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Ponzi Schemes and Public Pension Funds: The Reckoning is Coming

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.

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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.

Minorities might be saving America in more ways than one.

The story is in all the major papers today. For the first time in American history, the majority of births are to non-Hispanic whites. I have already commented recently on how non-whites are preserving Christian orthodoxy as well as traditional Christian teachings regarding marriage. Slate notes that African Americans are viewed all around as the key voting group in the effort to reestablish traditional marriage in Maryland. The conservative National Review quotes one black pastor, Dwight McKissic, commenting on Obama’s decision to support same-sex marriage, “The moral impact of this decision is equal to the military impact of al-Qaeda when they attacked the Twin Towers on 9/11.”

Reverend McKissic notes all the problems the black community faces: “divorce, out-of-wedlock birth, absentee fathers.” Same-sex marriage will exacerbate the problems, he argues. It will have a “devastating effect on families.” The president “slapped history in the face” by “going against natural law.”

But non-whites are having just as great of an impact on American demographics. In an age when industrialized countries around the world are struggling with the economic and fiscal implications of plummeting birth rates and aging populations, immigrants are maintaining America’s demographic health. As the New York Times puts it,

the fact that the country is getting a burst of births from nonwhites is a huge advantage, argues Dowell Myers, professor of policy, planning and demography at the University of Southern California. European societies with low levels of immigration now have young populations that are too small to support larger aging ones, exacerbating problems with the economy.

“If the U.S. depended on white births alone, we’d be dead,” Mr. Myers said. “Without the contributions from all these other groups, we would become too top-heavy with old people.”

The need for a vibrant economy to support the growing portion of the federal budget that goes towards health care, support for retirees, and the safety net has never been greater. Liberals often complain that America spends far too much on defense and far too little on care for the needy, but according to a vivid graph posted on NPR (which you should definitely look at), spending on defense has been steadily falling – from 51.7% in 1962, to 29.7% in 1987, to 22.6% in 2011 – while spending in health and welfare has been rising almost as dramatically (For instance, in the same years support for the poor has increased from 5.8% to 7.2% to 12.6%; Medicare has risen from 0 to 13.1%).

Someone has to pay for all of this of course, and that burden falls on the youth of the future. For that reason, a high birthrate among minorities is very good news, although one wonders about the social tension that would be created if the United States found itself in the situation of having a predominantly non-white work force pay for the comfortable retirement of mostly white senior citizens.

Whatever the case, one would hope that a healthy immigrant ethic would help Americans give up their seeming belief that they should receive everything from the government while paying nothing. As George Will vividly portrayed the problem in a recent Washington Post column:

Campaigning recently at Bradley University in Peoria, Ill., Romney warned students about their burden from the national debt, but when he took questions, the first questioner had something else on her peculiar mind: “So you’re all for like, ‘Yay, freedom,’ and all this stuff and ‘Yay, like, pursuit of happiness.’ You know what would make me happy? Free birth control.”

If this is how American youth think these days, we are in trouble. The burden they (or we) are facing is far greater than most people realize.

Calvin thought your church should devote half of its wealth to the poor. Does it?

One of Calvin’s hobby horses often ignored by modern conservative Christians was his sharp criticism of the way in which churches, clergy, and Christians used their wealth. In the Institutes (4.4.6) Calvin wrote the following:

You will frequently find both in the decrees of synods and in ancient writers that all that the church possesses, either in lands or in money, is the patrimony of the poor. And so this song is often sung there to bishops and deacons, that they should remember that they are not handling their own goods but those appointed for the need of the poor; and if in bad faith they suppress or waste them, they shall be guilty of blood. Accordingly, they are admonished to distribute these goods to whom they are owed, with the greatest awe and reverence, as if in God’s presence, without partiality. (emphasis added)

Does your church view its property as the “patrimony of the poor”? Calvin thought that pastors who could support themselves without the provision of the church should do so, for “if they receive anything belonging to the poor, [they] commit sacrilege.” To be sure, he thought the church should provide for all of the needs of those who “work for the church.” (4.4.6) But he limited the total funds appropriate to this end to roughly one fourth of the church’s revenue. In addition, another fourth could go to the “repair of churches and other buildings.” (4.4.7)

What did he think should happen with the rest? It should go to the poor. As he puts it, in the medieval era, to curb the greed of the clergy, “canons were enacted, which divided the income of the church into four parts: one for the clergy, another for the poor, a third for the repair of churches and other buildings, a fourth for the poor, both foreign and indigenous.” The latter fourth, Calvin admitted, was to be given to bishops, but that was for the purpose of their showing hospitality to travelers, prisoners, and other needy persons. (4.4.7) Calvin concludes, “To sum up, what the same man [Ambrose] said in another place we see to be very true: ‘Whatever, then, the church had was for the support of the needy.’ Likewise: ‘The bishop had nothing that did not belong to the poor.'” (4.4.8)

So how does your church budget match up to this standard? Calvin insisted that the church’s responsibility to the poor was not a marginal part of the church’s life. God appointed one of the church’s four offices for the care of the poor, and Calvin stressed adamantly and repeatedly that the deaconate was no secular office: “it was not secular management that they were undertaking, but a spiritual function dedicated to God.” (4.4.5) In other words, the way in which the church uses its wealth is not a lesser matter. It is a direct expression of the kingdom of God in our midst.

We often think of the giving of offerings in church as giving to God, and rightly so. But we should not forget that often the New Testament talks about the church’s giving simply in terms of giving to the poor. When we think of pastors as those who cannot earn a living because they have devoted their lives to the church, pastors are rightly seen as being included in this category. What the church does with its wealth, then, should be a partial fulfillment of Jesus’ command to “sell your possessions, and give to the needy” (Luke 12:33), in imitation of the early church, which did just that (Acts 2:44-45). If anything, the New Testament is even more radical in its teaching on this matter than Calvin was.

Fiscal conservatism seems to work for Germany and social justice needs to work

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.

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