Tag Archives: Boomergeddon

An Aging Economy Is a Sluggish Economy

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Source: “The Effect of Population Aging on Economic Growth, the Labor Force and Productivity.” (Click for more legible image.)

by James A. Bacon

Why is U.S. economic growth slowing? Perhaps for the same reason economic growth is slowing in Europe, Japan and other advanced economies — our populations are getting older. That was a major theme of my book “Boomergeddon,” written in 2010, when I accurately predicted that U.S. economic growth would fall short of the optimistic expectations in U.S. eonomic and budget forecasts. I don’t pretend I got everything right — I failed to foresee the fracking boom that ignited the U.S. energy boom, and I did not anticipate how quantitative easing would goose goosing the economy by inflating asset values. But I was pretty certain about one thing — the U.S. population was getting older, and an older population would dampen economic growth.

That’s not a controversial view among the handful of economists who study the impact of aging. It just isn’t appreciated by the broader economic profession, the geniuses who have consistently overshot economic growth forecasts over the past decade, or a political class that has shown no willingness to put entitlements and debt accumulation on an economically sustainable basis.

Now comes a study, “The Effect of Population Aging on Economic Growth, the Labor Force and Productivity,” by Nicole Maestas, Kathleen J. Mullen, and David Powell, and published by the National Bureau of Economic Research. Their disturbing conclusion: “We find that a 10% increase in the fraction of the population ages 60+ decreases the rate of GDP per capita by 5.5%. … Our results imply annual GDP growth will slow by 1.2 percentage points this decade and 0.6 percentage points next decade due to population aging.”

Extrapolating from differential rates of aging and economic growth in the 50 states, the authors see a number of forces at work. Slower growth in the workforce accounts for about one-third of the effect. The rest comes from slower productivity growth from an aging workforce, with possible spillover affects among younger workers.

The fraction of the United States population 60 or older will increase by 21% between 2010 and 2020, and by 39% between 2010 and 2050. This dramatic shift in the age structure of the U.S. population — itself the effect of historical declines in fertility and mortality — has the potential to negatively impact the performance of the economy as well as the sustainability of government entitlement programs.

We can argue over the impact of taxes, regulation, quantitative easing, fiscal policy, and most will retreat into our respective ideological corners, agreeing upon nothing. But the aging of the population is an undeniable phenomenon that transcends partisan analysis. And there is consensus in the economic profession that once a tipping point is reached — as it has in many countries — the economic impact is negative. The U.S. and other aging countries which once had the demographic wind at their back now are leaning into a gale. None are likely to return to the economic growth rates of the early post-World War II era.

Virginia impact. Sadly, the paper did not provide a state-by-state breakdown for aging. However, two maps in the appendix (including the one above) show that Virginia’s population aged more rapidly than that of most other states between 1990 and 2000, and again between 2000 and 2010. One could conjecture that the aging effect has dampened economic growth here somewhat more than the national average. There may be more to blame for Virginia’s economic sluggishness than federal sequestration or flawed public policy.

No one can foresee the future, but if there is one aspect of the future that is predictable with some reliability, it is a nation’s (or state’s) demographic profile. And if there’s one thing we can say with some certainty, it is that economic growth will be slower. Our elected leaders should bear in mind as they discuss expanding entitlements and taking on more debt. No miraculous resurgence of economic growth will make it easier to pay our bills.

When the political class ignores this advice, don’t say I didn’t warn you.

This Is What a Fiscal Meltdown Looks Like, IV: The State Intercepts Your Aid

Melt down

Melt down

by James A. Bacon

The City of Petersburg’s fiscal meltdown is reaching a new crisis stage as an Oct. 1 deadline nears to make a $1.4 million payment to the Virginia Resources Authority (VRA), a state funding source for local infrastructure financing.

In remarks to the Richmond Times-Dispatch following a House of Delegates Appropriations Committee hearing yesterday, Secretary of Finance Richard D. “Ric” Brown said that the state might have to “intercept” state aid to Petersburg in order to meet principal and interest payments on VRA bonds backed by the moral authority of the state.

The General Assembly had convened the session to discuss how to build a firewall between Petersburg and the rest of the state. The city faces a $12 million budget deficit this year as well as estimated backlog of $19 million in unpaid bills.

“I just hope we are not heading down this road where we are digging the state into a hole,” said Del. R. Steven Landes, R-Augusta, chairman of a task force formed to study the impact of fiscally stressed localities on the state.

