Guns, Butter and Abortion

Posted by PITHOCRATES - February 24th, 2014

Economics 101

Democrats will cut Defense but not Entitlements because fewer People in Defense vote Democrat

A cornerstone of the Obama presidency is social justice.  Primarily through redistribution of wealth.  Raising taxes to fund a growing welfare state.  To help those not lucky enough to have won life’s lottery.  Such as expanding the food stamp program (Supplemental Nutrition Assistance Program).  Which has grown over 70% under President Obama.

Of course, this costs money.  A lot of it.  Added on top of an already costly welfare state.  Driven by entitlement spending.  Social Security.  And Medicare.  The biggest portions of federal spending.  And it only keeps growing.  Making the welfare state unsustainable without entitlement reform.  But the politicians won’t touch entitlements.  The third rail of politics.  Because they’re afraid of losing votes in the next election.  So they’d rather the country implode instead of reforming entitlements.  And hope that implosion comes after they’re dead and buried.  For as long as they get to enjoy their lives they could give a rat’s behind about future generations.

But they will touch defense spending.  And often do when they are looking for more money for the welfare state.  Even now.  The Obama administration is proposing spending cuts in defense spending.  That will shrink the size of the military.  And cut pay and benefits for some of the lowest paid people in the country.  The people who go in harm’s way for their country.  They won’t touch entitlement spending because it may hurt people that typically vote Democrat.  But they have no problem doing just that to those who wear a uniform to serve their country.  Who don’t always vote Democrat.  Just so they can have a generous welfare state like the European social democracies they so admire have.  Who can have them because they don’t have large defense budgets.  For the United States has been protecting them since World War II.

People can’t pay Taxes to fund a Welfare State without a Job that Provides an Income to Tax

If you watch television you’ve probably heard New York State’s commercials to attract new businesses to New York.  Where the state is promising that businesses will be “100% tax-free for 10 years.  No income tax, business, corporate, state or local taxes, sales and property taxes, or franchise fees.”  Which is a clear admission from the state with the second highest tax burden in the country that high taxes hurt business.

The tax burden is so great in New York that some businesses have moved their operations out of state.  And people with vacation homes in New York who only visit them a couple of weeks out of the year are selling them.  As the state is taxing their incomes as if they are permanent New York residents.  But despite these high taxes New York has suffered great budget deficits.

New York City is a Democrat city.  Their high taxes pay for a large welfare state.  A large public sector.  And the enormous costs of their public sector benefits.  In particular, health care and pension costs.  But their high tax rates have shrunk the tax base.  Because people can pack up and move out of state.  Just as businesses can.  Which is why they are doing a 180-degree turn on taxes.  In a desperate attempt to get businesses to come to New York.  For even if these businesses aren’t paying taxes their employees will.  Income taxes.  Sales taxes.  Property taxes.  Liquor taxes.  Cigarette taxes.  Etc.  None of which they can pay if there are no jobs to give them an income the state can tax.

The Number of Abortions is having a Direct Impact on the Economy and Tax Revenue

New York City released its SUMMARY OF VITAL STATISTICS 2012 THE CITY OF NEW YORK PREGNANCY OUTCOMES this month.  In it you can find why New York City, New York State and the federal government are having such a difficult time paying for their welfare states.  It’s because of liberal Democrat policies.  Not on the spending side of the equation.  But on the revenue side of the equation.

In 2012 there were 73,815 abortions.  Which are future taxpayers that weren’t allowed to be born.  That’s right, before anyone pays the high tax rates of a welfare state they have to be born first.  And when they are not born that’s future tax revenue the government cannot collect.  If we look at a 20 year period (about a generation) and assume 73,815 abortions each of those 20 years that’s 1,476,300 people that never will pay taxes.  If they earned on average $30,000 each that’s $44,289,000,000 of economic activity they never created.  And at a New York State tax rate of 11.7% that’s $5,181,813,000 in lost tax revenue for the state.

But it gets worse.  If you divide this number by two you get the total number of couples (a man and a woman) that could have started a family.  If each couple had 3 children this lost generation could have brought in another 2,214,450 taxpayers into New York City.  Adding them to their parent’s generation and assuming a median family income of $53,046 (an older generation established in their career earning more and a younger generation just starting their career earning less) brings the total lost economic activity for these two generations of possible New Yorkers to $195,779,524,500.  And lost tax revenue for the state of $22,906,204,367.  So the number of abortions is having a direct impact on the economy.  And tax revenue.  Making it necessary to cut guns to pay for more butter.  Whereas if these taxpayers were born we could have both our guns and butter.  And live in a world made safe by the most powerful military in the world.  Peace through strength.  The Ronald Reagan way.  And not a world where our enemies are constantly testing our resolve.  The Jimmy Carter and President Obama way.

