“No Man’s life liberty or property is safe while the legislature is in session”.

- attributed to NY State Judge Gideon Tucker

Friday, January 21, 2011

Solar Power Failure in Massachusetts

Tuesday's Wall Street Journal carried a staff editorial sounding a cautionary note on government investing in alternative energy.

The poster child in this case is Evergreen Solar, a one-time darling of Massachusetts governor Deval Patrick.

Patrick directed state funding to Evergreen in the form of "$58 million in grants, loans and land and tax incentives- one of the largest investments in a private company in Bay State history."

To read the Journal editorial, this is one of those alternative energy plays which has existed predominantly on government handouts and subsidies.

According to the piece, Evergreen has lost "a cumulative $685 million," presumably to date. Most of this was already lost before the Massachusetts 'investments.'

Blaming Chinese government subsidies to its solar technology firms, Evergreen has closed the Massachusetts plant, with 800 workers, that attracted such attention when the state's governor lauded the firm as a symbol of it's "economic future."

The Journal editorial describes Evergreen as "waiting until it received the $58 million from Massachusetts to announce it would out-source jobs to a plant it continues to operate in China."

Now a fight is looming over whether Evergreen owes more than a mere $4MM to Massachusetts from the $58MM it received prior to exiting the state. And, in a move illustrative of how powerless the state is in the situation, it is allowing Evergreen its "sweetheart $1-a-year lease" because it isn't sure it can secure another tenant.

This is why it's so dangerous to let politicians squander public tax money on private investments. Besides a conflict of interests involving potential competitors within the state, it also requires investing acumen which the state of Massachusetts clearly doesn't possess.

Too bad for its citizens, for whom governor Patrick just blew over $50MM of their hard-earned money.

Thursday, January 20, 2011

Pat Toomey's Debt Ceiling Bill

Newly-elected Pennsylvania Republican Senator Pat Toomey wrote a sensible editorial in yesterday's Wall Street Journal concerning a bill he will introduce concerning the nation's debt ceiling.

He very reasonably notes that we have sufficient federal funds to service our debt. It's simply a matter of prioritizing payments. His bill will direct the Treasury Secretary to pay interest on the debt before all other claims. Thus, any shortfalls in operating funds from an inability to borrow more than the debt ceiling will necessitate Congress cutting spending.

You can frame it anyway you'd like, but the simple fact is that the only way we're going to begin to cut unaffordable federal spending is to draw a line in the sand on borrowing limits.

Why not now?

Wednesday, January 19, 2011

Aaron Friedberg On China's Ambitions

Princeton University's Aaron Friedberg wrote a succinct, informative editorial in Tuesday's Wall Street Journal explaining China's unexpected change in demeanor as it challenges the US for global dominance.

He concluded his excellent analysis with these paragraphs,

"Since the start of the 2008-09 financial crisis, many Chinese strategists have concluded that the U.S. is declining, while China is rising much faster than expected. Belief that this is the case has fed an already powerful nationalism that appears to be increasingly widespread, especially among the young.

In this view it is time for China to "stand up," to right some of the wrongs suffered when the country was relatively weak, and to reclaim its rightful role in Asia and the world. Such sentiments are not the exclusive preserve of the military, although it may seek to tap them for its own ends. The rising generation of Chinese leaders cannot afford to ignore these views, and they may well share them.

If this assessment is correct, then the last two years are not a temporary deviation but a portent. Rather than signaling the start of a new interval of cooperation and stability, Hu Jintao's visit may mark the end of an era of relatively smooth relations between the U.S. and China."

With this perspective, how can anyone argue whether Congress should be cutting everything in sight? How can we delay putting all transfer payment programs on a pro-rata basis relative to current government tax receipts and GDP?

Could it be more clear what we, as a nation, have done to ourselves since 1935? That's the year in which FDR signed the flawed bill creating the social security program.

It's my contention that, beginning with that act, the US embarked on a path which has fiscally ruined us. We began running deficits, initially to try, futilely, to spend our way out of the Great Depression, then to pay for WWII. After that, except for a few rare years of surplus, Congress and administrations of both parties just spent us into growing debt, essentially to afford inflexible, badly-designed social welfare programs.

Nearly 80 years later, we are borrowing from our enemies to pay retirees a pension and health care.

The Chinese, watching our foolish responses to the recent financial crisis have, as Friedberg points out, concluded that we are in decline, so they have little or nothing to lose by ramping up their rise to global dominance.

What are we going to do, anyway, borrow from the Chinese to buy and build the weapons to fight them? Like the recent commercial depicting Chinese university students laughing as their professor lectures them on the US' economic decline, we have foolishly luxuriated in unaffordable spending programs, the money for which we borrowed from abroad.

China is now realizing that economic coercion will be more effective and easier than going to war to replace the US as the world's dominant power.

We are truly at a cusp now, unlike those predicted for the past decades, because of external developments. China is now poised to take on the US, and, thanks to our profligacy, has the economic influence to do so. Multi-lateral trade has reduced the central role of the US in the global economy. Poor management of our economy and dollar has resulted in its being viewed less desirously by global investors. And our own appetite for non value-added transfer payment programs, resulting in continued budget deficits for most of the past nearly-80 years, have reached a point where our need for global capital has finally met resistance.

