s just the way it is.



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[Edward Campbell]

Paul Krugman is "stating the obvious" for those who know that the currency can be debased, over and over and over again, for purely partisan, political gain.

Sen. Bunning is also "stating the obvious:" chickens come home to roost; bills must be paid; inflation - fueled by zealous, devil take the hindmost overspending - is the real enemy of the poor because it lowers the value of what little they have.
 

 

[a_majoor]

Who is that John Galt guy anyway?

http://www.denverpost.com/harsanyi/ci_14658950

Harsanyi: Beware the Amazon

By David Harsanyi
Posted: 03/12/2010 01:00:00 AM MST

Tyranny is afoot. And this evil arrives in the guise of second- hand books and cheap Chinese trinkets. So beware.

Actually, if anyone ever needed an obvious illustration of how government overreach can damage an economy, they need look no further than the Colorado legislature's foolish attempt to wheedle a few extra bucks out of consumers via an Internet sales tax.

After legislation forcing online companies to collect sales tax passed, Amazon.com moved to protect its consumers and long-term interests by severing its ties with Colorado. Unfortunately, this meant closing its associates program, which involved an estimated 5,000 jobs.

Amazon's actions were not surprising, as it did the same in North Carolina and Rhode Island (a state, incidentally, which reportedly saw no additional revenue generated after passing a similar law taxing Internet sales).

"They've done nothing here but spit in our face," bristled Colorado Senate Majority Leader John Morse in a ludicrous rant on YouTube, wherein he went on to describe Amazon's actions as "such tyranny!"

Tyranny? Imagine that.

Since we're throwing incendiary words around, it should be noted that Morse's actions are a far better fit for the definition. The dictionary, after all, defines tyranny as "oppressive power exerted by government" or a "government in which absolute power is vested in a single ruler."

Besides, Amazon does not possess the power to compel its will on any Colorado citizens. All Amazon can do is pick up and leave. The state, on the other hand, does have the ability to coerce both taxpayers and corporations.

Once you get past the hyperbole of embarrassed legislators, the argument— and it has appeal — is that there is a lack of "fairness." Why should out-of-state online stores have an advantage over the traditional stores in the state?

Well, Amazon came up with better technology, it offers better services and, thus far, it has had a far superior business model. That's why. Let's leave the slippery concept of "fairness" to toddlers and legislators.

Amazon and other similar online stores offer a near-infinite array of choices at affordable prices. Their success hurts many on-the-ground businesses, no doubt, but it also benefits millions of consumers who save money. The tax savings that consumers cull from Internet purchases will be spent elsewhere, and more than likely in brick-and-mortar establishments.

But let's not forget that legislators also packed the bill with punitive measure and mandates that resemble, gulp, "tyranny."

Not only must online businesses notify consumers to pay taxes, but they would be mandated to hand over consumer sales records, and if not, pay fines for every violation — many beyond their control.

And as a recent Tax Foundation study on "Amazon laws" concluded, online companies would have to deal with more than 8,000 different tax computations should every state join Colorado's effort. Amazon would be nuts not to fight.

Still, you can understand why some folks are mad. ProgressNow, a liberal advocacy group, has launched a boycott of Amazon, which is a fine way to make a point, though I suspect its impact will be as small as the national Whole Foods boycott (which started after CEO John Mackey had the gall to offer some constructive ideas on health care reform).

One only wishes that citizens could boycott irascible and intrusive state legislators — with their knee-jerk, ill-informed, anti-capitalist sentiment — who are willing to risk the jobs of thousands of citizens for a couple million bucks in the state's coffers.

Alas, no such luck.

E-mail David Harsanyi at dharsanyi@denverpost.com and follow him on Twitter at @davidharsanyi.

Read more: http://www.denverpost.com/harsanyi/ci_14658950#ixzz0i7rW1JSu

 

[a_majoor]

You can either take a look at the facts or:

http://www.smalldeadanimals.com/archives/013716.html

Blame Bush

    There are a few little-regarded truths that have been buried under the relentlessly spewed pile of lies that were used to demonize George W. Bush and the Republican Congress from the day Al Gore failed to carry his own home State in the 2000 Election until… well… it’s still pretty much a leftist pastime.

    The horror of “the last 8 years” has become it’s own self-perpetuating meme. The problem is that it’s a meme without meaning. Two of those eight years – now stretched to three out of the last nine – saw fiscal and regulatory policies determined by the Democrat Congressional majority, elected in 2006. Every economic indicator available shows that this is where America’s recent tribulations began.

    The real horror – the years since the Democrat Congress rose to absolute power – hasn’t seen much discussion. It’s “all Bush’s fault”, as they say. But as the last ten years recede into the rear view mirror, we can see them in context. And 20/20 hindsight can often be quite revealing.

Read the whole thing, then pass it along to your friends.

h/t Cal2

 

[a_majoor]

More dominoes stacked up in a row:

http://www.city-journal.org/2010/20_2_strategic-mortgage-default.html

Luigi Zingales
The Menace of Strategic Default
Homeowners who walk away from their mortgages undermine our financial system.
Spring 2010

Eighteen years ago, when I bought my first apartment in Chicago, I asked my broker whether, if I defaulted on my mortgage, the lender could come after my income after repossessing the house. I had heard that some states didn’t allow that, and I wondered if Illinois was among them. To my surprise, the broker didn’t know, either, but she promised to find out. It clearly wasn’t a burning question for her, since she still wasn’t able to answer it the next time we met. Our ignorance wasn’t unique. Confident that house prices would never stop rising, most Americans never bothered to check what would happen if they defaulted. After all, who would walk away from a house worth more than the mortgage?

Today, the matter is far from theoretical for the 15.2 million American households holding mortgages that exceed the value of their homes. It will help determine how many of them choose to “default strategically”—that is, walk away from their mortgages even when they can afford them, because they’ve determined that it’s no longer worth it to keep paying. And that, in turn, will help determine the future health of the American housing market—and thus of the U.S. economy.

Many people think that we don’t have to worry about widespread strategic defaults. When I discussed the problem with a board member of one of the top four American banks, he categorically denied its existence: “The idea that people would walk away from their homes when they can still afford to pay the mortgage is unfounded.” A study from the Federal Reserve of Boston seems to confirm his skepticism. Evaluating Massachusetts homeowners during the 1990–91 recession, it found that only 6.4 percent of “underwater” borrowers—that is, those burdened with mortgages that exceeded the value of their homes—ended up in foreclosure. And not all of those households were defaulting strategically; many, presumably, were actually unable to pay their mortgages.

Unfortunately, such evidence may not tell us much about the likelihood of strategic default today. During the 1990–91 recession in Massachusetts, home prices fell just 22.7 percent from peak to trough, and most borrowers had made 20 percent down payments—so few owed much more than their houses were worth. Even people who had bought at the peak owed, on average, just 3 percent more than the value of the house. Over the last few years, by contrast, home prices have fallen by 40 to 50 percent in several areas, and many borrowers had put very little or nothing down when they bought their houses. Furthermore, during the current recession, the problem affects not only those who bought houses at the peak but also those who took advantage of rising house prices to take some money out in a refinancing. This wasn’t the case in 1990–91, when home-equity lines of credit were extremely rare.

Strategic default is hard to define, of course, and presents difficulties for researchers. What exactly does it mean to be able to pay a mortgage? If I default because I’m unwilling to work extra hours to pay my mortgage, is that a strategic default or a necessary one? Nevertheless, a growing body of evidence suggests that in the current recession, strategic default exists and is rising.

