Bailout Nation

We've bailed out Wall Street. We've bailed out the auto industry. Now, there's talk of bailing out out the schools, so they don't have to lay off so many teachers, and talk of bailing out union pension plans. and even talk of bailing out the entire city of Detroit. The BP president was on the Today Show this morning, and he looked like he hadn't slept in three week. I'm guessing that we're going to be dumping a ton of money to clean up that mess sometime soon.

We're about to enter into a new era where government does more than ever, but the money is going to prevent major disasters. Ain't nobody going to be happy. Progressives like myself don't mind paying more money in taxes, if the money goes to programs that we like, ie subsidized child care, job training, schools. Libertarians want less taxes and less programs. We're entering a weird era of more taxes and less programs.

This is most obvious at the local level, because state and localities aren't allowed to build up a deficit. State governments have passed to buck down to the towns. Here in my town, we're seeing a sharp rise in taxes, AND my kid's class size is moving from 22 kids to 31 kids.

It's Bailout Nation.

36 thoughts on “Bailout Nation

  1. Well, as Martin Feldstein (I think he was the one) said, “If something can’t go on, it probably won’t.” Possibly if some New Jersey municipalities actually go bankrupt, consolidation and rationalization will ensue. Or a grass roots anti-pension movement will give the legislature the political will to rein in bloated public sector pensions. Or some other solution will be developed.

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  2. “If something can’t go on, it probably won’t.”
    Keynes said “Markets can remain irrational longer than you can remain solvent,” which isn’t a direct answer to this, but it is a close enough corollary to the answer. Before you get to “can’t go on,” you can do irreparable damage. To put it another way, I’m guessing you won’t need to get but one Costco-sized box if you wanted to give a popsicle to every elected official in the country who wouldn’t hock the very air he breaths to punt a fiscal crunch two years down the road.

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  3. That’s so funny, MH. That has happened to me once or twice (though not here), that a spambot agreed with me. It’s very deflating, actually.

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  4. “That’s so funny, MH. That has happened to me once or twice (though not here), that a spambot agreed with me. It’s very deflating, actually.”
    Speaking of deflating, here is a specimen from http://www.fivefeetoffury.com:
    “Yesterday I was wallowing in self-pity, struggling with a VERY Serious Problem, and said as much on Twitter. (I mentioned the “self-pity” party, right?)
    “This morning I got a DM from someone I don’t know, offering to take me out for drinks sometime to commiserate.
    “I was all, “Thanks, but no. You’re a doll. Don’t mind me” etc.
    “Then he DM’d back:
    “”Ooops, sorry. I actually meant that message for somebody else. But hey, uh, you’re cool too” etc
    “Wow, what a reset button. I needed that. We now resume our regularly scheduled life.”

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  5. I have no problem with “bail outs” to the extent that they save or create jobs. Funding to state and local government was a big part of the Stimulus Bill, but no one noticed because it just let governments not have lay offs last year. This year, the Stimulus Money is gone, and the lay-offs are beginning.
    As someone who thought the Stimulus Bill was too small, I support these smaller ideas to expand it via other methods.
    Bailing out pension plans or BP isn’t saving any jobs, so I don’t see the value.

