Tag Archives: Boomergeddon

Trickle-Down Economics Revealed

Who's laughing now?

Who’s laughing now?

by James A. Bacon

A generation ago, liberals mocked the so-called “trickle-down economics” of the Reagan administration, the idea that creating wealth for the rich would trickle down to the less affluent by way of expanded economic activity. While Reagan himself never used that term, his economic philosophy of tax cuts, tax-code reform and restrained federal spending did work as advertised. The 1980s were a period of great prosperity in which all income groups and ethnicities shared. The irony is that the trickle-down economics is a label more aptly applied to the policies of President Barack Obama. During O’s five years in office, the rich have gotten richer while the poor have fed on scraps. But you’ll never hear the term “trickle down” applied to Obama’s monetary policies.

There are many winners from the low interest rate policy implemented by the Federal Reserve Board with the full support of the Obama administration — most of them wealthy. One group is the “millionaires and billionaires” who benefit from rising stock and bond prices. Another is the owners of mortgages who have refinanced their debt at lower interest rates, in many cases saving hundreds of dollars a month. Needless to say, those with the highest incomes who can afford the most expensive houses benefit the most. The biggest beneficiary, of course, is the federal government, the world’s largest debtor, which saves on the order of $200 billion to $300 billion a year in interest payments on its $17 trillion debt. Finally, there is a modest trickle-down effect in the form of job creation in interest rate-sensitive industries like construction.

Of course, there are many losers, too — a mega-narrative that has gone largely unreported by the mainstream media. One group of losers is small business, which finds it more difficult to gain access to capital (it’s easier for banks to lend to the government). Another group consists of state and local governments whose retirement funds no longer generate the returns they were several years ago and now face chronic fiscal stress as they struggle to make up the difference. Fifteen years ago, for example, the Virginia pension system was fully funded. Today, even after major structural reforms, Virginia and its local governments still owe billions.

Then there are the little guys, especially the Baby Boomers who accumulated modest nest eggs to help support them in retirement. I have fulminated on this topic on and off since writing “Boomergeddon,” frustrated that the issue has drawn so little attention. But a Bloomberg News article published today in the Times-Dispatch (sorry, can’t find the link) shows the full dimension of the problem. Some key points:

A 65-year-old who wanted to pay for retirement with annuities tied to bonds needed 24% more wealth in 2013 than in 2005. National Bureau of economic Research President James Potera calculated in a research paper released in February. …

U.S. Treasury yields are at least 2 percentage points less than what they would be otherwise because of the Fed’s low-rate policies and stimulus programs, said William Ford, former Atlanta Fed president who wrote a 2011 paper estimating the impact on savers of monetary easing. That reduces their income by at least $280 billion annually, his analysis shows.

“The cost of low interest rates are being ignored,” Ford said. “It is killing savers, elderly savers who are living on life savings that have been conservatively invested.”

The Fed is engineering one of the greatest wealth transfers in American history — from the working-class and middle-class to the rich. The stock market has never been higher. Wall Street is doing better than ever. Bankers are still getting their big bonuses. And the little guys with meager savings are watching their pathetic little nest eggs lose value as inflation exceeds the income they can generate.

The extraordinary thing is that Obama then turns around and castigates the economic system for inequalities in wealth — the very same inequalities that he and former Fed Chairman Ben Bernanke (it’s too early to pin any blame on Janet Yellen yet) did to aggravate. Rather than undo the harm he has inflicted, Obama ask Americans to entrust him with even more power to “help” the poor and downtrodden. What I find mind-boggling is that this is not the delusion of a single man — it’s that liberals and leftists have so uniformly and gullibly bought into the delusion. They have become apologists for the very evil, income inequality, that they decry.

I suppose that’s inevitable. The political class always gravitates to “solutions” that entail the accumulation of more power for the political class. In Virginia, liberals’ idea is to expand the Medicaid entitlement, paid for the federal government with borrowed money. Why not? It’s “free” money. But it’s really not. Every billion dollars borrowed by the federal government requires more financial repression and more wealth transfer from savers to favored classes of borrowers, the foremost of which is the U.S. government. The favored classes do not include the poor and middle-class who rack up credit card debt, typically charges around 13% to 15%.