“We’ve got to figure out what change we need to make from a state’s perspective; we need to protect ourselves,” said Committee Chairman Chris Jones, R-Suffolk, as reported by the Richmond Times-Dispatch. “VRA debt can be an issue that can affect our bottom line. We cannot allow [a default] to occur. It’s very distressing when you see what has occurred, and hopefully [the city] will continue to try — in a very straightforward way — to deal with the issues.”

So far, Petersburg officials have yet to ask for state bail-outs. Secretary of Finance Richard D. “Ric” Brown and his office have lent considerable “technical assistance” in disentangling the city’s finances. But other than shaking loose some funds to help the city’s school system, the McAuliffe administration has taken no concrete measure to ease the city’s burden — and it likely would meet considerable resistance if it tried to do so.

City Council has been enacting draconian cuts to the budget in a desperate effort to stem the red ink. Whether it can find $1.4 million to pay the VRA is an open question. The state has a lot at stake.

Created by the General Assembly in 1984, the VRA has funded more than $7 billion in investment in 1,000 projects across the Commonwealth. According to the VRA website, this is how the program works:

VRA sells bonds and then loans the proceeds to local governments to finance eligible infrastructure projects. The borrowers’ interest rates are based on the rates that VRA obtains in the public bond market. Based in part on the use of the Commonwealth’s moral obligation, VRA’s high credit ratings typically result in interest rate savings for localities. This translates to reduced rates, taxes and user fees for borrowers’ constituents.

Come Oct. 1, if Petersburg fails to make its $1.4 million payment to VRA, absent state intervention, the authority will be unable to make the interest and principal on the bonds sold to investors on Petersburg’s behalf. Those bonds are backed by the “moral authority” of the state, which does not legally obligate the state to made good, as it would if the bonds were backed by the full faith and credit of the state. But a failure to back Petersburg’s payment would damage the state’s moral authority, thus undermining the entire premise of the VRA, harming other localities who might wish to borrow from it, and perhaps even calling into question the creditworthiness of other categories of bonds backed by the state’s moral authority.

Allowing a default on the VRA bonds is, in a word, unthinkable. But bailing out Petersburg would create a moral hazard. If the state bails out Petersburg once, then why not twice? If the state bails out Petersburg, then why not some other hard-pressed locality? Fiscal discipline could unravel.

Brown clearly understands the state’s quandary. Speaking to reporter Markus Schmidt after the hearing, the finance director said he might have to “take certain steps to intercept aid” from the state to Petersburg to make sure the payments are made. He acknowledged the hardship such an action would create: “In many cases for the city, that would make matters a lot worse for them.”

Boomergeddon Watch: Student Debt Relief

debt_reliefby James A. Bacon

It should surprise no one that Hillary Clinton is advocating free college tuition and  loan forgiveness for millions of students in an attempt to appeal to the Millennial vote. But the pandering of presidential candidates doesn’t begin to plumb the depths of perversity in the American political system. Now industry is joining the cause. Reports the Wall Street Journal:

Real estate agents, farmers, architects, startup lenders, lawyers, tech companies, benefits administrators — even podiatrists — have sent lobbyists to Capitol Hill over the past two years to push for legislation to forgive or at least reduce what workers and consumers owe on their student loans. … Many industries argue that freeing up student debt, even for well-paid workers, would help the economy.

The proposal with the most traction, says the WSJ, would allow employers to contribute up to $5,250 a year toward an employee’s student debt without it being taxed.

The bald self-interest of these industries is appalling. To be sure, forgiveness of all or part of the $1.3 trillion in student debt would stimulate consumer spending — Millennials could buy more houses, more cars, more consumer goods. But such measures would pass on the cost to taxpayers, and it would ratchet up moral hazard to unprecedented levels.

It is mind-numbing to me that anyone is considering massive debt relief that would reward the profligate and irresponsible while punishing those who dutifully paid off their obligations. But why not? After all, we bailed out Wall Street after the real estate crash. We bailed out Detroit. We hand out tax breaks to big business like John D. Rockefeller tossed out dimes. We allow affluent home owners to deduct mortgage interest from their taxes. Now Donald Trump wants to hand out billions for a day care entitlement. There’s no end to the goodies we dispense, so what’s one more multi-billion-dollar giveaway?