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  6. “I have no problem with “bail outs” to the extent that they save or create jobs. Funding to state and local government was a big part of the Stimulus Bill, but no one noticed because it just let governments not have lay offs last year. This year, the Stimulus Money is gone, and the lay-offs are beginning.”
    How many years are you willing to carry the state and local payroll, if state and local revenues stay down? Deficit spending assumes that sometime down the road, things are going to be better, that you can smooth out consumption by borrowing when you are poorer and paying it back when you are more prosperous, but what if this is as good as it gets? There’s a chart for projected Medicare spending here:
    http://en.wikipedia.org/wiki/Medicare_(United_States)
    and a chart for projected Social Security spending here:
    http://www.ssa.gov/OACT/TRSUM/index.html
    In view of what those charts communicate about our future, deficit expending now is extremely unwise–there is not going to be a prosperous future us who can easily pay off today’s deficit spending.
    I realize that personal finance and government finance are somewhat different, but I really liked a post on a similar issue that Trent at The Simple Dollar wrote:
    http://www.thesimpledollar.com/2010/04/03/some-thoughts-on-easter-and-financial-responsibility/
    He’s talking about how when he was younger, he expected that his future self would be able to clean up his present self’s financial messes. Here’s a quote:
    “In April 2006, my protection failed. My “future self” didn’t save me. I found myself in a very, very deep financial hole and my “future self” wasn’t going to dig me out.
    “It was up to me and me alone.
    “If I had realized that whole thing a few years earler before I got into deep debt, I would have been a lot better off. I wouldn’t have missed out on anything of real value, while at the same time I wouldn’t have been in nearly as much debt or financial trouble. I wouldn’t have tossed thousands upon thousands upon thousands of dollars away in needless interest payments. I wouldn’t have to repeatedly robbed Peter to pay Paul. I wouldn’t have had a house full of stuff that just gathered dust. I would have had the home of my dreams right now.
    If you convince yourself to buy stuff and do things under the belief that your “future self” will take care of it, it’s time to grow up. Your future self is completely unreliable and serves only as a crutch, an excuse to allow you to continue to behave as a child would.”

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  7. I agree totally. I don’t understand why we are shortchanging our children to pay off bloated pension liabilities. I don’t understand why Gov. Chrystie and our hostess aren’t working together to implement an immediate 10% in all state pension payments, which I believe would pretty much solve New Jersey’s fiscal problems.

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  8. ” don’t understand why Gov. Chrystie and our hostess aren’t working together to implement an immediate 10% in all state pension payments, which I believe would pretty much solve New Jersey’s fiscal problems.”
    Because that’ just about as fair as deciding to tax all lawyers an extra 20% (which would probably also immediately solve all of NJ’s fiscal problems). And, the tax the lawyers plan is probably more legal than retroactively reneging on a contract to pay pensions.
    I’m all for changing pension plans, compensation structures for employees going forward, but I think maintaining the principle that contracts and agreements are not subject to arbitrary abrogation by the government is a pretty important principle.

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  9. “I’m all for changing pension plans, compensation structures for employees going forward, but I think maintaining the principle that contracts and agreements are not subject to arbitrary abrogation by the government is a pretty important principle.”
    It would be expensive upfront, but how about offering lump sum buyouts for state pensions?

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  10. I think maintaining the principle that contracts and agreements are not subject to arbitrary abrogation by the government is a pretty important principle.
    That’s also pretty much beside the point. In more and more places, it isn’t arbitrary. Pittsburgh cannot raise the money to pay those debts. We’re 50% below our population peak and our largest employers are now tax supported, not tax paying.
    Just in the news today, Pittsburgh’s unfunded pension liability is now $696.6 million, or nearly $5,000 per household. This is over 1/6th of the annual income of the median household. Plus we owe regular bonds (about another $700 million), plus the separate teachers’ pension has some huge unfunded liability, plus the population is dropping slowly but steadily. Let’s say $15,000 per household and getting worse. (And it’s far worse than that if you consider what it would take to do even basic infrastructure repairs as those have been deferred repeatedly.) At least half the households can pay nothing more without real suffering. Let’s say functioning households have a debt of $30,000.
    Given that no point in the city is more than say four miles from the border and that taxes are already 3% higher in the city than in the suburbs and that schools are much worse in the city, it’s pretty clear there is no way the city can raise those funds from it’s own resources. They can’t raise money without more taxpayers and they can’t get more taxpayers because so many of the current taxes go to paying down debt and not services.
    Either the state pays some of this, the state lets us raise more taxes on suburbanites who work in the city, or this doesn’t get paid. It will probably be a combination of all three.