Liberals prattle about “social justice” and lobby for distractions like a higher minimum wage (which raises pay for some and destroys jobs for others) while aiding and abetting the trickle-down economics that leaves America’s less well-off with crumbs. The hypocrisy is almost too much to bear.

Someone Has to Worry about Tomorrow

Mercedies Harris

Mercedies Harris

Mercedies Harris, speaking to the Times-Dispatch, came as close as anyone to summing up what Virginia’s Medicaid debate is all about: “The system is crazy. They have got to stop worrying about what is going to happen tomorrow and deal with the people who need help today.”

The 53-year-old veteran and Waynesboro resident suffers from glaucoma, which, if it goes untreated, likely will lead to blindness. Harris has spent his meager savings, and he’s about to lose the house where he lives with his wife and a step-son who suffers from seizures. He applied for Medicaid but was turned down because he works and his income — $8.88 an hour — is too high. But he would qualify if Virginia expanded the program, as allowed by the Affordable Care Act and as proposed by Governor Terry McAuliffe and General Assembly Democrats.

With the federal government promising to pay 90% of the cost of Medicaid expansion, it is hard to tell someone like Harris — who served his country in the military and, to all appearances, remains a contributing member of society — that, no, we can’t help you. And the idea of letting him go blind, so that he, too, becomes a total ward of the state, seems the height of folly.

Republicans insist that Medicaid must be modernized before expanding the program. To buttress their argument, they have nothing comparable to the stories of real-live people like Harris, just bloodless numbers. That’s why they could well lose the debate and McAuliffe could well get his way. But that doesn’t mean the Republicans are wrong. Someone has to worry about tomorrow.

The nation and the Commonwealth of Virginia cannot continue expanding the social safety net forever. Even after an increase in the federal income tax and even after the budget cuts imposed by sequestration, the federal budget is on a trajectory to hell. Here is the Congressional Budget Office‘s take on the next 10 years:

After [2015] deficits are projected to start rising—both in dollar terms and relative to the size of the economy—because revenues are expected to grow at roughly the same pace as GDP whereas spending is expected to grow more rapidly than GDP. In CBO’s baseline, spending is boosted by the aging of the population, the expansion of federal subsidies for health insurance, rising health care costs per beneficiary, and mounting interest costs on federal debt. By contrast, all federal spending apart from outlays for Social Security, major health care programs, and net interest payments is projected to drop to its lowest percentage of GDP since 1940.

And that’s an optimistic scenario. It assumes that the economy continues to grow in a slow-but-steady fashion without recession for what would amount to the longest business cycle in U.S. history. The longest recorded business cycle lasted less than 11 years. The current business cycle is almost five years old — another 10 years would make it the Methuselah of economic expansions. History suggests that the U.S. will suffer another recession and revenues, prone to wild gyrations due to its highly progressive structure, will plunge. The question then will be, can a president and Congress facing a fiscal crisis in 2024 be entrusted to keep the promises made by the president and Congress in 2014?

Without major policy changes, according to the CBO, the situation in 2024 will be dire: The deficit will exceed $1 trillion in a non-recessionary scenario. (One can only speculate what the deficit would be in a recession; it could exceed the $1.6 trillion-a-year level seen in the dark days of the last recession.) Ten years from now the national debt will blow past $21.6 trillion, interest payments on the debt will run $880 billion yearly, and the Social Security trust fund will be roughly seven years away from exhaustion. While entitlements and interest payments on the debt now amount to 66% of the budget, they will consume 77% in ten years (again, assuming no recession).

If a recession occurs in the early 2020s, the fiscal landscape will be far worse than it was in 2008 when the economy cratered. The United States will be forced either to cut discretionary spending (which includes the vast regulatory apparatus of the federal government plus the military), cut entitlements or cut both. The only way to avoid that fate in 2024 will be to start cutting entitlements sooner, not later. Continue reading

Oops, Long-Term Health Spending Crisis Not Averted After All

miracleThere has been much prattling of late that the cost increases for health care are slowing, that the long-term cost curve for Medicare and in the United States is bending downward and that Obamacare may even deserve some of the credit. Liberals everywhere are hopeful that health care expenditures somehow, miraculously, will not drive the nation into fiscal Armageddon and that no major entitlement reforms are necessary. Meanwhile, contrarians have attributed the slowdown in health care spending to economic weakness caused by the Great Recession and paltry recovery.

