Talk about Ponzi schemes. The New York Times published an excellent article yesterday on the terrible state of public pension funds across the country.
While Americans are typically earning less than 1 percent interest on their savings accounts and watching their 401(k) balances yo-yo along with the stock market, most public pension funds are still betting they will earn annual returns of 7 to 8 percent over the long haul, a practice that Mayor Michael R. Bloomberg recently called “indefensible.”
Now public pension funds across the country are facing a painful reckoning.
Local governments across the United States are something like $3 trillion short based on pensions and similar long-term commitments. Programs established based on the false assumption that the market would always perform at a high level are discovering that they have to choose between breaking those promises and pillaging the other services of government to pay them. But the first step in the process is honesty and openness about the dire state of affairs. And it turns out, that step may also be the most difficult:
Public retirement systems from Alaska to Maine are running into the same dilemma as they struggle to lower their assumed rates of return in light of very low interest rates and unpredictable stock prices.
They are facing opposition from public-sector unions, which fear that increased pension costs to taxpayers will further feed the push to cut retirement benefits for public workers.
Yes, there is an interest group here, and it is a powerful one. It just so happens that it is made up of the people who run our governments. And they do not want government to adjust its “laughable” and “absolutely hysterical” (Bloomberg’s terms) estimates of return because this will wake up the public to the real costs of these programs. Alexis de Tocqueville predicted this problem a long time ago. Thankfully, in states like Wisconsin the public-sector unions have discovered that for all the support of the mainstream media for their cause, the broader public gets what’s at stake. Governor Walker will probably win reelection on the back of his public sector reforms despite the best efforts of the unions to defeat him.
Walter Russell Mead continues to offer his excellent yet pragmatic analysis:
We’ve been warning readers for some time at Via Meadia that the politicians and union leaders in this country have been engaged in a systemic lie of epic proportions. How big and ugly is the lie?
Very. Private pension funds assume a standard of 4.8 percent return on their pension funds. As the Times notes, governments also use various tricky accounting loopholes not available to private companies to hide their liabilities. As far as we can make out at Via Meadia, if you tried to run a private pension fund the way unions and government-appointed trustees run public ones, you could go to jail for fraud.
But while lies can win elections, they can’t pay bills, and as the unsustainable commitments to municipal and state pensions come due, services will be cuts, taxes raised and benefits to retirees will be slashed as reality sets in.
America is fortunate enough to be able to watch the example of what happens when we avoid reality play out before our very eyes.
Today we are seeing what happens when Big Lies come unglued: all over Europe people who believed those sweet delicious stories politicians told them about their pensions and their futures are waking up to one horrible shock after another. Somehow we’ve come to the point in this country also where it’s considered “liberal” and “progressive” to lie like rats to the voters and to government workers about how solid their futures are.
Where there is denial about the problem, however, it is not the government employees or the middle class who will suffer most. It is precisely those that a liberal safety net is designed to protect.
Listen up, blues. The mother of all wedge issues is knocking on your door: when the pension crunch comes, who will you throw to the wolves: the retirees, the unions and the producers of government services — or the schoolchildren, the poor and the consumers of government services?
We should care about this not primarily as an instance of the age-old American struggle between the right and the left, but because when things go bad, it is the poor and the weak – not the guilty – who are likely to suffer most. We can all pad our coffers as much as we want, but when the bill comes due and we are left with our false promises and commitments, we are accountable not only for our lies and our abuses, but for all the tragic effects that bankruptcy and default brings upon those who can afford it least. These are the people government was ordained to protect. As citizens, it is our responsible to keep it accountable.
The reason money is so powerful in American politics is not because we don’t regulate it properly. It’s because of big government.
Virtually everybody agrees that money is far too influential in American politics and policy. No one really likes how much of a role money plays in primaries and electoral campaigns, and people are even more disgusted at the way in which lobbyists for a myriad of interests and organizations shape and muddle the work of both the legislative and executive branches of the federal government. For this reason, one constantly encounters calls for campaign finance reform, or for greater restrictions against lobbyists. Defenders of free speech are rightly wary about this. How can one legitimately prevent someone from using his resources to speak as loudly and as clearly as possible on an issue of concern? For all the complaints of the politicians and pundits, the Supreme Court was right to overturn campaign finance reform.
In fact, the power of lobbyists is probably a much greater problem than that of campaign finance. And when Barack Obama was swept into the White House amid an inspiring call for change we can believe in, he promised to deal with it. As the Washington Post points out,
More than any president before him, Obama pledged to change the political culture that has fueled the influence of lobbyists. He barred recent lobbyists from joining his administration and banned them from advisory boards throughout the executive branch. The president went so far as to forbid what had been staples of political interaction — federal employees could no longer accept free admission to receptions and conferences sponsored by lobbying groups.
Unfortunately, Obama has not kept his pledge.
The visitor logs for Jan. 17 — one of the most recent days available — show that the lobbying industry Obama has vowed to constrain is a regular presence at 1600 Pennsylvania Ave… The White House visitor records make it clear that Obama’s senior officials are granting that access to some of K Street’s most influential representatives. In many cases, those lobbyists have long-standing connections to the president or his aides. Republican lobbyists coming to visit are rare, while Democratic lobbyists are common, whether they are representing corporate clients or liberal causes.