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  11. Gee, Nobel prize winner and noted progressive Paul Krugman, along with most members of the House of Representatives, had no problem with the idea of abrogating the contracts of AIG employees. The principle of sanctity of contract seems to be invoked very selectively.
    The problem with taxing lawyers (or any other class of working people) is that they can move or change jobs. But pensioners can’t go and get a pension from someone else. So there’s no social loss from cutting their payments.

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  12. had no problem with the idea of abrogating the contracts of AIG employees.
    They should have let AIG go under, but since we apparently had to bail them out*, at least we can jerk them around a bunch. So, some of the people being jerked around had nothing to do with the failure of the company, but neither did 99% of the taxpayers who are on the hook for this.
    *I don’t buy it, but plenty of people do.

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  13. Burn down your cities and leave our farms, and your cities will spring up again as if by magic…
    Kind of remarkable that the rabble in the hinterland is now the hard money side of the game.

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  14. “Kind of remarkable that the rabble in the hinterland is now the hard money side of the game.”
    They’re not you know. I’m pretty certain that the main source of government revenue is raised in the city (even with the greater payouts there).
    Can Pittsburgh go bankrupt? I thought cities could. Then they should be able to get out of their pension obligations, presumably.

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  15. BJ,
    By “hard money,” I meant making it more difficult for borrowers. I was quoting the “Cross of Gold” speech which urged an expansion of the money supply to make it easier for people in what are now the red states to pay off the urban bankers. Obviously the fit the progressives and the Tea Party is very bad, but the policies supported by the financial elite seems to have flipped.
    Can Pittsburgh go bankrupt?
    We can’t, at least not yet. The state won’t allow it.

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  16. I sent a letter to the Sacramento Bee, and they seem to have decided not to print it. Oh well, now I will put it here so that at least SOMEBODY sees it.
    Dear Editor:
    When I was a lad in California, Jesse Unruh was the colossus of the Legislature. I am that old. And when he met newly elected members, he would say, “Son” (the newbies were generally ‘son’ in those days) “Son, if you can’t eat their steaks, and drink their whiskey, and…” (the Bee is a family newspaper, let’s pretend he said ‘have’) “…have their women, AND VOTE AGAINST THEM IN THE MORNING, you don’t belong here.” Fifty years on, there’s been a lot of steak eaten, whiskey drunk, women had, not so much voting against. A lot of people have been in the legislature who didn’t belong there.
    I live in Virginia now, and have been aghast to read about multi-hundred-thousand dollar pensions paid to Calif. state and municipal employees who have – perfectly legally – worked the system. Generally, the writers have said there is nothing to be done about currently pensioned people – the California Constitution requires it! – but perhaps there could be some adjustment of the terms under which new people would be hired. Some have suggested that there should be a Federal bail-out for the pension systems in California and other irresponsible states. Meanwhile, California and other state systems pay out pensions based on fantasy rates of return, and look to current taxpayers to make up short falls.
    It’s appalling that burger-flippers in Manteca may be asked to pay taxes out of their tiny incomes to top up huge pensions called for in existing Calif. law, and it’s even worse that burger-flippers in Biloxi are being thought of as a source. It’s dreadful that California cities are underprotecting their citizens because they have laid off current public safety personnel so they can continue paying enormous pensions to retired public safety personnel – pensions based not on their final salaries but on their final salaries plus any overtime worked in their last few years. Lincoln said in another context: “Are all the laws, but one, to go unexecuted, and the government itself go to pieces, lest that one be violated?” A zippier formulation by Justice Jackson, in 1949: “…if the court does not temper its doctrinaire logic with a little practical wisdom, it will convert the constitutional Bill of Rights into a suicide pact.”
    Another quote, this one from Willie Brown: “The deal used to be that civil servants were paid less than private sector workers in exchange for an understanding that they had job security for life. But we politicians — pushed by our friends in labor — gradually expanded pay and benefits . . . while keeping the job protections and layering on incredibly generous retirement packages. . . This is politically unpopular and potentially even career suicide . . . but at some point, someone is going to have to get honest about the fact.”
    There is an existing model for what to do when a pension fund goes bust: ERISA, the Federal law on pension standards, and the Pension Benefit Guaranty Corporation (PBGC). When a pension fund goes under, PBGC will take over its assets and pay up to $54000 a year to pensioners covered, paying as much as it can from the funds of that plan and making the rest up from the taxpayers. Pensioners who expected more are out of luck.
    What should California do? Declare CALPERS bankrupt. Establish a new fund – call it CALPBGC. Give it all of CALPERS’ assets. CALPBGC is allowed to assume a rate of return which is no greater than the smaller of the average which it made on all of its assets in each of the last ten years or the then-current rate on 30-year fixed rate mortgages. Redefine all CALPERS pensions to exclude overtime in calculating the base, and base pensions only on the most remunerative single job held by the pension recipient. Pay any CALPERS pension not exceeding $50,000 a year in full, pay $50,000 plus 25% of the excess up to $100,000 to people now receiving pensions between $50,000 and $100,000, pay another 10% of any CALPERS pension amount between $100,000 and $130,000. The retired school janitor from Lodi goes from a $40,000 pension to a $40,000 pension, the retired city manager, finance director, city clerk, redevelopment director, treasurer and chief of light and power of Vernon (all at the same time!) goes from a $449,675 pension to $65,500. Retirement age goes up. Formula for computing pensions excludes overtime, and you don’t max out til 35 years of service.
    Only after making changes like these should California taxpayers be asked to make up a shortfall. I am not eager to pay for a fiscal disaster brought on by term-limited schlubs in the California legislature who could not, or would not, comprehend the fifteen-years-down-the-road consequences of their actions. Only after a California tax surcharge (on, yes, California tax payers, including the burger flipper in Manteca) should Federal assistance be considered – on the same basis as it might be made available to Illinois, New Jersey, and other states in the same boat.