Now comes a paper written by Amitabh Chandra, Jonathan Holmes and Jonathan Skinner, “Is This Time Different? The Slowdown in Healthcare Spending,” that says both viewpoints are off the mark. State the authors:

We identify three primary causes of the slowdown: the rise in high-deductible insurance plans, state-level efforts to control Medicaid costs, and a general slowdown in the diffusion of new technology, particularly in the Medicare population.

Moreover, they believe the slowdown, like a similar abatement in healthcare spending in the early 1990s, is temporary. “Our best estimate over the next two decades is that health care costs will grow at GDP plus 1.2 percent; lower than previous estimates but still on track to cause serious fiscal pain for taxpayers and workers who bear the costs of higher premiums.”

Boomergeddon… running right on schedule.

– JAB 

No More Medicaid as Middle-Class Entitlement

Woo! Hoo! Love that Medicaid!

Woo! Hoo! Love that Medicaid!

by James A. Bacon

When legislators debate expansion of Virginia’s Medicaid program in the 2014 session, they would do well to consider the long-term outlook for Medicaid spending. The program already consumes 17% of the state’s general fund budget, and that percentage will grow relentlessly as the population ages.

“Virginia faces an onslaught of frail and infirm elders as the demographic wave of aging baby boomers advances,” warns a new study, “The Index of Long-Term Care Vulnerability: A Case Study in Virginia,” written by the Center for Long-Term Care Reform and presented by the Thomas Jefferson Institute for Public Policy. “Virginia’s risk is greater than most. The commonwealth’s 142,000 citizens over age 85 will more than quadruple by 2050 at a rate (307%), seventh highest in the nation.”

One in five seniors will require long-term care of five years or more. The cost is phenomenally expensive, ranging from $41,000 yearly to live in an assisted living facility to $83,000 a year for a semi-private room in a nursing home (and even more for a private room).

Making the problem worse, Medicaid is evolving from a safety net for the destitute into a middle-class entitlement, as lawyers counsel seniors on how to avoid paying down their estates in order to qualify for Medicaid-funded long-term care. While Virginia eligibility rules are relatively strict, it has loopholes big enough to push a gurney through.  States the report:

Virginia Medicaid has to cope with sophisticated legal techniques used by elder laws specialists to artificially impoverish their relatively prosperous clients in order to qualify for Medicaid. These include the use of promissory notes, Medicaid-compliant annuities, life estates and savings bonds used to shelter or divest often hundreds of thousands of dollars.

The authors quote a Fairfax County Medicaid worker: “Medicaid is a program that pays for pretty much anyone who needs care and knows how to get it, not just for the poor.” Virginia is already a leader in shifting long-term care from institutions to home and community-based services and in using managed care to control costs — two reasons why, in addition to relatively strict eligibility standards, the Commonwealth has one of the most frugal Medicaid programs in the country.

Nevertheless, Virginia still faces horrendous budget increases. The report suggests that legislators reverse the trend of relying ever more heavily upon Medicaid to fund the population’s long-term care needs. The state should restrict Medicaid assistance to the truly indigent by tightening eligibility standards and requiring middle-class and affluent Virginians to fund their own care.

  • Asset spend down. Medicaid requirements should make Virginians spend down their assets before going on public assistance. The state could look at Virginia’s home equity exemption of $536,000, which is higher than most other states.
  • Home equity conversion. More than two-thirds of Virginians own their own homes, which have a median value of $254,600. Reverse mortgages allow people to extract equity from their homes while continuing to live in them. That money could be used to fund home- and community-based services privately.
  • Estate recovery. Where Medicaid does allow people to retain substantial wealth, at the very least their estates should reimburse the program for the cost of their care upon death. The feds haven’t published recovery data since 2005 (based on 2004 data) but Virginia recovered only $777,000 that year, or about 0.1% of expenditures. If it boosted recovery to the 5.8% benchmark in Oregon, it could collect more than $50 million a year.
  • Long-term care insurance. The state does offer a 15% state income tax credit for the purchase of long-term care insurance but it discourages the purchase of insurance by making Medicaid so easy to obtain. Tighter eligibility standards would encourage more people to take out insurance.

While the federal government will pay 90% of the cost of expanding Virginia’s Medicaid program to provide health care to the w0rking-age near-poor, the Commonwealth is in no position to accommodate an expansion of the program without reining in future long-term care liabilities. Taxpayers cannot afford to allow the program to morph into an entitlement for the middle class.

