Aging Populations and Replacement Birthrate

Posted by PITHOCRATES - April 28th, 2014

Economics 101

(Originally published July 8th, 2013)

Trying to follow a Baby Boom with a Baby Bust creates Problems in Advanced Economies with Large Welfare States

In the late 1960s began a movement for zero population growth.  It called for women to have only enough babies to replace the current population.  Not to have too many babies that would increase the population.  Nor have too few babies that the population declines.  Something that women could easily do because of birth control.  And, later, abortion.  The drive behind this was to save the planet.  By keeping large populations becoming like a plague of locusts that devour the earth’s resources and food until the planet can no longer sustain life.

China did these zero population growth people better.  By promoting a negative population growth rate.  Limiting parents to one child.  They did this because during the days of Mao’s China the country set some world records for famine.  Their communist state simply couldn’t provide for her people.  So to help their communist system avoid future famines they tried to limit the number of mouths they had to feed.  Of course, trying to follow a baby boom with a baby bust creates other problems.  Especially in advanced economies with large welfare states.

China’s one-child policy and the preference for boys have led to a shortage of women to marry.  Some Chinese men are even looking at ‘mail-order’ brides from surrounding countries.  But China is going to have an even greater problem caring for her elderly.  Just like Japan.  Japanese couples are having less than 1.5 babies per couple.  Meaning that each successive generation will be smaller than the preceding generation.  As couples aren’t even having enough children to replace themselves when they die.  Leaving the eldest generation the largest percentage of the overall population.  Being paid and cared for by the smallest percentage of the overall population.  The younger generation.

States with Aging Populations are Suffering Debt Crises because they Spend More than their Tax Revenue can Cover

As nations develop advanced economies people develop careers.  Moving from one well-paid job to another.  As they advance in their career.  Creating a lot of income to tax.  Allowing a large welfare state.  Which is similar to a Ponzi scheme.  Or pyramid scheme.  As long as more people are entering the workforce than leaving it their income taxes can pay for the small group at the top of the pyramid that leaves the workforce and begins consuming pension and health care benefits in their retirement.  And there is but one requirement of a successful pyramid scheme.  The base of the pyramid must expand greater than the tip of the pyramid.  The wider the base is relative to the top the more successive the pyramid scheme.  As we can see here.

Babies per Generation - Constant Replacement Birthrate

Generation 1 is at the top of the pyramid.  It is the oldest generation.  Which we approximate as a period of 20 years.  In our example Generation 1 are people aged 78-98.  They’re retired and collecting pension, health care and other benefits.  Some combination of Social Security, Medicare, Medicaid, food stamps, heating assistance, etc.  All paid for by Generation 2 (58-78), Generation 3 (38-58) and Generation 4 (18-38).  Each generation is assumed to bring 6 children into the world.  So these couples are not only replacing themselves but adding an additional 4 children to further increase the size of the population.  Which really makes running a pyramid scheme easy.  For if we assume each member in Generation 1 on average consumes $35,000 annually in benefits that Generations 2 through 4 pay for that comes to $555.56 per person annually.  Or $46.30 per person monthly.  Or $10.68 per person weekly.  Or $1.53 per person daily.  Amounts so small that Generations 2 through 4 can easily pay for Generation 1′s retirement.  Now let’s look at the impact of a declining birthrate with each successive generation.

Babies per Generation - Declining Replacement Birthrate

When all couples in each generation were having on average 6 children this added 1.9 billion new taxpayers.  Which greatly reduced each taxpayer’s share of Generation 1′s retirement costs.  But thanks to birth control, abortion and the growing cost of living each successive generation has fewer babies.  Generation 2 only has 3 children.  Enough to replace themselves.  And add one new taxpayer.  Generation 3 has only 2 children.  Only enough to replace the parents.  Providing that zero population growth that was all the rage during the late 1960s and the 1970s.  While Generation 4 only has 1 child.  Not even enough to replace the parents when they die.  Causing a negative population growth rate.  Which is a big problem in an advanced economy with a large welfare state.  For instead of adding 1.9 billion new taxpayers they only add 217.5 million new taxpayers.  Greatly increasing each taxpayer’s share of Generation 1′s retirement costs.  Instead of paying $555.56 per taxpayer they each have to pay $5,384.62 annually.  Or $448.72 per taxpayer monthly.  Or $103.55 per taxpayer weekly.  Or $14.79 per taxpayer daily.  Numbers that prove to be unsustainable.  The state simply cannot tax people this much for Generation 1′s retirement.  For if they did this and added it to the rest of government’s spending they’re taxing us to fund it would take away all of our income.  This is why advanced economies with aging populations are suffering debt crises.  Because their spending has grown so far beyond their ability to pay for it with tax revenue that they borrow massive amounts of money to finance it.

If you want a Generous Welfare State you need Parents to have More Children

If you carry this out two more generations so every generation only has one child the per taxpayer amount tops out at $14,736.84 annually.  Or $1,228.07 per taxpayer monthly.  Or $283.40 per taxpayer weekly.  Or $40.49 per taxpayer daily.  Amounts far too great for most taxpayers to pay.  This is what an aging population does in a country with a large welfare state.  It makes the population top-heavy in elderly people who no longer work (i.e., pay taxes) but consume the lion’s share of state benefits.  When couples were having 6 children each across the generations there was a ratio of 84 taxpayers per retiree.  When there was a declining replacement birthrate that ratio fell to 15 taxpayers per retiree.  If we look at this graphically we can see the pyramid shape of this generational population.

Generational Population - Constant Replacement Birthrate

With 84 taxpayers per retiree we can see a nice and wide base to the pyramid.  While the tip of the pyramid is only a small sliver of the base (Generation 4).  Making for a successful Ponzi scheme.  Far more people pay into the scheme.  While only a tiny few take money out of the scheme.  This is why Social Security and Medicare didn’t have any solvency problems until after birth control and abortion.  For these gave us a declining replacement birthrate over time.  Greatly shrinking the base of the pyramid.  Which made the tip no longer a small sliver of the base.  But much closer in size to the base.  That if it was an actual pyramid sitting on the ground it wouldn’t take much to push it over.  Unlike the above pyramid.  That we could never push over.  Which is why the above Ponzi scheme would probably never fail.  While the one below will definitely fail.