The most convincing evidence comes from a study by Experian and the consulting firm Oliver Wyman that tries to measure strategic default by identifying people who go straight from having always been current on their mortgages to being 180 days late—while staying current on all their other debt obligations, such as credit cards and auto loans. The idea is that if somebody pays the credit card but not the mortgage, it’s probably because he wants to default on the mortgage, not because he must. The study estimates that in 2008, 17 percent of all U.S. defaults were strategic, though that figure differs tremendously across groups and regions. For instance, 27 percent of defaults among people with high credit scores appear to be strategic, a figure that jumps to 40 percent in California.

A study by the Amherst Securities Group takes a different approach. It shows that in areas where homeowners generally weren’t underwater, under 1.5 percent of subprime mortgages became nonperforming each month during the third quarter of 2009. But in areas where the average mortgage exceeded the current value of a house by 20 percent or more, the rate of monthly subprime defaults was 4.5 percent. The difference between the two rates probably isn’t due to homeowners’ ability to pay, because the study corrects for unemployment. The assumption, therefore, is that it’s due to homeowners’ willingness to pay when they see how much more expensive their mortgages are than their houses. The difference between the two default rates—the 1.5 percent “natural” rate and the 4.5 percent rate in areas where home prices dropped significantly—suggests that in those areas, two-thirds of defaults seem to be strategic.

Survey-based evidence also suggests that strategic default has become widespread. A survey conducted by the Chicago Booth/Kellogg School Financial Trust Index, which I helped design, asked a representative sample of 1,000 Americans how many people they knew who had defaulted and how many of those people had defaulted even if they could still afford to pay their mortgages. According to the respondents in March 2009, 23 percent of their acquaintances’ defaults were strategic. By September, that fraction had increased to 36 percent.

Though the rate of strategic default is hard to determine, one thing seems certain: the more you owe, relative to the value of your house, the likelier you are to default strategically. Nobody will do that if his mortgage is just 10 percent larger than his house is worth. Of households that owe 50 percent more than their houses are worth, the same survey suggests, 25 percent will default strategically. And a New York Fed study estimates that of households that owe 62 percent more than their houses are worth, a full half will default strategically. The good news is that many homeowners seem unwilling to default even when they owe a lot more than their houses are worth. The bad news is that we aren’t sure why they hold off—or how long they’ll continue to.

In fact, what’s surprising isn’t how many homeowners choose to default strategically, but rather how few do so, given the strong monetary incentives. In many areas, prices have fallen so steeply that the monthly mortgage on a house—if it was acquired just before the housing bubble burst—is twice as expensive as the monthly rent on an identical house. If you were holding such a mortgage, why wouldn’t you default?

The law doesn’t provide much incentive to stay put. It’s true that 39 states permit a lender to come after a borrower’s other assets and income if he defaults (as I would have discovered, had I done my homework 18 years ago). And it’s also true that even in the 11 states that don’t allow that, the restriction applies only to original home loans used to purchase property, not to home-equity lines of credit, while there is some legal uncertainty regarding mortgages issued to refinance existing mortgages. Nevertheless, lenders rarely slap borrowers with a deficiency judgment—a court injunction to pay the difference between the face value of a mortgage and the proceeds that the lender earns by repossessing and selling the house. The procedure is costly and generally not worth the expense because of the limited assets that most Americans own aside from their homes.

The tax code likewise doesn’t impede people from defaulting strategically. Until recently, it’s true, people had to pay taxes on any forgone debt. If you walked away from a house worth, say, $100,000 less than you owed the bank for it, that $100,000 was essentially income, and you had to pay income tax on it. However, in December 2007, Congress made mortgage debt cancellation nontaxable for personal residences. Congress’s aim was to facilitate the renegotiation of underwater mortgages, but the move had an unintended consequence: reducing the cost of walking away.

What does prevent people from strategic default, it seems, is their sense of what’s right. More than 80 percent of Americans think that it’s immoral to default on a mortgage if you can afford to pay it, according to a recent paper by Luigi Guiso, Paola Sapienza, and myself, and these people are 77 percent less likely to declare their intention to default strategically than people who don’t find the act immoral. Perceived social norms also seem to affect the propensity to walk away: knowing somebody who defaulted strategically, or living in an area where many people have done so, makes a person much more likely to declare his willingness to follow suit.

Recently, though, some scholars have begun questioning the moral imperative not to default. Roger Lowenstein, writing in the New York Times, wonders why we should expect homeowners not to default strategically, when banks routinely do so with their underwater investments. Similarly, Lowenstein likens strategic defaults to the “walkaways” that prominent companies have made, such as Tishman Speyer’s default on its Stuyvesant Town property in New York. The analogy isn’t apt, however, because in commercial real estate, contracts explicitly state that borrowers can transfer ownership of the collateral in lieu of repaying the debt. With such an agreement in force, there is no moral obligation to pay any residual debt after the property has been transferred. Such a provision is not present in home mortgages in most states.

University of Arizona law professor Brent White goes further, arguing that defaulting on a mortgage when its value exceeds the value of the house is the rational thing to do and that homeowners refrain only because of media “scare stories” pushed by powerful lenders. He suggests that the government should encourage borrowers to default when it’s in their economic interest, which would force banks to renegotiate the loans. His solution is akin to encouraging people not to pay taxes in an effort to induce the government to reduce fiscal pressure: it might work, but at the cost of putting the entire system at risk.

How much risk? If the underwater homeowners who currently refuse to default changed their minds and decided to abandon their mortgage commitments, the results could be catastrophic. The more people walk away, the more houses get auctioned off, further depressing real-estate prices. This additional decline would push more homeowners into negative territory, leading to still more defaults. Adding to the deadliness of this cycle would be the fact that as more strategic defaults occurred, the social stigma associated with them would lessen. Such a continued collapse is already a distinct possibility in several states: Nevada (where two-thirds of all homeowners are underwater), Arizona (51 percent), Florida (49 percent), Michigan (48 percent), and California (42 percent). Every time a borrower defaults, moreover, he makes future mortgages more expensive (because lenders have to cover the cost) and the mortgage market more inefficient (because many potential borrowers are shut out). This higher cost and reduced availability of credit would depress house prices even more, jeopardizing the possibility of an economic recovery.

Undermining the social norm to repay mortgages, as Lowenstein and White do, is thus a very bad idea. You might just as well say that when a theater is going up in flames, it’s “rational” to trample other people in rushing to the exits.

Not only did the real-estate crisis shove millions of homeowners underwater; it also jeopardized the very social norms that it rests upon. To prevent a complete breakdown in social norms—a breakdown that could take decades to reverse—it’s necessary to facilitate mortgage renegotiations, especially in the areas most affected by the drop in home prices. Unfortunately, the major lenders oppose any reduction of mortgage principal. They’re playing a dangerous game of chicken, gambling that the real-estate market will recover and that any dollar of principal reduction now will be a dollar less in profit for them later. (Even if the market doesn’t recover, they don’t have much to lose, since if they collapse they’re likely to become wards of the state.)

Eric Posner and I have proposed a simple solution to the problem of underwater mortgages. We envision a reform of the bankruptcy code that, in areas where house prices have dropped precipitously, would require lenders to give homeowners the option of resetting their mortgages to the current value of their houses. In exchange, the lenders would get 50 percent of the houses’ future appreciation. To keep homeowners honest—that is, to prevent them from doing minimal upkeep in the knowledge that they stood to gain less from a home-price increase—the capital gain would be measured based on an average of houses selling in the area, rather than on the change in the value of the actual house.

