Yesterday I noted that Massachusetts is faced with figuring out how to handle the Cadillac tax among its government workers. Many of the very expensive plans are found among municipal workers, most negotiated by government unions representing the workers.
There’s another ticking time bomb out there that isn’t getting the press it deserves which too can be laid at the feet of unions which represent government workers and gutless politicians who can’t say no with your money. California provides a good example:
The state of California’s real unfunded pension debt clocks in at more than $500 billion, nearly eight times greater than officially reported.
That’s the finding from a study released Monday by Stanford University’s public policy program, confirming a recent report with similar, stunning findings from Northwestern University and the University of Chicago.
To put that number in perspective, it’s almost seven times greater than all the outstanding voter-approved state general obligation bonds in California.
Those are the facts, stated simply. It provides an example of absurd extravagance within the public sector and now a huge level of debt on those unfunded promises – and that’s what we’re talking about here – of $500 billion. Where will California get the money, since these promises are contractual obligations and it can’t print money?
From, increased debt, cuts in other state services or increased taxes or all three, that’s where. David Crane explains how the state ended up in this condition, using GM as an example:
How did we get here? The answer is simple: For decades — and without voter consent — state leaders have been issuing billions of dollars of debt in the form of unfunded pension and healthcare promises, then gaming accounting rules in order to understate the size of those promises.
As we saw during the recent financial crisis, hiding debt is not a new phenomenon. Indeed, General Motors did something similar to obscure the true cost of its retirement promises. Through aggressive accounting, for a while it, too, got away with making pension contributions that were a fraction of what it really needed to make, thereby reporting better earnings than was truly the case.
But eventually the pension promises come due, and for GM, that meant having to add extra costs to its cars, making its prices less attractive to consumers and contributing to its eventual bankruptcy.
Issue debt, spend the money, game the accounting system, look surprised when the obligations come due and blame your predecessors. The new way in American politics. As we saw with the charade of health care reform, it is alive and well and pumping out more unfunded entitlements as we speak.
But sticking with the case of California, Crane (who, btw, is a special adviser to the Governor on jobs and economic growth) gets to the heart of the matter, something I see more and more of:
Last summer Gov. Arnold Schwarzenegger proposed exactly that. Since then? Silence. State legislators are afraid even to utter the words “pension reform” for fear of alienating what has become — since passage of the Dills Act in 1978, which endowed state public employees with collective bargaining rights on top of their civil service protections — the single most politically influential constituency in our state: government employees.
Because legislators are unwilling to raise issues that might offend that constituency, they have effectively turned the peroration of Abraham Lincoln’s Gettysburg Address on its head: Instead of a government of the people, by the people and for the people, we have become a government of its employees, by its employees and for its employees.
This isn’t at all uncommon among state, local or the federal government. And it is an ever increasing base – the one sector still hiring throughout the recession is government. What Crane points out is a problem everywhere. Pension funds, in many cases are underfunded. Government employees have union negotiated benefits that are unaffordable given the current fiscal climate and are most likely unaffordable even in good economic times. Gutless politicians, especially those who count on those public sector unions for support on election day, refuse to address and act on the problem.
And taxpayers? Again, these are contractual obligations – if the money’s not there, it has to come from somewhere. Any guesses who ends up holding the bag?
If public service is about serving the public, my guess is the public is going to want to know why their servants make more than they do and have better benefits as well? The answer is found under the roof of your state legislature where politicians use your money, as well as obligating you to future debt, to buy the support of the government unions.
Heck of a scam if you can pull it off, huh? And to this point, they have.
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There’s been a lot of discussion about how much of our debt is controlled by foreign governments. The answer is found in this chart. In short a lot (more than half) and growing.
While the ownership of our debt may be theoretically neutral, there is a case to be made that this debt reliance gives significant bargaining power to individual foreign governments.