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  17. That’s really good, dave s, especially the last paragraphs. It was their loss not publishing it.
    I don’t like promise-breaking any more than the next person, but there’s a reason that personal bankruptcy was invented. On the individual level, there comes a point where the debtor can no longer both pay creditors and supply themselves with a basic minimum for life, and bankruptcy is the solution to that problem. A state or a city or a country is somewhat different, but it does seem to be analogous. There equally well is a point where the government (city, state, federal) cannot both pay its creditors and carry on basic operations, and numerous areas in the country have reached that point. The negative side of bankruptcy is that it is afterwards difficult to get credit on good terms (i.e. workers will no longer take lower pay now in return for fat pensions by and by), but I’m not convinced that that is 100% negative.
    As to a federal bailout of local pension funds, it’s first of all impractical. The states with the bad funds are some of the richest and most populous in the country–there’s no way that Alabama is going to bail out New Jersey. That’s not going to work. Secondly, it’s not a learning experience for the states involved unless there is discomfort and embarrassment–i.e. bankruptcy. If you bail them out, they learn that other people will go on covering for their bad choices. Thirdly, I think it is unfair and unwise to punish thrifty locales and reward imprudent ones. If you want more governments to make good choices, don’t reward the ones that make bad choices with money from the locales that made good choices.
    I note here that following dave’s plan would unfortunately lead to a cascade of foreclosures and personal bankruptcies in CA from state pensioners whose credit burden and mortgage level was based on their expectation of high income in retirement.

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  18. It’s a bailout when we give public money to private for-profit corporations.
    When we give public money to schools and universities, it’s the business of government that is getting done. It’s not a bailout nor anything like one. We owe our children an education: and our neighbour’s children, and in fact any child. That’s a simple kind of investment.
    Not doing this is foolishness of a high order.
    See
    http://zunguzungu.wordpress.com/2010/05/25/2049/
    for some thoughts on higher ed.
    “Whereas California spent 8% of its general funds on the UC system in 1965, for example, it now pays 3.6%.”

