Is Illinois Circling the Drain?

Illinois has a greater burden of unfunded government liabilities than almost any state, and Illinois’ position looks more precarious with each passing day. Economic growth is slow and taxes keep rising in order to finance the bloated public sector. The combination of high and rising taxes and little job growth is causing people to flee the state. As people flee, the tax base shrinks, increasing the burden on those who remain, and creating a vicious cycle in which ever more people have the incentive to leave. Shockingly, the state’s population has fallen over the last two years by over 70,000, the equivalent of a small city. Default beckons.

At wirepoints.com, Mark Glennon sounds the alarm on Illinois’ fiscal crisis.

The most recent news marks a death spiral in full swing. Population is shrinking, the tax base is eroding and the state’s revenue is declining, all while the underlying causes remain unaddressed and debt soars for the state and most of its municipalities.

One credit rating agency last week finally conceded that death spiral, at least tepidly. “A self-reinforcing cycle of population loss and economic stagnation could greatly complicate Illinois’ efforts to stabilize its finances,” Moody’s  wrote.

Glennon reports a rather disturbing statistic.

[A] recent RealtyTrac study found a stunning 500,000 Illinois homes — nearly 20% of houses in the state — with seriously underwater mortgages. That is, the mortgage balance exceeds home value by at least 25%.

Ironically, the underwater mortgages are probably serving to reduce the exodus from the state, because homeowners who are underwater can’t sell without getting the bank to approve a short sale.

In the comment section, reader “nixit” makes a further point about Illinois’ population–the fastest growing demographic consists of elderly people who don’t work or pay taxes.

Persons 65 years and over, 2015 = 14.2%
Persons 65 years and over, 2010 = 12.5%

Assuming 65 is the age of retirement, that’s an additional 200,000+ residents that are no longer on Illinois’ tax rolls because their retirement income is not taxed. And that’s a conservative estimate as I’d bet there are more retired folks under 65 than folks over 65 that are still working.

And the percentage increase I noted above is the largest increase among any age group in the state. In a nutshell, the fastest growing segment of the Illinois’ population doesn’t pay state income taxes. You don’t need to leave the state to negatively impact state revenue, just retire.

The good news is that neighboring states like Indiana will benefit from Illinois’ demise. Not living in Illinois is just one more thing to be thankful for.

The Real Crisis of Sustainability

One of the most popular buzzwords on campuses nowadays is sustainability. Professors label activities they consider bad for the environment, like burning fossil fuels, as ‘unsustainable,’ and their preferred activities as ‘sustainable.’ But when it comes right down to it, none of these environmentalists really knows what he or she is talking about, as evidenced by the fact that they can’t even define the term. Try it. Ask your environmentalist professors to define ‘sustainability.’ They can’t provide a definition that withstands logical scrutiny. As a result, the sustainability ‘issues’ they rant about are mostly mythical, and their proposed ‘solutions,’ such as wind farms, are boondoggles that do more harm than good.

There does exist, however, one genuine problem of sustainability, and that is the financial sustainability of the government budget. Unlike environmentalists and most professors, economists can in fact rigorously and precisely define financial sustainability. And it turns out that the federal government’s current budgetary path is utterly unsustainable. Writing in the New York Times, Tony’s favorite economist, Laurence Kotlikoff, points out that the size of the problem is measured by what economists call the ‘fiscal gap.’

I calculate that the “fiscal gap” — a yardstick of total government indebtedness that I’ve worked on with the economists Alan J. Auerbach and Jagadeesh Gokhale — was $210 trillion last year, up from $205 trillion the previous year. Thus $5 trillion was the true deficit.

The fiscal gap — the difference between our government’s projected financial obligations and the present value of all projected future tax and other receipts — is, effectively, our nation’s credit card bill. Eliminating it, would require an immediate, permanent 59 percent increase in federal tax revenue. An immediate, permanent 38 percent cut in federal spending would also suffice. The longer we wait, the worse the pain. If, for example, we do nothing for 20 years, the requisite federal tax increase would be 70 percent, or the requisite spending cut, 43 percent.