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Governments turn People into Addicts to generate Tax Revenue

Posted by PITHOCRATES - January 4th, 2014

Week in Review

During the days of the British Empire Great Britain had a problem.  They loved Chinese tea.  But the British had nothing the Chinese wanted in trade.  Except for one thing.  Silver.  Hard money.  Which was a problem for Britain.  They were running out of hard money.  So they came up with an ingenious way to solve that problem.  By getting as many Chinese hooked on opium as possible.  So they could trade Indian grown opium for Chinese tea.  It worked out great for the British.  But the Chinese didn’t like it.  And fought two opium wars with the British.  Which did not end well for them.

North Korea has a hard money problem, too.  And they, too, turned to drugs.  Crystal meth.  Which North Korea manufactured in state-run labs.  Destined for China.  Where they tried to get as many people addicted to crystal meth as possible.  So they can sell it in exchange for Chinese currency.  Which they could use to buy Chinese food.  To help ward off famine in North Korea.  This worked pretty well for North Korea.  But only gave China another addiction problem.

In the United States the government found other ways to raise revenue.  The first two big sources of addiction-revenue were cigarette and alcohol taxes.  But it soon proved not enough.  They then got people addicted to playing the lottery.  When that revenue proved to be insufficient they then got people addicted to casino gambling.  But government spending had grown so great that this revenue was still not enough.  So the government is looking at other things to get people addicted to (see Why Legalizing Marijuana Is a Smart Fiscal Move by Bruce Bartlett, The Fiscal Times, posted 1/3/2014 on Yahoo! News).

Perhaps the dominant factor driving marijuana legalization is the desperate search for new revenue by cash-strapped state governments. The opportunity to tax marijuana is potentially a significant source of new revenue, as well as a way of cutting spending on prisons and law enforcement. The California Secretary of State’s office, for example, estimates savings in the hundreds of millions of dollars from both factors. The following summary is from a proposed state ballot initiative in California (No. 1617)…

It is not surprising that revenue considerations should be critical in the marijuana legalization movement. That was previously the reason why cigarettes were not banned until the 1920s despite a strong nationwide movement to do so. In the wake of Prohibition, governments simply needed cigarette tax revenue too badly. And when Prohibition ended, the need for new revenue after the Great Depression decimated government budgets was a driving force.

Indeed, according to author Daniel Okrent, expectations of the revenue from taxing legal liquor were so great in 1932 that some people thought it might permit the repeal of income taxes. It’s worth remembering that in 1900, taxes on alcohol and cigarettes constituted half of all federal revenues. Indeed, the only reason Prohibition was possible in the first place was that the income tax established in 1913, which was greatly expanded by World War I, would replace the revenue lost from the liquor tax after Prohibition.

There have been no great cuts to revenue like that following Prohibition.  Government spending has just grown so great that it far exceeds the nation’s ability to pay for it with current taxes and borrowing.  So they are looking to make people addicted to marijuana to help pay for their large public sectors.  As well as their vote-buying welfare state.  And when this proves insufficient they can turn to other sources of revenue.  Such as decriminalizing and taxing heroin.  Cocaine.  Crack.  Crystal meth.  Opium.  Even prostitution.  People are already doing these things.  So they can’t be any worse than marijuana.  As long as only responsible adults indulge in these activities.  Just as only responsible adults will smoke marijuana in Colorado.  For think of the tax revenue heroin, cocaine, crack, crystal meth and opium could generate.  For those drugs are really addictive.  And just think how much old rich men would enjoy 18 year old prostitutes.  Prostitution would be a booming business to tax.  These young women could generate great tax revenue for the government by just doing what consenting adults want to do.

We could do these things to find new sources of revenue.  Or we could NOT make people addicts.  Or NOT sell women into prostitution.  Instead we could cut the size of the public sector and the welfare state.  So we can cut spending.  Which would eliminate the need to produce new tax revenue in the first place.  Allowing people to keep their hard-earned money instead of handing it over to the government.  To pay for generous pensions and retiree health care for others.

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Democrats and Unions are impoverishing American Cities

Posted by PITHOCRATES - December 21st, 2013

Week in Review

Detroit had a massive public sector.  Lots of union government jobs.  With very generous benefits.  Then the city began losing population.  As the city shrank the public sector did not.  As the city could no longer support the public sector on tax revenue they turned to borrowing.  At her bankruptcy her pension obligations were in the billions.  And were just unsustainable.  With a lot of those retirees going to see huge cuts in their retirement benefits.  A first for a public sector union.  And one that may set a precedent for other impoverished cities (see Cities where poverty is soaring by Michael B. Sauter and Thomas C. Frohlich, 24WallSt.com, posted 12/16/2013 on Yahoo! Homes).

Many of these cities show a symptom of the regions hit hardest by the recession — a significant decline in real estate value. Nationally, the average home value during the three-year period of 2010-2012 was down by 9% compared to the previous three-year period. In eight of the 10 cities with soaring poverty rates, property values fell by at least 10%. Homes in Eastpointe lost nearly half of their value. In Inkster, Michigan, another city where poverty grew substantially, an average of 43.3% of homes were worth less than $50,000 between 2010 and 2012, compared to just 11.8% of homes during the 2007-2009 period…

Several of these cities were already struggling prior to the recession, in part because of their reliance on manufacturing. The industry had been declining for years, and the recession only made matters worse. In Salisbury, North Carolina, employment in manufacturing fell from 15.5% of all jobs to 8.3%. Goshen, Indiana, another city with a major increase in poverty, is heavily dependent on the auto industry — more than a third of the working population was employed in manufacturing between 2010 and 2012. According to Joe Frank at the Indiana Department of Workforce Development, this dependence had particularly dire consequences during the recession.