This proposal eliminates all the incentives for a strategic default without excessively rewarding the borrowers. In fact, the proposal’s main appeal is that it tries to split the costs and benefits fairly between lenders and borrowers, without having taxpayers subsidize both, as the Obama administration’s interventions have done. Unfortunately, that makes our proposal unpopular. Since it doesn’t unduly favor any constituency, it isn’t supported by any. And since it doesn’t spend tax revenue, it isn’t favored by politicians, who never tire of rescuing some people with other people’s money.

Luigi Zingales is the Robert C. McCormack Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business.

 

[a_majoor]

Don't expect a gradual decline:

http://www.theatlantic.com/business/archive/2010/04/going-greek/38668/

Going Greek

Apr 8 2010, 3:19 PM ET
Greece's fiscal problems are turning into one of those endless sagas, the kind we watch unfold at Thanksgiving every year.  Aunt Daphne is going to leave Uncle John!  No, they're in counseling! Wait, now Aunt Daphne is breaking up with the counselor, too!  The rumors are starting to take on a toxic life of their own, driving up the yields demanded on Greek debt--which in turn, makes it less likely that they'll be able to finesse the crisis with a moderate infusion of outside cash.

Paradoxically, that seems to be good news for us, pushing our debt yields lower; we are the proverbial "any port in a storm". This phenomenon is what makes it so difficult to assess the risk of US fiscal trouble.  On the one hand, the US budget is clearly on a completely unsustainable path, and frankly, our household budgets don't look so much better.  This should make investors nervous about our bonds.

And as far as I can tell, they are.  But they're even more nervous about bonds everywhere else . . . because everywhere else has worse demographic problems, and a less impressive history of economic growth.  So they aren't signalling their nerves the way we'd expect, by slowly and steadily pushing up bond yields.

But that in itself is a vulnerability. If at any point we are not seen as the safest game in town, we will take a gigantic--the better word might be "catastrophic"--hit on our bond interest.  If there's somewhere safer to park our money, suddenly we lose the premium we currently enjoy for having bonds considered the "risk free" rate.  So while our super-sterling credit rating may delay the onset of a fiscal crisis, if we ever let it get to that point, the onset may be even more sudden and disasstrous than these things usually are.  All the more reason to start getting our fiscal house in order now.

 

[a_majoor]

An interesting "twofer". How these conditions can take place at the same time defies belief, but this is an unstable equilibrium we are living in today...

http://www.cnbc.com/id/36421625

A V-Shaped Boom Is Coming
Published: Monday, 12 Apr 2010 | 11:01 AM ET

By: Larry Kudlow
CNBC Anchor

Conservatives shouldn’t fight the tale of the tape.

Sometimes you have to take out your political lenses and look at the actual statistics to get a true picture of the health of the American economy. Right now, those statistics are saying a modest cyclical rebound following a very deep downturn could actually be turning into a full-fledged, V-shaped, recovery boom between now and year-end.

I’m aiming this thought especially at many of my conservative friends who seem to be trashing the improving economic outlook — largely, it would appear, to discredit the Obama administration.

Don’t do it folks. It’s a mistake. The numbers are the numbers. And prosperity is a welcome development for a nation that has suffered mightily.

Credibility is at issue here.

Conservative credibility.

Capitalist credibility.

Now, I have written extensively about the tax-and-regulatory threats of the Obamanomics big-government assault. But most of that is in the future. The current reality is that a strong rebound in corporate profits (the greatest and truest stimulus of all), ultra-easy money from the Fed, and some small stimuli from government spending are working to generate a stronger-than-expected recovery in a basically free-market economy that is a lot more resilient than capitalist critics think.
Rather than blow their credibility over a cyclical rebound that is backed by the statistics, free-market conservatives should tell it like it is.
Let’s begin with the March employment numbers recently released by the Labor Department. Those numbers were solid. People say small businesses are getting killed by taxes and regulations from Washington, but the reality is that the small-business household employment survey has produced 1.1 million new jobs in the first quarter of 2010, or 371,000 per month. If that continues, the unemployment rate will drop significantly.

Additionally, the corporate payroll number for March increased by 224,000 -- not 162,000 as some claim -- with the prior two months being revised up by 62,000. And this is being led by private-sector job creation.

And according to just-released data, retail chain-store sales for the year ending in March were up a blowout 10 percent. Ten percent. That’s a V-shaped recovery. And the real-time ISM purchasing-managers reports for manufacturing and services indicate that the economy in the next few quarters could be much, much stronger than the consensus expects -- maybe 5 to 6 percent. Another V-shaped recovery.

Commodity charts, meanwhile, are roaring. All manner of raw industrial materials have been booming -- iron ore, steel, you name it. More V-shaped recovery. So with higher commodity prices running virtually across-the-board, there is every incentive for rapid inventory-rebuilding. (Inventory prices are going up as commodity prices go up.)

At this point it’s impossible to project a long-lived economic boom, such as we had following the deep recession of the early 1980s. For one thing, tax rates will rise in 2011 for successful earners and investors, quite unlike the Reagan cuts of the 1980s. So it’s possible that entrepreneurs and investors are bringing income, activity, and investment forward into 2010 in order to beat the tax man in 2011. This would artificially boost this year’s economy, stealing from next year’s economy.
Recall that when Hillary Clinton took her Rose Law Firm bonus in December 1992, rather than January 1993, she knew full well that her husband Bill would raise the top tax rate in 1993. So the fourth quarter of 1992 grew at nearly 4.5 percent, but the first quarter of 1993 saw less than 1 percent growth. The temporary growth spurt for all of 1992 was 4.3 percent, but activity dropped to 2.7 percent the following year.

It could happen again in 2010 and 2011.

Although the Obamacons deny it, tax-rate incentives matter a lot.

And at some point, monetary policy will tighten, with higher interest rates on top of higher tax rates. That, too, could slow growth markedly next year. And then there’s the dozen tax hikes in the Obamacare health takeover, and a possible VAT attack from Paul Volcker, all of which will work against growth in the out-years.
Clearly, we are not operating a supply-side, free-market model today. What I wish for is sound money and lower tax rates, which would promote sustainable economic growth. Instead, we’re getting easier money and higher tax rates, which could mean a temporary boom today and disappointingly slow growth after that.
But then again, who knows? Maybe the tea-party revolution overturns the obstacles to future growth and the boom is sustained. Free-market populism and a return to Reaganism, along with an anti-federal-spending coalition that is the most powerful force in politics today, could right the economic ship.

That’s the credible take.

Or:

http://taxprof.typepad.com/taxprof_blog/2010/04/per-capita-income-.html

Per Capita Income Has Fallen 3.2% Since Obama's Inauguration; 47 of 50 States See Decline in Income

Washington Times, Income Falls 3.2% During Obama's Term:

Real personal income for Americans -- excluding government payouts such as Social Security -- has fallen by 3.2% since President Obama took office in January 2009, according to the Commerce Department's Bureau of Economic Analysis.

For comparison, real personal income during the first 15 months in office for President George W. Bush, who inherited a milder recession from his predecessor, dropped 0.4%. Income excluding government payouts increased 12.7% during Mr. Bush's eight years in office.