The Folly of Expanding Medicaid

Getting health care in emergency rooms stinks. But it's better than no health care at all.

Getting health care in emergency rooms stinks. But it’s better than Medicaid when Uncle Sam goes into default.

by James A. Bacon

As Richmond lawmakers ponder whether or not to expand Virginia’s Medicaid program, the center-left Commonwealth Institute has made another pitch for the program. Their paper, “Medicaid is Far from Broken,” creates plausible talking points to bolster anyone inclined to accept the federal government’s offer to cover the vast majority of the costs associated with the expansion.

Some 400,000 uninsured, low-income Virginians would receive medical coverage, argue Massey Whorley and Michael J. Cassidy. The Medicaid program is efficient; it has lower administrative costs than private insurance. Medicaid costs less than private insurance. Contrary to claims that doctors are deserting the Medicaid program, almost as many physicians are accepting new Medicaid patients as are accepting new patients with Medicare or  private insurance. And contrary to reports that the health outcomes of Medicaid patients differ little from those of the uninsured, Medicaid recipients are more likely to report good health than the uninsured.

“Medicaid isn’t broken,” write Whorley and Cassidy. “Far from it. Lawmakers should expand Medicaid to get hard-working Virginians the help they need.”

Medicaid may not be broken (the point is arguable, but I’ll grant it for the purposes in order to make a larger point) but the federal government very nearly is. The Medicaid push in Virginia comes just as the federal government is hobbled by a partial shutdown and facing default on the national debt. Even more strikingly, the much-anticipated roll-out of the Obamacare health-care exchanges, a companion initiative to the Medicaid expansion, has been stymied by a disastrously flawed IT system.

Is this really a good time to make 400,000 more Virginians dependent upon the fiscal solvency of the federal government?

Die-hard liberals will say yes. The political problems of the federal government are all the fault of evil Republicans, and if they just behaved themselves, there wouldn’t be a problem. Yeah, and if pigs had wings, they could fly. The Republicans aren’t going away. They might buckle under public pressure but they aren’t going away. They’ll come back and re-fight the same battle every time the debt ceiling need to be raised.

Even if the Republicans did go away — it is possible that the Dems will trounce the GOP in the 2014 election — the budget issues won’t. The nation still is saddled by a $17 trillion debt. Deficits still are running at more than $500 billion a year and, even according to the Obama administration’s forecasts, red ink will resume its rise as aging Boomer retire and cash in on Medicare, Social Security and Medicaid. The Social Security disability trust fund is almost empty — no one is even talking about a fix. President Obama has ignored the recommendations of his own Bowles-Simpson budget-balancing commission, and he has shown zero interest in reforming entitlements — except to expand them.

If federal finances are unsustainable over the long run and Uncle Sam faces eventual financial collapse — liberals won’t accept that premise, but most other Americans do — is it really a good idea to expand the population’s dependence upon the Medicaid program? Shouldn’t we be distancing ourselves from the federal government and reducing peoples’ dependence upon federal transfer payments? Here in Virginia, shouldn’t we be looking instead for ways to drive costs out of the health care system and to make private insurance affordable to more people?

If we expand Medicaid and dismantle the system for indigent and uncompensated care, as inadequate as it is, what safety net will exist for the poor and near-poor should the federal government go into default? Where will those people go for care? Who will pay for them? What plan will the Commonwealth Institute recommend for picking up the pieces on short notice?

With a dysfunctional government in Washington, D.C., expanding Medicaid in Virginia is madness.

Boomergeddon Three Years Later: Still Running on Schedule

budget_deficits2
by James A. Bacon

With the non-stop news coverage about the federal budget and debt-ceiling crisis, I’ve been thinking a lot about the Boomergeddon scenario I wrote about back in 2010. Since I predicted a financial collapse of the federal government within 15 to 20 years, a number of significant developments have occurred. Congress enacted Obamacare, President Obama managed to raise taxes on the Top 1% and partisan deadlock created the blunt expenditure-cutting tool of sequestration. Economic growth has continued at a steady but sub-par pace, and Quantitative Easing has pushed interest rates to almost zero percent.

From a peak of $1,413 billion in 2009, the federal budget deficit has plummeted to $642 billion in 2013 — and the Congressional Budget Office (CBO) forecasts that it could fall as low as $378 billion before embarking upon an rising again as more and more Boomers start drawing Social Security and Medicare.