The Democrats are all Keynesians.  Who believe in government spending.  And keeping interest rates artificially low to stimulate the economy.  To encourage people to buy big expensive houses.  Just because interest rates are low.  So people did.  With mortgages so cheap everyone was getting them.  And as these buyers flooded the market housing prices soared.  Creating a great housing bubble.  Which collapsed when interest rates rose.  Resetting the rates on those subprime adjustable rate mortgages (ARMs).  Raising monthly payments.  Beyond what some people could afford.  Forcing them into bankruptcy.  Creating the subprime mortgage crisis.  And the collapse of housing prices.

The UAW made American cars so expensive people started buying the less expensive imports.  As most people don’t have UAW contracts giving them a fat paycheck and generous benefits.  Leaving them to get by on less than UAW workers.  Which meant they turned to the less costly imports.  Built by companies that didn’t have those great legacy costs of years of overly generous contracts that became unsustainable.  Pension costs and health care for retirees (which outnumbered active workers) forced GM and Chrysler to ask for a government bailout to avoid bankruptcy.  Asking the taxpayer to help them pay the generous pensions and health care costs of others.  Instead of bringing these benefits into line with the rest of America.

Democrats are Keynesians.  They believe in government intervention into the private sector economy.  And they protect their friends in unions to get their votes.  Raising costs for everyone else.  These policies, though, are just impoverishing American cities.  At least the ones dominated by unions and/or Democrats.

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Alberta Health Services privatizes some Pensions to Cut Health Care Costs

Posted by PITHOCRATES - December 14th, 2013

Week in Review

Public sector pensions are pushing cities and states to bankruptcy.  The Detroit bankruptcy was due in large part to the staggering debt the city took on to meet current pension obligations (and health care cost for retirees).  While the pension fund remained woefully underfunded.  The Detroit bankruptcy may set a precedent for other debt-laden cities.  Who are drowning under the costs of their bloated public sectors.  As they’ve run out of room to raise taxes any further.  Which wasn’t a problem during the initial surge of public sector growth.  But now that those retirement rolls have grown so large cities and states have found those generous pensions to be just unsustainable.  Even in Canada (see Alberta Health Services privatizing Edmonton labs posted 12/11/2013 on CBC News).

Alberta Health Services is going ahead with its plan to privatize all of its diagnostic lab services in Edmonton…

The new lab will replace hospital labs operated by AHS and Covenant Health as well as the services provided by DynaLIFE…

No jobs will be lost and all staff positions will be protected by the new employer, AHS says.

The Health Sciences Association of Alberta represents about 75% of the 2,000 workers affected by the changeover.

Even though AHS claims wages won’t change, the union believes pensions will take a hit.

“This is going to a private provider,” said HSAA president Elisabeth Ballermann.

“The private provider by definition cannot participate in the pension plan that our public sector members are currently part of and that’s an enormous loss for those workers.”

A loss perhaps for 2000 workers.  But a win for the health care system in Alberta and the people who use it.  As the cost savings from privatizing these pension obligations will free up money to spend on health care.  Something to think about as Obamacare continues to rollout and destroy the private health insurance industry on its way to establishing national health care.  Nationalizing one-sixth of the U.S. economy.  Creating a windfall of new public sector workers to vote Democrat.  And unsustainable pension costs that will increase the cost of health care.  Which will lead to longer wait times and rationing.  As well as adding to the deficit and debt.  Which will, in time, lead to the same cost-cutting actions like Alberta is taking.  Or something a little more painful like they did in Detroit.

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FT184: “If our big Democrat-controlled cities seceded from the US to form a liberal utopia they’d all become like Detroit.” —Old Pithy

Posted by PITHOCRATES - August 23rd, 2013

Fundamental Truth

The President basically said he doesn’t like Representative Government

President Obama recently said that some Republicans in Congress told him in private that they agree with his policies.  And would like to vote for his policies.  To do what is right for the American people.  But they won’t because they have a primary election coming up.  And if they agree with the president that will hurt them in that election if they go up against some Tea Party candidate.  And they’re afraid what Rush Limbaugh will say.  Him and his conservative extremists.

Now think about what the president is saying.  He said that these Republicans would vote for his policies if they weren’t afraid to vote against the will of the people they represent.  For if these Republicans are afraid they will lose a primary election by voting for the president’s policies that could only mean the people they represent don’t want them voting for the president’s policies.

This is very telling.  For what the president is really saying is that he could do what he wants to do if it wasn’t for representative government.  That is the big obstacle preventing him from passing policies the people oppose.  The people.  Which is why his administration is full of czars to help write and execute policy.  Because they have no elections to worry about.  And can do things against the will of the people all day long without worrying about the consequences of doing so.