"This is hardly surprising," said Douglas Holtz-Eakin, an economist and former director of the nonpartisan Congressional Budget Office. "Under President Obama, only federal spending is going up; jobs, business startups, and incomes are all down. It is proof that the government can't spend its way to prosperity."
According to the bureau's statistics, per capita income dropped during 2009 in 47 states, with only modest gains in the other states, West Virginia, Maine and Maryland. But most of those increases were attributed to rising income from the government, such as Medicare and unemployment benefits.

Two of the most populous states in the country reported dramatic declines: Per capita income in California dropped 3.5 percent to $42,325; in New York, the drop was 3.8 percent to $46,957.

 

[a_majoor]

And more sweeping news under the carpet:

http://wcollier.blogspot.com/2010/04/paging-emily-litella.html

Waxman Subpoenas Emily Litella

From the Washington Examiner:

A House Energy and Commerce Committee spokeswoman tells me that Chairman Henry Waxman, D-Calif., has indeed cancelled the April 21 subcommittee hearing in which CEOs were to testify about Obamacare. So far, the only indication of this change appears on the committee's website is on the Republican minority ranking member's site. In fact, the hearing still appears on Waxman's committee calendar for that day.

Waxman had called the hearing in reaction to public statements by several companies -- including Verizon, AT&T, and John Deere, among others -- that Obamacare would cost them hundreds of millions or even billions of dollars because it laid a new tax on their retiree health benefit payments.

Ever since the passage of the Medicare Prescription Drug benefit, the payments had been subsidized, tax-free, as a way of preventing these companies from dropping enrolees onto the Medicare rolls. When Obamacare changed the tax rules, it was quite clear that this would result in huge losses, but President Obama and Democrats had failed to heed warnings to this effect in the run up to Obamacare's passage last month.

The CEOs, required by law to be honest about earnings projections, re-stated their bottom lines in reaction to Obamacare's passage, earning the ire of Waxman and other Democrats. Hearings on this matter would likely have proved an embarrassment to them, and helped drag out discussion of Obamacare's unexpected ill effects.

Oopsie.

The CEOs should show up anyway, and hold a press conference illustrating all the additional costs and related impacts to their bottom lines and prospects for hiring new employees.

 

[a_majoor]

More overhanging debt threatens the economy. Since teachers unions are powerfully connected with the political process, expect to see a massive effort to soak the taxpayers for the $300 billion to one trillion dollar shortfall....

http://www.manhattan-institute.org/html/cr_61.htm

Civic Report

No. 61 April 2010

UNDERFUNDED TEACHER PENSION PLANS:

It’s Worse Than You Think

Josh Barro, Walter B. Wriston Fellow, Manhattan Institute for Policy Research

Stuart Buck, Distinguished Doctoral Fellow, Department of Education Reform, University of Arkansas

This report was co-sponsored by the Foundation for Educational Choice

Executive Summary

SUMMARY
Teacher pension funding gaps are three times greater than what states report, states a new Manhattan Institute/Foundation for Educational Choice study. Authors Josh Barro and Stuart Buck reveal the major disparity between what states report and the true value of unfunded liabilities for teacher pensions. These liabilities for all 50 states now total almost $1 trillion—an unfunded burden that states must pay over time at taxpayer expense.

Table of Contents:
Executive Summary
About the Authors
Introduction
I. Background
II. Our Calculation of State Governments' True Liabilities For Teacher Pensions
III. Our Recommendations
Endnotes
References
Appendix

To all the other fiscal travails facing this country’s states and largest cities, now add their pension obligations, which are far greater than they may realize or are willing to admit. This paper focuses on the crisis in funding teachers’ pensions, because education is often the largest program area in state budgets, making it an obvious target for cuts.

Although it is generally acknowledged that education is the foundation of every modern society’s future prosperity, schools unfortunately will have to compete with retirees for scarce dollars. This competition is uneven, because retirees have a legal claim on promised pension benefits that supersedes schools’ budgetary needs. Consequently, Americans can look forward to higher taxes and cuts in services, resulting in fewer teachers, bigger classes, and facilities that are allowed to deteriorate. In several states, these developments have already arrived.

The crux of the problem is the gap between assets and liabilities affecting the fifty-nine pension funds that cover most public school teachers in America. Some of these are general state-employee pension funds, while others cover only teachers. Among the findings of our study of these funds:

All fifty-nine pension funds studied face shortfalls.
California, the most populous state, has the largest unfunded teacher pension liability: almost $100 billion.
The worst-funded plan in our sample is West Virginia’s, which we estimate to be only 31 percent funded.
Five plans are 75 percent funded or better: teacher-dedicated plans in the District of Columbia, New York State and Washington State and state employee retirement systems in North Carolina and Tennessee that include teachers.
The general picture is not a good one. According to the fifty-nine funds’ own financial statements:

Total unfunded liabilities to teachers—i.e., the gap between existing plan assets and the present value of benefits accrued by plan participants—are $332 billion.
According to our more conservative calculations:

These plans’ unfunded liabilities total about $933 billion.
In addition, we have found that:

Only $116 billion, or less than one quarter, of this $600 billion discrepancy is attributable to the stock market drop precipitated by the 2007 financial crisis.
The Dow Jones Industrial Average would have to nearly double overnight to make up for the present underfunding of these plans.
What explains the rest of the gap between the funds’ estimates and our own? The funds aggressively “discount” the cost of paying benefits in the future because they assume that stocks’ values will be much higher by the time the funds have to pay out those benefits. This assumption permits public officials to contribute fewer dollars toward satisfying these plans’ obligations, and thus to avoid taking the cautious but unpopular step of raising taxes or cutting services.

Under current guidances, which are prepared by separate bodies, state pension funds are able to set aside fewer assets than their counterparts in private companies to cover equal liabilities. Private pension plans may invest in stocks and other higher-risk assets, but those plans may not reduce their pension funding on the basis of the superior performance expected of these types of assets. This is because those higher returns are accompanied by greater risk that returns will fall short of expectations. Yet pension funds’ obligation to retirees present and future does not diminish accordingly.

By contrast, public pension plans are permitted to base the amount of money they need today to meet their future obligations on the higher expected performance of stocks, allowing sponsors to cut their contribution rates and hope the markets perform as anticipated. Unfortunately, markets can drop instead of rising, as they did in 2008-2009, when the large decline in the Standard & Poor’s 500 index of stocks created especially severe shortfalls among public pension funds. With formal bond indebtedness of U.S. states and localities reaching approximately $2.4 trillion, the shortfalls in teacher pensions alone increased the indebtedness of state and local governments by roughly one-third.

The purpose of this paper is not to instruct pension funds in how to invest their funds. Rather, it is to recommend that they account for their liabilities in the manner of private pension plans, which must estimate the present cost of future liabilities on the basis of the lower returns that high-quality corporate bonds pay. They do so because the likelihood that these instruments will fail to make payments to their owners, the pension funds, is about as great as the risk that retirees will not receive their promised payments in the promised amounts. Using these accounting rules, public plans (like private ones) would be denied the opportunity to short-change their pension plans by assuming strong asset performance.

Unfortunately, accounting reforms will not eliminate the accrued liability, which represents income already earned by public employees but not yet paid. States must simply amortize these costs over time, at taxpayer expense. In part they have grown so large because elected officials have not been held accountable for them: while the cost of higher retirement benefits is off in the future, the cost of higher wages is in the present, and thus visible and felt. Visible or not, the promise of future pensions is a very real cost of hiring teachers, one just as real as the teachers’ current salaries.