Generational Population - Declining Replacement Birthrate

If you want a generous welfare state where the state provides pensions, health care, housing and food allowances, etc., you need parents to have more children.  For the more children they have the more future taxpayers there will be.  Or you at least need a constant replacement birthrate.  But if that rate is below the rate of a prior baby boom the welfare state will be unsustainable UNLESS they slash spending.  The United States has a replacement birthrate below the rate of a prior baby boom.  While the Obama administration has exploded the size of welfare state.  Especially with the addition of Obamacare.  Making our Ponzi scheme more like the second chart.  As we currently have approximately 1.75 taxpayers supporting each social security recipient.  Meaning that it won’t take much pushing to topple our pyramid. We’re at the point where a slight breeze may do the trick.  For it will topple.  It’s just a matter of time.

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Aging Populations and Replacement Birthrate

Posted by PITHOCRATES - July 8th, 2013

Economics 101

Trying to follow a Baby Boom with a Baby Bust creates Problems in Advanced Economies with Large Welfare States

In the late 1960s began a movement for zero population growth.  It called for women to have only enough babies to replace the current population.  Not to have too many babies that would increase the population.  Nor have too few babies that the population declines.  Something that women could easily do because of birth control.  And, later, abortion.  The drive behind this was to save the planet.  By keeping large populations becoming like a plague of locusts that devour the earth’s resources and food until the planet can no longer sustain life.

China did these zero population growth people better.  By promoting a negative population growth rate.  Limiting parents to one child.  They did this because during the days of Mao’s China the country set some world records for famine.  Their communist state simply couldn’t provide for her people.  So to help their communist system avoid future famines they tried to limit the number of mouths they had to feed.  Of course, trying to follow a baby boom with a baby bust creates other problems.  Especially in advanced economies with large welfare states.

China’s one-child policy and the preference for boys have led to a shortage of women to marry.  Some Chinese men are even looking at ‘mail-order’ brides from surrounding countries.  But China is going to have an even greater problem caring for her elderly.  Just like Japan.  Japanese couples are having less than 1.5 babies per couple.  Meaning that each successive generation will be smaller than the preceding generation.  As couples aren’t even having enough children to replace themselves when they die.  Leaving the eldest generation the largest percentage of the overall population.  Being paid and cared for by the smallest percentage of the overall population.  The younger generation.

States with Aging Populations are Suffering Debt Crises because they Spend More than their Tax Revenue can Cover

As nations develop advanced economies people develop careers.  Moving from one well-paid job to another.  As they advance in their career.  Creating a lot of income to tax.  Allowing a large welfare state.  Which is similar to a Ponzi scheme.  Or pyramid scheme.  As long as more people are entering the workforce than leaving it their income taxes can pay for the small group at the top of the pyramid that leaves the workforce and begins consuming pension and health care benefits in their retirement.  And there is but one requirement of a successful pyramid scheme.  The base of the pyramid must expand greater than the tip of the pyramid.  The wider the base is relative to the top the more successive the pyramid scheme.  As we can see here.

Babies per Generation - Constant Replacement Birthrate

Generation 1 is at the top of the pyramid.  It is the oldest generation.  Which we approximate as a period of 20 years.  In our example Generation 1 are people aged 78-98.  They’re retired and collecting pension, health care and other benefits.  Some combination of Social Security, Medicare, Medicaid, food stamps, heating assistance, etc.  All paid for by Generation 2 (58-78), Generation 3 (38-58) and Generation 4 (18-38).  Each generation is assumed to bring 6 children into the world.  So these couples are not only replacing themselves but adding an additional 4 children to further increase the size of the population.  Which really makes running a pyramid scheme easy.  For if we assume each member in Generation 1 on average consumes $35,000 annually in benefits that Generations 2 through 4 pay for that comes to $555.56 per person annually.  Or $46.30 per person monthly.  Or $10.68 per person weekly.  Or $1.53 per person daily.  Amounts so small that Generations 2 through 4 can easily pay for Generation 1’s retirement.  Now let’s look at the impact of a declining birthrate with each successive generation.

Babies per Generation - Declining Replacement Birthrate

When all couples in each generation were having on average 6 children this added 1.9 billion new taxpayers.  Which greatly reduced each taxpayer’s share of Generation 1’s retirement costs.  But thanks to birth control, abortion and the growing cost of living each successive generation has fewer babies.  Generation 2 only has 3 children.  Enough to replace themselves.  And add one new taxpayer.  Generation 3 has only 2 children.  Only enough to replace the parents.  Providing that zero population growth that was all the rage during the late 1960s and the 1970s.  While Generation 4 only has 1 child.  Not even enough to replace the parents when they die.  Causing a negative population growth rate.  Which is a big problem in an advanced economy with a large welfare state.  For instead of adding 1.9 billion new taxpayers they only add 217.5 million new taxpayers.  Greatly increasing each taxpayer’s share of Generation 1’s retirement costs.  Instead of paying $555.56 per taxpayer they each have to pay $5,384.62 annually.  Or $448.72 per taxpayer monthly.  Or $103.55 per taxpayer weekly.  Or $14.79 per taxpayer daily.  Numbers that prove to be unsustainable.  The state simply cannot tax people this much for Generation 1’s retirement.  For if they did this and added it to the rest of government’s spending they’re taxing us to fund it would take away all of our income.  This is why advanced economies with aging populations are suffering debt crises.  Because their spending has grown so far beyond their ability to pay for it with tax revenue that they borrow massive amounts of money to finance it.

If you want a Generous Welfare State you need Parents to have More Children

If you carry this out two more generations so every generation only has one child the per taxpayer amount tops out at $14,736.84 annually.  Or $1,228.07 per taxpayer monthly.  Or $283.40 per taxpayer weekly.  Or $40.49 per taxpayer daily.  Amounts far too great for most taxpayers to pay.  This is what an aging population does in a country with a large welfare state.  It makes the population top-heavy in elderly people who no longer work (i.e., pay taxes) but consume the lion’s share of state benefits.  When couples were having 6 children each across the generations there was a ratio of 84 taxpayers per retiree.  When there was a declining replacement birthrate that ratio fell to 15 taxpayers per retiree.  If we look at this graphically we can see the pyramid shape of this generational population.

Generational Population - Constant Replacement Birthrate

With 84 taxpayers per retiree we can see a nice and wide base to the pyramid.  While the tip of the pyramid is only a small sliver of the base (Generation 4).  Making for a successful Ponzi scheme.  Far more people pay into the scheme.  While only a tiny few take money out of the scheme.  This is why Social Security and Medicare didn’t have any solvency problems until after birth control and abortion.  For these gave us a declining replacement birthrate over time.  Greatly shrinking the base of the pyramid.  Which made the tip no longer a small sliver of the base.  But much closer in size to the base.  That if it was an actual pyramid sitting on the ground it wouldn’t take much to push it over.  Unlike the above pyramid.  That we could never push over.  Which is why the above Ponzi scheme would probably never fail.  While the one below will definitely fail.