If you want to see the Result of Failed Liberal Policies just look at the Big Democrat-Controlled Cities

There’s a reason why those who want to implement liberal policies like the president have to use deceit.  The nation is about twice as conservative as it is liberal (see Conservatives Remain the Largest Ideological Group in U.S. by Lydia Saad posted 1/12/2012 on Gallup).  This is why Republicans in Congress fear the Tea Party.  Because the Tea Party represent about twice as many of the people than they and their liberal friends in Congress do.

There’s a reason why the number of people who call themselves liberal has hovered around 20% for decades.  Because liberal policies are not good for America.  They are only good for the ‘connected’ class.  Those with friends in high places.  America’s aristocracy.  Who hate the Tea Party.  And most of America.  As they talk condescendingly down to them from their lofty perches in academia, the mainstream media, union leadership, Hollywood, government bureaucracies, etc.  People who are wealthier than most.  Who like to force people to live the way they want them to live through the heavy hand of government.  While exempting themselves from the laws they pass for us.  Like Obamacare.

If you want to see the result of their failed policies just look at the big Democrat-controlled cities.  Like Detroit.  Detroit was controlled by Democrats for decades.  Democrats there ushered in their liberal utopia.  They raised taxes so much to fund a massive city government that they chased business out of the city.  While layer upon layer of costly regulatory policies helped chase even more businesses away.  And with the jobs gone the people soon followed.  Now they have half the population they once did.  With their tax base imploded they are now left with unfunded pension and retiree health care obligations for their public sector that can never pay.  Sending them into bankruptcy.

Just imagine all the Good that could come from Paying an Entry-Level Worker $75,000

There are a lot of people on the left that want a federal bailout for Detroit.  They want people who have long suffered the high taxation and the job-killing legislation that caused Detroit’s problems in the first place to bail out the city.  People who do not benefit from those generous pension and retiree health insurance benefits.  And who will not benefit from a bailout.  They will only see higher taxes.  More federal debt.  Or more inflation to eat away the money THEY saved for their own retirements (if the government chooses to monetize the debt).  Just so the people in the public sector can enjoy better and longer retirements than they will enjoy.  Because they’ll have to work closer to their own death as they will never be able to save enough to enjoy a ‘public sector’ retirement if they have to pay for the public sector’s retirement as well as their own.

Here’s a thought, why not have the other big Democrat-controlled cities bail out Detroit?  Oh, wait a minute, they can’t.  Because their public sectors have left them greatly indebted, too.  These cities are irresponsibly running up debts that they never will be able to repay.  No matter how much they raise taxes and implement new taxes.  There’s never enough.  In fact, in creating their little liberal utopias they have chased a lot of business, and their tax base, out of their cities.  Yet these cities vote overwhelmingly Democrat.  Perhaps these cities should band together.  If they are so much more enlightened than the rest of the knuckle-dragging Neanderthals in this country perhaps they should secede from the US.  Declare themselves city-states.  And join a federation with other Democrat city-states.  Then they can live like they want to live.  And tell the rest of us (the 80% or so who don’t think like they do) to go someplace warm but not at all pleasant.

They could raise taxes on everyone to really redistribute wealth.  They can do away with drug laws.  Lessen the severity of our criminal laws so there isn’t such a disparity of offenders in our jails.  Make it a hate crime to criticize anyone who isn’t a conservative.  Have government-funded birth control, abortion and morning-after pills.  Government-funded housing.  Government-funded food.  And government-funded health care.  They can outlaw profits and force businesses to maximize the social good.  Raise the minimum wage to a true living wage.  Say, $75,000 a year.  Just imagine all the good that could come from paying an entry-level worker $75,000.  There would be no more student loan debt.  For there would be no reason to go to college to become engineers, doctors, nurses, dentists, paramedics, pharmacists, etc.  Wouldn’t that be lovely?  Wouldn’t you love to work and live in a city where you could do any kind of drug wherever you wanted?  Even while you were cooking food in an entry-level job?  Where there was no punishment for breaking the law?  And no one was so puritanical to tell us not to have sex as often or with as many people as we wanted?  Wouldn’t women love this?  Sure, there would be an epidemic of venereal disease but there would be free health care to treat that (if anyone still worked hard to learn to become a doctor, nurse, dentist, paramedic or pharmacist, that is).  Can you just see these utopian city-states?

Actually, you can see it right now.  For I dare say anyone wanting to open a business or raise a family would NOT want to do so in a city like this.  The jobs would leave first.  Then the people.  Imploding the tax base.  Until you’d have nothing but Detroits dotting the landscape of this utopian federation of liberal city-states.  This is what the president and those in the 20% want.  While of course exempting themselves from this world.  Living in their gated fortresses.  Comfortably.  Where they’ll blame the people who abandoned their utopian city-states as unpatriotic.  Who wouldn’t have fled if it wasn’t for the Tea Party.  Rush Limbaugh.  And, of course, George W. Bush.  Who the left will never tire of hating.  Or blaming.