States can start by accounting honestly for the current costs of future benefits. If they did so, they would reduce the temptation of their elected officials to be overly generous in awarding benefits. Going forward, there are structural changes they can take that would avoid funding shortfalls and rein in out-of-control public pensions:

States should consider shifting to defined-contribution retirement plans, especially on behalf of new and young employees; this is the norm in the private sector and was adopted successfully by Michigan in the 1990s. States are not obligated under such plans to provide any particular level of benefit.
In cases where defined-contribution plans face major political resistance, states should consider hybrid options like cash-balance plans and TIAA-CREF, the latter having provided a version of defined-contribution retirement saving for employees of public colleges and universities for decades.
About the Authors

Josh Barro is the Walter B. Wriston Fellow at the Manhattan Institute focusing on state and local fiscal policy. He is the co-author of the Empire Center for New York State Policy’s “Blueprint for a Better Budget.” He writes weekly on fiscal issues for RealClearMarkets.com and has also written for publications including the New York Post, Investor’s Business Daily, the Washington Examiner, City Journal, and Forbes.com. His commentary has been featured on CNN, Fox News Channel, CNBC, the Fox Business Network, and Bloomberg Television.

Prior to joining the Manhattan Institute, Barro served as a staff economist at the Tax Foundation, where he wrote the 2009 “Tax Freedom Day” report. He also wrote several critical analyses of state tax and budget proposals and gave testimony on tax reform before officials in Arkansas, Louisiana, Maryland, New Jersey, Rhode Island, and South Carolina. Previously, he worked as a commercial real estate finance analyst for Wells Fargo Bank. Barro holds a B.A. from Harvard College.

Stuart Buck is a Ph.D. candidate in the Department of Education Reform at the University of Arkansas. He is the author of a forthcoming book, Acting White: An Ironic Effect of Desegregation, from Yale University Press (2010). He has also authored numerous scholarly articles in journals such as the Review of Public Personnel Administration, Harvard Law Review, Harvard Environmental Law Review, Stanford Technology Law Journal, Administrative Law Review, Federal Communications Law Journal, and the Case Western Law Review. Buck received a J.D. with honors from Harvard Law School in 2000, where he was an editor of Harvard Law Review; he thereafter clerked for Judge David Nelson of the Sixth U.S. Circuit Court of Appeals and Judge Stephen F. Williams of the U.S. Circuit Court of Appeals for the D.C. Circuit.

 

[a_majoor]

Interesting trend lines. If we aggressively reduce taxes and spending, we can capitalize on the exodus of US capital and entrepreneurs:

http://www.nypost.com/f/print/news/opinion/opedcolumnists/eurobama_6fLHQRfsBJUMrOPsybryvM

EurObama

By MATT WELCH

Last Updated: 4:49 AM, April 25, 2010

Posted: 1:01 AM, April 25, 2010

With the stunning emergence of the consumption-based Value Added Tax (VAT) as a legitimate public policy option, the Obama administration has now all but made it official: There is no European economic idea too extreme for 21st century America. Even if the Europeans themselves are largely headed in the opposite direction.

VAT, first rolled out in 1950s France, is a sales tax on everything that every person or entity buys within a country, with exceptions or reductions carved out for things like food, newspapers, or various links along the industrial supply chain.

Compared to the H&R Block subsidy program that is the US tax code, the VAT is a straightforward way for governments to skim 20% or so off the top of every transaction. By penalizing consumption and not earnings, it encourages savings and resists gaming by well-connected special interests. In an ideal world, you could enact a VAT while slashing America’s corporate income tax rate, which is the globe’s second-highest.

But as the last 18 months of federal misgovernance has aptly demonstrated, we do not live in anything like an ideal world.

The only reason VAT is even on the table right now is that bureaucrats like VAT enthusiast Nancy Pelosi have an appetite for spending that far outpaces Americans’ willingness to cough up their hard-earned dough. Every statehouse and city council across the land is literally out of money, and turning to the only people who can print the stuff: Washington.

The federal government spent $3.5 trillion last year while taking in just $2.1 trillion, producing a deficit-to-Gross Domestic Product ratio of 10%, a level not seen since World War II. By contrast, the European Union requires member countries to keep deficits at 3% of GDP. If America was in Europe, we’d be Greece.

What’s worse for us is that we’ve pretty much given up trying to address the root problem, which is the decade long spending binge initiated by George W. Bush and then tripled down on by Barack Obama. The VAT isn’t a way to streamline a complicated tax code; it’s a new spigot to flood money into the pockets of teachers who can’t be fired, and securities regulators who can’t get enough porn.

The grand irony here is that the very continent we’re scrambling to emulate has been moving aggressively in the opposite direction on taxes and economic policy.

While the US keeps corporate taxes frozen near 40%, EU countries have slashed them down to an average of around 25%. Top marginal income tax rates, which in the US are 35%, are under 25% all across the former East Bloc.

As the share of government spending in health care has been steadily increasing in the US, it has been inching downward in Europe. While first Bush and then Obama pushed through massive new public entitlements, governments from Stockholm to Rome have been grappling with real private reform.

Though conservatives especially like to sneer at the democratic socialism of Old Europe, it is precisely those cheese-eaters in France and Vikings up north who have been leading the world in privatization these last two decades, selling off everything from airports to sewage companies.

It was hardly an accident that, in the midst of Washington’s partial nationalization of Detroit automakers, Swedish Enterprise Minister Maud Olofsson announced “The Swedish state is not prepared to own car factories.” With this week’s news that General Motors is “paying back” one set of Troubled Asset Relief Program loans from another pile of TARP money, we can see why Europeans have a lot to teach us about separation of industry and state.

Where Republicans look across the Atlantic and see soft socialists worth avoiding, Democrats see enlightened progressives worth emulating. And it does not matter how little reality conforms to either fantasy.

So now the federal government is pushing to ape Germany and France in paying individuals far-above-market prices for selling their excess solar or wind power back to the electricity grid. The only problem? Those countries are running, not walking, away from those unaffordable programs.

The same dynamic is at play with labor relations. President Obama is on record pushing organized labor’s dream policy of “card check,” which would drastically bump up private sector unionism after decades of steady decline, and he has gone so far as appoint to his bipartisan “deficit commission” the notorious labor honcho Andy Stern.

Meanwhile Germany, which has the tightest labor-management-government relations in the EU, has been aggressively loosening, not tightening, workplace rules.

The fact that America’s most influential public-sector union leader is within a thousand miles of a deficit commission, let alone one that is floating the idea of an American VAT, tells you all you need to know about the relationship between any new consumption tax and fiscal responsibility. Which is to say, there isn’t any.

The solution to unsustainable budget deficits and precarious debt levels remains the same as when Barack Obama took office: Stop spending so much damned money. Until government gets serious about that, trial balloons for gobbling ever-more tax money deserve nothing more than a good swat.

And we’ll be left with a massive exodus of business geniuses to that bastion of capitalism — France.

Matt Welch is Editor in Chief of Reason. matt.welch@reason.com

 

[a_majoor]

Instapundit provides another look at the "figures" coming out from Washington:

http://pajamasmedia.com/instapundit/

GDP GROWTH DROPS — UNEXPECTEDLY: “In January, Barack Obama and Democrats insisted that the 5.7% annual growth rate in the fourth quarter of 2009 showed that their stimulus plan had set the American economy back on track for rapid growth and job creation. The administration needed a big number for 2010 to allay fears that unemployment would stagnate at the current high levels for the long term. Unfortunately, they didn’t get it, with the 3.2% annualized GDP rate for the first quarter of 2010 falling below analyst expectations.”