I can't see a viable solution which gives us a chance at remaining as the powerful nation we've been for over a century that does not include moving all transfer payment programs to in-year, pro-rata payments, as defined-contributions from the government, as a share of current GDP and tax receipts. No more deficits and no more borrowing to pay fixed pensions or other benefits. Everyone- taxpayers and tax money recipients- shares equally in the nation's economic pains or gains.

We don't really have another choice, because, quite soon, global investors and other nations will simply foreclose our option to continue the madness we've practiced for nearly 80 years.

Tuesday, January 18, 2011

Dangerous Public Pension Thinking From Roger Ferguson

The Wall Street Journal published an editorial by TIAA-CREF's CEo, former Fed vice-chairman Roger Ferguson. Given Ferguson's pedigree and current position, it's rather unfortunate to see him endorsing more pension schemes containing any sort of guarantees.

In this case, he is pitching an Orange County, California plan that ostensibly offers new municipal workers both defined-benefit and defined-contribution components. Ferguson refers to the Federal Employees Retirement System which also contains both a guaranteed annuity and tax-deferred defined-contribution accounts.

The trouble with these approaches is that they offer any guarantees whatsoever.

Ferguson rather disingenuously writes,

"While there's been much talk of putting new state and local government workers into a 401(k)-type plan, we cannot simply shift the burden of paying for retirement entirely onto the nation's 27 million state and local government workers without preserving a source of guaranteed retirement income."

Really? Why the hell not? Nobody gives private sector non-union or management workers any guarantees. Why should government employees be special? In fact, in light of recent information which found average government unionized workers to have both higher average cash compensations and better pensions and benefits, Ferguson's contention is just plain wrong.

Given that it's publicly-funded government we're discussing, I'd say the best solution is no strings whatsoever over time for pensions. Simply offer government workers a defined-contribution payment from the state or local entity, and make individuals, once more, responsible for managing their own retirements.

Perhaps they'll even learn to save again. Rather than simply assume that, once they retire after 30 years, they can enjoy a lifestyle nearly the same as that which they had when fully compensated as workers.

It's just a mistake to continue to place governments and, thus, taxpayers, in a position to be responsible for the retirement arrangements of millions of government workers.

Making guarantees only creates more opportunity for shortfalls and funding gaps which will cause problems later on. Even once-esteemed insurance companies have, in the past, fallen afoul of their overly-generous annuity promises. And annuities disguise hidden costs while adding little actual value beyond simply saving money and investing in mutual or bond funds.

One of the reasons America began its journey down the road of fiscal disaster is because in the 1930s, politicians stupidly chose to design social safety net programs as defined benefit schemes, implicitly assuming the funding guarantees without fully apprising taxpayers of the costs.

Guarantees always create counterparty risks. What if the instrument funding the scheme comes up short? What if governments, as they now so often do, simply delay or skip their required funding payments?

We have to stop this exercise in self-delusion and return to a world where everyone is responsible for their own retirement funding.

Monday, January 17, 2011

Illinois Commits Economic Harakiri & Raises Tax Rates

It's sad to see my home state of Illinois going so badly wrong in its fiscal policies.

If I recall correctly, the state's top income tax rate rose by 40%, from 3% to 5%. This was done in a lame-duck session by Democratic legislators in an attempt to tax their way to closing a yawning budget deficit.

Reading remarks from the Republican governors of surrounding states like Indiana's Mitch Daniels and Wisconsin's Scott Walker leaves no doubt that Illinois is bound to lose citizens and probably businesses to those two hungrier, lower-tax states. Even Michigan, which has its own troubles, will probably get into the act once it can stabilize its own fiscal mess.

Other pundits have written, aptly, that we're seeing a wonderful example of our nation's federal system at work. Each state may pursue their own approach to government, and Illinois is foolishly raising taxes while its neighboring, redder states lower theirs and explicitly target Illinois business and personal income tax revenues via outward migration.

Still others have noted that even incoming New York Democratic governor Andrew Cuomo is sounding like Ronald Reagan.

So what's with my old home state? How did Richard Ogilvie's prudent and prosperous Illinois become the bloated, indebted shambles we now see?

Simply put, state and municipal unions run wild with the active assistance of the state's Democratic legislators. New Jersey managed to vote in Chris Christie to try to solve a similar crisis. In Illinois, they're just reaching for the usual measures- higher taxes. No serious pension reform, no serious spending cuts. Just a bunch of lame duck political hacks squeezing an aging population to pay more tribute to the government workers' unions.

Isn't it amazing that none of this is sticking to Wonderboy yet? After all, what little government experience he had before his two-year introductory tour of the US Senate was in the Illinois legislature. And how will his former chief of staff, Rahm Emanuel, handle Chicago, should he be elected, amidst this fiscal mess?

Some years ago, my late father predicted all this. On a summer trip to visit my parents, for my children's benefit, he spoke at length about the coming fiscal storm. There was a huge pension obligation for government workers, he said, while the state's economy had been hollowed out over the past few decades. Much of central Illinois' economic activity, he contended, had become elder citizens spending on local health care services. Hardly the sort of exportable, growth industry that would sustain a base of younger state citizens for the future.

At least there's the hope that, with the expected failure of Illinois' tax hikes to solve its financial problems, even the state's apparently liberal-leaning voters will eventually replace their state-level politicians with ones who will start slashing union-friendly spending.