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To avoid Detroit’s Fate Chicago looks at Revenue Generation from Speed Cameras

Posted by PITHOCRATES - August 11th, 2013

Week in Review

The City of Detroit bankruptcy shows how the massive costs of a city’s public sector are strangling these cities.  Promises of generous pensions for a long retirement and free health insurance up until you die are just promises these cities can’t pay for.  So some (like Detroit) raised their tax rates so high that people left the city in droves.  Further reducing the tax base.  While other cities turn to other revenue generating schemes (see Speeders were plentiful in camera test run by David Kidwell and Bill Ruthhart posted 8/12/2013 on the Chicago Tribune).

As Mayor Rahm Emanuel rolls out his long-delayed speed camera plan, new numbers his office released suggest that drivers who speed in Chicago could rack up way more in fines than a cash-starved City Hall initially projected.

The mayor had hoped to bring in $30 million this year. But results from a monthlong test of the automated camera system indicate the city could reap well into the hundreds of millions of dollars in the program’s first year.

City transportation officials argue that estimate is overblown, but the test period statistics the mayor’s office released Friday reinvigorated critics who argue that the program is more of a cash grab than the child safety measure Emanuel sold it as…

City transportation officials put estimated first-year revenues at $40 million to $60 million, arguing that several factors will cut down on the number of tickets actually issued.

For starters, they argue that it’s incorrect to estimate revenues based on the test program. They suggest the money will never reach into the hundreds of millions of dollars because of a number of factors. The most important: the fast learning curve of Chicago drivers…

Ald. Leslie Hairston, 5th, who voted against the speed camera program, said the number of speeders captured on the test cameras supports her insistence that the main motivation is to generate more city revenue.

“I guess this is just going to be a city for wealthy people, that’s where we’re headed,” she said…

The speed camera rollout was scheduled for closer to the start of the year, but it was delayed after City Hall came under scrutiny following Tribune reports of an alleged bribery scandal involving its 10-year-old red light camera program.

Making the streets safer for children is a noble goal.  But like their red light camera program it’s all about the Benjamins.  The money.  And they love cameras because they can rake in the money without having to put more costly public sector workers (i.e., cops) onto the streets.  That is, they’re outsourcing these costly union jobs to machines.  To minimize their labor costs.  Just like corporations try to minimize their labor costs.  Because union workers are very, very expensive.

But like every government revenue policy they’ve overstated the expected revenue from these cameras.  Just like a higher cigarette tax rate reduces cigarette tax revenue.  Taxes, and these revenue cameras, change human behavior.  Actually achieving the stated purpose for them (better health if people don’t smoke and safer streets if speeders are punished).  Which means though they have a burst of revenue in the beginning it will eventually taper away.  Requiring a new revenue generating scheme.  And then another one to replace that one.  And so on.  On and on.  Forever and forever.  Instead of doing the simpler thing.  And the thing that would work best.  Forever and forever.  Just stop spending so much.

If the public sector union enjoyed pensions and health care benefits like they do in the private sector there would be no Detroits going bankrupt.  Because there would be no generational theft.  These workers would provide their own pensions—401(k)s—and pay a much larger portion of their health care expense.  And they would work into their Sixties (or more) like the rest of America.  Instead of retiring in their 40s or 50s.  To enjoy a retirement that in some cases lasts longer than their working career.  This would solve the budget problems of the big cities.  Instead of passing it on to future taxpayers who were not included in those generous contract negotiations that they find themselves stuck paying for.

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Unfunded Pension and Retire Health Care Liabilities are a Problem for more Cities than just Detroit

Posted by PITHOCRATES - July 28th, 2013

Week in Review

The problem all our big cities are having is the cost of pension and retiree health care for their public sectors.  These cities made ridiculous promises during their contract negotiations with their public sector unions.  Promising them generous pension and health care benefits for life for retirees.  Benefits a later generation would have to pay for.  Which is why these cities are imploding under these costs.  And why Detroit filed bankruptcy.  These cities never put away the money for these future benefits because they were just too costly.  Besides, they no doubt thought, when the bill comes due it will be someone else’s problem.  And that’s where we are today.

How bad is it?  Really bad.  Especially in Detroit.  A city that has about half the population it had when it entered into those agreements.  And nowhere near the automotive industry it had back then.  A race riot in 1967 caused a white flight.  And the black middle class would follow years later.  As the jobs left Detroit for the suburbs.  And the people followed those jobs out of the city.  Just decimating the tax base that has to pay those unfunded benefits (see The Retirement Surprise In Detroit’s Bankruptcy by Robert C. Pozen posted 7/25/2013 on Brookings).

When Detroit recently filed for bankruptcy, one number surprised a lot of observers–$6.4 billion in other post-employment benefits (OPEB). OPEB is primarily comprised of unfunded obligations to pay health care costs for municipal employees.