Plus this: “Capital will not flow back into the market under the conditions set by the Obama administration and the Democratic Congress over the last fifteen months. Instead, it will most likely flow overseas, in markets more friendly to capital investment, where the nation’s executive doesn’t offer off-the-cuff remarks about people making too much money.”

 

[a_majoor]

Chain reaction failures in the cards?

http://www.investors.com/NewsAndAnalysis/Article.aspx?id=531813&p=3

Beware Of The Muni Bond Bubble: States And Cities Can Fail As Well

By NICOLE GELINAS
Posted 04/29/2010 06:15 PM ET

Greece and Spain both suffered S&P downgrades this week — Greece to junk — as bondholders realized the obvious. The nations cannot raise taxes and cut spending fast enough to pay their debt without killing off economic recovery.

But nothing has shaken another massive debt market: American municipal bonds.

You might think that investors would pause before pouring money into obligations of muni debt, particularly obligations of California, New York or Illinois. Like mid-2000s homeowners, state and local governments spent boom years using illusory gains to justify ever-higher spending and borrowing.

By 2008, state and local debt rose to $2.2 trillion — 49% higher, after inflation, than in 2000. The biggest partners in profligacy also promised more benefits to public workers in the future.

As the recession's severity became apparent, officials kept borrowing: States have already borrowed another $15 billion for operating costs over the past two years.

Yet gatekeepers consider municipal bonds low-risk. "We do not expect that states will default on general-obligation debt, even under the most stressed economic conditions," analysts at Moody's wrote in a February 2010 report.

Higher Taxes

As for cities and towns, "we expect very few defaults in this sector given the tools that local governments have at their disposal." Standard and Poor's agrees.

The investment advisers and managers who allocate credit assume that states and cities will do anything to avoid default. The assumed incentive, of course, is their desire to borrow more.

The analysts also think that lending to state and local governments isn't risky because they — unlike private firms — have a captive source of funds. State and local governments can always tax their residents and businesses more.

There's further reassurance in the law. State governments can't declare bankruptcy to escape debt. Cities, towns and counties can file for bankruptcy only if their state allows it, and more than half don't.

The analysts take comfort in financial engineering too. The underwriters who help governments raise money have found creative ways to dodge obstacles that theoretically constrain borrowing. States issue debt through structures that depend on taxes for repayment, even as repayment isn't an official state obligation because such a promise would require voter approval.

Another theory is that the federal government regards the biggest debtors "too big to fail."

Finally, observers point to the past. Between 1970 and 2000, no investor took a loss on a state's or a city's general-obligation debt. Even Orange County, Calif., which declared insolvency in 1994 in a one-off meltdown, repaid its lenders with interest.

Blown Up

We've heard it before. Before 2006, conventional wisdom held that if you wanted a risk-free investment, you couldn't do better than buy mortgage-backed securities. Homeowners were willing and able to repay what they owed. Struggling homeowners couldn't turn to bankruptcy. Financial engineering provided another layer of security: Underwriters and raters had designed airtight structures. History proved all this.

Yet investors pumped so much money into that supposedly airtight market that they blew it apart.

To get a glimpse of the possible future of Muniworld, look to Vallejo, Calif., about 30 miles north of San Francisco. Like many municipalities, this city of 120,000 residents found itself hard hit by the housing bust, with property-tax revenues falling by more than a quarter.

So Vallejo did something unprecedented. Seeing that the real problem was that "collective bargaining agreements control the city's labor costs," as Vallejo told the court, it petitioned a bankruptcy judge in 2008 to throw out those agreements.

Vallejo violated the first principle of municipal-finance conventional wisdom: that cities and towns will do anything to avoid default. Vallejo was insolvent, true, but its managers could have done what many of their counterparts around the nation have done: try, through structured finance, to borrow more somehow and hope for the best.

But the benefits of paring down contractual obligations outweighed the costs. If the court approves Vallejo's bankruptcy-exit plan this summer, for example, the city will emerge from bankruptcy with $34 million in health-care obligations to retirees, down from $135 million.

Throughout its bankruptcy, Vallejo has not paid the full amount it owes on its municipal bonds. (The city has one municipal bondholder, the Union Bank of California.) What's more, it has proposed, in its exit plan, to defer payments on its bonds, investing in infrastructure before paying lenders in full.

Vallejo's bondholders may get off relatively easily, though, because Vallejo stopped piling up obligations, rather than trying one mad dash to borrow more. Vallejo didn't follow, say, Illinois' example: borrowing in the bond markets to fund future obligations to retirees. Vallejo knew that it had to cut future obligations — and even so, it couldn't do it without affecting bondholders.

It's easy to imagine some future mayor convincing a bankruptcy judge that it's only fair for bondholders, along with union members, to take big cuts in a restructuring.

Indeed, heavily indebted governments' willingness to repay crippling debt will depend on what's politically expedient. Today, politicians see the advantages of borrowing more. Ten years from now, it may be more practical for a governor to tell the public: We've borrowed too much. We did so because clever Wall Street investors convinced our predecessors that it was a good idea, and we shouldn't have to pay it back.

Investors continue to assume that financial calculations would trump political calculations — that is, that no state or city would default because it would cut off access to credit. But a state or city that did cut down its obligations might have an easier time getting financing, since new bondholders would know that its finances were sustainable.

Lenders Forsaken

As municipal debt grows, the risk mounts that someday it will be politically, economically and financially worthwhile for borrowers to escape it. When that happens, the protections that lenders supposedly enjoy will be meaningless. Lenders shouldn't take solace in states' inability to access bankruptcy codes: A state could certainly stop making payments on its debt without going into bankruptcy.

But there's always Uncle Sam, right? In relying on future bailouts, investors are taking a gamble. When the White House rescued Chrysler and General Motors, it forced bondholders to take bigger losses than union members did. And as Europe's woes may be showing now, sometimes governments are just too big to bail out.

• Gelinas, a Manhattan Institute senior fellow, is author of "After The Fall: Saving Capitalism from Wall Street and Washington" (Encounter Books). This article is adapted from the spring issue of the institute's City Journal.

 

[a_majoor]

Look at the official unemployment figures:

http://www.nationalreview.com/campaign-spot/47199/9-9-percent-unemployment-99-vulnerable-house-democrats-i-see-connection

9.9 Percent Unemployment, 99 Vulnerable House Democrats — I See a Connection!
May 07, 2010 3:05 PM
By Jim Geraghty   

“The storm is receding and the skies are brightening,” Obama said, days before unemployment increased from 9.7 percent to 9.9 percent.

Okay, so our economy actually created a decent number of jobs this month, which is actual good news. Not the “things are getting worse less rapidly than they were before” good news, but good news that represents actual progress.

But discouraged workers – those who had given up looking for work — are getting off the sidelines, and so we’re seeing the inverse of the phenomenon I described in this video. Instead of moving from “unemployed” to “discouraged,” workers who were “discouraged” are looking for work and not finding it, putting them back in the “unemployed” category.

That modest good news of jobs created is overwhelmed by the bigger picture:

    The U.S. jobless rate rose to 9.9% in April, the first increase in three months, but the government’s broader measure of unemployment ticked up for the third month in a row, rising 0.2 percentage point to 17.1%.

