Tag Archives: political economy

Fiduciary Duty

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State and local governments are at it again.  Or still.

The value of investments by public pension funds declined last quarter, widening the gap between what these funds say they will earn and what they actually earn.  Pension fund managers—especially government pension fund managers—must make annual “estimates” (they’re actually politically self-serving pie-in-the-sky claims) of the market returns they expect to make on the funds under their nominal care.  These WAGs determine the amount of money “the government that is affiliated with the pension fund must pay into it”.

(Aside: notice the directionality of that emphasis.  The state or local government (and the Federal government with its own public pension funds) is an affiliate of the fund; the fund is not a benefit provided by the government.  Which controls what, now?)

But these fiduciary money managers have been off, and not just occasionally.  They’ve consistently overstated the returns they claim they’ll get compared to the returns they actually get.  Currently, these worthies are claiming they’ll get a return of 7.25% on the taxpayers’ monies with which they’re entrusted and from which they’re promising the funds’ beneficiaries retirement payouts.  The reality is that these worthies have only been able to get 6.49% on average over the last 20 years.

That difference—0.0076%–that’s just chump change; who cares?  Us taxpayers should, and so should the funds’ retirees.  On a $1 million investment—a tiny fraction of many of state-level pension funds, but a significant part of most county- and city-level pension funds, the three-quarters of one per cent difference over those 20 years works out to a more than $4 million dollar difference.

Where’s the money?

How is this not a violation of fiduciary duty?

Taxes and Deduction Caps

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New York thinks it’s found a way around the tax reform act that cut Federal income taxes and capped the deduction taxpayers can take for State and Local Taxes (vis., State income and property taxes).

The idea, which became law last month, creates a new optional payroll tax that shifts the state and local tax deduction from individuals who can no longer fully take it to businesses that can.

However,

Employers are worried about compliance costs, interactions with union contracts, complexity across state lines, and the difficulty of explaining to workers how a plan that might lead to smaller pay raises still puts more money in their pockets.

In response,

The Wall Street Journal asked the 10 largest private employers in the state and in New York City, along with all Fortune 100 companies based in New York state, whether they would opt for the new payroll tax. None that responded said they would do so

Hmm….

Here’s an alternative idea; work with me on it, it’s simple and not very nuanced.  The State jurisdictions should simply lower their income and property tax rates.  That would bypass the SALT cap by making it less important (and as a happy side effect it would leave more money in the hands of the State’s citizens).

A Graph

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The Wall Street Journal had a piece on shifting bank deposits, and in that article was an interesting graph.  The article itself is worth the read, but the graph has, I think, wider import.

The graph illustrates the differing rates between what banks pay on depositors’ accounts compared to what money market funds pay, but look at the rates as indicated on vertical axis.  Plainly, these aren’t the heady days of the early ’90s when money market funds like Dreyfus’ Worldwide Dollar Fund was paying in the region of 6%-8%.  This graph, instead, illustrates the effect of the Fed’s continued suppression of market interest rates, even if they are—slowly—allowing their benchmarks to come up a bit.

Who cares about these rates, besides businesses? Folks on fixed income, folks illustrated by the stereotypical widows and orphans, who have no other sources of income.  More normal market interest rates are in the region of 3%-4%.

The Fed needs to finish getting out of the way.  But they’re not the only ones.  Dodd-Frank suppresses banking competition.  Too big to fail pits large banks against regionals and locals, but Dodd-Frank, by guaranteeing the big banks against failure, has eliminated competition among the big banks.  Congress needs to get rid of Dodd-Frank so all banks will compete against all banks.  And offer higher rates on savings and checking deposits.

German Defense Spending

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Recall that at the just-concluded summit between President Donald Trump and German Chancellor Angela Merkel, Trump urged Merkel to increase Germany’s defense spending.  Recall further Secretary of State Mike Pompeo’s subsequent meeting with NATO bigwigs in which he urged NATO members generally to increase their defense spending.

This table illustrates why Germany really needs to plus up its defense spending.

And this:

In February, the newspaper Rheinische Post cited an internal Bundeswehr paper stating that the army lacked the necessary basic equipment for its deployment in a NATO rapid reaction force.

Basic equipment: really basic, like tents for winter shelter, winter clothing, even combat basics like protective vests.

Germany’s Defense Minister has said she wants €12 billion ($14.6 billion) more than currently allocated to begin to bring the nation’s military establishment to a higher state of capability.  That’s barely a third of one per cent of Germany’s €3.4 trillion ($4.2 trillion) GDP.

I have to ask: is Germany serious about its own defense? Or does it really intend to continue to freeload off other NATO members—not only the US?

A Misunderstood Premise

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Greg Ip is worried about financial deregulation.  He opened his Wednesday piece with this statement:

Deep into an economic boom with asset prices near records is when you’d expect the US financial system’s guardians to tamp down risk-taking. Instead, federal regulators and legislators are doing the opposite—watering down, narrowing or declining to enforce rules passed after the financial crisis.

That’s his misunderstanding.  Government shouldn’t be interfering in any way with the business decisions of private enterprises operating in a free market economy.  Beyond that, while declining to enforce is a bad move for any reason other than enforcement resource allocation, there’s no bad time to reduce the burden of regulation when regulatory bodies have gotten out of control, as the CFPB (among others) has done, and when regulations themselves have gone beyond what is truly necessary, as 80,000 pages in the Federal Register indicates.

His concern?

They will stimulate lending and risk-taking at a time when the industry is lowering its own standards amid a near-record economic expansion.

Again, this isn’t Government’s job.  A free market, unfettered by excessive Government diktats, will do a fine job of “regulating” businesses whose risk-taking goes too far.  And the free market will do it in real time, not the weeks or months required to write a regulation or to complete an enforcement action within an existing regulation.