Sunday, July 24, 2011

Solving the Budget Crisis Through Theft


"If you steal from one author, it's plagiarism. If you steal from two, it's research."
- John Burke
"PlagiarizeLet no one else's work evade your eyes
Remember why the good Lord made your eyes
So don't shade your eyes
But plagiarize, plagiarize, plagiarize
Only be sure always to call it please 'research'"
- From "Lobachevsky" by Tom Lehrer.
The federal budget fight has been unusually acrimonious. On July 14, Obama walked out of the budget talks. On July 22, Boehner walked out of the budget talks. And throughout these talks, the American public has been walking out from both parties, and for good reason: neither party has been serious about tackling the debt crisis. Sure, both sides crow about how they have proposed drastic cuts, but these spending proposals are "cuts" only in a sense that is accepted no where else than Washington. What they mean by cuts is that they propose spending less than projected 2011 spending. Neither the "Cut, Cap, and Trade" proposal nor the president's most recent proposal would reduce 2011 spending to less than the previous year, even after adjusting last year's spending for inflation and population growth. The Republicans have been reluctant to really address the looming entitlement crisis. Congressional Democrats are even worse on this issue, threatening to block any entitlement program changes, while hypocritically complaining that the Republicans are too inflexible about taxes.

We need not worry the August 2 deadline, however. For starters, the default deadline is bogus anyways: the government need not default nor miss sending Social Security checks if the debt ceiling is not raised by August 2. But now that both sides have propped up this phony crisis, they will have to save face by coming up with some compromise before the "deadline". The bigger problem is that the compromise that the president and congress will likely fall far short of what is needed to reassure the rating services such as Standard and Poor's. They want to see creditable deficit reduction if U.S. government bonds are to retain their AAA ratings. If U.S. bonds are downgraded,
  1. Bond holders will be hurt; and
  2. The costs of U.S. borrowing will balloon.
So we may dodge the August 2 bullet, only to be hit with the S&P bond downgrade.

Dramatic action is required to prevent our bond rating dropping to AA. We need a deficit reduction plan, and fast. One effective approach would be to find a previous successful budget, and steal it. In short, we can solve our money problem by theft - not of money, but ideas.

I propose that the 2011 budget be based on the U.S. budget from 2000, one of the last budgets assembled before the 2 recent spendthrift administrations. This budget covered the basic government functions while spending less than the revenues collected. This budget was put together by a Democratic president working with a Republican congress - if they could do it, why can't we? When you adjust the 2000 budget for inflation and population growth, it comes out to $1,965,999 million. This would allow us to meet the S&P deficit reduction limits without taking the perilous action of raising taxes in a troubled economy. So one simple approach would be to adopt the 2000 budget, adjusted for inflation and population growth. This is the one sequel that we would all welcome.

Critics will immediately point out how the world has changed since 2000. We are now fighting 3 simultaneous wars, we have a slew of new agencies that have cropped up to fight the "War on Terror", a bunch of new Czars, not to mention ambitious new programs such as designing and building a whole new rail system. How could the 2000 budget cover these programs that did not exist 10 years ago? To this argument, I would reply that a large part of the reason we are in this mess is that we adopted expensive new programs without figuring out how to pay for them. We simply cannot afford all of them, so we need to prioritize. Given that we almost certainly cannot do both, should we engage in nation building in 3 middle east countries, or should we rebuild our own nation? Do we really need all these agencies that we were able to get along without for two centuries, and if so, could we pay for them by making cuts elsewhere in the 2000 prototype budget? If we really need the TSA, could we pay for it by eliminating the Import-Export bank or by cutting farm subsidies paid to millionaire farmers?

Real budget reform is possible. In fact, it is inevitable: the only real question is whether we fix the budget ourselves now or let our creditors decide how to fix it in the future. With the 200 budget austerity program, we can avoid default, avoid a credit downgrade, pay down the deficit, revive the economy, and then we can party like it's 1999.

Sunday, July 17, 2011

Should Someone Take the Fall for the Central Falls Pension Mess?

Prices slashed! Everything must go!
"Liberty means responsibility. That is why most men dread it."
- George Bernard Shaw, "Man and Superman" (1903)
"With great power comes great responsibility."
- Stan Lee / Steve Ditko / David Koepp, "Spiderman" (2002)
Many state and local governments are burdened with unfunded pension liabilities. Recently it was revealed that Central Falls, Rhode Island, a small, impoverished city, has a pension obligation of $80 million. This is more than the city could possibly pay, so Central Falls is looking into filing for municipal bankruptcy. The backup plan is to go into receivership.

I wonder if this rash of municipal pension problems is caused in part because there is no one individual who is legally liable when a municipality makes pension agreements that are not fully funded. Private company officials have done the "perp walk" for not funding their pension obligations. But who will go to jail for Central Falls' pension promises that cannot be met? The mayor? City councilors? The city's union contract negotiators? And who, if anybody, should go to jail for the California pension mess?

Please contribute your thoughts: who, if anyone, should be held liable if a municipality does not properly fund its pension obligations? And if we do not hold any one person liable, what is the best way to prevent future pension crises? Feel free to also discuss the mothers of all unfunded liabilities, social security and medicare.