Generational Population - Declining Replacement Birthrate

If you want a generous welfare state where the state provides pensions, health care, housing and food allowances, etc., you need parents to have more children.  For the more children they have the more future taxpayers there will be.  Or you at least need a constant replacement birthrate.  But if that rate is below the rate of a prior baby boom the welfare state will be unsustainable UNLESS they slash spending.  The United States has a replacement birthrate below the rate of a prior baby boom.  While the Obama administration has exploded the size of welfare state.  Especially with the addition of Obamacare.  Making our Ponzi scheme more like the second chart.  As we currently have approximately 1.75 taxpayers supporting each social security recipient.  Meaning that it won’t take much pushing to topple our pyramid. We’re at the point where a slight breeze may do the trick.  For it will topple.  It’s just a matter of time.

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Keynesian Economics is as Corrupt and Immoral as is Crony Capitalism

Posted by PITHOCRATES - May 5th, 2013

Week in Review

Before John Maynard Keynes came along the established economic thought was classical economics.  Those principles that made America the number one economic power in the world.  A sound money like the gold standard gave you.  Low tax rates to encourage economic risk taking.  Responsible government spending for only those things a federal government should be doing.  And only spending what that minimal federal tax revenue could pay for.  Little government intervention into the private sector economy.  And thrift.  People spending money very cautiously.  And saving as much as they possible could.  To save for the future.  While providing investment capital for businesses.

These policies made the United States the number one economic power in the world.  Laissez-faire capitalism.  Tried and proven for over a century in the U.S.  But then government got big in the beginning of the Twentieth Century.  The progressives came into the government.  And they needed a new way to lie to and deceive the American people.  And then came along John Maynard Keynes.  The answer to their dreams.  Whose Keynesian economics has destroyed nation after nation with his assault on classical economics.  And now debt crises from excessive government spending in the Twentieth Century have plagued Greece, Italy, Spain, Portugal, Ireland, the United Kingdom, Japan, the United States, and other nations that dared to embrace Keynesian economics.

President Obama’s economic recovery has been horrible because he embraces Keynesian economics.  He lied like a good Keynesian to the American people to pass his stimulus.  It did nothing.  As predicted by everyone that isn’t a Keynesian.  He continues to destroy the American economy with near zero interest rates.  Destroying our savings.  Creating stock market bubbles while the labor force participation rate falls to its lowest since the Seventies.  And caused the federal debt to soar to levels that we can never pay down.  Putting us on the road to Greece.  All because of the corrupt economic school of thought John Maynard Keynes gave us.  That governments everywhere are using to increase their size and power.  To elevate the government class into a new aristocracy.  That lives very well thanks to those people beneath them.  The working class.  That works longer while earning less.  Like the nobility and peasants of old.  And a little Orwellian.  As they built this upon a house of lies.  Beginning with changing the meaning of words (see Two Sides of the Same Debased Coin by Hunter Lewis posted 5/2/2013 on Ludwig von Mises Institute).

When we turn to Keynes’s economics, perhaps the most fantastic self-contradiction was that an alleged savings glut, too much supposed idle cash, could be cured by flooding the economy with more cash, newly printed by the government. Perhaps even more bizarrely, Keynes says that we should call this new cash “savings” because it represents “savings” just as genuine as “traditional savings.” That is, the money rolling off the government printing presses is in no way different from the money we earn and choose not to spend.

All this new “savings” enters the economy through the mechanism of low interest rates. At this point, Keynes further confounds his forerunners and elders by arguing that it is not high interest rates, as always thought, but rather low interest rates, that increase savings, even though we started by positing too much savings in the first place.

Keynes’s followers echo this even today. Greenspan, Bernanke, and Krugman have all written about a savings glut which is supposed to be at the root of our troubles, and have proposed more money and lower interest rates as a remedy, although they no longer call the new money “genuine savings.” They prefer quantitative easing and similar obscure euphemisms…

The General Theory does argue that interest rates could and should be brought to a zero level permanently (that’s pages 220–21 and 336)…

Keynesians hate savings.  They don’t want people saving their money.  They want them to spend every last dime.  And then borrow more money to spend when they run out of their own.  Because consumer spending is everything to them.  Spending is what drives economic activity.  And any money they save they don’t spend.  And drain out of the economy.  Which is why they want zero interest rates.  Or even negative interest rates.  To discourage people from saving.  For if you lose purchasing power when you put your money in the bank you might as well spend it now.  And generate economic activity.

This is, of course, a ‘live for the day and screw the future’ mentality.  For if people spend all of their money going out to dinner, buying new cars, going on more vacations, running up their credit cards, etc., that will create a lot of economic activity.  But when these people retire they will have to live like paupers.  Because they didn’t save for their retirement.  Even if someone loses their job and is out of work for a few months if they have no savings they will struggle to pay their mortgage or rent.  Struggle to put food on the table.  They will struggle to pay their utility bills.  And their credit card bills.  This is the problem of living as if your income stream will never end.  It sometimes does end.  And if you didn’t bank a rainy day fund you could find yourself suffering some extreme hardship as you can no longer afford to live like you once did.

Keynesians once called printed money ‘savings’.  Today they call tax cuts ‘spending’.  A little Orwellian doublespeak.  Change the meanings of words.  So they can fool the people into believing that the government printing money and depreciating the currency is the same thing as you working hard and saving for your retirement.  And not taking more of your hard-earned paycheck is irresponsible government spending.  The only government spending, incidentally, they find irresponsible.  This is a fundamental tenet of Keynesian economics.  Deceiving the people.  So politicians can continue to recklessly spend money they don’t have to buy votes for the next election.  And to reward their campaign contributors with the favors of crony capitalism.

These Romney advisors also, of course, believed in the fairy tale of borrow-and-spend stimulus. It is usually forgotten that Keynes assured us that each dollar of such stimulus would produce as much as twelve dollars of growth and not less than four dollars. Even the most ardent Keynesians have, of course, been unable to demonstrate as much as one dollar. How did Keynes know that you would get four dollars at least? He didn’t. He told the governor of the Bank of England, Norman Montague, that his ideas were “a mathematical certainty” but that was just a crude bluff.

What is empirically verifiable is that all debt, private or public, has been generating less and less growth for decades. In the ten years following 1959, the official figures say that you got 73 cents in growth for each dollar borrowed. By the time of the Crash of ’08, that was down to 19 cents. And I expect it was really negative by then and is deeply negative now.