Was I wrong to expect fiscal disaster? Are we, however noisily and messily, getting our budgetary house in order? I didn’t know the answer when I woke up this morning, so I checked the numbers.

As it turns out, I am no more optimistic than I was three years ago. The chart above tells part of the story. The blue line shows the deficit levels that the Obama administration was expecting back in 2010 when I was writing Boomergeddon. The red line shows the actual deficits (and CBO forecast for Fiscal 2013 and 2014). The numbers haven’t changed much.

The fact that the nation is on nearly the same fiscal trajectory as forecast back in 2010 is remarkable. Think about it. The tax increase on the rich has bolstered tax revenue. Sequestration has constrained spending. And Quantitative Easing has driven down the borrowing costs of government.

Indeed, Federal Reserve Chairman Ben Bernanke deserves credit as the biggest deficit fighter in America. In 2010, the Obama administration anticipated that the country would be paying $510 billion in interest on the national debt in FY 2013. The actual figure: only $215 billion. That’s a $295 billion swing. In other words, roughly 40% of the deficit decline has occurred as a result of monetary stimulus, not fiscal discipline.

Given the higher taxes, reduced spending and monetary stimulus, why isn’t the deficit picture way better? One simple answer: Sub-par economic growth. Economic growth has consistently fallen short of Obama administration forecasts. Lower economic growth translates into lower-than-expected tax revenues and higher-than-expected transfer payments to the poor and unemployed.

So, the big question is this: Will economic growth resume traditional, post-World War II patterns? If so, there is hope. If not, we’re all toast.

On the positive side, the economy has worked its way through most of the damage caused by the 2007 real estate crash. Real estate prices are rising again, consumers are carrying far less indebtedness than they once did, and corporations have rock-solid balance sheets. We should be pulling out of the sluggish-recovery phase and entering the boom-boom phase of the business cycle. Over the longer haul, the economy should benefit from some promising trends — the U.S. energy boom, the re-shoring of American manufacturing and productivity gains from Big Data and the Internet of Things.

But we’re still mired in sub-par growth. The question of why will spark endless partisan disagreement. Democrats blame the uncertainty created by the Republican-caused debt and budget showdown. Republicans blame the Democratic-caused debt and budget showdown. The GOP attributes some of the economic languor to higher taxes on the wealth producers. Dems assert that the effect is negligible. The Donkey Clan implicates the slowdown in the global economy. The elephants indict the burden created by Obamacare, Wall Street regulatory “reform” and hundreds of smaller initiatives.

yield curve

Click for larger image.

Here’s the 500-pound gorilla in the room: the $17 trillion debt. The graph to the left shows nominal interest rates and inflation-adjusted interest rates. Rates on U.S. debt with maturities of five years or less are negative on an inflation-adjusted basis. Even 30-year bonds are paying a real return of only 1.5%. If the U.S. is in slow-growth mode despite one of the most stimulative monetary regimes in its history, the prognosis is grim if interest rates ever move up.

And higher rates are almost inevitable. As soon as economic growth resumes and demand for credit increases, interest rates will rebound. The upward move will be accentuated by Federal Reserve Board promises to back off Quantitative Easement when job creation picks up. Indeed, interest rates shot up this summer when Bernanke merely hinted that he would gently decelerate the bond buying. Investors are hyper-vigilant and ready to unload their bonds at moment’s notice.

We face a predicament in which any sign of economic growth will trigger a rapid increase in interest rates, in effect capping the speed at which the economy can expand. The $17 trillion national debt will exert a severe drag on the economy for years, perhaps generations, to come. I don’t see any painless way out of the fix we have created for ourselves. We can stagger onward like this for another decade and a half, perhaps, but not much longer. I’ve been wrong before, and I could be wrong now. I hope I am. I truly dread the future that I see.

The Debt Vise Tightens

whirlpoolby James A. Bacon

Moody’s Investor Service may revise its rules for rating municipal bonds, and the news could be bad for states and local governments with large unfunded pension liabilities. The company  is proposing to increase the weighting of  pension liabilities and other long-term debts from 10% to 20% in its scorecards for General Obligation (GO) bonds and to lighten the weighting for economic strength from 40% to 30%, reports Governing magazine. (Governance/ management factors account for 20% and financial strength for 30%.)