By contrast, the unfunded pension obligations of Detroit were $3 billion–less than half the size of its OPEB…

The Pew Charitable Trust did a study in 2013 of both pension and OPEB shortfalls in the 30 largest cities in the United States. The three cities other than Detroit with the largest pension shortfalls were:

$14,302 per city household in New York City;
$12,170 per city household in Philadelphia; and
$11,389 per city household in Portland, Oregon.

But the shortfalls for OPEB, primarily healthcare obligations, were significantly larger. According to Pew, the three cities other than Detroit with the largest OPEB shortfalls were:

$22,857 per city household in New York City,
$18,962 per city household in Boston
$13,487 per city household in San Francisco.

These numbers are staggering.  Based on the U.S. Census, there are about 264,209 households in Detroit.  If you divide the total unfunded pension and health care costs by the number of households you get $35,578.  That is, to pay this outstanding debt it will cost each household in the city of Detroit $35,578.  Which will be very difficult to do when the median household income in Detroit is $27, 862.

Those in the union say these people are owed their retirement and health care benefits.  Because they made a deal.  But they didn’t make a deal with the people currently paying the taxes.  What this amounts to is generational theft.  Like all those municipal pensions and health care benefits.  For when they made those generous agreements the people who ultimately had to pay them weren’t in the room when they signed those contracts.  In fact they weren’t even born yet.  The people demanding their benefits now and their union representation apparently had no problem sticking it to future generations.  They were the ones in the room when they signed those contracts.  And didn’t give the people stuck paying for their benefits a second thought.

All big cities with big public sectors have the same problem.  They may not be ‘Detroit’ bad but they have bills that they won’t be able to pay.  There are about 100 U.S. cities with a population of a quarter million or more.  If each one of them had this problem that’s about $1 trillion in unfunded benefits just in these cities alone.  With trillion dollar deficits already, Obamacare coming on line and Social Security and Medicare projected to go broke the federal government just won’t be able to bail these cities out.  Perhaps bringing the days of generational theft to an end.  Which may be the only good thing to come from a wave of municipal bankruptcies.

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The City of Detroit Bankruptcy

Posted by PITHOCRATES - July 22nd, 2013

Economics 101

There is nothing more Dangerous to a City’s Finances than a Shrinking Tax Base

The federal debt is at record levels.  Because federal spending is at record levels.  But those on the left say there’s nothing to worry about.  And try to expand federal spending further.  With more government benefits to hand out to the people.  And an ever growing federal bureaucracy.  Full of new jobs with generous pay and benefits.  All funded by the taxpayer.

Businesses in the private sector cannot operate like this.  Because businesses have to pay their costs with the things and/or services they sell.  That people willingly buy.  So there is a limit on the costs a business can incur.  But not so with government.  For the government has the power to tax.  To forcibly take more money from the people against their will.  Something businesses just can’t do.  And when that fails they can borrow money by issuing bonds.  Which are generally easy to sell.  Because governments have the power to tax.  All but guaranteeing that they will repay those bonds.  And when that’s not enough the federal government has one other benefit businesses don’t have.  They can print money.  Further guaranteeing that they will be able to redeem their bonds.  Making them that much easier to sell.

Government below the federal level, though, doesn’t have that last option.  So when they want to spend more money than they have they have no choice but to borrow.  And hope that their tax base doesn’t erode over time.  For there is nothing more dangerous to a city’s finances than a shrinking tax base.  Especially when the city has a huge and growing public sector.  Enjoying generous pay and benefits.  Especially pension and health care benefits for retirees.  Where promises made must be kept decades into the future.  During which time a lot of things can happen.  Such as that tax base shrinking.

Detroit’s Tax Base plummeted while the Size of the Public Sector did not for Government Never grows Smaller

This is the problem the City of Detroit has.  And it is why they filed the largest municipal bankruptcy in U.S. history.  Thanks to the automotive industry and World War II destroying most of the industrial economies of the world, Detroit became an economic power house.  And one of America’s grandest cities in the 1950s.  Paris of the Midwest they called Detroit.  Automotive capital of the world.  The Motor City.  The mecca of American manufacturing.  Having one of the richest middle class.  And one of the largest black middle classes.  Everyone was doing well in Detroit.  So the City of Detroit did the only rational thing a city could do with a swelling tax base.  They exploded the public sector.  All paid for with higher taxes.  Including a new city income tax.

But that growing public sector soon turned Detroit into a business unfriendly city.  With more red tape, regulatory costs and a corporate income tax.  And rising union demands during contract negotiations made it even less business friendly.  So businesses started leaving the city.  Taking their jobs with them.  And people followed.  Then the race riots hit in 1967.  Five days of unprecedented violence.  Thus beginning the great white flight from the city.  And the great population decline of the City of Detroit.  Culminating in the nation’s largest municipal bankruptcy in history.

At Detroit’s peak her population topped out at about 1.8 million people.  Today there are but 680,000 people remaining.  A loss of 1.12 million people.  About 62% of her peak population.  So Detroit’s tax base plummeted.  But the size of the public sector didn’t.  For government never grows smaller.  So Detroit continued on with the overhead expenses of a city with a population of 1.8 million people.  With the tax revenue of a city with a population of 680,000 people.  Making bankruptcy inevitable.

