Tag Archives: political economy

The Taxpayer and Union Pensions

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Here’s the state of the Pension Benefit Guaranty Corporation, a Federal government entity set up to insure union-negotiated pension plans.

Overall, the PBGC has total assets of $90 billion and total liabilities of $152 billion.

The multiemployer subset of that, the section of the PBGC that “guarantees” union-sponsored pension plans to which groups of companies belong, has total assets of $1.8 billion and total liabilities of $44 billion.

The single employer subset, the PBGC section that “guarantees” the pensions of individual companies, has total assets of $88 billion and total liabilities of $107 billion.

The reason for this is that what are being insured are not just any old pension plans, but defined benefit pensions in particular. Recall that these are the plans that guarantee a pensioner a set amount of money every month for life, regardless of how much money the pension plan actually has in it. Somebody has to make up the difference and make the payments, or the plan goes bust, and the pensioner gets nothing. With the PBGC, that guarantor is you and I: us taxpayers.

Of course, the PBGC proclaims that it has never taken a penny of taxpayer money, and that’s true. But the PBGC has never been in worse shape, either, and it’s deteriorating rapidly. Last year, the PBGC was in the hole only $36 billion, compared to this year’s $63 billion pit.

The PBGC also proudly proclaims its mission is to

encourage the continuation and maintenance of private-sector defined benefit plans.

Fine. Congress, as part of the budget bill it will pass next winter, should cut us taxpayers out of this corporation altogether. Congress should spin off the PBGC into a wholly private sector insurance corporation with no ties to the Federal government at all. Let the new company prosper or fail entirely on the private sector merits of encouraging and insuring private-sector defined benefit plans.

Pass the Bill, Anyway

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…and force President Barack Obama to sign it or to veto it. On the record. Either way, it shapes the 2016 elections, and if Obama actually signs, it’ll be good for the country.

Obama has said he’ll veto

a potential agreement to permanently enact tax breaks on business investments in new equipment and research and development as part of a plan that would renew dozens of expired tax breaks for businesses and individuals both.

Obama threatened his veto even before any such plan actually has been developed and floated. Because you have to veto the bill before you can find out what is in it, away from the fog of the bill writing.

Obama said, through his Deputy White House Press Secretary, Jennifer Friedman, that he would

veto the proposed deal because it would provide permanent tax breaks to help well-connected corporations while neglecting working families[.]

This, of course, is nonsense. Corporations don’t pay a lot of taxes, anyway; they pass what they pay on to their customers, including working families and unemployed families, in the form of higher prices. Contra Obama, the best way to help families is to leave more money in their pockets through lower taxes and to put more money in their pockets by getting government out of the way of the economy, so that growth can occur, hiring can occur, pay raises can occur.

Pass the bill, and force Obama to do something besides talk.

Collective Social Action

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A practical lesson from the People’s Republic of China on societal collective action.

When a fabric company called Jiangyin Xueyuan Textile Co collapsed, the troubles soon cascaded through other firms in this mill town.

A machinery maker, paper producer, manufacturer of faux-wood flooring and textile maker had one thing in common. They had promised, in the event of default, to repay the loans taken on by Xueyuan.

Indeed, they had all guaranteed each other’s loans, promising to pay the lender should one of them fail. Yet in the PRC’s current economy, they’re all having trouble making their own payments, and some have, as a result, refused to honor their guarantees of the others’.

Xueyuan’s court-appointed bankruptcy administrator, Zhang Fuliang, had this to say on the general practice:

[T]he big problem among private firms is that you owe me, I owe you, and in the end, if something goes wrong, then everyone gets tangled up together[.]

A policy outcome likely will look like this one: The People’s Bank of China, the PRC’s central bank, has lowered its benchmark lending rates, in the expectation that “private” and “commercial” banks will lower theirs commensurately and thereby stimulate the PRC’s economy. However,

banks likely will hesitate to lower the cost of loans for fear of hurting their profits.

Those profits aren’t only tied to the spread between the banks’ deposit interest paid and loan interest collected. They’re also tied to the likelihood the loans will be repaid at all. When an individual firm fails, the loan is lost, but the loss is limited to the single firm. When an individual firm fails, and the network of fellow firm guarantors default on their guaranty, the single loan still is lost, but now the bank must worry about the credit worthiness of each member of that network of guarantors. That’s going to hold up interest rates for the entire network as a hedge against the loan’s default—and as a hedge against default on more of the loans the network is guaranteeing for each other. And as a hedge against the loans made to other networks. And….

Hmm….

Illinois and Money

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The government of Illinois—a Democratic Party-controlled government at the time—reduced the cost of its public pension programs by passing a law reducing future cost growth, specifically, by reducing the size of future increases in pension payouts, without eliminating those increases.

Illinois’ Constitution has this to say on the matter of public pensions:

Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.

Illinois State Judge John Belz decided that the enacted law was a violation of Illinois’ constitution and struck the law.

The state of Illinois made a constitutionally protected promise to its employees concerning their pension benefits[.]

And

[I]t is clear that if something qualifies as a benefit of the enforceable contractual relationship resulting from membership in one of the State’s pension or retirement systems, it cannot be diminished or impaired.

Yet what “qualifies as a benefit” is a matter of statutory definition, a matter set by the Illinois’ legislature. Belz’ ruling indicates that these legislative definitions are, in fact, amendments to Illinois’ constitution—else those definitions must be changeable at legislative initiative, as the law Belz has struck did.

Among his objections is this:

The Act adds new language to the Pension Code….

Now the whole Pension Code, enacted by the legislature and not by constitutional convention, is suddenly a part of the State’s constitution.

Belz’ ruling goes on in that vein.

Belz also seems to have misunderstood what the legislature has done in concrete terms. As he clearly understands, the legislature acted to reduce the size of future pension payouts, changing, for instance, the way a (future) pensioner’s 3% annual increase in pension payment is calculated. The pensioner still gets an increase, though. A smaller increase, as any third grade pupil in arithmetic easily understands, still is an increase. A pensioner’s pension in no way is diminished or impaired, by the definition of increase.

Finally, a practical question: a State’s police powers are an assertion that the State can use its governance offices to act to protect public safety and welfare—to prevent a State from being unable to honor its financial commitments and defaulting altogether, for instance. Thus, if Illinois’ government is unable to act to pay its pension obligations, how does Belz propose those obligations be met?

The judge screwed up, and the State is appealing.

 

Belz’ summary judgment order can be read here.

Isn’t that the Point?

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From the subtitle of a Wall Street Journal article at the time I wrote this post:

Russian Foreign Minister Says Sanctions Are Aimed at Hurting Economy

It’d be a poor set of sanctions, even for the Obama administration, if they weren’t having the intended effect.

And he had this:

Russian Foreign Minister Sergei Lavrov on Saturday accused the West of “seeking regime change” in his country by imposing sanctions against Moscow.

Probably not, just behavior change. But if regime change did happen, what would be the downside for us? At worst, we’d just get another KGB has-been or another oligarch in charge. But the Russian government might get replaced by something better. It is, after all, on the far left side of the distribution curve for quality of governments.

The present Russian government has annexed the Ukraine’s Crimea and is occupying eastern Ukraine, and it has invaded, partitioned, and now occupies parts of Georgia. It’s conducted damaging cyber warfare against the Baltic States. It’s repositioning ground forces near the Polish and erstwhile Ukrainian border.

Back to that behavior change: get Vlad to withdraw from Ukraine, and maybe the sanctions will get lifted. Go one better: get him to withdraw from Georgia and pull back from the Polish and restored Ukrainian borders. See how that works, Sergei Viktorovich.