The changes could create winners and losers in Virginia, where local governments tout their bond rating as a sign of fiscal rectitude. New rules from the Government Accounting Standards Board (GASB) are requiring local governments to report unfunded pension liabilities on their balance sheets for the first time in recognition of the long-term claim on fiscal resources. Under that rule, Fairfax County would have to acknowledge nearly $2.7 billion in unfunded liabilities; another 15 Virginia cities and counties would report $200 million or more.

Making matters worse, reflecting the lower financial returns on pension portfolios in a zero-interest rate environment, Moody’s might apply a lower discount rate on investments. Most retirement systems assume their portfolios will generate returns of 7% to 8% per year. In recent years, 3% to 6% has been more typical. If portfolios are assumed to earn less money, state and local governments will face much higher liabilities.

Another change that could hurt fast-growth localities is Moody’s decision to downplay economic strength, a composite of economic growth trends, the type of economy, workforce profile and socioeconomic/demographic profile. This revision, reports Governing’s Liz Farmer, recognizes that some local governments are either unwilling or unable to capitalize on the strength of their local economies by raising taxes.

Virginians pride themselves on their fiscal probity. The Commonwealth of Virginia has a AAA bond rating, as do several cities and counties. The favorable rating keeps borrowing costs low. But the situation is surprisingly murky. There has been a proliferation of debt in Virginia under the aegis of independent authorities. Bond rating companies may be on top of the situation but the public is in the dark. How much total debt is out there — not just GO bonds, for which governments are legally obligated, but Moral Obligation bonds, for which governments are morally obligated to back up. How many bonds are issued by independent authorities which would cause economic distress if they were defaulted upon?

… which brings us to the topic of roll road debt. Moody’s also is concerned about rising levels of toll-road debt. Nationally, average debt per roadway-mile increased from $18.9 million in fiscal 2012 from $14.3 million in fiscal 2011, the company stated in a press release earlier this month. The average toll per transaction increased over the same period from $1.82 to $1.96.

Steady toll rate increases will be necessary to support a growing debt burden, says Moody’s, although the unfettered ability to increase toll rates could face mounting political pressure in an economy that is growing slowly. One reason Moody’s continues to have a negative outlook for the US toll road sector is the weak and uneven pace of the economic recovery.

Under the McDonnell administration, Virginia has been a national leader in financing highway infrastructure through tolls, often through Public Private Partnerships. The technique has allowed the state to build roads it could not have otherwise. But no one, to my knowledge, has analyzed what level of financial risk the state might be exposed to if toll revenues faltered and bond payments were missed.

… and university debt. Virginia’s public universities also are heavily indebted, incurring debt to finance the construction of buildings and dormitories. Colleges and universities have enjoyed nothing but enrollment growth and rising tuition and fees for decades, but there are signs of increasing consumer resistance and the number of entering freshmen may have peaked. Enrollments are leveling off nationally, and some institutions are seeing declines. How leveraged are Virginia institutions, and what obligation does the Commonwealth have to stand behind them in case of default?

Then there’s the Virginia Housing Development Authority, the Small Business Finance Authority, water-and-sewer authorities, and various authorities critical to the economy such as the Metropolitan Washington Airports Authority, the Virginia Port Authority, other airport authorities, industrial development authorities, special tax districts and community development authorities.

Everything may be hunky dory. But there may be systemic risks that nobody recognizes. Five years ago, no one was concerned about unfunded pension liabilities. Now everyone is. What other land mines lurk out there? What is our exposure? We just don’t know.  We need to find out.

Prairie Populism Meets Boomergeddon

prairie_townOver on the Strong Towns blog, Andrew Burleson describes the reaction that he and his compatriots get when they tour the country preaching their Minnesota brand of Boomergeddon, to wit: that human settlement patterns in many cities and towns are fiscally unsustainable; local elected officials need to re-think everything about growth and development; and communities should strive to achieve productivity, not growth.

“More than any other group, Conservatives tend to initially react very negatively to the Strong Towns message,” says Burleson in his recent blog post. Many conservatives don’t see a problem with current human settlement patterns. They tend to see “growth” as the key to prosperity.

When dealing with conservatives, Burleson makes the case that the way things are now is not the way they always have been. Indeed, today’s status quo is the result of decades of social engineering beginning with the not-so-conservative New Deal.