In the world of international politics, nothing is “theoretically neutral” that can be used as an advantage against another country. In the case of our debt we are handing out that ability each and every time we spend more than we have and ask foreign governments to finance it. Another in a seemingly endless number of reasons to cut spending, stop borrowing, pay off our debt and get our financial house in order.
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Not to make to much of them, but this is important to know when you hear some of what is going to pass for analysis today and this weekend. Calculated Risk does a good job of drilling down into the numbers and giving them some context.
First, part timers. The BLS reports:
The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) increased to 9.1 million in March. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.
Calculated Risk adds:
The all time record of 9.2 million was set in October. This suggests the increase last month was not weather related – and is not a good sign.
Again, while any gross positive number is better than a negative number, other areas of employment don’t necessarily support an outlook that says “the job picture is turning around”. As if to emphasize that point, Gallup’s “underemployment” numbers were released today as well and they increased to 20.3% of the US workforce is underemployed – up from 19.8% in February.
A second number to consider is those who’ve been unemployed for over 26 weeks and would work if a job was available:
According to the BLS, there are a record 6.55 million workers who have been unemployed for more than 26 weeks (and still want a job). This is a record 4.3% of the civilian workforce. (note: records started in 1948)
The number of long term unemployed is one of the key stories of this recession.
It is the highest number ever recorded since records started in 1948. The previous high was 2.5% in 1983. And, as the cite points out, this is “one of the key stories of this recession” and one that isn’t yet showing signs of improving.
The Wall Street Journal points out:
A survey of private employers shows they shed 23,000 jobs in March in a sign that the labor market remains a mixed bag in an economy that is otherwise growing again.
The private-employer report, which came two days before the Labor Department issues its own, broader job report, was a disappointment to many who were expecting both measures to mark a turning point into positive territory.
Calculated Risk concludes:
Although the headline number of 162,000 payroll jobs was a positive (this is 114,000 after adjusting for Census 2010 hires), the underlying details were mixed. The positives: the unemployment rate was steady, the employment-population ratio ticked up slightly (after plunging sharply), and average hours increased (might have been impacted by the snow in February).
But a near record number of part time workers (for economic reasons), a record number of unemployed for more than 26 weeks, and a decline in average hourly wages are all negatives.
Shorter version: Don’t put too much positive weight on this month’s numbers.
There is a lot that has to change in the markets in general before you’re going to see any significant change in the labor market. So when you hear the talking heads this weekend tell you that it is all turning around and it will be sunshine and roses from now on, take it with a grain of salt.
[Welcome Real Clear Politics readers]
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It certainly wouldn’t surprise me given the unsettled business climate. And, in fact, that’s what the Bureau of Economic Analysis is reporting – a record 1.6 trillion is being held while companies sort out what is happening in the business and financial sectors. That, of course, means it isn’t being spent on hiring. But there’s another reason, other than the unsettled business climate that is keeping corporations from hiring:
“Companies slashed their work forces and now find that they could function far more resourcefully than they ever realized possible,” Bianco said. “If anything, we could start to see some of the money being used to expand overseas or to acquire other companies. In either case, that does not bode well for job creation. In fact, mergers lead to job reductions unfortunately.”
A nice way of saying, it may get worse. Companies have become more efficient and productive. Because of that, most experts I’ve read expect the national unemployment rate – the U3 – to remain in the 9% area throughout the year. Government efforts to spur hiring haven’t amounted to much:
Alan Krueger, assistant secretary for economic policy at the US Department of the Treasury, points out that President Obama recently signed a jobs creation act known as HIRE which includes a variety of incentives. HIRE, for example, exempts companies from paying social security payroll tax if they hire someone who has been out of work for more than two months, and offers them a $1000 cash bonus if they retain the worker for a full year.
That’s not going to tip the scales and cause a company to hire if solid business reasons don’t dictate such action. And, as pointed out in the first cite, there’s a very good reason, at least at this point, not to hire – companies have learned to live and, in some cases, prosper without the employees they slashed.
