The Pew Center on the States estimates $1 trillion of underfunding for the pensions and health benefits of states.Economists Robert Novy-Marx of the University of Rochester and Joshua Rauh of Northwestern University have higher totals for pensions alone; their gaps are about $3 trillion for states and almost $600 billion for localities.Underfunded health benefits for states and localities together are reckoned by different studies between $500 billion and $1.5 trillion, report economists Robert Clark and Melinda Morrill of North Carolina State University. Whatever the ultimate costs, they threaten future levels of public services. The generous benefits encourage workers to retire in their late 50s or early 60s after 25 years of service. The health benefits typically provide coverage until retirees qualify for Medicare at 65.To pay for unfunded benefits, either government services must be cut or taxes must be raised. _Samuelson
Here is the public union problem in a nutshell: Union members lobby vociferously for untenable wages and benefit packages. Greedy politicians willing to accept bribes to get reelected, go along. On any threat of reduction in benefits, union organizers get out the vote with massive fear-mongering campaigns promising ruin if they do not get what they want. At election time unions donate massively to candidates willing to back union sponsored agenda. Over time, school boards, city halls, and legislative bodies in general get packed with politicians accepting bribes (campaign contributions) from the unions. _Mish
Like homeowners, states and cities splurged on debt and found inventive ways to get around borrowing limits to finance projects they couldn’t pay for otherwise. And recently the federal government encouraged investors to pour their money into the coffers of these less-than-creditworthy borrowers.Now some of those investors, like the few lonely mortgage-industry short sellers in 2005–06, have started betting against the borrowers. Time reports that some of them “are jumping into the credit default swap market to bet against cities, towns and states.” A CDS is an insurance contract that protects a bond holder against default. But there’s a difference: You don’t necessarily have to be exposed to the underlying bond to buy a CDS. They can be bought or sold, and are priced depending on the market’s perception of bond default probability. If the risk increases, it is likely that the demand for CDSs will too, leading to an increase in their price. Brian Fraser, a partner at the law firm Richards Kibbe & Orbe LLP, told Time, “The spreads on CDSs have been growing, and the dollar amount of CDSs on municipals has grown in the last year. That’s a clear warning sign that people are effectively starting to short the muni market.”The state and municipal debt crisis could culminate in a request for the third near-trillion-dollar bailout of the last two years. That much federal borrowing on top of the current debt could very quickly have an impact on interest rates and on the dollar. And at that point, we can just forget about the recovery. _ReasonMag
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