Keynes lied.  But that lie sanctioned governments to expand into the private sector economy.  So they embraced the lie.  And continue the lie.  Because none of these politicians want to give up the good life and get a real job.  They like it the old fashioned way.  Before the Founding Fathers had to muck it up with their attacks on the nobility.  They like being part of the aristocracy.  To live better than any of the poor schmucks that work a 40-hour week.  They just want to take a percentage of that poor schmuck’s earnings for themselves.  Rub elbows with the beautiful people.  And laugh at the working class.

The idea that you can take a dollar from the taxpayer, run it through a costly bureaucracy that a portion of that dollar has to pay for and think you’re going to generate more than a dollar in economic activity is absurd.  By the time that dollar reenters the economy the government has skimmed so much off the top that any economic activity it generates is negligible.  Now compare that to how the taxpayer who earned that dollar spends it.  He or she spends a dollar out of that dollar.  Because they’re not putting it through a costly bureaucracy before they spend it.

Which begs this question.  If a wage earner gets more economic activity when spending that money why not let that wage earner keep more of his or her money to spend?  For each additional dollar they can keep they can generate another dollar of economic activity.  Not the 19 cents the government will be lucky to generate from it.  Ah, well, if they can keep their money they may just do something responsible with it.  Like save it.  Which Keynesians hate.  And the government won’t be able to skim at least 81 cents from each dollar if they don’t tax it away.  Which Keynesians hate even more.

The common theme [of Keynesian Economics] is that market prices don’t matter…

Is this, then, the essence of Keynesianism, its blind destruction of the price mechanism on which any economy depends, as Mises demonstrated? Yes. But there may be an even deeper essence…

For the Victorians, spending within your means and avoiding debt were not just financial principles. They were moral principles. Keynes, who was consciously rebelling against these same Victorians, described their “copybook morality” as “medieval [and] barbarous.” He told his own inner circle that “I remain, and always will remain an immoralist…”

So, in conclusion, when we strip down Keynesianism to its essence, the relationship to crony capitalism becomes even clearer. Crony capitalism represents both a corruption of capitalism and a corruption of morals. Keynesianism also represents both a corruption of economics and a corruption of morals. Crony capitalism and Keynesianism are just two sides of the same debased coin.

The price mechanism allocates scarce resources that have alternative uses.  Through the laws of supply and demand.  Guaranteeing that the people who most want a resource—and are willing to pay more for it than others—will get that resource.  While those who don’t want that resource as badly are not willing to pay the higher prices others are willing to pay.

This is capitalism.  This is what enables you to go out and buy the things you want.  Because the price mechanism has automatically allocated millions upon millions of resources in the economy to get them into the things people most want to buy.  Crony capitalism smashes this apart.  By distorting market forces.  With government fiat.  Which allocates those resources first to their close friends who, in return, favor their friends in government with generous campaign contributions.  Or gifts of gratitude.  While others must pay a higher price.  If they can even get these resources at all.  Which they might not be able to do if they don’t please someone in government who has power over these resources.

This is crony capitalism.  Corrupt.  And immoral.  Just as is Keynesian economics.  Unlike the classical economics that made this country the number one economic power in the world.  Thanks to the gold standard, low taxes, low government spending, little government intervention into the private sector economy and thrift.  Things that kept a government moral.  However hard they may try not to be.

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The UK is Holding off on Selling EU Carbon Permits as the EU is Holding off Taxing other Countries for their Spending

Posted by PITHOCRATES - November 17th, 2012

Week in Review

The Eurozone is wallowing in a sovereign debt crisis that just won’t end.  Caused by spending obligations made during good economic times.  On the assumption that those good economic times would last forever.  But they created a lot of that economic activity with expansionary monetary policy.  Keeping interest rates artificially low.  By expanding the money supply.  Encouraging consumers and businesses to borrow and spend.  Which they did.  Leaving them with massive amounts of debt.  And inflation.  Which they fought the only way you can fight inflation.  By raising interest rates.  And contracting the money supply.  Or, in other words, with a recession.  Which reduces tax revenues.  Forcing governments to borrow more to pay for these ever expanding spending obligations.  Which led to rising borrowing costs.  And debt crises.  Leaving these Eurozone countries starving for cash.

Enter the Emissions Trading Scheme.  Making high energy uses buy permits to exhaust carbon.  Ostensibly to reduce global warming.  But really just a massive wealth transfer from the private sector to the public sector.  To help those countries with debt crises to pay for their ever expanding spending obligations without having to govern responsibly.  So they can continue to pander and buy votes and advance their liberal agendas.  But there has been some push back.  In particular from other nations flying into the European Union (EU) airspace who don’t want to subsidize the irresponsible governing of the EU countries.  Because of possible retaliation (like China threatening to cancel their Airbus orders for new airplanes) the European Commission is delaying the implementation of their airline emissions law (see Britain says it may review carbon permit auctions for airlines by Nina Chestney posted 11/12/2012 on Reuters).

The UK government will review its forthcoming auctions of European Union carbon permits for the aviation sector when it gets more details from the European Commission about its plan to delay the bloc’s airline emissions law, a minister said.

The UK plans to hold two auctions of around 3.5 million EU carbon permits for the aviation sector on November 26 and December 10…

The EU Commission said on Monday it will conditionally put on hold its rule that all airlines must pay for their carbon emissions for flights to and from EU airports.

Why is the UK reviewing their auction of carbon permits?  Because these permits are basically new taxes for the airlines.  That the airlines will pass on to their passengers.  Raising the cost of flying.  Which, in turn, will make some people forgo flying.  Hurting the airline industry.  Further exasperating a weak economy.

Of course those in the Eurozone rioting against austerity would love to see the EU go ahead with taxing other nations for flying into their airspace.  Because they don’t like austerity.  And would love to pass on their costs to other nations’ taxpayers.  Something other nations’ taxpayers are none too keen on.  So it’s a mess.  And the Emissions Trading Scheme only compounds the problem.  As it does nothing to address the source of the problem.  Excessive spending obligations that these nations cannot afford.

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No Economic Recovery, Crushing Debt and a Credit Downgrade, the U.S. inching closer to European-Style Crisis

Posted by PITHOCRATES - August 5th, 2011

The Unemployment Rate is Down even though more People are Unemployed

That stubbornly high unemployment rate that has been dogging the Obama recovery has finally dropped (see Jobs report: A pig in lipstick by Nin-Hai Tseng posted 8/5/2011 on CNN Money).

The unemployment rate in July fell slightly to 9.1% from 9.2%

But…

The unemployment rate might have fallen slightly but that’s mostly because the number of people actively looking for jobs fell back – signaling that perhaps workers are feeling less confident about entering the job market.