One of the great surprises of the economic downturn that began 27 months ago is this: Businesses are producing only 3 percent fewer goods and services than they were at the end of 2007, yet Americans are working nearly 10 percent fewer hours because of a mix of layoffs and cutbacks in the workweek.
That means high-level gains in productivity — which in the long run is the key to a higher standard of living but in the short run contributes to sky-high unemployment. So long as employers can squeeze dramatically higher output from every worker, they won’t need to hire again despite the growing economy.
And right now, employers are indeed doing more with less and are not going to be inclined to hire more employees until it is clear that demand for their product is up, will continue to grow and requires more employees to produce their product and fulfill the consumer’s demand.
The Employment report has shown good numbers throughout March today release but not as good as expected by market. NFP data has posted 162.000 new jobs in march, with a revision in the previous data to -14.000 from -36.000 in February. Market expectations were 187.000 new jobs in March. Unemployment rate remains at 9.7% in March, the same February number.
What that report doesn’t break out is the fact that the numbers are most likely inflated by the temporary hiring of census workers (and that will continue through June). The Bureau of Labor Statistics did note it in its release:
Temporary help services and health care continued to add jobs over the month. Employment in federal government also rose, reflecting the hiring of temporary workers for Census 2010. Employment continued to decline in financial activities and in information.
So while +162,000 is obviously better than -162,000, the numbers aren’t really all that solid. Also remember that our economy requires about 120,000 to 140,000 new jobs a month just to offset job loses elsewhere and maintain a static unemployment percentage. And that’s pretty much what this month’s numbers show us and is the reason the unemployment percentage has remained static. What would give us a truer picture of the rate is to remove the census hiring from the numbers. My guess is we’d still be well below the 120,000 to 140,000 threshold necessary to drop that rate. But what the last three months may indicate is the labor market is finally bottoming out.
The point, of course, is that corporations are still in a position, driven by increases in productivity and lack of demand as well as an unsettled business environment, not to increase hiring any time soon. The money corporations are sitting on, as noted, is going to go somewhere – most likely to increased dividends or mergers. And mergers actually mean fewer jobs, not more. Until companies see increased, well-defined and sustainable growth in demand to the point they can’t handle it with their present level of employees, they’re not going to hire no matter how many “jobs” bills Congress passes and Obama signs.
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Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates.
Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.”
“I’m very much concerned about the fiscal situation,” said Greenspan, 84, who headed the central bank from 1987 to 2006. An increase in long-term interest rates “will make the housing recovery very difficult to implement and put a dampening on capital investment as well.”
When investors go to bonds, they’re looking for security. If they want higher risk, stocks are ready when they are. What Greenspan is talking about is this:
The Treasury Department sold $42 billion in 5-year notes on Wednesday at 2.605%, higher than traders had anticipated. Bidders offered to buy 2.55 times the amount debt being sold, the lowest since September. That metric of investor demand also compares to 2.74 times on average at the last four sales of the securities, all for the same amount. Indirect bidders — a class of investors that includes foreign central banks — bought 39.6% of the offering, compared to an average of 49.6% of recent sales and the lowest since July. Direct bidders, including domestic money managers, purchased another 10.8%, versus 9% on average. After the auction, yields remained sharply higher in the broader government-bond market as corporate and other higher-risk debt drew investors away from Treasurys. Yields on 10-year notes, which move inversely to prices, rose 13 basis points to 3.81%.
“I don’t like American politics and what’s happening,” Greenspan said.
Historically, there has been “a large buffer between the level of our federal debt and our capacity to borrow,” he said. “That’s narrowing. And I’m finding it very difficult to look into the future and not worry about that.”
Well join the club – I don’t like what’s happening either. Nor do a whole bunch of other Americans. And a clue to our addled leftist friends – it has nothing to do with the race of our president. Instead it has to do with the ideology that he and Democratic leadership are pursuing to the detriment of the country and its solvency.