The blindness is breathtaking. Despite sequestration, despite the expiration of the Bush tax cuts, despite a zero interest-rate monetary policy, despite continued (though tepid) economic growth, the Congressional Budget Office says that the post-recession trend of declining deficits is over, and that spending shortfalls will continue to increase every year, pretty much forever, and so will the national debt.

projected_deficits

Adding another entitlement — a higher-ed entitlement — rather than addressing the underlying problem of rising college tuition will only accelerate America’s march to Boomergeddon. This cannot possibly end well.

The 5,000-Year Sovereign Debt Bubble

maelstromby James A. Bacon

Every financial bubble has its own unique characteristics. The late-1980s Savings & Loan Bubble was restricted mainly to anachronistic savings & loans institutions. The Internet bubble was limited mainly to tech stocks. The real estate bubble was tied mainly to mortgage finance. The common thread is that in each case, the powers that be convinced themselves that “this time it’s different” — and ridiculed the warnings of the doom sayers. Now we find ourselves in the midst of the sovereign debt bubble, the largest financial bubble in human history, and the story is the same. The experts tell us that everything is just fine and lampoon the critics as cranks and gold bugs.

This bubble is not limited to the United States. Indeed, other economies such as Japan, China and the European Union have been pushing the experiment of covering massive debts with massive credit creation even more aggressively than our own Federal Reserve Bank. But when the bubble bursts and the dominoes start toppling, they’ll eventually reach the United States. In a global economy, everyone is connected to everyone else in ways that are not always visible to policy makers.

In a Wall Street Journal op-ed today, James Freeman notes that there is no evidence in 5,000 years of recorded history of negative interest rates. Such rates are an innovation of modern central banks, and they take the world into uncharted territory. Writes Freeman:

However it ends, the deflating of the sovereign debt bubble may have us longing for the carefree days of the 2008 mortgage crisis. Internationally traded bonds amount to nearly $60 trillion, according to the Institute of International Finance. That’s about six times the mortgage debt outstanding for American homeowners. But those sovereign bonds are a mere fraction of the liabilities carried by the world’s governments. If you count political promises to support retirees, patients and others, the obligations are hundreds of trillions of dollars higher. …

The sovereign debt boom certainly has its share of liar loans. European countries routinely violate pledges to limit larger budget deficits. As for documentation, has anyone found a thorough and comprehensible description of government accounting?

And then there’s China, arguably in a league all its own when it comes to financial opacity. I suspect China is one big Enron, kept afloat by unfounded confidence in its financial integrity. When that confidence starts eroding, watch out. The financial collapse will be spectacular, and China’s economy is big enough to send shock waves around the world.

It’s impossible to predict how the global debt bubble will play out. In the early stages, the U.S. actually might benefit as capital flees to safe havens. Insofar as the dollar is regarded as less un-safe than other currencies, U.S. Treasuries might stay strong. But the unwinding of the global sovereign debt bubble will be unpredictable, creating wreckage in ways that no one today can imagine. There will be secondary and tertiary effects as nation states pursue protectionist policies to blunt the damage.

Many readers are confident, no doubt, that the “experts” who didn’t foresee the real estate crisis know what they’re doing this time. And perhaps, after 5,000 years of recorded human history, we finally have perfected a fiscal-monetary perpetual motion machine that allows us to spend and borrow without negative consequence.

If you don’t believe that fairy tale, however, the only sane course for Virginians is to pursue is a contrarian policy of eschewing debt, building reserves and strengthening the balance sheets of governments and public institutions in preparation for the travails to come. That’s why I obsess over the Virginia Retirement System pension crisis, the Petersburg fiscal meltdown, the decaying finances of other small jurisdictions, the unsustainable increase in college costs and the exposure of higher-ed institutions to declining enrollments, land use policies that drive up the costs of utilities and public services, the overbuilding of transportation infrastructure that governments cannot afford to properly maintain, and the mal-investment of public dollars in futile economic development projects. We are part of the global problem. I don’t want Virginia to be part of the global calamity.

This Is What a Fiscal Meltdown Looks Like, III: Eating the Seed Corn

petersburg_visitor_center

Petersburg Visitor Center

Poor Petersburg. Financial consultants are advising City Council to save $300,000 this year and $400,000 next year by shutting down three museums and two tourism centers as part of a draconian plan to slash a projected $12 million budget deficit and work down a $19 million backlog in unpaid bills. (Read the details in the Richmond Times-Dispatch.)