So the only reason why it dropped is that more people have just given up looking for a job.  And the smaller the group is that is looking for a job the smaller percentage this group is of the total working population.  Ergo, smaller unemployment rate.  So the actual employment picture isn’t better.  It’s worse.

In July, labor participation fell by 193,000.

What’s more, though the economy added 117,000 jobs, it falls short of the 125,000 jobs a month needed just to keep up with population growth and prevent the unemployment rate from trending higher. And it would take at least twice that many to rapidly reduce unemployment.

“The bigger picture, then, is that two years after the recession ended the labor market has not really recovered at all, and may even have gone backwards,” writes economist Paul Dales of Capital Economics.

The economy is worse.  Not better.  So just how much ‘not better’ is the economy?

The Real Economic Recovery not as good as the Made-up One

Apparently pretty ‘not better’ according to the people who count the numbers.  They revised their past numbers.  And the new numbers are even worse than the not-so-great numbers of numbers past (see Distress signal by R.A. posted 7/29/2011 on The Economist)

BEA revised its national accounts numbers back to 2007 for this release, and the picture revealed is far darker than anyone previously believed. From 2007 to 2010, real output declined by 0.3% per year on average. Previously, BEA had estimated annual growth of 0.1% over that period…

Projected growth rates were simply overstated, and current unemployment is exactly what we’d expect given such a feeble recovery. Those overly optimistic assessments of the likely impact of interventions, from fiscal stimulus to QE, also make much more sense now. Policymakers were fighting a fire far more intense than they recognised.

So I guess the Obama administration was a little premature with that Recovery Summer talk.  Or they are not good at reading economic numbers.  Or they are good at reading economic numbers but they were stretching the truth a bit for political purposes in hopes that the real economic recovery would catch up with the made up one.

All right, so the economy isn’t doing so well.  What do we do?

The dire economic situation undergirds this point: Washington should delay immediate fiscal cuts. Indeed, it ought to be spending more now and revisiting the possibility of a payroll tax cut.

Really?  After the recent budget debate to raise the debt ceiling to avoid default and a credit downgrade because of excessive spending and debt?  The same kind of excessive spending and debt that has put Europe in an even worse financial crisis?  Shouldn’t we take a lesson from the European Union sovereign debt crisis?  And not follow them into a similar sovereign debt crisis? 

I mean, it was going to be Armageddon if they lowered our bond rating.  Don’t we care about that anymore?  (By the way, S&P did lower their bond rating today.  So hello Armageddon.)

A Small Negative Return in the U.S. is Preferred over any Investment in the Eurozone

Apparently not.  At least investors appear to be more worried about the debt crisis in Europe.  They’re so worried, in fact, that they’re dumping their European holdings and running to the safe harbor of U.S. banks.  Despite that possible downgrade (which has since happened).  And Armageddon (see Thanks a lot, Europe by Cyrus Sanati posted 8/5/2011 on CNN Money).

The massive selloff in U.S. markets on Thursday appears rooted in Europe as fears of a sovereign debt default in Italy and Spain caused traders to panic and run for cover…

The European Central Bank attempted to ease the market’s fears, but it seemed to have only exacerbated the problem. European leaders are now scrambling to avoid an all-out run on the euro as the European sovereign debt crisis enters a possible terminal phase. They will need to act fast to restore market confidence or the current correction could turn to capitulation.

This crippling debt crisis may very well take down the European Central Bank.  With the fear of default, investors don’t want to buy anything in the Eurozone.  They fear anything they buy today may lose most of its value in the not so distant future.  So they’re pulling their cash out of Europe and parking it in the United States.

All this cash is being dumped into custodial banks in the U.S. This led the Bank of New York Mellon (BK), the largest custodial bank, to start charging its institutional clients a fee for depositing what they consider an “extraordinarily high” amount of cash — it has no place to invest it either, and higher cash levels mean higher FDIC fees.

You know it’s bad when even the banks don’t want your money.

Indeed it is.  So investors will pay a bank to hold their cash.  Because that’s the safe ‘investment’ right now.  A small negative return versus what could be a catastrophic negative return.

The Economy may not be able to Survive much more Government Help

Employment numbers are bad.  GDP is bad.  Talks of an economic recovery appear to have been hopelessly premature.  Debt crises have gripped Europe.  And S&P downgraded U.S. credit and pushed them towards Armageddon.  The Keynesians advice, though, is the same.  More government spending.  Only this can stimulate the economy back to recovery.  Even though it was excessive government spending that gave Europe and the U.S. their crises in the first place.

It’s like Ronald Reagan said.  Government isn’t the answer to our problems.  Government is the problem.  It needs to do the things it does best.  And leave the economy to the private sector.  Because the economy just may not be able to survive much more government help.

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Debt Crises are Far Greater than Many choose to Believe

Posted by PITHOCRATES - June 17th, 2011

Was it the Plan to Bankrupt the Nation?

The IMF is worried about a technical default on U.S. debt.  But it’s the budget deficits that really concerns the IMF.  In the U.S.  And in Europe.  For the entitlement spending of these welfare states has proven to be beyond unsustainable.  They’re downright dangerous.  And if unchecked, it will destroy these nations (see IMF cuts U.S. growth forecast, warns of crisis by Luciana Lopez posted 6/17/2011 on Reuters).

The International Monetary Fund cut its forecast for U.S. economic growth on Friday and warned Washington and debt-ridden European countries that they are “playing with fire” unless they take immediate steps to reduce their budget deficits.

They’re not saying that the U.S. had better raise their debt limit.  They’re saying that they better reduce their deficit.  Either by raising taxes.  Or cutting spending.  And with the IMF cutting their forecast for U.S. economic growth, that pretty much means they’re leaning towards cutting spending.  Because higher taxes don’t stimulate economic growth.  And the U.S., and all countries with huge budget deficits, needs as much economic growth as possible.  For ‘economic growth’ means ‘tax revenue’ growth.  And that’s what they need.  Tax revenue.  Add to that spending cuts and you start making headway in reducing those deficits. 

Meanwhile, Greece has edged closer to default as euro zone officials disagree on a possible second aid package for the indebted country. With strikes and protests around the country, political turmoil has added to uncertainty, stoking fears that the government will not be able to tighten its belt enough to reduce crippling deficits.

“If you make a list of the countries in the world that have the biggest homework in restoring their public finances to a reasonable situation in terms of debt levels, you find four countries: Greece, Ireland, Japan and the United States,” Vinals said.

With strikes and protests over austerity measures to reduce their deficit, it doesn’t look good in Greece.  They’re getting closer and closer to a default on their debt.  And not a technical default as in being late on an interest payment.  But an all out default as in making their bonds worthless.  What’s worse is that the U.S. made it to the short list of nations with the absolute worst public finances.  And that’s before Obamacare adds another trillion dollars or so of federal spending.

You know this didn’t happen overnight.  We knew about the crushing weight of U.S. entitlement spending for decades.  Even Ronald Reagan raised taxes to save these programs.  So it wasn’t a secret.  And for the Obama administration to spend to the tune of a $1.4 trillion deficit was ill advised to say the least.  Unless the plan was to bankrupt the nation.  If that was the plan then kudos to them.  They may actually have something work as planned yet.

Overheating Economies are a Bitch on the Downside

Greece may be beyond saving.  Worse, when she goes under she may drag others with her (see IMF warns of increased risks to the world economy posted 6/17/2011 on the BBC).

Many analysts believe Greece will not be able to pay back all the money it has borrowed.

“I don’t think there is a question over whether Greece is going to default, it is just a question of whether it is an orderly or disorderly one,” says George Magnus, senior economic adviser at UBS.

The IMF warned that if Greece was unable to pay its debts, other countries such as Spain or Portugal may also be affected.

A cascading electrical blackout is a lot like bank failures.  The North American electrical grid is interconnected.  Power plants attach locally but their power can be sent almost anywhere on the grid depending on demand.  Back in the Northeast Blackout of 2003, downed high voltage power lines triggered a sequence of events.  With some power disconnected from the grid, more power flowed from other sources to make up for the loss.  Higher currents caused these lines to sag and eventually they, too, failed.  Other lines then surged with higher currents to make up for the loss supply and then they failed.  As lines failed power plants disconnected from the grid.  Those still attached tried to make up for the lost supply.  Until they exceeded their safe limits and then disconnected from the grid to protect themselves.  And this continued until a large part of Northeast North America lost all electrical power.

Now think of governments as power stations.  Government spending as high currents in power lines.  The economy as the electric grid.  And Greece as the first failure.  Right now the European Union and the European Central Bank are trying to minimize the cascading damage.  Before financial trouble spreads further and stresses other governments.  Causing additional stresses on the European banking system.  But it doesn’t look good.  All that spending has only overheated those ‘power lines’.  But the problem is still attached to the grid.  Greek spending.  Unable to stop their spending (i.e., commit to their austerity plans), that ‘power station’ will fail.  And then the cascading will begin.

Outside Europe, the fund said it expected economic growth in developing countries to remain strong.

This, in turn, presents a risk of overheating – where economies grow too fast leading to a rapid contraction later.

Like in Japan in the 1980s (Japan Inc).  The U.S. in the 1990s (the dot-com bubble).  And the U.S. again in 2007 (the housing bubble and the subprime mortgage crisis).  Overheating economies can be a whole lot of fun on the upside.  But they’re a bitch on the downside.  Not to mention the economic impact on the rest of the world economy.  And it’s the rest of this world economy that’s scaring the IMF.  For it’s these growing economies that are buying what little manufacturing there is in the older established economies.

It’s going to Suck Worse before it gets Better

There’s no relief for the American consumer.  But the stock market is doing well.  In a normal economic recovery this would benefit the consumer.  But this isn’t a normal economic recovery (see U.S. Confidence Out of Sync With Stock Gains by Bob Willis and Alex Tanzi posted 6/17/2011 on Bloomberg).

The Bloomberg Consumer Comfort Index has stalled near its recession average as the Dow Jones Industrial Average has risen 83 percent from a 12-year low in March 2009. A tight correlation between the index and Dow that lasted more than two decades has broken down as joblessness above 9 percent, stagnant wages and near $4-a-gallon gasoline outweigh the benefits of higher share prices, even after a 6.6 percent retreat in the Dow since the end of April.

“Consumers are fairly depressed, yet the stock market continues to improve,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in an interview. “It’s foreign demand that is really pushing corporate profitability. Consumer confidence is pretty constrained by the labor market.”

U.S. manufacturers in particular have profited from faster growth in emerging economies, including Colombia and Indonesia, where expanding middle classes are demanding more roads and utilities, as well as higher-protein foods and more consumer goods. Deere & Co. (DE), the world’s largest farm-equipment maker, raised its fiscal 2011 earnings forecast on May 18 to $2.65 billion from $2.5 billion, citing increased demand for farm and construction machinery outside the U.S, along with growth in America.

If it wasn’t for these emerging economies there would probably be no corporate profitability.  High unemployment, stagnant wages and $4-a-gallon gasoline is leaving the American consumer little disposable cash to stimulate anything.  That’s why they’re depressed.  Because it sucks out there.

U.S. corporations have gotten “a pickup in sales growth, but they’re not responding with a big pickup in wages and labor growth,” said Rob Carnell, chief international economist at ING Bank in London. “This is helping them to keep their margins intact in the backdrop of rising commodity prices…”

The 18-month recession shaved 4.1 percentage points off gross domestic product before ending in June 2009, making it the deepest downturn since the 1930s. Growth has averaged about 2.8 percent since then, enough to restore only 1.8 million of the 8.8 million jobs lost as a result of the slump.

And now inflation is raising commodity prices.  That means corporations, small businesses and consumers all have less disposable cash.  Which means there will be no job creation.  Because there is no new demand they need to hire people to meet.  Which means it’s going to suck worse out there before it gets better.  Which makes it hard to believe that the recession ended in June of 2009.  High unemployment.  Low economic growth.  Stagnant wages.  If it looks like a duck, walks like a duck and quacks like a duck, we’re probably still in a recession.  The worst one since the Great Depression.  And if things continue as they are we may have to call the Great Depression the worst economic downturn before the Great Recession that started in 2007.

Making the easy Difficult

Things are looking bleak for Greece.  And the other three nations that have spending problems as bad as theirs.  Ireland, Japan and the United States.  Boy.  I’d sure hate to be in our shoes.

We know what caused their problems.  Excessive government spending.  So you’d think it’d be easy to fix their problems.  Just stop spending so much.  But when you get people used to that government spending.  And politicians get used to the votes that spending buys, it makes the easy difficult.  So they continue to spend.  Ask for bailouts.  And plead to Congress to raise the debt ceiling so they can spend some more.

The politicians either don’t believe in the magnitude of the problem.  Or they are counting on being dead before they have to pay the piper.  But someone will eventually pay the piper.  And it’s going to hurt.  And the longer we wait to pay the more it’s going to hurt.

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Solving Public Spending and Debt Crises with Privatization

Posted by PITHOCRATES - May 23rd, 2011

To Privatize or not to Privatize the NHS

Some want to start privatizing parts of the National Health Service (NHS).  Some don’t.  Some want to improve quality and cut costs.  Some don’t.  But as people live longer into retirement, there is no place for costs to go but up.  Especially when there is no competition (see Where lucre is still filthy posted 5/19/2011 on The Economist).

THE profit motive is alive and well at the Circle hospital outside Bath, in south-west England. The hospital was designed by the architect Norman Foster, and is run by Circle Healthcare, a firm part-owned by its employees and set up by Ali Parsa, a former banker at Goldman Sachs, in 2004. It treats a mixture of National Health Service and private patients. Corridors are wide and gleaming, operating theatres newly equipped. Doctors and nurses have more say in management decisions than in many English hospitals.

So a private, for-profit hospital is well run, clean and has new equipment.  Which implies that the run of the mill NHS hospital is bureaucratic, cramped, dirty and outdated.  Hmmm.  Based on this it would appear that the private, for-profit hospital is a better hospital than your run of the mill NHS hospital.  At least, from a patient’s viewpoint.  And who could argue?

Trade unionists and lobby groups are queuing up to denounce any expansion of the private sector’s role in health care.

So trade unionists and lobby groups are against cleanliness and modernity.  They prefer bureaucratic, cramped, dirty and outdated.  One can only presume so because of the money.  For it usually is.  Of course, they will deny this.  And say they are just looking out for what’s best for Britons.

To some foreign observers, this reticence about private involvement looks odd. There is ample international evidence that competition among private providers yields better results. For example, a report last year by America’s National Bureau of Economic Research found that increased competition in health care was correlated with improved financial and clinical outcomes; adding a rival hospital and instigating patient choice substantially increases the quality of management. As Nick Seddon, of the British think-tank Reform, points out, “It’s a fallacy to think you can choke off the profit motive without losing momentum and innovation.”

And the current debate somehow overlooks the fact that for-profit companies are already delivering many support services in health, education, prisons and other public services. Family doctors have been private operators since the foundation of the NHS in 1948. The profit motive has been making further steady advances in the state sector since Margaret Thatcher’s outsourcing campaign in the 1980s. Tony Blair let privately owned treatment centres provide specialist services within the NHS. His wider reforms were restricted by internal battles in the Labour Party; all the same, a recent report from the London School of Economics found that introducing competition among NHS hospitals in 2006 helped to reduce patient deaths.

The history appears to side with privatization.  Both in the UK.  And the USA.  That is if you’re measuring by the quality of patient care.  And by the number of people you prevent from dying.  Which is a rather important statistic in any hospital I would think.

Let’s take a closer look at this ‘not dying’ thing.  Suppose there is only one hospital serving an area.  And suppose that 5 out of every 10 patients that enter dies.  Now suppose a second hospital opens up.  Where only 1 out of every 10 patients that enter dies.  Which hospital would you want to go to?  I’m guessing the 1 out of 10 one.  Because that ‘not dying’ thing is pretty relevant when choosing a hospital.  And when more people do in this example, the ‘5 in 10’ hospital will have no choice but to improve.  To become a better hospital.  This is what competition does.  It makes everything better.  And it’s just not the UK and the USA seeing this.

Britain is unusual among rich democracies not in how much private involvement there is in its public services, but how little. Only 4% of acute-care beds are provided by private companies. In Germany, the proportion of hospitals run for profit (32%) overtook the number of publicly run ones (31%) two years ago (charitable and voluntary organisations account for the rest). The Spanish region of Valencia allows for-profit firms to run over 20% of its health-care services, with the sort of long-term deal British providers hanker for. New European democracies are experimenting with similar public-private mixes. Two-fifths of Slovak hospital provision is delivered by private operators.

It’s rather ironic.  The people who did so much to improve the life of the individual coming out of the Middle Ages is now among the least free nations when it comes to health care.  They’re talking about privatizing more health care to improve quality.  And cut costs.  Because the NHS, as all state monopolies do, is trending in the wrong way in areas of quality and costs.  The fact that there is a debate proves this.  Now, don’t get me wrong, the NHS is full of good people.  It’s not the people in the system.  It’s the system.  And the people managing the system.

But old bureaucracies are hard to reform.  People trust them.  Because they’re used to them.  Like a comfortable pair of filthy, worn slippers.  But people are living longer.  Consuming more health care in their retirement years.  Vastly increasing health care costs.  Which the NHS has to pay.  Either by more taxation (which can reduce economic activity, which will reduce tax receipts across the board).  Rationing services to make what they have cover more people.  Or by more deficit spending.  Borrow and spend for today.  Leaving a debt bomb for future generations to worry about.

Italy and Spain Circling the Drain?

And speaking of debt bombs, a couple more are about to go off in the European Union (see U.S. stocks plunge on European debt worries by the Associated Press posted 5/23/2011 on the Los Angeles Times).

Stocks plunged Monday after warnings about the finances of several European countries stoked fears that the region’s debt crisis is worsening. The euro dipped briefly to its lowest level against the dollar in two months…

Italy is the latest European country to be affected by the region’s widespread debt problems. Standard & Poor’s said Saturday that country was in danger of having its debt rating lowered if it could not reduce its public borrowing and improve economic growth.

Too much public sector spending has caught up to the Italians.  High taxation to support that spending is hindering economic growth.  And they’ve borrowed so much that people are starting to think that they won’t get their money back.  Making people that much more reluctant to loan (i.e., buy Italian bonds) them money again.

Spain’s public finances are also worrying investors. Spain’s ruling Socialist party was roundly defeated in local elections, raising concerns that political instability would keep that country from enforcing spending cuts. The Ibex 35 index on the Madrid stock market fell nearly 2 percent in midday trading.

The 10-year U.S. Treasury yield fell to 3.10 percent, its lowest level this year. Bond yields fall when prices go up, so the drop is a sign that investors are clamoring for the safety of long-term U.S. debt.

And the Spanish are in the same boat.  Even with their partial privatization of health care, there’s still just too much public spending.  And a political atmosphere that won’t take kindly to spending cuts.  Unemployment among the young and educated is high.  Close to 50%.  Making their prospects for future borrowing not that favorable either.  So they, like the Italians, will not be able to pay their bills one day.  Which will eventually bring about those spending cuts.  The hard way.

Greece too far gone to Save?

The big public sectors in the social democracies of the European Union (EU) are taking their toll.  Their costs are crippling some of their economies.  And it all started in Greece.  Who is still trying to dig themselves out of their debt hole (see Greece mulls deeper spending cuts as borrowing rates hit record by Derek Gatopoulos, Associated Press, posted 5/23/2011 on thestar.com).