    The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. Though the rate is still 0.3 percentage point below its high of 17.4% in October, its continuing divergence from the official number (the “U-3″ unemployment measure) indicates the job market has a long way to go before growth in the economy translates into relief for workers.

(On another video, I showcased all the gloomy signs of a lousy economy, even in a community where the official unemployment rate is only a bit above 5 percent.) If the unemployment numbers in September and October are close to today’s 9.9 percent, the number of GOP wins will be on the high end of that list of 99 I assembled.

 

[a_majoor]

As desperation takes hold, will the US government resort to this at the risk of a total backlash across multiple areas (the market, civil disobedience, political activism, global economic uncertainty?). Given the tone deaf attitude of a large portion of the political class and their enablers in the bureaucracy, academy, media and public service unions, I'm leaning towards "yes they will".

As a student of history, I should war them that the class war they seem willing to ignite isn't the one they are thinking of or expecting. People who have something to lose will fight hardest, and the French Revolution was the first of the modern revolutions because it was the middle class fighting the aristocracy for their hard won rights and wealth rather than a peasant uprising simply looking to short term survival. (The real Russian Revolution(s) were also characterized by this mentality; the Bolsheviks were able to move in and topple a destabilized State through good timing with their coup; no revolution here comrade!)

http://www.powerlineblog.com/archives/2010/05/026260.php

Are the Feds Trying to Nationalize Your Retirement Savings?
 
May 9, 2010 Posted by John at 7:15 PM

For some time, there have been rumblings that the federal government might try to solve its budgetary problems by nationalizing (i.e., stealing) the money that millions of Americans have set aside for retirement in 401(k) plans and the like. One way they might do this is to confiscate the cash on hand in exchange for a promise to make future payments in the form of an "annuity." An involuntary annuity, in that scenario.

I haven't taken this speculation too seriously, mostly because the core of the Democratic Party consists of lawyers, and a lawyer's most precious possession is his 401(k) account. One of those who have taken the threat more seriously is Congresswoman Michele Bachmann, who co-authored a letter warning the Obama administration against any attempt to confiscate Americans' retirement savings. You can read the letter here. It says, in part:

    In the Annual Report of the White House Task Force on the Middle Class, Vice President Biden discussed at length the creation of so-called "Guaranteed Retirement Accounts (GRAs)" which would provide protection from "inflation and market risk" and potentially "guarantee a specified real return above the rate of inflation" -- presumably at taxpayer expense. ...

    The Vice President's comments are troubling, insofar as they come on the heels of testimony before Congress from supporters of GRAs proposing to eliminate the favorable tax treatment currently afforded to 401(k) plans, and instead use those dollars to fund government-invested GRAs into which all employees would be required to contribute a portion of their salary -- again, with a government subsidy. These advocates would, essentially, dismantle the present private-sector 401(k) system, replacing it instead with a government-run investment plan, the size and scope of which remain to be seen.

The letter goes on to discuss a "Request for Information" that has been issued by the Departments of Labor and Treasury on the "annuitization" of 401(k) plans:

    Similarly, and more recently, the Departments of Labor and Treasury have jointly issued a "Request for Information" regarding the "annuitization" of 401(k) plans through "Lifetime Income Options." ...

    [W]e urge that the Departments take no action to mandate that plan sponsors -- often, small businesses -- include a "lifetime income" or "annuitization" option if they choose to offer a 401(k) plan to their employees, or that beneficiaries take some or all of their retirement savings in such an option.

You can read the Labor and Treasury Departments' Request for Information in the Federal Register. Its main theme is that the private-sector trend is toward defined contribution plans and away from defined benefit plans, and that, for some reason, plan beneficiaries don't choose lifetime annuity products as often as some bureaucrats think they should. So the federal government is looking for ways to promote lifetime annuities.

There are, of course, benefits to such products. There are also drawbacks; most notably, they do not allow the saver to leave money to his children. If you die prematurely, you are just out of luck. In that respect as in others, lifetime annuities look a lot like Social Security. It is not clear why the federal government should be in the business of promoting one form of retirement product over another.

But, while the Request for Information definitely exhibits a paternalistic attitude, it doesn't explicitly say anything about confiscating 401(k) accounts, or about the government taking on the role of annuity issuer.

At this point, I think the best we can say is this: the federal government is desperate for cash, and the biggest untapped source of wealth is the hundreds of billions or trillions of dollars that Americans who are now nearing retirement age have saved over their lifetimes. I don't doubt for an instant that the Obama administration would like to get its hands on this money, which would go a long way toward resolving the current government debt crisis. An obvious way of doing so is to take the money now, in exchange for a promise to pay an "annuity" later. The bottom line is that, given what we know about the Obama administration's rapacious appetite for swallowing up private wealth, anyone who has savings should be vigilant.

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Globe and Mail, is an exposé, about that is really wrong with America’s economy – not big banks, not derivatives, not big business, not even Obama or Bush: it is America’s culture which, exactly mirroring Canada’s, wants more and more and more, for free:

http://www.theglobeandmail.com/report-on-business/economy/california-on-verge-of-system-failure/article1609891/

California on 'verge of system failure’
Golden State, like many others, is nearly bankrupt and desperately needs a bailout

Barrie McKenna

Los Angeles — Globe and Mail Update
Published on Friday, Jun. 18, 2010

Arnella Sims has seen a lot in her 34 years as a Los Angeles County court reporter, but nothing like this.

Case files piling up by the thousands, phones ringing off the hook, forced midweek courthouse closings and occasional brawls as frustrated citizens queue for hours to pay parking fines.

“People think we’re becoming a Third World country,” said Ms. Sims, 55. “They don’t understand.”

It’s a story that’s being repeated all across California – and throughout the United States – as cash-strapped state and local governments grapple with collapsed tax revenues and swelling budget gaps. Mass layoffs, slashed health and welfare services, closed parks, crumbling superhighways and ever-larger public school class sizes are all part of the new normal.

California’s fiscal hole is now so large that the state would have to liberate 168,000 prison inmates and permanently shutter 240 university and community college campuses to balance its budget in the fiscal year that begins July 1.

Think of California as Greece on the Pacific: bankrupt and desperately needing a bailout.

“We are on the verge of system failure,” warned Jean Ross, executive director of the California Budget Project, an independent think tank based in Sacramento.

None of this would matter much to anyone outside the not-so-Golden State except that California’s budget crisis is a harbinger of a grim dilemma that all Americans will soon confront. The country has built an elaborate and costly government machine, tied to a regressive tax system that can’t generate enough revenue to pay for it all.

Canadians too have a stake in all this. Dramatic cuts by state governments are threatening to derail the U.S. recovery, dampening expectations for global growth.

“This is a classic American dilemma,” explained Peter Dreier, a professor of politics and director of urban and environmental policy at Occidental College in Los Angeles. “Americans expect a lot of their government. But politicians have convinced them they’re not getting what they want.”

Americans have been “brainwashed” into believing they pay a lot of taxes, Prof. Dreier added. In fact, they are among the least-taxed people in the Western World, particularly if they’re wealthy, he said.

After unveiling a grim budget last month that scraps a popular welfare program for a million children and slashes countless other programs for the poor and elderly, California Governor Arnold Schwarzenegger complained that the state’s broken budget process has left him facing a “Sophie’s Choice.” That’s a reference to the story of the Polish Jew forced by the Nazis to choose between saving her son or her daughter from the Auschwitz gas chambers.