The real problem of sustainability isn’t the fact that you drive a car or plug in a hair dryer. It’s Social Security, which

takes in money, via payroll taxes, while promising hefty retirement benefits in return. Dig deep into the appendix of the most recent Social Security Trustees Report, released on Monday, and you’ll find that the program’s unfunded obligation is $24.9 trillion “through the infinite horizon” (or a mere $10.6 trillion, as calculated through 2088). That’s nearly twice the $12.6 trillion in public debt held by the United States government.

Neither the campus sustainability crowd, nor America’s decadent Political Class, wants to talk about financial sustainability. And the longer they ignore the problem and indeed divert the attention of the public to phony issues, the worse the problem grows, until the point when the nation ultimately is facing a full-blown financial crisis.

Next time anyone on campus uses the term sustainability, students should ask them about financial sustainability.

Hackademic tries to revive New Deal myth

Writing at The Daily Beast, Mason Williams, a history professor at The New School, claims that Franklin Delano Roosevelt’s New Deal “saved America.” And from Prof. Williams’ perspective, an important consequence of this alleged success of the New Deal was that “people came to believe in the power and benefit of the government.” What Williams admires about the New Deal era was its “political culture in which public institutions were trusted and esteemed far more than they are today.” Indeed, his entire article reflects his overriding concern with “trust,” “belief,” and “faith” in government. That’s because for true believers like Williams, statism is a kind of religion, with Big Government worshiped as a kind of powerful god that can deliver the goods, make or break people, and if necessary, move mountains.

With the national government’s support, New York built the Triborough Bridge, the Lincoln and Queens-Midtown tunnels, the West Side Highway, FDR Drive, and LaGuardia Airport. It also created two new college campuses, launched a program of working-class public housing, opened 11 monumental swimming pools and hundreds of neighborhood playgrounds, and opened and staffed neighborhood health clinics…

But despite all that, Americans have nonetheless lost faith in Big Government.

Today, the story of the New Deal seems almost foreign. Now, bridges are not raised; they collapse. The vast ambitions of the 1930s are gone: not since the Great Society declared war on poverty and provided health insurance to all over the age of 65 has the United States government attempted to solve a domestic social problem on the scale of the mass unemployment of the 1930s. Although the polling-place apathy of the 1990s has been reversed somewhat in recent years, Americans’ faith in public institutions has rarely been lower.

Of course, the reason why faith in Big Government has diminished is because is it has so manifestly failed to deliver on its promises. The Great Society was supposed to eliminate poverty, crime, delinquency, and all the other social pathologies of the underclass. Instead, despite the spending of literally trillions of dollars, all the problems got worse, as carefully documented by Charles Murray in his book, Losing Ground.

And regarding the attempt of “the United States government…to solve…the mass unemployment of the 1930s,” two points are in order. First, that mass unemployment was created by a government-sponsored institution:  The Federal Reserve. Second, the unemployment crisis created by the Fed was then greatly prolonged by the actions of the federal government. As usual, government was the problem, not the solution.

The first point above was demonstrated by the great Milton Friedman in some of the research for which he was awarded the 1976 Nobel Prize in economic science. Friedman showed that, during the early 1930s, the Federal Reserve permitted the stock of money to contract by one-third, a shocking and unprecedented decline. This occurred despite the fact that the U.S. enjoyed an influx of gold from abroad. Under the workings of the classical gold standard, the influx of gold should have enlarged the U.S. monetary base. But for reasons that are not entirely clear, the Federal Reserve screwed up by not permitting the monetary base to expand. As a result, what might have been an ordinary recession, like the one that had occurred in 1920, was turned into an economic crisis of unprecedented severity.

After the economy reached its nadir in 1933, the economy for a few years started to improve, until a setback occurred in 1937-38 as employment and industrial production fell sharply. Hence the Depression was not a single recession, but a double-dip. The cause of the double-dip was again government intervention, in two ways. First, the government sharply raised taxes on investment income. Second, the government pursued policies that empowered organized labor to obtain wages that were too high to sustain employment. According to UCLA economist Lee Ohanian,

The tax rate on dividends also rose to 15.98% in 1932 from 10.14% in 1929, and then doubled again by 1936. Research conducted last year by Ellen McGratten of the Federal Reserve Bank of Minneapolis suggests that these increases in capital income taxation can account for much of the 26% decline in business fixed investment that occurred in 1937-1938.