Greece’s borrowing costs surged to another record Monday, as the crisis-hit country’s prime minister chaired emergency talks to deepen austerity measures beyond his own government’s term in office.

A Cabinet meeting began as yields rose above 17 per cent for Greek 10-year-bonds, hitting a record margin — or spread — over the benchmark German rate.

Greece suffered another bond downgrade late Friday from the Fitch ratings agency, lowering its investment ranking by three notches deeper into junk status. Prime Minister George Papandreou conceded over the weekend that plans to return to bond markets next year may not be achievable.

Junk status.  Wow.  That’s bad.  That means few people think they’ll get their money back if they loan any to Greece.  And according to Papandreou, no one will next year.

Greece’s economy is being kept afloat by €110 billion ($156.6 billion), in a 2010-2013 package of rescue loans from European countries and the International Monetary Fund.

But that rescue package does not cover all of Greece’s financing needs for 2012, and EU countries are demanding tougher cost-cutting action from Greece before considering offering another financial lifeline.

In return for the bailout, the government imposed a series of austerity measures, including pay cuts in the public sector, tax hikes and social security reforms, and is under strict supervision from the EU and IMF to ensure the country is meeting the conditions for the rescue loans.

And here we see why they have such a debt crisis in Greece.  High salary and benefits for a bloated public sector.  And state benefits that are too generous.  Things that are hard to cut.  As is evident by the requirement of another bailout.  And the demand by those doing the bailing for tougher cost-cutting.  Because what they’ve done so far isn’t enough.

In Vienna, top financial official Olli Rehn said Greece needed to take more steps “in the coming days and weeks” to convince other EU nations and lending institutions that it is serious about overcoming its huge monetary deficit.

He urged the crisis-hit national to urgently step up its ambitious privatization program. General elections are due in Greece in 2013.

And here again we come to that wonderful panacea.  Privatization.  For the EU countries with the greatest debt crisis are the ones with the least privatization.  Whereas the strongest economy in the EU, Germany, has quite a bit.  Even in the one area people fear most.  Health care.  Germany has more private hospitals than public ones.  So profit (i.e., lucre) isn’t a dirty word in Germany.  They have a strong economy.  And fiscal restraint.  Which is why Germany is doing a lot of the bailing in the EU.  Of course, they have experience rehabilitating financially weak nations.  They no doubt learned a lot when they reincorporated the former East Germany into a reunified Germany after the Cold War.

Ticking Debt Bombs

Public spending has grown in countries big and small.  And it is crippling countries big and small.  Privatization is a way to cut public spending.  But it doesn’t help win elections.  So it’s not easy to do.  People get set in their ways.  And once people grow up on generous state benefits, it’s hard to convince them that things will be better if they start paying for what they once got free.  So few try.  It’s easier to just keep promising more of the same.  And close your eyes to that ticking debt bomb.  Hoping that it will blow up later rather than sooner.  And that the people continue to enjoy their comfortable pair of filthy, worn slippers.  No matter how filthy and worn they get.

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It’s Public Sector Union Pay and Benefits, Stupid, Bankrupting our Cities and States

Posted by PITHOCRATES - December 20th, 2010

The Greed of Public Sector Unions

Cities around the globe are imploding under the weight of their own debt crises (see $2tn debt crisis threatens to bring down 100 US cities by Elena Moya posted 12/20/2010 on the Guardian).

More than 100 American cities could go bust next year as the debt crisis that has taken down banks and countries threatens next to spark a municipal meltdown, a leading analyst has warned.

But it’s not just American cities.

Cities from Detroit to Madrid are struggling to pay creditors, including providers of basic services such as street cleaning. Last week, Moody’s ratings agency warned about a possible downgrade for the cities of Florence and Barcelona and cut the rating of the Basque country in northern Spain. Lisbon was downgraded by rival agency Standard & Poor’s earlier this year, while the borrowings of Naples and Budapest are on the brink of junk status. Istanbul’s debt has already been downgraded to junk.

Cities throughout the world are going belly up.  Why?  Here’s a clue.

US states have spent nearly half a trillion dollars more than they have collected in taxes, and face a $1tn hole in their pension funds, said the CBS programme, apocalyptically titled The Day of Reckoning.

State pension funds?  That means only one thing.  Union pensions.  It’s public sector union pay and benefits that are bankrupting our cities and states.  Why?  They’re monopolies.  Public sector employees have no competition.  There are no market forces dictating the pay of these employees.  And there is no incentive for the unions to bargain anything away.  Not when the municipality can raise taxes.  And that’s what the unions expect the municipalities to do.  Because they just don’t cut their pay and benefits.  Not when taxpayers can pay more taxes.  And when it comes to getting by on less, the unions will always choose the taxpayer to get by on less.  Not the unions.

Vallejo, a former US navy town near San Francisco, is still trying to emerge from the Chapter Nine bankruptcy protection it entered in 2008.

The city, now a symbol of distressed local finances, is still negotiating with the unions, which refused to accept a salary cut plan two years ago. Paul Dyson, an analyst with the Standard & Poor’s credit agency, said Vallejo, which is mostly a dormitory town for Oakland or San Francisco employees, did not have enough local industry to sustain its finances and property tax – a major source of local income – plunged with the collapse of the real estate market. The S&P credit-rating agency has a C rating on the town – the lowest level.

With a population of about 120,000, Vallejo has $195m (£125m) of unfunded pension obligations and has to present a bankruptcy-exit plan to a Sacramento court by 18 January.

Talk about the greed of CEOs all you want but their ‘greed’ never bankrupted a city.  Like the greed of unions do. 

Cities who don’t Cut Union Pay and Benefits Face Bankruptcy

This is our future.  The public sector grows bigger and bigger.  They take care of themselves.  And tax private business (and private citizens) more and more to pay themselves those fat union pay and benefit packages.  But when more and more people work for the public sector instead of the private sector, what do you get?  Vallejo.  Detroit.  Madrid.  Florence.  Barcelona.  Lisbon.  Naples.  Budapest.  Istanbul.  To name a few.  And how are these cities doing?  They’re sucking air.

You can cut the police and firefighters all you want but it won’t help the problem.  You may be able to squeeze another millage or two by scaring people by cutting their police and fire services.  But the public sector unions have got to cut their pay and benefits to make any real change.  And they have to be serious cuts.  They have to take such a big cut that…dare I say it?  Yes, I dare.  They have to take such a big cut that they end up living like you or me.  And everyone else who works in the private sector.

Of course, you know what the public sector union employees will say to that?  That’s just crazy talk.

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