Experts say the U.S. government will inevitably have to come to the rescue, using its borrowing clout to save the state from near-bankruptcy or devastating service cuts. Do nothing, and the entire U.S. economy could be put at risk. California, like the country’s banks, may be too big to fail.

California is looking at a gap of $19-billion (U.S.) this year and $37-billion next year on a roughly $125-billion-a-year budget. Local governments, including the City of Los Angeles, are in similarly dire financial straits and are now scrambling to shed workers and services.

Red ink, from sea to shining sea

“We have to get some federal money,” argued Ms. Ross of the California Budget Project. “The impact [of the Schwarzenegger budget] would be enough to slow down the U.S. economy. It would be bad for the U.S. and, arguably, bad for the world to do the shock therapy approach.”

And California isn’t alone in angling for a bailout. U.S. states are facing shortfalls totalling nearly $300-billion in 2010 and 2011; they also must wrestle with hundreds of billions more in unfunded pension obligations to their workers. “There are a few Greek crises brewing among the United States of America,” said economist Ed Yardeni of Yardeni Research Inc.

The task is made all the more difficult because California and virtually all other states are barred by legislation from running operating deficits, forcing them to balance their budgets annually by slashing spending, raising taxes or both. Typically, states can only borrow short-term funds, or for capital projects.

Billionaire Warren Buffett, who advised U.S. President Barack Obama during his White House run, suggested recently that a Washington bailout of California and other troubled states is inevitable. How, he wondered, can Washington deny California after saying yes to General Motors, AIG and dozens of banks.

“I don’t know how you would tell a state you’re going to stiff-arm them with all the bailouts of corporations,” Mr. Buffett said.

The alternative for many state and local governments may be default. Mr. Buffett said many state and municipal bonds are only triple-A rated because investors assume there’s a federal backstop. “If the federal government won’t step in to help them, who knows what [the bonds] are,” he said.

California’s credit rating is already the lowest of all 50 states.

How California, the largest and once most-prosperous state, got in this mess is a story decades in the making. It began with middle-class angst and a property tax revolt in the sprawling suburbs of Los Angeles.
The movement would eventually sweep the country in the inflation-ravaged economy of the late 1970s, leaving government unable to pay for many of the services and entitlements people now take for granted.

John Serrano Jr., a social worker, was frustrated that he had to move his family out of East L.A. to find decent public schools for his children. He would eventually lend his name to a class-action lawsuit that would go all the way to the California Supreme Court. In a series of decisions, the court found the state’s school finance system to be unconstitutional for relying too heavily on local property taxes, which vary widely in poor and wealthy neighbourhoods. For example, a school in tony Beverly Hills would often get more than twice the funds per student than one in poor East L.A.

The landmark case would forever change the fiscal landscape of California, and many other states, shifting the financial burden of kindergarten to Grade 12 education from local to state governments, but not the tax base. K-12 education is now the State of California’s single largest expense, soaking up roughly a third of its budget.

A tax revolt would further tilt the tax burden to the state and deprive local governments of their most stable funding source – property taxes.

In the mid-1970s, California property taxes were soaring, along with real estate values, and incomes couldn’t keep pace. The result was a campaign, financed by L.A.-area apartment landlords, that culminated in the now-infamous Proposition 13 ballot initiative in 1978.

Prop. 13 rolled back and capped both residential and commercial property tax rates at 1975 levels. And it virtually guaranteed that only a revolution would reverse the measure. Proposition 13 imposed a two-thirds majority requirement for all tax bills and required local voters to approve all municipal tax increases.

“California put itself in a straitjacket that it hasn’t been able to get out of,” Occidental College’s Prof. Dreier explained.

In the years since Prop. 13, California has come to the rescue of local governments, taking on ever-greater responsibility for schools, low-income health care and welfare. And it has paid for all that with volatile sales and income tax revenue, making it tough to balance its budget when the economy stalls.

“A lot of people predicted doom and gloom in 1978. It just took a long time,” said John Tanner, executive director of Local 721 of the Service Employees International Union, which represents 85,000 government workers in Los Angeles and throughout Southern California.

Prop. 13, according to Mr. Tanner, has put schools, courts, parks and a raft of other government services in a downward spiral. “We are at an unacceptable place right now,” he said.

Perhaps no group of workers feels more targeted in the crisis than teachers. U.S. Education Secretary Arne Duncan has warned that without money from Congress as many as 300,000 teachers nationwide could lose their jobs to state budget cuts, including several thousand in California.

“It’s not easy being me these days,” said A.J. Duffy, president of the United Teachers of Los Angeles. “I have 45,000 members looking to me to save their jobs.”

His union represents teachers and other employees at 700-plus L.A. schools, where as many as 1,200 jobs are threatened.

“We’re destroying education as we know it,” Mr. Duffy lamented. “My teachers will do a great job no matter what. But it’s harder and harder to deliver the quality of education we’ve had.”

California public schools were once a beacon for the country. Now, the state ranks dead-last in student-teacher ratios, 45th in per-student spending and 36th in high school graduation.

The tax structure may be badly flawed. But even union activists acknowledge that repealing Prop. 13 outright is probably a non-starter. Recent polls show support for keeping a lid on property taxes remains strong, in spite of the budget crisis.

Experts say tax reform is the only option for California, short of a massive and unprecedented shrinking of government. And that requires an “open conversation” between voters and their elected leaders, and almost certainly higher taxes, according to Ms. Ross, the economist.

If you want good schools, you have to pay for them,” she said. “Cutting taxes doesn’t raise revenue.”

That kind of talk angers Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association, named after the L.A. homeowner who led the Prop. 13 campaign and dedicated to ensuring it’s never overturned. He said California is a high-tax state with generously paid government workers, and recession-weary taxpayers have no money to pay more.

“The bank is empty,” Mr. Vosburgh complained.

“We have tried to be all things to all people and we can’t afford to do that any more.”

But in California, and elsewhere, the price will be steep – in lost jobs and vanishing services.

Carliose Lane, 37, an animal licensing official for the City of Los Angeles, knows the city, and the state, are in a budget bind. But he can’t understand why he and the city’s entire team of animal fee collectors must pay the price with their jobs. Who, he wondered, will collect the money that pays for the city’s shelters and pet control operations after he’s laid off on July 1.

“Laying me off isn’t going to solve the city’s budget problems,” said Mr. Lane, whose $32,300-a-year salary helps support a wife and three children. “It will make them worse.”

The graphic (and the text around it) says it all: sovereign debt crises – 48 of them, 30+ ‘serious’ ones, the PIIGS disease that rocked Europe and the world, are the norm in the USA. Gov. Schwarzenegger is adopting the right course – not because he really wants to: cutting expenditures even when they deeply hurt real, vulnerable people. US states – and Canadian provinces – have to get a grip on spending; they have to set priorities and the top priority might involve not mollycoddling people. Personal tax rates (income and consumption tax rates) in the USA might not be high enough but spending must be controlled first, before taxes can be raised.

 

[GAP]

California has always been a state of conspicuous consumption.....now they are paying the price.

Off the top of my head, I can't remember some of the more outlandish spending (and they have been the poster child for ridiculous programs), but it has been literally decades of living high off the hog, and now the hog is dying....

I can't see the Federal government bailing them out....they are in no better position, for the same reason...