Meanwhile, after the 1935 National Labor Relations Act, union membership rose to about 25% in 1938 from about 12% in 1934. The increase in unionization was fostered by the sit-down strike.

In late 1936 and early 1937, for example, members of the United Auto Workers (UAW) occupied a General Motors auto body plant in Flint, Mich. Without auto bodies, production plummeted, and the company was forced to settle the strike and recognize the union.

The GM strike effectively unionized the auto industry, as UAW membership rose more than 15-fold the following year to about 500,000 members. Just the threat of a sit-down strike by steelworkers led to a unionized U.S. Steel in 1937. An unprecedented increase in union power increased manufacturing wages by nearly 10% between 1936 and 1938, which increased costs and reduced employment.

Several years into the New Deal, the economy remained depressed, and observers at the time concluded that the New Deal had failed. Indeed, FDR’s own Treasury Secretary, Henry Morgenthau, essentially acknowledged the failure:

We have tried spending money. We are spending more than we have ever spent before and it does not work…I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises…I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot!

Furthermore, there is considerable evidence that the public at large became extremely frustrated with the New Deal, so much so that they reconciled with the Republican Party, which voters had previously cast into the wilderness. In the wake of the Depression, the GOP had been devastated in the elections held between 1930 and 1936. But in the mid-term election of 1938, the GOP gained an astonishing 70 House seats, seven Senate seats, and governorships of key states like Ohio and Michigan (when those states were relatively more important than they are today.)

Even the vast majority of the online commenters to Williams’ article acknowledge that the New Deal and Great Society were failures. These are mostly laypersons who cannot cite Friedman, Murray, or Ohanian, but they nonetheless arrive closer to the truth than does the professional historian. Of course, they have the advantage of not having their judgment clouded by statist religious belief.

And so Williams, a paid priest of statism, does what religious leaders have always done to advance their sectarian beliefs–spin mythical tales about miraculous events. But those of us with a relatively stronger commitment to evidence-based thinking have reason to doubt that FDR’s New Deal “saved America” any more than Moses literally parted the Red Sea or than St. Francis silenced the swallows.

Some Clarity on the Debt and Growth Debate

There has been a large amount of discussion in the blogosphere about the coding errors of Reinhart and Rogoff which, once corrected, somewhat weaken their claims regarding debt and economic growth. Specifically, Reinhart and Rogoff maintain that a 90% debt to gdp ratio defines a key tipping point, beyond which leads to significantly and substantially slower economic growth. This academic debate has even entered into the pop culture world.

In trying to wade through these issues, Professor Lawrence Kotlikoff (as usual) best clarifies the key empirical and theoretical issues in the debate:

 The fiscal gap – the present value difference over the infinite horizon – between all projected spending, including servicing official debt, and all projected taxes is economics label-free measure of the unpaid bills being left to today’s and tomorrow’s children. It’s $222 trillion, based on the Congressional Budget Office’s latest projections. This true measure of our children’s fiscal abyss, which, by the way, grew $11 trillion over the last year, is almost 20 times the size of official debt held by the public!

The relentless postwar expansion in the fiscal gap fueled a truly amazing consumption spree by oldsters that drove our national saving rate from 14 percent in 1950 to 1 percent last year. The ratio of the average oldster’s consumption to the average youngster’s consumption is now more than twice what it was back then. Domestic saving is the main determinate of domestic investment, so it’s no surprise that take as you go has also wiped out most of domestic investment. And less domestic investment has meant slower economic growth. In sum, Reinhart and Rogoff are right. They just aren’t using the right numbers to show they’re right.

The case for spending cuts

Professors John Cogan and John Taylor have a good article in today’s Wall Street Journal on the macroeconomics of budget cuts. They argue against the Keynesian view that government spending cuts must be contractionary in the short run:

The long-run economic gains from restraining government spending would not, despite what critics claim, harm the economy in the short run. Instead, the economy would start to grow right away. Why?

First, the lower level of future government spending avoids the necessity of sharply raising taxes. The expectation that tax rates won’t need to rise provides incentives for higher investment and employment today.