The thing is, this isn’t really Obama’s fault. The reason why lobbyists (and money) have grown to play such a decisive role in American politics and policy is not because of lack of regulation; it is because government is so big. Simply put, the stakes are so high in Washington D.C., that individuals and organizations with money simply will find a way to influence what goes on there. It will be impossible to stamp that out.
I’m not making this up. In their fascinating book Winner-Take-All-Politics Jacob S. Hacker and Paul Pierson describe how money came to play such a big role in American politics, arguing that Washington has turned its back on the middle class and placing the blame on both the Republican and the Democratic parties.
Hacker and Pierson point out that in 1970 money was not nearly the factor in American politics that it has become. What changed? From the presidency of Franklin D. Roosevelt to that of Lyndon B. Johnson, labor unions allied with the Democratic Party met considerable success in having their agenda regarding a variety of reforms enacted in Congress. Government grew significantly during this time, as the New Deal and the Great Society expanded its commitment to caring for the poor, labor, and the middle class, and to manipulating the economy to ensure constant prosperity and full employment. The 1960s were a golden era in terms of American equality and the progress of the middle class. Wages were high, jobs were secure, virtually everyone was happy.
Unfortunately all of this progress was built on a foundation of regulation and economic manipulation that was taking its toll on business, industry, and finance. It was only during the mid 1970s – when the economy was beginning to feel the inflation and economic strain of the policies of the previous decade – that leaders in these sectors realized the importance of organizing to defend their interests. Largely successful in derailing the agenda of the Carter administration despite solid Democratic control of all branches of government, these forces orchestrated tax cuts and massive deregulation under President Reagan. They stymied modest reform efforts and furthered deregulation under President Clinton while increasing their control over both the Republican Party and the conservative wing of the Democratic Party (represented by Bill Clinton and Al Gore, as well as John Kerry and Charles Schumer).
Hacker and Pierson’s reading of this story leans left. They fail to take seriously the popular conservative backlash against these developments as represented by the Tea Party (although the Tea Party admittedly emerged as a significant player in American politics only after this book was written), focusing almost entirely on the Obama administration as the hope for the middle class.
Nevertheless, Hacker and Pierson are surprisingly silent on the lesson their own story tells. The mobilization of business, finance, and industry – which they blame for the role of money in American politics – was largely a reaction to the growth of the federal government between the 1930s and 1960s into areas it had once left unregulated. The emergence of money-power in that sense is a defensive reaction to big government rather than an orchestrated attempt to use government to advance moneyed interests.
This is not true simply for matters relating to the economy. It is worth noting that the Christian Right emerged as a powerful political force – and Evangelicalism became disturbingly politicized – at just the same time. Why? Because government was extending its power into areas Evangelical Christians once thought untouchable, and because the growth of government meant that far too much was at stake to leave politics to the world. Here too is an example of how the politicization of American society corresponds directly to the growth of American government.
The question is, given the growth of government, could things have turned out any other way? Power breeds struggle and corruption. When you have a centralized government spending trillions of dollars to regulate and manipulate the largest and most dynamic economy in the world, people with money will find a way to make sure that what that government does is compatible with their own interests. You can try to stamp out the problem in one place, through one set of laws, but the interests will quickly find another pressure point.
Most Americans – whether Democrats or Republicans – agree that money should not be so influential in American politics. This is a point of basic consensus. It would be helpful if we could start having a conversation about the way in which our growing government has made this inevitable. Big government has some advantages, but it also carries tremendous costs which Americans have never really taken seriously. It’s about time we started talking about it.
I am not an economist nor do I have any expertise whatsoever in the world of finance. My comments on these matters should therefore be taken worth a grain of salt. But I can’t help but notice how well Germany is doing compared to the rest of Europe. Americans love to compare themselves with Europe, particularly when discussing the merits of various social positions or of the welfare state. But within Europe itself, fiscally conservative Germany is the only thing keeping the Eurozone from recession.
There is all sorts of talk about the longstanding tension between the German and French visions for the EU. And Francois Hollande, the new French president, has vowed to confront Angela Merkel and the German “austerity” model by promoting public spending driven “growth” as a way out of the current economic crisis. But why should anyone listen to the French? France is not doing well at all, and if current trends continue, it will go the way of Greece, Spain, and Italy. True, the United Kingdom is an example of the reality that austerity bites in the short-run too. But in the long-run it seems quite clear which model works best.
One thing that is clear is that economic prosperity matters. We could have the most just social welfare system in the world on paper, and if the country cannot afford it and the economy cannot sustain it, the poor will be much worse off. That doesn’t mean we should cast off the poor and turn to laissez-faire economics. But it does suggest that what works matters just as much as what sounds right. This is one of the reasons why American Christians are rightly skeptical when their pastors claim the authority to speak on fiscal and economic policy. This is clearly an area in which human experience and wisdom – natural law if you will – has significant authority. Rather than shout economic and political orthodoxies at one another, and use the pulpit to do so, we should work together to figure out what works best, and what works best for all.