The Problems of the City of Detroit are the Problems of the Nation Writ Large

At the height of Detroit’s industrial might there were approximately 300,000 automotive or manufacturing jobs in the city.  Today there are a mere 27,000.  That’s a loss of 273,000 jobs.  That’s 273,000 breadwinners whose families are no longer in the city.  If each of them had on average 2.5 children who remained in the city with their parents that would have added about 1.2 million to the city’s population.  Which corresponds pretty closely to the 1.12 million the city actually lost.  So we can see how the loss of the jobs devastated the population.  But we can also see what it did to the city’s finances.

Let’s assume these breadwinners had their children when they were in their 20s.  So the breadwinner was still in the workforce when their children were 20 and had entered the workforce.  Let’s say this happened over a 40-year period.  So, on average during that 40-year period, there were an additional 136,500 jobs per year.  Let’s say they each owned a house and paid property tax of $750.  Over 40 years that’s about $4.1 billion in lost property tax revenue.  If each of these workers earned $35,000 on average over those 40 years and paid a 3% city income tax that’s about $9.8 billion in lost personal income tax revenue.  Finally, if we figure a 50-50 split between labor and material, a 15% overhead and a 2% net profit we can extrapolate that $35,000 average personal income into approximately $448 billion in lost corporate revenue over those 40 years.  At a city corporate income tax rate of 2% that’s about $9 billion in lost corporate income tax revenue.  Adding these all together we see a total loss of tax revenue to the city of approximately $18.8 billion due to the loss of 273,000 jobs.  Plus or minus.

This is a crude guesstimate with an emphasis on crude but it could be close enough to explain what happened in Detroit.  For with the falling tax base Detroit turned to borrowing more and more money to pay for an oversized public sector.  To service a disappearing population.  With those pension and retiree health care benefits being especially burdensome.  Which forced the city to borrow so much it left them with a debt of $18.5 billion (very close to the $18.8 billion in our little exercise above) that they don’t have a chance in hell of ever repaying.  Leaving bankruptcy as the only option.  Unless the federal government steps in.  Which probably won’t happen.  And shouldn’t happen.  For Detroit is not the only government suffering under the weight of unfunded pension obligations and retiree health care benefits.  If they bail out Detroit then they’ll have to bail out all other states and municipalities.  Which they can’t afford to do.  For the federal government has its own problems with pensions (Social Security) and retiree health care benefits (Medicare).  And they’ve just added a new government benefit that will dwarf the costs of Social Security and Medicare.  Obamacare.  All while burdening the economy with a slew of anti-business regulations that has chased jobs out of the economy.  And out of the country.

So the federal government can’t step in to save Detroit.  For the federal government is working to ‘out Detroit’ Detroit.  As the problems of Detroit are the problems of the nation writ large.  What’s happening in Detroit will happen in other states and cities across the country.  That are spending more money than they have to support an oversized public sector.  And in time what’s happening in Detroit will happen to the federal government.  Bailing out these states and cities will only hasten the downfall of the federal government.  Which the federal government will do whatever it can to prevent.  For while the nation can survive a city like Detroit going bankrupt the nation cannot survive a federal bankruptcy.  Because the numbers are just too big at the federal level.

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Canadian Public Sector Workers average 18.2 Paid Sick Days a Year

Posted by PITHOCRATES - June 15th, 2013

Week in Review

Nations around the world are suffering financial crises due to the costs of their public sectors.  Which they pay for by taxing the private sector.  Even though people in the private sector don’t enjoy anywhere near the generous benefits the public sector enjoys (see Government to target public service’s sick days in next round of bargaining by BILL CURRY posted 6/10/2013 on The Globe and Mail).

The Conservative government is putting public-service unions on notice that sick days will be targeted in the next round of collective bargaining.

Treasury Board president Tony Clement said the government wants to move away from the current rules, where workers can use up to 15 paid sick days and five family days a year, in addition to vacation time.

The Minister stopped short of accusing public servants of abusing the system, but questioned why the federal absentee rate is higher than that of other governments and the private sector, where he said the average number of sick days is 6.7.

“Look, I think that the great majority of public servants are, when they take time off, they are sick. But there’s no question that the rate of sick leave, when you’re looking at 18.2 days as an average in a year, is well beyond not only private sector norms but other public-sector norms,” Mr. Clement said Monday at a news conference on Parliament Hill…

Union leaders also took issue with comparisons of public- and private-sector absenteeism, arguing the private sector does not document sick days in the same way as governments do…

“Mental illness, stress, anxiety, depression were not admitted to or acknowledged,” he said. “Cancer was much less treatable than it is today. So the workplace has changed dramatically in the past 40 years, but the disability management system has not. Employees are getting lost or forgotten in the system.”

Yes, we admit and acknowledge those illnesses more today than we used to.  And we do treat cancer more than we once did.  However, these illnesses do not affect the public sector differently than they affect the private sector.  So if the private sector is averaging 8.7 sick days there is no reason why the public sector should be averaging 18.2 sick days.  On top of 5 family days.  Holidays.  And vacation time.