Second, since the expectation of lower future taxes has the effect of raising people’s estimation of future disposable income, consumption increases today. This change comes thanks to Milton Friedman’s famous “permanent income” hypothesis that the behavior of consumers reflects what they expect to earn over a long period. According to our macroeconomic model, the higher level of consumption induced by the House budget’s effect on consumer expectations is large enough to offset the reduced growth of government spending.

Third, the new budget’s reduction in the growth of government spending is gradual. That allows private businesses to adjust efficiently without disruptions.

They conclude by explaining that:

For too long, policy makers have been misguided by models that lend support to bigger government or to the politically convenient objective of delaying any reduction in spending. It is better to recognize the flaws in this approach and get on with the sensible budget reforms the country so sorely needs.

Eurozone robs Cypriot banks

Profligate governments all over the world are desperate for money. As a result, each day brings more validation of Mark Twain’s quip that “No man’s life, liberty, or property is safe while the legislature is in session.” Indeed, we wrote previously about Argentina’s expropriation of private pensions. That action was appalling, but not so surprising, given that Argentina has long practiced quasi-fascist governance. Now, however, the expropriation has reached closer to the First World, as the Eurozone this weekend plunders Cypriot bank deposits.

Eurozone leaders and the IMF on Saturday announced an unprecedented levy on all deposits in Cypriot banks as the sting in the tail of a 10-billion-euro bailout for the near-bankrupt government in Nicosia.

The levy will see deposits of more than 100,000 euros in Cypriot banks hit with a 9.9 percent charge when lenders re-open their doors on Tuesday after a scheduled bank holiday on Monday. Under that threshold and the levy drops to 6.75 percent.

The robbers in government no doubt chose the banks because, as famous bank robber Willie Sutton put it, “that’s where the money is.”

Intended to apply to everyone from pensioners to Russian oligarchs alleged to have billions stashed away in what officials say is a bloated Cypriot banking sector…

What’s “bloated” is not the “Cypriot banking sector,” but the Cypriot public sector. Due to the plunder, the government “avoided salary and pension cuts” for public sector workers. So rather than make cuts, the government resorts to unprecedented Third-World-style expropriation. That says a lot about the government’s priorities. In theory, the public servants work for the people. One might therefore expect that, when the people can no longer afford to pay, the people would dismiss some public servants, their employees, or pay them less. But instead, the public servants remain untouched, while the people get squeezed harder. It’s almost as if the world is turned upside down and the people work for the public servants.

The authorities say the plunder is just a “one-off” event. It will never happen again. Never again, that is, until the next time the government runs out of money.

At a time when Cyprus and the rest of the Eurozone need to reinvigorate their economies, this policy is counterproductive because it undermines the public’s confidence in the banking system and, more generally, in the security of property under the law.

Fortunately, in the United States, such an expropriation of bank deposits would be prohibited by the takings clause of the 5th Amendment to the U.S. Constitution. But since Europe has no Bill of Rights, the plunder is legal. Similarly, since Europe has no 1st Amendment, European states can prosecute people for speech. And because Europe has no 2nd Amendment, they can also deny people their basic human right to self-defense. Events in Europe should indeed serve as timely reminder to Americans that their Bill of Rights is indispensable.

Update: The deposit deal has been rejected by Cyprus’ parliament.

Selling the Debt Short?

Mayor Michael Bloomberg talks here about the sequester and the U.S. fiscal imbalance. While he does agree that the federal deficit does indeed need to be curtailed, he dismisses the possibility of a default. His argument runs as follows:

“We are spending money we don’t have,” Mr. Bloomberg explained. “It’s not like your household. In your household, people are saying, ‘Oh, you can’t spend money you don’t have.’ That is true for your household because nobody is going to lend you an infinite amount of money. When it comes to the United States federal government, people do seem willing to lend us an infinite amount of money. Our debt is so big and so many people own it that it’s preposterous to think that they would stop selling us more.

Hmmm. So a sovereign debt crisis can’t occur since we have already issued so much debt? There is nothing in economic theory or history that supports such a proposition. As for his calling long- term concerns about being able to roll over our debt “preposterous”? That word is defined, according to the Merriam-Webster dictionary, as “conceived or made without regard for reason or reality.” Apparently, he is self-aware enough to not use this related adjective: