Quote of the Week (Japan Edition)

I wanted to pull this week's Quote of the Week from Arnold Schwarzenegger's Q&A on Reddit last week, I really, really did. The concept of 1,000 duck-sized Predators is just too great to not mention, and I couldn't get that mental image out of my head all week. Brilliant stuff.

But I decided instead to give the honor to Japan's new Finance Minister (their 11th since 2007!) Taro Aso, whose brutal bout of honesty this week added a neat little twist onto Japan's growing fiscal problems (and demographic nightmare). In a statement that is almost certainly intended directly for the ears of Jiroemon Kimura, the oldest man in recorded history, Aso uttered a phrase (well, a few of them, really) that you might end up hearing a lot of around the world over the coming decades...

This week's QUOTE OF THE WEEK

"Taro Aso said on Monday that the elderly should be allowed to 'hurry up and die' to relieve pressure on the state to pay for their medical care.

'Heaven forbid if you are forced to live on when you want to die. I would wake up feeling increasingly bad knowing that [treatment] was all being paid for by the government,' he said during a meeting of the national council on social security reforms. 'The problem won't be solved unless you let them hurry up and die.'

Aso's comments are likely to cause offence in Japan, where almost a quarter of the 128 million population is aged over 60. The proportion is forecast to rise to 40% over the next 50 years.

To compound the insult, he referred to elderly patients who are no longer able to feed themselves as 'tube people'. The health and welfare ministry, he added, was 'well aware that it costs several tens of millions of yen' a month to treat a single patient in the final stages of life."
                                                     - Justin McCurry; Guardian

So, first of all, it needs to be said that this dude is completely off his rocker. If you read Mish Shedlock's whole piece, you'll see that Aso has previously made bizarre off-color remarks about Jews, Taiwanese, and blue-eyed U.S. diplomats, so clearly he has a habit of saying outlandish things to provoke a reaction (sort of like another economist we all know and love).

That said, this little moment of honesty might hit just a little close to home for all of us here in America. Our Medicare costs are already projected to go through the roof over the coming decades, in large part because we continue to refuse to have difficult conversations about end-of-life care (specifically, how much is it worth to keep somebody alive for an extra year at age 65, versus at age 75, versus at age 85? Is there an infinite value? A declining value? Do we even begin to know?).

We can choose to spend an infinite amount of money to keep a person (any person) alive for another day, and hospitals and doctors will surely be glad to dispense those services as long as somebody (i.e. the taxpayer) is willing to pay. But sooner or later, we simply can't afford to do so for everybody, and we have to have that difficult little conversation with each other. Japan is having it now; it's coming our way sooner than you might think.

[Mish Shedlock]

Quote of the Week (Fiscal Cliff edition)

I don't have a lot to say about the recent "resolution" to the fiscal cliff, largely because it resolved nothing and is, once again, merely a prelude to the next "fiscal crisis" that is mere weeks away. However, I thought that Tyler Cowen of the Marginal Revolution blog shared the most succinct (and sobering) summary of the entire fiscal cliff experience. From New York Times columnist Ross Douthat, it's your Quote of the Week.

This week's QUOTE OF THE WEEK

"If a newly re-elected Democratic president can’t muster the political will and capital required to do something as straightforward and relatively popular as raising taxes on the tiny fraction Americans making over $250,000 when those same taxes are scheduled to go up already, then how can Democrats ever expect to push taxes upward to levels that would make our existing public progams sustainable for the long run?"
                                                     - Ross Douthat, New York Times

Indeed. Which of course just shows us that there is, ultimately, zero political will to address the problems about which I've spilled so much ink (okay, pixels) on this blog. If we can't raise revenue, then we can't fund programs, period, end of story. It's just a matter of when we choose to recognize this fact (or when the markets decide to recognize it for us, as is usually the reality when it happens elsewhere, and is almost assured given that politicians are already setting up to capitulate on the next crisis).

All of this means that charts like this one aren't likely to change any time soon, regardless of what some people might want to tell you:

Source: Bianco Research via Barry Ritholtz

But hey, at least the markets liked the deal, that must be good news, right? Uh, maybe. Or maybe this thing was just like every other piece of legislation out of Washington lately—hastily thrown together, not well-understood even by those who voted on it because they didn't bother to read it, and loaded up with all sorts of kickbacks and favors to the corporate elite that don't belong in there to begin with.

Business as usual in Washington, right? Good grief.

[New York Times]
(h/t Marginal Revolution)

Quote of the Week

I'm going to keep things quick and simple with this week's Quote of the Week, because I think it largely speaks for itself. Let's get right to it, with blogger Karl Denninger's response to the recent revelation that over 47 million Americans (about 15% of the total population) are now receiving food stamps. That's an increase of nearly 50% just since 2009, which is costing our government an additional $25 billion annually. Yuck.

This week's QUOTE OF THE WEEK

"The last month for which data is available, September, shows over 600,000 people [began collecting food stamps] in that month alone, comprised of 290,000 households. In one month! The average handout is $278.89 per household, or $134.29 per person monthly. Note that there are only 143,549,000 people in the workforce -- that is, people earning a wage... To put this in perspective for every three people working one is collecting food stamps."
                                     - Karl Denninger, The Market Ticker

That is awful. Setting political issues of the "fiscal cliff" or the "welfare state" or whatever else aside, the simple fact is that this is a completely untenable economic situation. Far too many people are currently receiving food stamps, and this alone is a huge indication that our policy responses to the financial crisis of 2008-09 (deficit spending, Fed money-printing) have been an utter failure.

The debt-based financial games that we've played for the last several decades have gutted our nation's middle class (death by several trillion paper cuts), and yet many would suggest that more of the same is what we need to solve our problems. Believe me, they're wrong.

It is imperative that we stop lying to ourselves and pretending that these policies work. They don't. We need to clean up our fiscal house (starting with defense and Medicare), take the power away from the banks who continue to steal from the rest of society, and most importantly stop printing money. It won't be fun, and it won't be easy, but it really is the only option—things will only be worse in the future if we fail to act today. America is a country that has always strived for greatness, and 15% of the population on food stamps falls far short of "great".

[Market Ticker]

The "real" fiscal cliff

From Tyler Cowen at the Marginal Revolution blog, what he terms "the truly important news". I'll agree with his assessment.

Forget post-election dissection and the fiscal cliff, here is the stunner: 

The U.S. birthrate plunged last year to a record low, with the decline being led by immigrant women hit hard by the recession, according to a study released Thursday by the Pew Research Center. 

The overall birthrate decreased by 8 percent between 2007 and 2010, with a much bigger drop of 14 percent among foreign-born women. The overall birthrate is at its lowest since 1920, the earliest year with reliable records. The 2011 figures don’t have breakdowns for immigrants yet, but the preliminary findings indicate that they will follow the same trend. 

That’s the real fiscal cliff.  Yet The Washington Post reports that its most popular article today is “Starbucks’ new $7 coffee is its priciest ever."

Yeah, that's not good. As I mentioned on Twitter this morning, over the long run, without population growth there can be no economic growth. Worse yet, a steady decline in the ratio of non-working (retired) citizens to working age citizens means that there's virtually no way to keep Social Security solvent, or to have any hope of paying down our national debt.

Want to know why Japan's economy can't seem to get out of its own way? This is why:

Too few working people (we could also call them "taxpayers"), too many unproductive people to support, and not enough aggregate savings among the latter to support themselves without help from the former. That's a problem, and it's one that's difficult if not impossible to reverse.

When a population ages dramatically, in relative or absolute terms, that always creates issues from an economic standpoint. It's a simple problem, and yet it's one that no amount of modern economic complexity (or monetary policy) can overcome. As Tyler wrote, this is the real fiscal cliff.

[Marginal Revolution]

Pay for Congressional performance?

Sheila Bair baffles me. Every time she starts making a ton of sense, the former FDIC head says or writes something else that comes across like low-grade satire, except I don't think it is. Her most recent piece for Fortune falls into the latter camp.

Will the elections bring about improvements in our increasingly dysfunctional government? I fear not. Successfully running for office these days is more about political fundraising and negative campaigning than about the art of governing. Only one in 10 Americans thinks Congress is doing a good job, and no wonder. Our economy is stuck in low gear, and our fiscal situation is precarious. How do we motivate our national leaders to deal with these problems? As with most organizations, it comes down to economic incentives. If our elected officials can keep their paychecks by being adept at fundraising and negative campaigning, then that is what they'll do. But if at least part of their pay is based on performance, maybe we could get them to focus on doing their jobs. Pay for performance has improved management in the private sector. Why not try it with the folks in D.C.? 

For instance, one-half of compensation for corporate directors is frequently paid in stock, which they must hold for several years. The idea is to align their economic incentives with the long-term profitability of the corporation. There is no stock ownership in the federal government, obviously, but we do issue a lot of debt (boy, do we ever). So here is an idea: Let's start paying members of Congress and the President half of their compensation in 10-year Treasury debt, which they must hold until maturity. Members of Congress make roughly $180,000, so under this proposal, they would get $90,000 in cash and $90,000 in 10-year Treasuries. (We would add a housing allowance, too, given the high cost of living in Washington.) For the President, it would be $200,000 cash and $200,000 in T-bonds. If the economy does well and if they get our fiscal house in order and institute pro-growth tax and spending policies, those 10-year bonds should hold their value. But if we continue our profligate ways, inflation spikes, and interest rates skyrocket, those bonds may end up being worth as much as the stuff Czar Nicholas issued shortly before the Bolshevik revolution (some of which I bought at a flea market and now use as wallpaper in the bathroom).

She keeps going with her proposal, but I refuse to further indulge her ramblings here. Realistically, the very premise of Bair's argument is fundamentally flawed.

"Pay for performance has improved management in the private sector," she writes. No, Sheila, it hasn't. Reams and reams of research have been produced which prove your argument wrong. What pay for performance tends to do, instead, is encourage leaders and executives to make company-betting moves which promise huge potential payoffs but equally large risks. If those risks pan out, the executive in question makes millions and retires happy, but if they don't, the whole company blows up and the manager walks away scot-free, moving on to the next gullible company to rinse and repeat (see: John Thain).

These schemes have led to an epidemic of short-termism on Wall Street in particular, where traders and executives have little interest in the firm's profitability beyond the next quarter or year. Making those stocks or options or bonds vest at a later date does little to change the underlying risk/reward dynamic from the standpoint of the executive. While things may be slightly different for Congressmen than for Fortune 500 CEOs, those differences aren't nearly as great as we would like them to be. The folks in Washington have already shown themselves to be experts at trading long-term security for short-term gain, and the last thing they need is another scheme from us that encourages them to do more of the same.

You see, even if our Congressmen (and women) were to blow up the whole country under Bair's proposal, they'd still be pulling in $90k a year (oh, and a housing allowance, of course), well above the national average. That's not exactly giving them the "skin in the game" that they might need in order to ensure that they don't screw things up terribly for the rest of us.

Worse still, the plan suffers from a serious flaw in design by tying compensation to a bond price rather than some other more tangible measure of actual long-term American prosperity. If our Congressmen suddenly own millions of dollars worth of U.S. government debt, then all that does is give them a huge incentive to encourage the clowns over at the Fed to keep on keeping on with their ridiculous quantitative easing, which sends bond prices skyrocketing (and yields plummeting) even while the fiscal state of the union deteriorates by the day.

The real flaw in Bair's argument, ultimately, lies in its presumption that Congressmen and Senators control bond prices and economic outcomes with their policies—they don't. The Fed controls these things, they have for decades, and that won't be changing any time soon, regardless of any "pay for performance" scheme that you want to put into place. Not until the voters force it to be so, that is.

The truth is, the only kind of "pay for performance" scheme that will ever work in a democracy is to vote the bums out when they screw over their constituents. That requires real, actual responsibility on the part of the voters, more than some lazy "autopilot" compensation scheme that won't work and represents a further abdication of the voters' responsibility to hold their elected officials accountable.

Now as ever, we as voters get the government that we deserve. If we refuse to hold our Congressmen accountable with our votes on Election Day, then we can't expect the mess to sort itself out just because they own a few more government bonds then they used to. Bair should know better than this, and yet somehow she doesn't. Unless, of course, this is satire, in which case the joke is, once again, on me.

D.C. politicians have in large part ascended to their lofty positions by being experts at gaming whatever system has been placed before them. Unless a pay-for-performance scheme is meticulously designed to avoid any unintended consequences, you can bet that they'll find the loopholes and design ways to maximize their compensation, regardless of the externalities that may result from their actions. What a joke of an idea. Our politicians need fewer systems and schemes to try to game, not more. Go back to the drawing board, Sheila.

[Fortune]

Ponzi financing in California

I don't have a lot to add to Mish Shedlock's take on this situation—this post of mine basically covered the issues at hand—but suffice it to say that by now, just about every government in California is bankrupt and desperate. Given my previous post, though, I thought I had to pass this item along. From Mish (italics are quotes from this article, bolding is mine):

Poway California, population 47,811 as of 2010, has placed an enormous bet on rising home prices and tax revenues. Poway borrowed $105 million but will not start to pay that amount back until 2033 at which time they will owe $877 million in interest. 

Clearly this would be fiscal insanity anywhere, but it is especially true in California given Proposition 13 that caps property taxes... 

Last year the Poway Unified School District made a deal: It borrowed $105 million from investors to fund a final push in its decade-long effort to revamp aging schools. 

Without increasing taxes, the district couldn’t afford to borrow money in the conventional way. So, instead of borrowing from investors over 20 or 30 years and paying the debt down each year, like a mortgage, the district got creative. 

With advice from an Orange County financial consultant, the district borrowed the money over 40 years in a controversial loan called a capital appreciation bond. The key point for the district: It won’t make any payments on the debt for 20 years. 

And that means the district’s debt will keep getting bigger and bigger as interest on the loan piles up... 

As well as being expensive, capital appreciation bonds work by tapping future growth in property values to pay today’s debts, a concept considered by many in the school bond business to be both risky and inequitable. In 1994, the state of Michigan banned school districts from issuing bonds like this, deeming them too toxic to taxpayers. 

Nevertheless, California’s ever-strapped districts have increasingly looked to capital appreciation bonds to raise money for improvements without increasing taxes on current residents. Across the state, districts have borrowed billions this way, using exotic financing to shift the burden for paying for today’s school construction to future generations of Californians. 

"This is way worse than loan sharking," said Michael Turnipseed, executive director of the Kern County Taxpayers Association in central California, which has lobbied the state Legislature to tighten laws on school district borrowing. "And Poway is the poster child. What they have done is absolutely insane." 

Think growth will bail out Poway? Think again. 

From Poway City Data the population of Poway shrank by .5% between 2000 and 2010. 

The current upfront cost of this $1 billion proposal would be $2196 per every man, woman, and child. 

By the time Poway starts paying the bill, the cost will be $20,916 per every man, woman, and child. 

Given the average household size is 2.9, the cost per household when the debt is due will be $60,656... 

This scheme is not insane, it's well beyond insane. Unfortunately, I cannot come up with a stronger word to describe it. 

Bear in mind that 20 years from now it is highly likely the school district will need still more money for school maintenance.  What then? Will property taxes rise 10-fold to pay back this loan?

Mish's last point is right on. The problem with taking on massive amounts of debt—thus shifting the burden of current expenditures onto future generations, with interest—is that future generations will still have to find a way to finance the expenses that come up in their time, in addition to paying off the previous generations' bills.

For an analogy, imagine trying to pay down a mortgage on your own house while also still paying down your parents' mortgage on a house that you no longer live in but that has been accumulating interest for decades without a single principal payment—yeah, doesn't sound too feasible, does it?

Sooner or later, the debt writedowns (defaults) will come, because they must. If you can't find the money now, you can't just wave your hands and assume that your kids will have it in 20 years' time. They won't. They'll be too busy paying down their own student loans, not to mention fixing the crumbling infrastructure that you left for them.

But hey, that's not your problem, right? Hey, somebody give J.G. Wentworth a call... we've got some bridges that need some fixing.

[Mish Shedlock]

How Facebook could (help) bankrupt California

I wrote briefly last week about the troubles over in Facebookland (I shed no tears for Mr. Zuckerberg) and the company's incredibly shrinking stock price. Unfortunately for some of us—especially the California schoolteachers among us—there's some collateral damage here (isn't there always?). Per Bloomberg:

Facebook Inc. (FB)’s declining price may cost California “hundreds of millions of dollars” in revenue expected from taxes on capital gains, the state’s fiscal analyst said.

The owner of the world’s largest online social network, touched $19.82 today, the lowest price since the Menlo Park, California-based company first offered shares to the public at $38 on May 17.

The most populous U.S. state’s $91.3 billion budget, signed by Governor Jerry Brown in June, counted on $1.9 billion in income-tax revenue from company insiders such as Chief Executive Officer Mark Zuckerberg exercising options or sell shares, assuming an average price of $35. Facebook, which touched $45 May 18, has averaged $29.49 on the Nasdaq stock market.

“Facebook share prices have fallen far below levels assumed in the state’s revenue projections,” the nonpartisan Legislative Analyst’s Office said yesterday in a report. If “the lower share prices persist through November and December, hundreds of millions of dollars of income-tax revenue assumed in the state budget plan are at risk.”

Perfect. Let me put this as simply as possible—if your budget is only "balanced" based upon assumptions of one-time revenue streams from viciously overvalued assets (whether those assets are internet stocks or McMansions or marijuana farms or whatever else), then your budget isn't actually balanced and you need to go back to the drawing board. That's true whether you're an individual, a corporation, a credit union, a babysitting co-op, or the world's largest local government. Math doesn't care who you are, and it can't be fooled (or manipulated) for very long.

The simple and uncomfortable truth is that this is why our nation has developed the unprecedented culture of bailouts and financial market manipulation that we now have, a culture that's robbing us all of our prosperity by warping and manipulating the underlying infrastructure of our economy. We've all been led to believe by any number of politicians and economists that deflation is our enemy, and that we need inflation (and $5/gallon gas) in order to prosper. This is, of course, obvious bullshit, but the party line actually makes a lot of sense when you dig a little deeper.

Simply put, almost every government in our country—whether local, state, or federal—depends upon high asset valuations in order to maintain anything in the ballpark of a balanced budget. Property taxes, capital gains taxes, sales taxes, even excise taxes, all of these are significantly higher when asset prices are inflated. When the housing bubble burst in 2007-08, it blew a gargantuan hole in state and local budgets nationwide, a hole that still hasn't been adequately plugged. Politicians will be damned if they're going to let this happen again, even if their actions guarantee that the next bubble will be bigger and uglier than the one that preceded it.

For more than a decade, governments made overly rosy assumptions about current and future tax revenues—and therefore made overly aggressive financial commitments—entirely because they believed that house prices could never decline. Then they did, significantly, and tax revenues dried up, but the financial commitments remained. Oops. And despite all of our government's best efforts, we haven't been able to reflate that housing bubble, so here we remain, in a position of constant stagnation.

When a state like California has its budget riding on Facebook's stock price, is it at all far-fetched to assume that California politicians will do whatever is necessary to prop up that stock, unintended consequences be damned? Of course not, and that's why we've got the system we've got. It sucks, but thousand of California pensioners now "need" Facebook's stock to rally. So won't you be a good neighbor and buy a few thousand shares?

[Bloomberg]

P.S.- For another cute example of how individual taxpayers end up on the hook to effectively (or directly) subsidize the corporations in their communities, check out these two recent posts from Deadspin, showing how the Kansas City Chiefs and Royals have been oh-so-cleverly using taxpayer dollars to pay ordinary operating expenses. This is yet another reason why we should never have conceded to the concept of taxpayer-funded stadiums and arenas. We pay for the company's expenses (as taxpayers), and then we pay for the company's product (as fans). Sweet business, huh? Beats stealing cardboard.

What do firefighters do?

Tyler Cowen had an interesting post up last week on his Marginal Revolution blog, noting that the number of career firefighters in the U.S. has increased 40% over the last 35 years, even as the incidence of fire calls has gone down by roughly that same percentage (largely because of improved building codes and increased usage of smoke alarms).

What are the firefighters doing, then? Mostly they're tagging along with ambulances on car accident calls and other miscellaneous medical emergencies. Cowen cites a 10-year-old article from Fred McChesney, the facts of which almost certainly still apply today.

Taxpayers are unlikely to support budget increases for fire departments if they see firemen lolling about the firehouse. So cities have created new, highly visible jobs for their firemen. The Wall Street Journal reported recently, “In Los Angeles, Chicago and Miami, for example, 90% of the emergency calls to firehouses are to accompany ambulances to the scene of auto accidents and other medical emergencies. Elsewhere, to keep their employees busy, fire departments have expanded into neighborhood beautification, gang intervention, substitute-teaching and other downtime pursuits.” In the Illinois township where I live, the fire department drives its trucks to accompany all medical emergency vehicles, then directs traffic around the ambulance—a task which, however valuable, seemingly does not require a hook-and-ladder.

Interesting stuff. For a graphical representation of the effect described above, Cowen passed along this chart:

When you see trends like this, it's hard to argue that fire departments really need to be as expansive as they have become. And with state and local budgets coming under more pressure by the day, don't be surprised if there are increasing calls to cut back on firefighters (and maybe return to volunteer fire departments?). It doesn't take a trained firefighter (or a large and expensive fire truck) to direct rubbernecking traffic around a wreck, and we really can't afford to pretend that it does.

[Marginal Revolution]

The great touring Olympic games?

Yesterday I was tipped off to this spooky Yahoo slideshow of Beijing, four years later. It shows what's become of many of the city's Olympic venues, many of which never had any real use after the games had concluded. I'll include some of my favorite pics, but I suggest you look at the whole presentation, for the full before-and-after effect.

Track & Field (and Opening/Closing Ceremonies)

Kayaking

Baseball Stadium

As I mentioned briefly in my post earlier today, the maintenance costs alone on some of these facilities is often more than the municipalities can bear, to say nothing of the ongoing burdens of the construction costs (especially if debt was used). This can often leave huge scars—and often, safety concerns—in these cities once the Olympics have left town.

It is for exactly these reasons that Chicago and many other cities have proposed the idea of "disposable" stadiums for the Olympics—facilities that are intended to be torn down or immediately repurposed, with the steel beams and sheet metal and concrete and whatever else to be recycled or re-used for some other project elsewhere in the city or surrounding areas.

I say, why not go a step further? What's the purpose of constantly purchasing and building and recycling and purchasing and building and recycling in a different city every four years when the types of venues needed rarely change in any meaningful way from one games to the next? Why can't the Olympics be more like a giant concert tour (maybe like the U2 360 tour) that just rolls into town and sets up shop somewhere every four years, then packs up and heads on down the road to the next tour stop? We could have facilities that are literally built and torn down in less than a month (remember, many of these venues are pretty small undertakings, not giant stadiums like those that host the track and opening/closing ceremonies), only to be rebuilt and torn down again somewhere else—with the same materials.

No, that solution wouldn't work for all venues, but it could certainly work for a few, couldn't it? And it would have to be a whole hell of a lot more cost-effective than doing it the way we're currently doing it, right? Of course, the problem is, who's gonna pay for the equipment and the tour? The IOC? Not likely. They're perfectly happy with the way things are, and they're probably not changing anything any time soon. But with municipal budgets in this country and around the world becoming increasingly strained, the IOC may ultimately be left with no choice, as nobody has any money left to build all these venues to the specs that the Olympic powers-that-be require.

This is all probably another one of my pipe dreams, but I'm nevertheless interested to see what shapes up over the next couple of decades.

[Yahoo!]

Quote of the Week (Malinvestment Edition)

One of the greatest criticisms of the extraordinarily expansionary monetary policies that we have seen over the past couple of decades (and past several years in particular) is that they create a widespread culture of malinvestment—companies and governments launch projects that look attractive solely on the basis of ultra-cheap financing, projects which then go sour when economic reality (or a higher interest-rate environment) returns. This exacerbates the booms and busts of our economic cycles, making recessions more severe than they should be (and much more difficult to cure).

This dynamic helps to explain the severity of the housing bubble (built as it was on ARMs and subprime mortgages), and also... Spain. Spain is in some pretty tough shape lately, asking for bailouts from people who probably can't afford them and possibly won't even provide them anyway. A big part of Spain's problem lies beneath the surface in the regional governments, which can no longer afford to finance their debts. It's essentially a bigger and more dangerous version of the budding problems with local pensions here in the United States, and it's a situation that seems like it pretty clearly could have been avoided.

This week's QUOTE OF THE WEEK

Ciudad de la Luz [an extravagant, publicly financed, near-bankrupt movie studio] has become a prominent example of Valencia’s frenzy of modern-day pyramid building, which left a legacy of $25.5 billion in regional debt and bankrupt infrastructure projects as well as the backlash now building against it.

Valencia’s other investments included a harbor for superyachts, an opera house styled like the one in Sydney, Australia, a futuristic science museum, the biggest aquarium in Europe and a sail-shaped bridge, not to mention an airport that never had a single arrival or departure. It also attracted extravagant events like the America’s Cup and Formula One racing.

                                             - Doreen Carvajal and Raphael Minder, New York Times

When governments of any kind begin to make "investments" in the economy to attract big events or simply more tourists—especially when such investment is geared toward attracting big international events like the America's Cup and Formula One (and the Olympics... more on that later)—it rarely ends well. At best, the local economy receives a short-term jolt, and then is left trying to figure out what to do with the infrastructure (and how to pay for its maintenance) after is it no longer in active use. At worst, we end up with a Valencia situation, with taxpayers on the hook for failed ventures, looking for bailouts from anywhere they can find them.

Yes, the taxpayers themselves are always to blame for allowing their governments to spend like this, but the central banks' "expansionary" monetary policies are aggressive enablers in the process. Appropriate, then, that they should find themselves under increasing scrutiny in the aftermath of these sorts of bubbles. But be aware, "doing more" is not the solution—on the contrary, it's at the very heart of the problem.

[NY Times]
(h/t Tyler Cowen)

Quote of the Week (Teachers' Edition)

To tee up this week's Quote of the Week, we first need to introduce you to Michelle Apperson. Ms. Apperson, a 6th grade teacher in Sacramento, just had a very big month--first, she was honored as Sacramento's "Teacher of the Year". Then, she was laid off.

So, either the people who give out the "Teacher of the Year" award in Sacramento are sorely mistaken, or something else is going on here. Guess which is the case?

This week's QUOTE OF THE WEEK

"It hurts on a personal level because I really love what I do. But professionally and politically or economically, I get why it happens."
                                         - (Former) Sacramento Teacher of the Year Michelle Apperson

It seems that Ms. Apperson is too diplomatic to actually say why it happens, so I'll step in for her here. It happens because California, like many (or most) places in our country, has a rule in place that ensures that teachers are laid off based on seniority alone, regardless of performance. Ms. Apperson didn't have seniority, so nothing else mattered. She's gone.

These sorts of rules--which are of course championed by teachers' unions from coast to coast--are devastating our nation's education system at a time when it can ill afford any further strains. Time and time again, teachers' unions have fought for greater benefits for themselves (like, for example, lucrative pensions that can't be funded), with little regard for who will have to pay the price down the road. In this case, it's Ms. Apperson (and Sacramento's students) who are paying the price for the unions' negotiated spoils.

I fully appreciate the potential benefits of unions, but in recent years it seems that many of them have been doing more harm to their organizations than good (Detroit certainly comes to mind). It's one thing to fight over the allocation of revenues or profits between management and labor, but quite another when these negotiations begin to sink the whole ship--if a company goes bankrupt, nobody gets paid. Furthermore, I think that public unions are a strange and ugly animal, and I share FDR's belief that they probably shouldn't exist.

Part of the knee-jerk reaction to Ms. Apperson's dismissal was a call for an overhaul of the way that education is funded in this country--in fact, there's a quote in the Yahoo article that I cited which argues exactly that point. But that idea couldn't be more wrong. This isn't a matter of funding, it's a matter of spending, and of what we choose to spend our money on. Do we choose to spend it on the most senior teachers, or on the most accomplished? Do we choose to spend it on current teachers, or on retired teachers in the form of bloated pensions?

No matter how we raise our money, or where we raise it from, there's ultimately only so much to go around, and we simply can't afford to be wasteful. This goes for all forms of government spending, including education, defense, healthcare, infrastructure, etc, etc, etc. Unfortunately, when budget crises hit, we tend to cut in the worst possible places, using the worst possible methods. So we lay off successful teachers, we stop maintaining our roads, and we end up costing ourselves significantly more money in the long run as a result.

Ms. Apperson's case is only the most recent example of an unintended consequence of government budget-cutting. The simple fact is, the more we insist on ignoring the REAL sources of our budgetary problems (at the federal level, it's Medicare, defense spending, and Social Security; at the state level, it's almost always those un-fundable teachers' pensions), we'll end up cutting all of the wrong things and driving ourselves further and further into the ground. We can't nickel-and-dime our way out of these budgetary quagmires--we need to take on the big problems, rather than counter-productively chipping away at the small-but-productive government programs (like, say, NPR) that always end up being easy targets.

If our retired teachers care as much about children now as they did back when they were teaching, then they should be willing to sacrifice at least some of their pensions so that teachers like Ms. Apperson can keep their jobs. But of course, they won't be doing that any time soon, will they? So Ms. Apperson is out of luck, and so are our children. Good times.

[Yahoo]

Local governments dial up JG Wentworth

While Mayor Bloomberg has been receiving a lot of attention for his proposed soda ban, it's a different Bloomberg proposal that could have a much greater impact on life in Manhattan--despite receiving little fanfare at all (isn't that always the way?). Old friend Matt Taibbi has the scoop:

Readers of my last book, Griftopia, might recall a chapter about the city of Chicago leasing 75 years of its parking meter revenue to a coterie of private investors, some of them from the Middle East. The end result was and is a political obscenity: Native Chicagoans are now completely at the mercy of private interests when it comes to parking rates, collections, even holidays. When elected officials in Illinois can’t shut off the parking meters on Abe Lincoln’s birthday because a bunch of sheiks in Dubai don’t want the revenue stream turned off even for a day, you know something has gone seriously sideways in the national body politic. 

Well, Chicago isn’t alone anymore. Hizzoner Michael Bloomberg in New York has decided to do his own version of the Chicago infrastructure bake sale; the city announced that it is putting up nearly 90,000 parking meters for lease. They’re expecting to get over $11 billion in upfront money from the deal, which is great news if you’re Mike Bloomberg, who gets to use that money to patch current budget holes instead of making tough cuts or raising taxes. The news is less awesome for the next half-dozen New York City mayors, or for the citizens of New York, who now will get to spend most of the 21st century grappling with its increasingly monstrous deficits with a major tributary from the city’s revenue stream shut off. 

A New York parking meter deal, like the Chicago deal, would be a perfect example of the deeply cynical short-term thinking of many American politicians these days. These deals involve a sitting executive selling off a valuable piece of city property at a steep discount to private financial interests (often, to friends or campaign contributors), in order to solve a current cash flow problem that, surprise, surprise, will still be there the year after you finish spending the proceeds of your sale. 

In Chicago’s case, Mayor Richard Daley sold 75 years of meter revenue – worth an estimated $5 billion – for $1.2 billion. So he gets 20 cents on the dollar for the city’s parking meters in 2008, and then in 2009 the city still has a budget problem that’s now worse, because there’s no parking meter revenue anymore, ever. Meanwhile, a bunch of private investors rounded up by Morgan Stanley – these bankers go on road shows here at home and abroad to places like Geneva and the UAE to hawk discount American infrastructure to foreign billionaires and sovereign wealth funds – get to enjoy the fruits of raised rates. In some Chicago neighborhoods, the meter rates went from .25 cents an hour to $1 an hour in the first year of the deal, and then to $1.20 after that.

As Taibbi points out on his own blog, this is basically the government equivalent of dialing up JG Wentworth (877-CASH NOW!! 877-CASH NOW!!) to pull forward future government revenues into the current period. Who cares if I'll be broke in 5 years, it's my money and I need it now!! It's a slightly more desperate version of the privatization of liquor stores proposal put forth in my state two years ago, on a much larger scale with much more at stake.

For what it's worth, according to my math the discount rate implied in selling a revenue stream worth $5 billion for $1.2 billion in present-day cash (as Chicago's Mayor Daley did) is about 5.5%--in other words, the city government is effectively borrowing money at a 5.5% rate, which is.... eh, not great, not terrible. But the loss of control over the property is a significant problem, as the Chicago case has shown. Private parties can and will take advantage of the kindness of government bodies, and they have done so before. Those with foreign allegiances will feel even less shame when they do so--all is fair in love and international business.

We simply can't allow our governments--local, state, or federal--to continually take out mortgages on the nation's property just to plug current budget holes. If they continue to do so, what will be left of our sovereignty at all? Will we be the United States of America in name only, with all future economic production belonging to China or Dubai?

But by all means, New York, please pay no attention to this case. It's way less important than the size of your drink container, so please ignore it entirely, and direct your legal and political might toward challenging stupid and irrelevant nanny laws. Because by the time you realize you've been screwed, it will be far too late to do anything about it.

[Rolling Stone]

Quote of the Week (bonus edition)

Okay, this week I couldn't make a choice, so you're getting two Quotes of the Week. They're not related in any way, I just thought they both deserved recognition, so here goes.

First of all, in advance of this Friday's highly-anticipated monthly jobs report, former Reagan economic adviser David Stockman decided to put things in perspective for those of us who are getting (maybe a little too) excited about our apparently improving economy. In a wide-ranging interview that is highly critical of Fed policy (attaboy, Stockman), we're reminded that while things may be getting somewhat better in the job market, they're still pretty ugly.

QUOTE OF THE WEEK #1

"Look at the data that really counts. The 131.7 million (jobs in November) was first achieved in February 2000. That number has gone nowhere for 12 years."
                                                 - David Stockman

This is a gentle reminder that without a SIGNIFICANT number of new jobs and a MUCH higher labor force participation rate among the younger generation, there is NO WAY that we can possibly afford to subsidize the Baby Boomers' retirement years via Social Security and Medicare without going completely bankrupt as a nation. While the debt and deficit numbers are already staggering, our biggest liabilities have barely even begun to show up, and our tax base is showing no signs of expanding. This is a big problem.

And hey, on that note, it's Super Tuesday!! The day on which we will (maybe) choose who will try to lead this country out of the problems that Stockman has so kindly pointed out for us in his interview. So we'll turn things over to Joe Nocera, who has some... interesting words about Rick Santorum (a candidate I've briefly discussed here). In a piece that is highly critical of what the modern Republican party has become, Nocera gives his best endorsement of Santorum:

QUOTE OF THE WEEK #2

"An alcoholic doesn’t stop drinking until he hits bottom. The Republican Party won’t change until it hits bottom. Only Santorum offers that possibility."
                                     - Joe Nocera, New York Times

Yeah, that's pretty much how I feel about him. I support neither party, but I've voted Democrat in three straight Presidential elections because the Republican alternative was so distasteful to me (I have few kind words for George W. Bush, and John McCain ruined any good feelings I had about him the day he picked Sarah Palin as his running mate). And yet, if I had to choose between Bush, McCain/Palin, and Santorum... Santorum would be the absolute last choice on my list. But enough of that.

Nocera makes some solid points (it's not all snark), and I think his take on the matter is worth a read. I will now go vote for Ron Paul. Go America.

[USA Today]
[New York Times]

The blight of interest rate swaps

It's no secret that state budgets (not to mention their public pension funds) have been under intense pressure lately, a problem made significantly worse by perpetually accommodative Fed policy. Much like our federal budget, these state funding crises have stemmed from both the revenue side and the spending side, caused by decades of politicians who habitually promised the world to their constituents without bothering to do any contingency planning at all.

But a recent report from SEIU sheds light on yet another drag on state and municipal budgets at a time when they can least afford it, once again aided and abetted by Fed policy--and, of course, benefiting banks everywhere at the expense of taxpayers. To summarize...

Big banks are profiting at state and local governments’ expense using the same toxic financial instruments that helped crash the economy.  These derivatives known as interest rate swaps, were sold to governments with a promise that they would lower their borrowing costs but have now become a huge liability. The banks have already taken as much as $28 billion from state and local governments.  Now, during the worst public budget crisis in memory, the big banks seek to collect billions more from toxic deals that local and state governments are trapped into and are forcing layoffs and cuts to services to cover payments to banks.

I do take issue with the assertion that these are "the same toxic financial instruments that helped crash the economy", but that disagreement is immaterial to this discussion. The quick and dirty of it is that banks enticed state and local governments everywhere to "lock in" their interest rate costs--both pre-existing and projected--at what were at the time multi-decade lows. Those governments were effectively borrowing money in advance, often paying interest to the banks on loans never made (for projects not yet approved or begun). When the economy tanked and interest rates went even lower, the governments were still on the hook for the higher interest rate expense.

Adding insult to injury, the weakened economy meant that those not-yet-approved projects would in fact never begin (as spending measures were reined in), meaning that the governments had "locked in" interest rates on non-existent borrowing needs--without a project to fund, the swaps became naked bets on interest rate movement, bets that the governments had no way of winning in the face of loosening Fed policy.

The governments therefore were (and still are) left paying an insane tab to the banks for no reason whatsoever. If this whole scenario sounds familiar, that's because it is--I wrote several months ago about a similar scenario involving Bobby Bonilla and the Mets, in which case Bonilla was effectively playing the role of the bank. These interest rate swaps also cost the Port Authority of New York/New Jersey vast sums of money, sums that they are now trying to recoup via increased tolls and fees (as though they weren't high enough to begin with).

While the states should have known better than to get into these arrangements to begin with, the fact that these local budgets are now suffering so badly as a result shows yet another side effect--an unintended consequence--of the Fed policy that I have spent so many words on this blog deriding. The only way to solve the problems that these governments--state and otherwise--now face is, of course, through more monetary stimulus!! And round and round and round we go... aren't centrally planned economies fun?

[SEIU]

Quote of the Week

For this week's Quote of the Week, I was incredibly tempted to give the honors to Metta World Peace (some of you may still know him as Ron Artest, but he's way more insane now), who summed up the Jeremy Lin mania (which I'm enjoying immensely) in a way that only a certifiably crazy person could--by ranting about leather pants, cigars, and Allen Iverson jerseys. Sure.

But I decided I'd go with a more "serious" Quote of the Week (I put "serious" in quotations because I honestly hope the speaker was joking when he said it), courtesy of Republican Presidential candidate Mitt (aka "Mittens") Romney. Mitt was formerly the Governor of my home state of Massachusetts, and I voted for him when he ran (way back in 2002). I'm pretty sure I won't be doing so this time around, and this little tidbit is part of the reason why.

This week's QUOTE OF THE WEEK

“This week, President Obama will release a budget that won’t take any meaningful steps toward solving our entitlement crisis. The president has failed to offer a single serious idea to save Social Security and is the only president in modern history to cut Medicare benefits for seniors.”
                                - Mitt Romney

Yeah. That doesn't make a lick of sense. It's quite possibly the most contradictory statement made to date by a man who has seemingly made a living off of contradicting himself. His platform makes absolutely no sense--the only consistent thing about it is that he will clearly say or do anything to get elected, sort of like John McCain four years ago.

I'm not sure what Mitt would consider a "meaningful step" toward solving our entitlement crisis if "cutting Medicare benefits for seniors" doesn't qualify, but then, I'm not sure what Mittens thinks at all anymore.

[Marginal Revolution]

On taxation and black economies

A few months back I tried to shed some light on the problems in Greece by citing a statistic that there are more Porsche Cayennes registered in the country than taxpayers declaring an income of 50,000 euros or more. That statistic, when combined with other anecdotal evidence, shows that one of the root causes of Greece's ongoing economic problems is its government's inability to collect taxes on the economic activity that is actually occurring in the state.

An article last week regarding Italy showed that Greece is not alone in that regard.

Police fanned out across Milan in late January halting more than 350 vehicles, mostly luxury SUVs and Porsches. 

At checkpoints, including one adjacent to the fashionable Corso Como, the police got the driver’s license and registration, which they passed on to the national tax agency. The tax authorities will use the data to check if the cars’ owners had declared enough income -- and of course paid the right amount of income taxes -- to justify their lifestyles. 

It was at least the fifth raid targeting wealthy Italians since a Dec. 30 sweep at the posh Cortina d’Ampezzo ski resort, where 251 high-end cars were stopped, including Ferrari and Lamborghini supercars, Bloomberg Businessweek reports in its Feb. 13 issue. Rome, Portofino on the Italian Riviera and Florence have also been targeted.

Italy is getting aggressive with its tax evasion crackdown, and it's a necessary step--depending on the estimate, the underground "Black Economy" (or, "System D") accounts for 20 to 30% of all economic activity in the country. However, it's unclear whether Italy's efforts will be sufficient in the long run to solve its significant debt problems.

Ultimately, the strength of a state depends entirely on its ability to collect taxes from its citizens. One could argue that the United States is relatively strong in this regard (its "Black Economy" is nowhere near the levels of Italy and Greece), but it still does not collect nearly enough tax to pay its annual bills. If it in fact tried to raise its tax rates in order to close that gap--as Italy is now trying to do, in effect--it might find that the "Black Economy" would grow significantly as a result.

Those who argue that raising tax rates would harm economic growth are therefore certainly correct, although perhaps not in the way they might imagine. Instead of actually decreasing the overall amount of economic activity, a higher tax rate might just lead to a decrease in the amount of "official" economic activity, as more and more transactions went off the record. It's quite possible (if not probable) that's what happened in Italy over the last decade, which would help explain the nation's pitiful "official" economic statistics.

If citizens (of any nation) begin to feel that their tax burden is too high--or that their government is misusing their tax dollars--they will always find ways to avoid paying their tax bill. Sometimes this will be through outright misrepresentation and fraud, but often it will be much more subtle and therefore much harder to prove. If a mechanic fixes a friend's car for free, with the understanding that his doctor friend will return the favor in the future by dispensing free medical care, the level of "economic activity" (in terms of favors exchanged) is the same whether or not cash actually changes hands. But in one case, the government can collect taxes on the transactions, and in the other case, the government cannot (at least not easily).

The choice to do these transactions "on the record" or "off the record" depends entirely on the mechanic and the doctor's respective faith in their government, and whether they feel that their leaders are operating in good faith with respect to taxation. Unfortunately, once that good faith bond has been broken, it can be incredibly difficult to restore, as Italy and Greece are now learning. As the U.S. tries to solve its own deficit and debt problems, it too will end up facing a similar dilemma--how can it extract more money from its citizens without pushing more economic activity down into the underground, beyond its reach?

The strength of the state, ultimately, is only as good as the citizens' belief in that state and its leaders. Break that bond, and the state can suffer even as many of its citizens continue to thrive--at least in the short run. But in the long run, both the state and its citizens suffer together, and that's where Italy and Greece now find themselves.

[Bloomberg]

Paul Ryan gets it?

I've had my disagreements with Paul Ryan's decisions in the past (namely, voting for TARP and voting for Medicare Part D), but today he issued some incredibly sensible analysis in his questioning of Fed Chairman Ben Bernanke.



The highlight, as I see it: "The Federal Reserve, whose primary goal is to manage our money, is involving itself in fiscal policy--is sort of bailing out fiscal policy, because the branch of government in charge of fiscal policy, this branch, is not doing its job. I mean, a budget hasn't passed Congress in two years."

That is correct. I vehemently disagree with Bernanke and his inflationary policies, as I've made clear here on several occasions. But as I pointed out in my post earlier this week, Bernanke is merely raising taxes (effectively, at least) where Congress has refused to do so. His constant purchases of U.S. debt have kept the federal government solvent where it otherwise would not be (by artificially depressing borrowing costs), and it is therefore disingenuous at best to see elected officials hurling barbs at Bernanke without also acknowledging their own shortcomings.

With his analysis today, Rep. Ryan showed that he at least seems to understand the dynamics at play--Bernanke may be the devil, but he's a devil of Congress' own creation. One cannot exist without the other.


(h/t The Mess That Greenspan Made)

Quote of the Week

This week's Quote comes courtesy of Karl Denninger, who has inspired more than a couple of my rants here in the past. It stems from the Congressional Budget Office's projections released yesterday, which are absolutely chock full of ugly numbers and statistics (ignore them at your own peril). Let's get right to it:

This week's QUOTE OF THE WEEK

"Government spending for Medicare, Medicaid and other healthcare programs will more than double over the next decade to $1.8 trillion, or 7.3 percent of the country's total economic output, congressional researchers said on Tuesday.


In its annual budget and economic outlook, the non-partisan Congressional Budget Office said that even under its most conservative projections, healthcare spending would rise by 8 percent a year from 2012 to 2022, mainly as a result of an aging U.S. population and rising treatment costs. It will continue to be a key driver of the U.S. budget deficit."
                                           - David Morgan, Reuters

Look at that first paragraph: that's 7.3 percent OF THE COUNTRY'S TOTAL ECONOMIC OUTPUT! Not of tax revenues, not of total government spending, of the ENTIRE ECONOMIC OUTPUT. In case you were wondering, total federal tax receipts in 2011 were approximately $2.3 trillion, on total economic output (GDP) of $14.6 trillion--about 15.8% of total economic output. That means that our expected expenditure on health care programs would be a full HALF of everything that we currently bring in from tax revenues.

That is, in a word, untenable. There's absolutely no way to make these programs solvent, and we need to stop pretending that there is. We can't grow our way out of this problem, we can't inflate our way out of this problem (hi, Ben), and we certainly can't default our way out of it (although that's where we're heading).

Oh yeah, and just repealing Obamacare doesn't do anything to help matters either, in case any of you Republican-lovers were wondering.

This country is bumping up against fundamental problems with respect to how it cares for its elderly, and it's clear that we've made promises that we mathematically cannot keep. A millionaire tax or a wealth tax or an inflation tax or whatever other tax can't compensate for the fact that there's just simply not enough money to go around. We need to admit that we've made promises that we can't keep, and begin the ugly and unpleasant process of reneging on those promises. The longer we wait, the worse the problem will get--procrastination is an expensive vice that we simply cannot afford.

[Reuters]
(h/t Karl Denninger)

Way to go, Florida

The internet is clearly asleep this week, probably because nobody is actually at work (or, if they are, they're not actually doing anything, sort of like me). Far be it from me to wake up a sleeping giant, but I thought I'd pass along this fantastic article from Florida, which is seemingly hell-bent on setting a new low for state governments.

Florida school districts will be able to sell the naming rights for public school cafeterias under a bill filed this week.

Irv Slosberg, D-Boca Raton — who has also filed a bill that would allow advertising on the sides of school buses — filed the "Student Nutrition Enhancement Act" on Tuesday.

It would allow school boards to decide the details on naming rights, including where the name is displayed. It says revenue generated shall be used "to enhance the school district's school food service budget and to meet the nutritional needs of students."

In the midst of historically deep budget cuts for Florida schools, "this is a way to get private businesses to partner up with governments," Slosberg said Wednesday.

Oh my dear God. For what it's worth, Slosberg has previously called for Florida to sell the naming rights to just about everything, from state roads to beaches to--in his words--"anything the state of Florida owns that we could possibly sell". Like, you know, children.

Why not just institute a statewide public school dress code policy, and then sell advertising space on the school uniforms? That way we can raise new revenue to help pay for, I don't know, art and music classes, and our kids can all get gussied up like their favorite NASCAR drivers. I should probably shut up, before I give ol' Irv any more bright ideas.

This bill is honestly fairly inevitable, as it follows logically in the theme of moral relativism when state budgets are on the line--first it was drugs, alcohol, and gambling, and now coming soon to a state near you, whoring our kids' futures out to corporate interests.

What worries me most about this particular bill, though, is that there is a direct connection being made between the source of the revenue and the uses of said revenue. In most cases, that's a good connection to have, as taxpayers can better understand what they're paying for, and can therefore make better-informed decisions about whether or not a proposed program is a good idea.

But in this case, because it's corporations that are being considered, I worry that participating companies will make their sponsorships contingent upon certain specific uses--for example, "we, Frito-Lay, will sponsor your cafeteria, but only if you serve at least 35% Frito-Lay products in said cafeteria". In fact, such a setup is basically inevitable once you've opened up this Pandora's box. The potential for kickbacks and unintended consequences is staggering and frankly frightening.

But then, Congress has already told us in very clear terms that our school cafeterias are for sale to large corporate interests, when it openly declared that it considered pizza to be a vegetable. I probably shouldn't be so surprised to see desperate people with unfunded pensions so eager to sell out their own children's future, but I am nevertheless.

Cities, states, and countries have promised more than they can afford, but nobody wants to admit it or pay more in taxes to cover it. That leaves us with little choice but to begin chipping away at many of our once-cherished values, compromising the integrity and well-being of future generations in the process. Sad.

[Tampa Bay Times]