One of the arguments for a single-payer health care system in the United States is that people will be healthier.  With access to health care doctors will catch disease early and stop it in its tracks.  Now either the Canadians are milking the system or a single-payer health care system doesn’t make people healthier.

If the organization a person works for can get by for a month (after you add together all that paid time off) without that person being there chances are that they can get by the other 11 months of the year without that person being there.  Which is why you don’t see 18.2 sick says in the private sector.  Because it’s too great a cost burden to pay people for not working.  As private sector employers can’t just raise their prices to cover this cost.  Whereas the government can raise taxes.  Or print money.

But there even is a limit for government, too.  As we can see by the Eurozone sovereign debt crisis.  And the need to cut back on generous sick pay in Canada.  Higher taxes reduce economic activity.  Which reduces government revenues.  Which they make up with borrowing.  Until they suffer a sovereign debt crisis.  Like in the Eurozone.  Where a country is so deep in debt that no one wants to loan them anymore.  For it is unlikely that a nation so deep in debt will ever repay that debt.  Which is why these generous public sector benefits are simply not sustainable.  When you can no longer tax or borrow you have but one option left.  You have to cut costs.  And the public sector will have to live more like the private sector.  Less exalted and privileged.  As public servants should.

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Public Sector Costs are Bankrupting Detroit and Illinois

Posted by PITHOCRATES - June 8th, 2013

Week in Review

Public sector pay and benefits are crushing state governments and cities.  The City of Detroit is probably going to file bankruptcy.  And the State of Illinois just saw its bond rating cut (see Illinois Bond Grade Cut as Lawmakers Can’t Fix Pensions by Tim Jones & Brian Chappatta posted 6/3/2013 on Bloomberg).

Illinois had its credit rating cut one level after lawmakers failed to restructure state pensions saddled with almost $100 billion in unfunded liabilities…

The retirement systems cover state workers, teachers, university employees, judges and lawmakers…

“It is disgraceful that this year’s legislative session ended without a new pension plan,” Treasurer Dan Rutherford, a 58-year-old Republican who is running for governor in 2014, said in a statement. The failure “costs the state millions of dollars each day, plus these downgrades could continue to make borrowing additional funds even more expensive…”

Illinois’s growing pension deficit is “unsustainable,” Fitch analysts led by Karen Krop, a senior director in New York, said in a statement. The inaction by lawmakers raises questions about the state’s ability to deal with “numerous fiscal challenges.” They also cited a growing backlog of unpaid bills and borrowing to cover operational costs, indicating another cut may be forthcoming.

These public sector workers have pay and benefit packages unlike those in the private sector.  Which has to pay for the pay and benefits of both the private and public sectors.  So they keep raising taxes on individuals and businesses.  And our politicians never worry about the long-term consequences.  But they can only tax so much.  People can only pay so much in taxes before they can no longer pay their own bills.  So they start borrowing.  And the more they borrow the more risky they are to loan money to.  The more in debt they go and the greater their spending obligations the higher the interest rates they have to pay to get investors to take a chance on buying their bonds.  Because there’s a very good chance something like this will happen (see Detroit to offer creditors less than 10 percent of what city owes -report by Steve Neavling posted 6/7/2013 on Reuters).

Detroit Emergency Manager Kevyn Orr plans to deliver grim news to the city’s creditors next week: Take less than 10 percent of what the city owes or risk losing it all in a bankruptcy proceeding, the Detroit Free Press reported on Friday…

In his report, Orr stated that the city has run annual deficits of $100 million and more since 2008. Detroit is believed to owe about $17 billion in debts and liabilities.

So on the one hand they beg and plead for investors to loan them money.  So they can pay the overwhelming costs of their public sector in the face of a shrinking tax base.  And then when their finances get so bad that they can’t even service their debt any more they say, “Thank you for your money when we could not raise any ourselves.  And because you took that great risk for us we will reward you by screwing you out of 90 cents of every dollar you loaned us.  But stick around after the bankruptcy.  For once we shed this debt we will need to borrow more to pay for the overwhelming costs of our public sector.”

Detroit had annual deficits of $100 million.  Illinois has $100 billion in unfunded liabilities.  Is it any wonder Fitch lowered their bond rating?  For the state of Illinois has a greater financial problem than the City of Detroit has.  The State of Michigan gave Detroit an emergency manager to fix their problems.  They even offered to buy a city park.  Belle Isle.  To help Detroit get out of the mess they put themselves into.  But Illinois cannot help Illinois.  Only the federal government can.  But will they?  If they do you know California will demand a bailout, too.  As will every other state and city with a crushing public sector cost will.  But the federal government can’t bail out everyone.  Not when they have their own trillion dollar deficit problem to fix.

No.  There is only one way to fix the problems these cities and states are having.  They have to cut their public sector costs.  Which means someone else besides the bondholders will have to take a haircut to put these states and cities back into the black.  Meaning the public sector can no longer enjoy the kind of benefits people in the private sector haven’t enjoyed in decades.

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