Back to the line I italicized in Greenspan’s statement. What does it mean? The obvious – continued economic problems, continued high unemployment and slow expansion. The message? The debt is out of hand, and it isn’t being addressed in any meaningful way.
The Obama Administration is asking for $2.8 billion to help with ongoing disaster efforts in that Caribbean nation, responding to the devastating earthquake that struck Haiti in January.
“This request responds to urgent and essential needs,” wrote President Obama in a letter sent to Congressional leaders last week. “Therefore, I request these proposals be considered as emergency requirements.”
Let me translate that for you: “Therefore, I request that these amount of money needed for these proposals not be paid for, with the cost of the bill simply added to the deficit.”
That’s what “emergency” spending means in the Congress. It doesn’t go on the yearly deficit figure, but it does get added to the overall federal debt.
Now for those who are going to scream, “but Bush did it with the war”, I agree. Yes, he did it. And doing that was wrong. Clear enough? So whether it is for war or relief, it needs to be “on budget” – that’s if all the nonsense for Obama and the Democrats about PAYGO is to be believed.
Last week Democrats in the House approved a $5.1 billion emergency disaster bill to pump more money into FEMA. While there weren’t any pork barrel items attached to that bill, the Democrats did add on a $600 million Summer Youth Jobs initiative, along with $60 million for a small business loan program.
And the $5.1 billion disaster aid had the necessary verbiage to keep it “off budget”.
“EMERGENCY DESIGNATION – SEC. 102. Each amount in this Act is designated as an emergency requirement and necessary to meet emergency needs pursuant to sections 403 and 423(b) of S. Con. Res. 13 (111th Congress), the concurrent resolution on the budget for fiscal year 2010.”
In other words, the cost does not have to be offset.
Unacceptable. Unacceptable when George Bush and the GOP did it. Unacceptable when Barack Obama and the Democrats do it.
They need to understand and be reminded that such avoidance of the PAYGO law requiring new spending be offset by cuts elsewhere is to be followed to the letter. Certainly there may be real emergencies, but the money spent is just as real. If we have emergencies that require immediate spending, then fine – give Congress some time (90? 120 days?) to find the offsets. But this nonsense about whatever they decide to call an “emergency” is off budget – to include wars – has to stop and stop now.
The money spent is real, the debt becomes larger – the fact that politicians pretend it doesn’t add to the deficit is insane and borders on criminal fraud and is certainly no better than Enron accounting.
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I’m sure this is a CBO report (the “gold standard” remember) that Democrats and the administration will try to ignore. Especially since adding to the debt so significantly with ObamaCare.
President Obama’s fiscal 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years, $1.2 trillion more than the administration projected, and raise the federal debt to 90 percent of the nation’s economic output by 2020, the Congressional Budget Office reported Thursday.
In its 2011 budget, which the White House Office of Management and Budget (OMB) released Feb. 1, the administration projected a 10-year deficit total of $8.53 trillion. After looking it over, CBO said in its final analysis, released Thursday, that the president’s budget would generate a combined $9.75 trillion in deficits over the next decade.
Of course that’s a static assessment that assumes nothing changes over the next few years. Or said another way, if left to their devices, this is precisely what Democrats and this administration plan for our future. And all the denial in the world won’t change that. This is a plan for fiscal ruin.
To put it in a more easily understandable context:
The federal public debt, which was $6.3 trillion ($56,000 per household) when Mr. Obama entered office amid an economic crisis, totals $8.2 trillion ($72,000 per household) today, and it’s headed toward $20.3 trillion (more than $170,000 per household) in 2020, according to CBO’s deficit estimates.
That figure would equal 90 percent of the estimated gross domestic product in 2020, up from 40 percent at the end of fiscal 2008. By comparison, America’s debt-to-GDP ratio peaked at 109 percent at the end of World War II, while the ratio for economically troubled Greece hit 115 percent last year.
So, is it time to demand those calling the path we’re on “unsustainable” (i.e. Timothy Geithner, Barack Obama and the Democratic Congress) to put up or shut up? As usual, we continue to hear Democrats blather on about PAYGO, but we continue to see them ignore it in legislation they pass. It appears, given the budget numbers, they also plan to ignore it in the future – wouldn’t you say?
Look at that per household figure from 2008. It was already outrageous and yet within the next 10 years they plan on tripling it to $172,000.
Anyone have any idea of the effect such debt will have on our economy?
For countries with debt-to-GDP ratios “above 90 percent, median growth rates fall by 1 percent, and average growth falls considerably more,” according to a recent research paper by economists Kenneth S. Rogoff of Harvard and Carmen M. Reinhart of the University of Maryland.
Hey, when you have the fiscal policy of Greece or Argentina, what do you suppose the end result might be?
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Bruce mentioned yesterday that the 5-year note auction drew thin demand, with a low bid-to-cover ratio, and a steep drop in indirect buyers. This led to a jump in interest rates for both the Fives and the Tens also went up by 13 basis points. meanwhile, investors began moving into corporate paper, instead of treasuries.
I also note that this week saw weaker than expected durable goods orders, atrocious new home sales, and initial unemployment claims still at 442k–which is better than it was last week, but not great.
The “recovery”, apparently is still on pretty shaky ground.
Meanwhile, the new health care reform law attempts to shift a bunch of spending via Medicaid to the states, who are not really in a position to cover those costs, as state tax revenues have sharply declined from 2007.
In short, with a weak economy, we are planning on adding what may be as much as $2 trillion to the deficit over the next 10 years–deficits that are already at $1 trillion per year as far as the eye can see. How neatly that coincides with the announcement that Social Security will run into the red this fiscal year, paying more in benefits than it receives in payroll taxes, six years earlier than previously expected.
So, we got that going for us.
The United States is supposed to be the richest country in the world. But, on our present fiscal course, that cognomen will not attain in a very few years. We simply will not have enough money to service the debt load we will be carrying. In a very real sense, it doesn’t matter whether the Republicans can win in November and repeal the HCR law just passed. Or Cap & Trade. Or Medicare Part D. Or whatever.
We are directly on course to having to run massive inflation by monetizing the debt, or to simply defaulting on it, both of which will result in massively high interest rates, and economic stagnation. With the added bonus of runaway inflation, for good measure.
That this will happen cannot be in serious doubt if we continue our present course. Our fiscal and monetary policies are self-evidently unsustainable.
I can only presume that the Democrats believe that, at the appropriate time, fairies will appear out of thin air to sprinkle magical pixie dust on the economy, and all will be well. The current raft of policies they are proposing to enact will crush the economy. We’ve seen it happen time and again in South America, and now even in the EU, in which the Greeks are headed for a default in the very near future.
What is coming out of Washington is not policy. it is full-scale flight from reality.
Just as the Democrats add another massive new entitlement to the laws of the land, one of the oldest entitlements “officially” goes into the red:
This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.
Stephen C. Goss, chief actuary of the Social Security Administration, said that while the Congressional projection would probably be borne out, the change would have no effect on benefits in 2010 and retirees would keep receiving their checks as usual.
The problem, he said, is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.
Three things to be gleaned from this excerpt. 1) CBO numbers are static numbers based on nothing changing over the years in which their “scoring” takes place. Obviously that’s not reality and the CBO numbers for health care reform will prove that again soon. 2) Democrats will have to eat their words about Social Security being solvent and not in trouble. Many of the same one’s who made that claim recently also gave you the “numbers” in the health care bill scored by the CBO. And finally, 3) this isn’t a can Obama can kick down the road is it?
Not that he won’t try.
Because according to the NY Times, Cap-and-trade is the next legislative item the administration wants Congress to act upon.
Jobs? The economy?
What in the world are you smoking – they don’t give a rip about jobs, the economy or you. There’s an agenda at stake here. The window’s closing fast. And what the citizens of America need or want aren’t important right now. Don’t believe me? Read the article cited above – it’s another economy killing tax slated for an April introduction into the legislative process.
Are the scales perhaps beginning to fall from a few eyes yet?
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The French Finance Minister has noticed that the disparities within the European economy are causing a number of issues, and fingers the….Germans!
“Clearly Germany has done an awfully good job in the last 10 years or so, improving competitiveness, putting very high pressure on its labour costs. When you look at unit labour costs to Germany, they have done a tremendous job in that respect. I’m not sure it is a sustainable model for the long term and for the whole of the group. Clearly we need better convergence.”
You see, having an economy so efficient that you can be more competitive than your neighbors with high wages and a high standard of living means you need to change so that the French, Greeks and other assorted PIIGS can continue down the path they have chosen. The Germans are just too darned efficient for the greater good.
In the interest of being helpful I have identified several important initiative’s that the Germans should adopt to align themselves more fully with their neighbors.
- Do not keep your debt levels below 3% of GDP…ever.
- Encourage massive strikes at the drop of a hat.
- Make public services far more attractive than working in the private sector, with massive strikes and riots to keep it that way.
- Make it almost impossible to layoff anyone for any reason.
- Mandate at least six weeks paid vacation for every employee.
That should make sure your economy is not too efficient.
Is China’s economy about to rollover?
I won’t explain this, just let it sink in:
I don’t think it will be as bad as Japan, but the evidence isn’t giving me any great comfort either.
I love Apple, and I love my iPhone. Still, is Apple really worth more than Walmart? Or these various baskets:
- 4x the global smartphone market
- 5x the global music market
- 100x the global smartphone app market
- Enough to buy HP, Dell and Hitachi, with mad money left over for Xerox or Seagate
Yep, that whole efficient markets hypothesis may take a beating again.
Did any of you see Michael Lewis on 60 Minutes Sunday? If you didn’t, I highly recommend it.
Cross posted at The View From the Bluff
I’m not sure how much more of a blatant warning than this can be sounded over the financial path the Obama administration plans on taking us:
Moody’s Investor Service, the credit rating agency, will fire a warning shot at the US on Monday, saying that unless the country gets public finances into better shape than the Obama administration projects there would be “downward pressure” on its triple A credit rating.
Examining the administration’s outlook for the federal budget deficit, the agency said: “If such a trajectory were to materialise, there would at some point be downward pressure on the triple A rating of the federal government.”
That’s a very civilized way of saying “cut spending and cut borrowing or we’ll cut your credit rating so you can’t borrow and can’t spend”. The budget deficits projected by the Obama administration would eventually see 15% of the government’s future revenue committed to debt service – about the same as in 1983. However:
This time the servicing burden would be harder to reverse, however, because it would not be caused by high interest rates but by high debt levels.
Moody’s says it doubts the political will to raise taxes significantly from their present 14.8% of national income level or to cut spending from 25.4% of national income. That, of course, means an ever increasing gap between revenue and spending and jeopardizes the nation’s credit rating.
Moody’s isn’t the first rating firm to issue this type warning:
The report follows concerns recently expressed about the US public finances from the other large rating agencies. Standard & Poor’s warned last week the triple A status of the US was at risk unless the country adopted a credible medium-term plan to rein in fiscal spending. Fitch Ratings issued a critical report on the US in January.
Fitch said: “In the absence of measures to reduce the budget deficit over the next three to five years, government indebtedness will start to approach levels by the latter half of the decade that will bring pressure to bear on the triple A status.”
Or, we’re headed toward a financial cliff and right now our leadership is hitting the accelerator. If you think we have financial problems now, watch what happens of we suffer through the downgrading of our national credit rating.
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