Staring Down a Mutually Assured Downgrade
The so-called superdowngrades — rating cuts of three or more levels — highlight a renewed focus on municipalities choosing between making bond payments and cutting services as they recover from the recession that ended in 2009. Moody’s said in July that the bankruptcy decisions by three California municipalities since June show distressed cities may view debt service as a “discretionary budget item.”
The example in the story is a debt load carried to fund a sports complex. The article isn’t explicit, but it sounds similar to Rhode Island’s 38 Studios arrangement — with “moral obligation” bonds issued through an economic development agency. The city is claiming foul, saying that it’s not fair to judge its overall finances or even its willingness and ability to pay general-obligation bonds based on a default of this sort of bond.
Because, you know, risk and financial leverage aren’t supposed to apply to government borrowing. A stork flies in with a bundle of charmed bonds, the community gets some super-cool asset that sustains itself and never requires maintenance, taxpayers save money because future profits/savings are always higher than interest, lenders get a guaranteed profit, and politicians get to celebrate themselves for adding value to their communities without ever having to pay for it.
I’m being sarcastic, of course. The “investment” of government-backed bonds is inherently on nothing more than the ability to tax a population, and the people implementing the plan rarely have competence to judge the real risk of the projects in which they’re investing — whether risk is defined as a profit in jobs and new tax revenue or as savings’ outlasting new costs.
But here’s what voters should remember: At the end of the day, the interest that investors anticipated was fundamentally a payment for taking a risk with their money. The finance industry is very powerful, as the term “superdowngrade” indicates, but at the end of the day, a community that operates without borrowing is for the most part beyond its reach.
Pensions Are the Finance Industry Inside Government
Philip Overton, a Certified Financial Planner and town council candidate in Westerly, has joined me in explaining to Rhode Island that even the pension reform’s new return rate assumption of 7.5% is way too optimistic. Nonetheless, as Ted Nesi points out, media purveyors of the common wisdom (ever anxious to juxtapose the white knight progressive Democrat Gina Raimondo with Republican red-meanies like Wisconsin Governor Scott Walker) are still inflating the parade balloon of Rhode Island’s plan. Here’s the Washington Post’s Fred Hiatt:
She stressed her respect for public service workers — and that the problem was not their fault. What they had been promised was unsustainable. Their pensions were at risk and so were other state services.
“That was my mantra the whole time: Progressives care about public services,” Raimondo told me. “A coalition of supporters developed, and it wasn’t just the chamber of commerce. It was younger teachers, police, heads of social service agencies . . . Advocates for the disabled really came out.”
The problem, as I’ve written in too many places to pick a link, is that the whole thing is for show because the promised benefits still outstrip the combined level of employer and employee contributions plus likely investment returns. (Indeed, employees contributions to the guaranteed part of their pensions has been reduced.)
For good reason does Raimondo go on to stress the importance of turning attention to Rhode Island’s economic growth. From a certain perspective, pension reform “fixed” the problem to the extent that it pushed off reckoning in the hopes that a strong economic recovery (happening who knows how or when) would increase tolerance for the necessary tax increases.
Although not one to wish my life away, I’m extremely curious what the common wisdom is going to say in 5-10 years, when the pension reform proves not to have been adequate. I’d wager the message will, to some extent, be, “if only returns on investment had been a little higher,” which was the origin of the problem.
While doing all this writing about the web of big government and big investment, I’d be remiss if I didn’t point to Charles Gasparino’s column, today, noting the cozy relationship between prominent politicians and the Wall Street that they malign in public:
Consider: As we near the four-year anniversary of the financial crisis, not a single Wall Street fat cat has been charged with violations of securities laws in connection with the 2008 collapse.
Then we have the outlandish case of MF Global, the brokerage firm run into the ground nearly a year ago by Obama’s pal and campaign-cash bundler, Jon Corzine. It isn’t just that the former Goldman Sachs CEO and New Jersey governor took outsized trading risks that destroyed the firm; his firm appears to have misused and lost $1.6 billion in customer funds in the process.
Under securities laws, those customer funds were supposed to be kept sacrosanct — yet not a single MF Global employee, much less Corzine, has been charged in the matter by the Obama Justice Department or the Securities and Exchange Commission.
Ultimately in Service of Redistribution
So, we’ve established that a great deal of the money cycling through government ends up in the pockets of investors, of one form or another. One wonders, then, why people tolerate it.
A partial answer is that the grift is mere grains of grist slipped from the machine. Another partial answer is that it’s because so many folks are implicated in the larger project. This chart from the Canfield Press illustrates that these two explanations are inextricably linked:
That scary blue line includes the various entitlements (Social Security, Medicare, and Medicaid) as well as safety-net spending, including unemployment insurance, income maintenance, and more. The amounts are so massive that astonishing amounts of waste and corruption can be lost in their midst, and funding it all creates a huge pressure to increase borrowing so as not to expose how much money governments are really spending.
Regionalization Is Another Example of Centralization and Redistribution
Stanley Kurtz has been all over California’s Prop. 31, and the Obama administration’s largely unmentioned intention to target regionalization:
Proposition 31 allows collections of local governments to pool their tax receipts. While this “tax sharing” is supposedly voluntary, the initiative sets up rewards and punishments that effectively force California’s local governments to submit to redistribution, or accept second-class status instead. Once California’s municipalities have been swallowed up by de facto regional super-governments, citizens will come under the thumb of officials unelected by the public they control.
From my basement office a couple miles from the Sakonnet River Bridge in Tiverton, I can’t help but think of local politicians’ attempts to convince legislators in other parts of the state to take pity on our poor struggling county economy and block the new toll that the General Assembly has made imminent. The effort is almost definitely futile, because there aren’t enough legislators outside the reach of the urban ring or the Democrat establishment to make the change.
In this respect, and given its size, Rhode Island is essentially a prototype of the sort of regional government intended for California, and these are the results.
Romney and ObamaCare
It’s been quite a lesson watching the mainstream media and the general public misconstrue the intricacies of healthcare reform policy. The most important point, in this regard, relates to a common error in understanding: Intention is different from execution.
For example, it is entirely possible for Mitt Romney to wish to ensure that people never lack health insurance because they have preexisting conditions and still not support government requirements that it be so. Indeed, it is possible for the president’s method of seeking that objective to be at odds with Romney’s method.
The former mandates coverage in a way that cannot do otherwise than drive up costs, but makes no provision for addressing that problem, while the latter would seek flexibility in programs and pricing to make it common practice for everybody to acquire insurance before any conditions are preexisting. That is, let people buy individual plans; let those plans be inexpensive high-deductible plans without mandates; and people will always be covered.
Campaign Finance, Another Area in Which Intention and Execution Differ
This week’s WPRI Newsmakers is worth a watch. For the short version, fast-forward through the Clint-Eastwood-questioning Cranston mayor, Allan Fung, to the segment involving John Marion of Common Cause, Rhode Island.
Marion covered various topics related to government operation, from voting changes to access to public records to campaign finance disclosures.
On the first, the state has implemented a number of changes beyond voter ID, notably reducing the number of polling places as well as their hours of operation. That leads Marion to worry that lines will cause people just to “walk away” because “it’s just not worth their time waiting in line to vote.” Which raises the basic question of political theory: If it’s not worth a given person’s time and effort to vote, is that person’s vote likely to be to the benefit of the society, if cast? Seems like a gambling, to me.
As a quick search of the Current’s archives will show, though, my larger disagreement with Marion has to do with his support for strong campaign finance laws. On the one hand, he worries that a few minutes in a voting line will drive people away from the ballot box, and he (rightly) worries that people requesting government documents will “feel intimidated,” and yet, he wants groups expressing their views — even on local ballot questions for which bribery of potential candidates is not an issue — to have to expose their donors to the world, including political adversaries.
To be sure, the language of the bill softened as it made its way through the legislative process, and Marion assures me, personally, that the “intent” of such laws is not to allow political bullying. As I pointed out in my first article concerning this legislation, whatever Marion’s intent, many of his allies on this issue give clear indications that the possibility of intimidation is not a bug, but a feature.
I will offer sympathy in one regard: When you start restricting freedom of speech and association, and strive to eliminate the principle of caveat emptor from democracy, you find yourself trying to collect a nest of slithering snakes.
That’s why, just as it’s better to eliminate the concept of pre-existing conditions by creating incentives to pre-invest in health insurance, the healthier route would be, I’d say, to reduce the government’s ability to do things that make hundreds of millions of dollars of influence buying a worthwhile investment.
At the end of the day, all of the above topics seem to come down to basic assumptions about the beneficent activities of big government.