City Council has not voted on the measure, but it has little choice in the matter. Its budget predicament is so catastrophic that it has no choice but to suspend all but the most essential services. That means the city is undermining its own economy. Fewer tourist destinations = fewer tourists = less business and tax revenue.

Sad, really sad. Let Petersburg be an object lesson to all. Never, never, never let your city or county to get into the same situation.

— JAB

This Is What a Fiscal Meltdown Looks Like, II

Looks like you'll have to repair it yourself, boys.

Looks like you’ll have to repair it yourself, boys.

by James A. Bacon

The fiscal chickens are coming home to roost in Petersburg, which has racked up some $19 million in unpaid bills and is on track to run a $12 million deficit this year. The city is learning what happens when vendors are scared of not getting paid.

Yesterday, we heard that Central Virginia’s regional waste management authority was threatening to suspend the city’s garbage pickup and recycling services due to $632,000 in unpaid bills. Today we read that one vendor has repossessed $390,000 worth of new firefighter breathing apparatuses, while another, owed about $1 million, has terminated a contract to service police cars, fire trucks and other city vehicles.

First Vehicle Services Inc., a national vendor, claims to be owed $1.1 million, according to the Richmond Times-Dispatch. The city asserts that it owes only $844,000. The contract was terminated in April at the city’s request, city officials say, to move all repairs in-house as a budget efficiency.

Meanwhile, Richmond-based Fire Protection Equipment Co. repossessed 53 new breathing apparatuses purchased through a Federal Emergency Management Agency grant. Under the grant, FEMA would pay 90% of the $568,000 tab while the city paid 10%.

According to Deputy Fire Chief Brian Sturdivant, the FEMA funds arrived in two payments, but he doesn’t know what happened to the money:  “That’s a question for the city manager. We have followed the requirements of the grant, but once the paperwork leaves the fire department, it heads straight to City Hall.”

The new breathing apparatus replaced older equipment that was suffering wear and tear. Last month, older equipment failed for two firefighters, one of whom had to be treated for smoke inhalation.

Meanwhile, the fire department has suspended annual physicals for its firefighters due to an unpaid balance with its contracted physician.

Bacon’s bottom line: Now that vendors understand Petersburg’s perilous fiscal condition, they’re stampeding toward the exits. As they try to limit their exposure, one piece of bad news feeds the next. It’s ugly, and it’s terrifying, and it’s putting Petersburg citizens and employees at risk. But this is what happens when a local government experiences a financial meltdown.

Hopefully, Petersburg will serve as a sobering example for others. Virginians need to move beyond the gawking-at-the-fiscal-car-wreck phase and start asking serious questions. Is Petersburg a one-off situation, or is it suffering from systemic challenges that potentially threaten other Virginia localities? If other localities are in earlier stages of financial collapse, is their predicament due to managerial ineptitude, flawed policies, or structural issues beyond their ability to control? What can be done to ensure that similar meltdowns don’t happen to anyone else?

Playing the Racism Card… Just Pathetic

howard_myers

Mayor Howard Myers. Photo credit: WTVR

In other Petersburg-related follies… Petersburg Mayor W. Howard Myers has told fellow City Council members that the attacks on his leadership are motivated by racism and partisanship.

“I will as a representative of Ward 5 and as major duly to my right hand, serve the public without blemish and from scare tactics from a few racists[s] and Republican supporters,” he wrote in an Aug. 11 email that he asked the city clerk to share with other council members, reports the Richmond-Times Dispatch.

Dude, you presided over the worst financial meltdown of a Virginia locality probably since the Great Depression and you think your critics are motivated by racism? Under your watch, the city is facing a current-year budget gap of $12 million (nearly 20% of General Fund revenue) on top of $19 million dollars of unpaid bills, and you have conceded in unguarded remarks that you had no idea how this all happened, yet you expect anyone to believe that the people who are unhappy about it are being partisan in their attacks?

Do you know how totally pathetic that is? Not only pathetic, but in this racially polarized era, wildly irresponsible?

As I understand from the news coverage, Petersburg’s five City Council members are all African-American while many of the citizens who get irate and engage in shouting matches with you during council sessions are mostly white. Yeah, I suppose one reason that they’re argumentative is that they’re racist. But there’s another possible explanation: They’re pissed off at how you ran the city into the ground!