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  19. ” I was quoting the “Cross of Gold” speech”
    Ok, that was over my head. I’m guessing this had something to do with the gold standard and is a historical reference? I could google it, but I think it’s important for people to show their ignorance occasionally, lest they start believing the internet quizzes that say that they are remarkably educated.

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  20. You guys are missing the point of a federal bail out of the states — it allows the feds, who can deficit spend, to bail out the states, who can’t (or at least all the ones I know of can’t). Alabama won’t be bailing out New Jersey, because, as you point out, it’s impossible. There’s not enough money there.
    Future New Jersans (what are you supposed to call someone from New Jersey?)would be baling out the current ones (or at least the current retirees) (Along with Californians, and New Yorkers, and so on).
    I’m not advocating federal intervention, but it’s wrong to think that NJ is being bailed out by Alabama by federalizing the problem. The money transfers are coming from the future.
    And, Dave, I’m guessing you’re on the Bee’s crank list now. How many words is that letter to the editor, anyway? Don’t letters to the editor have to be like Tweets?

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  21. “Ok, that was over my head. I’m guessing this had something to do with the gold standard and is a historical reference?”
    (Waves hand) Farmers liked inflation in order to inflate away their debts, so they wanted silver, while bankers liked gold, in order to avoid having their loans inflated away. (I’m kind of fuzzy on the mechanics of the gold/silver free coinage thing, but do I get a gold sticker?)

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  22. do I get a gold sticker?
    Why not? The only reason I remember is because Nebraska high schools are (were?) required to teach Nebraska history.

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  23. Yes, Harrisburg is the first PA city of any size to get this far. Unlike Pittsburgh, they don’t have a structural problem. They were ruined by one really stupid decision. It may set sort of a precedent if they are allowed. And being the state capital doesn’t hurt for being allowed to short-cut the usual austerity stuff.

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  24. “Why not? The only reason I remember is because Nebraska high schools are (were?) required to teach Nebraska history. ”
    Why?
    OK, I don’t really mean that. But, I couldn’t resist. When we visited DC, my daughter complained that where we live has no history, either. After we go to London, she’s probably complain about the entire country.

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  25. “They were ruined by one really stupid decision.”
    Today was the first I heard of it, but do they really have $288 million in debt for an incinerator for a town of 50,000? Holy smoke!

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  26. How is anyone actually bailing out CA? They still pay more in federal income taxes than they receive. I am highly suspicious of folks claiming burger flippers are bailing out CA pensioners…
    With regards to those pensions: think about what it would mean to have constitutional contractual guarantees that you are depending on for your retirement (these folks don’t collect SS by the way) that people are then going to renege on? That is some serious BS. And the idea that these things are underfunded… they are funded by tax payer allocation! You can be assured that they will be underfunded because anytime they look like they just might be overfunded some politicians will come in and find a way to ‘fix’ the problem with some timely tax cuts.
    There is a simple solution for what ails state governments: tax increases.

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  27. How is anyone actually bailing out CA? They still pay more in federal income taxes than they receive.
    Unless you want to revisit the whole idea of progressive taxation, I don’t see how that is related to the topic.

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  28. Dave,
    I checked the Bee’s website, and it looks like it has a 200-word limit for letters. That’s short — though not as short as The New York Times, whose limit is 150 words.
    Your letter is 840 words (according to a count I did in Microsoft Word). If you’re still interested in having the Bee publish your missive, one way to trim it to the acceptable length is to “make (your) case with a point or two” — as the Times’ letters editor says — rather than making all the points you might want to make.
    I’ve been letters editor at a paper that had a 250-word limit, and we would receive veritable term papers, with footnotes and all, in excess of a thousand words. Some readers were quite willing to cut and resubmit their letters. Others, not so much. They were not happy to hear that our limit was only 28 words shorter (give or take) than the entirety of the Gettysburg Address.

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