  1. Historically, mortgages were short-term instruments (5-10 years) for no more than 50% of the value of the property. The first fixed-rate, amortizing mortgages (20 year term, 20% down-payment) were created by government programs during the FDR administration, and sweetened into their current form (5% down payment) as part of an economic stimulus policy immediately following World War II.

  2. Historically, land uses were determined by the property owner with very little intervention from the government. Zoning was conceived of as a tool for relocating industrial pollution out of densely populated areas, but was rapidly adopted across the country as a tool for segregation. Even in places where racial segregation was not official policy, zoning was often intentionally wielded as a tool for keeping different socioeconomic groups separate, and continues to have negative socio-economic consequences.

  3. Historically, cities were built with highly connected street patterns, either as designed grids (most American cities), or organic street networks (see Boston). Starting in the FDR administration, grids were actively discouraged by the government in favor of superblocks and the traffic hierarchy.

  4. Historically, streets were seen as shared spaces where many activities took place, driving being simply one of those activities. Led by Ralph Nader and AASHTO, this view was dramatically changed in the 60′s and 70′s. The engineering community adopted a mindset that all streets should be designed according to highway geometries, the idea being that the road should facilitate high-speed driving while also “forgiving” driver error. This made the historic Main Street, with slow speeds and everything happening close to the street, a non-starter.

I love these guys. That is very much the message that I have been preaching (although, I’ll concede that I never made a connection between Ralph Nader and suburban sprawl — I guess I still have a lot to learn). Some conservatives are wedded to the status quo, but others understand that Business As Usual is fiscally unsustainable. Reality is sinking in and the thinking is beginning to change.

– JAB

What Happens in Detroit, Does Not Stay in Detroit

ripples

Ripple effect

Detroit seems a long way from the Old Dominion, and its bankruptcy woes seem largely irrelevant to a state and its local governments which, whatever else their flaws, have among the strongest bond ratings in the country. But it would be a mistake for Virginians to ignore events in the Wolverine State.

It looks like holders of Detroit municipal bonds will take a proverbial hair cut. That’s inevitable, and even understandable as the city’s emergency manager, Kevyn Orr, fights to shore up basic services for city residents. If that means taking on the public employee unions and the bond holders, he’s willing to do it. And public opinion will be on his side. The unions have been guilty of gross over-reach and bond holders, for the most part, are big boys who understood the risks they were taking when they bought the bonds.

But precedents could be set that could rattle municipal bond markets. As the Wall Street Journal reports today, “A fight over bankrupt Detroit’s sewer system threatens to reshape the nation’s $3.7 trillion municipal bond market.”

Owners of some $5 billion in water-sewer bonds thought they were well protected because their bonds were backed by revenues from Detroit’s water-sewer system, which is solvent. Orr wants to renegotiate the terms of the bond deal in order to free up water-sewer revenue for other city needs.

Bond holders are spooked, even though Orr maintains payments on the water-sewer bonds will be secure. Credit-rating firm Standard & Poor’s declared that Orr’s plan “tantamount to a default” on the bonds. “You really break the foundation” of debt markets if municipalities can freely restructure their obligations, Jim Colby, a muni strategist for Van Eck Global, told the Journal.

The legal structure backing municipal bonds will come under increasing stress as Detroit and other bankrupt cities resort to increasingly desperate maneuvers to stay afloat. It’s not clear such actions will have on states, like Virginia, that have gone to great lengths to preserve their credit ratings. Will such shenanigans sour investors on the entire class of municipal bonds, a bad thing for Virginia? Or will they engage in a flight to quality, which could be a good thing for Virginia? That depends largely upon the rulings of Detroit judges. But Virginians should pay attention — we have a lot riding on the outcome, too.

Update: The WSJ has a follow-up story today on Saginaw County’s decision to postpone a $60 million bond offering, following decisions by Genessee County and Battle Creek to pull bond sales last week. Clearly, the contagion is spreading throughout Michigan. The question is, will it spill beyond Michigan’s borders.

– JAB

It’s the Debt You Don’t See that Kills You

chainsIn theory, state and local governments in the United States are required to balance their budgets every year. In practice, many have been running massive deficits. Count on slippery politicians to find the loopholes. The most widely practiced trick is the under-funding of pension obligations. Another is dishing off debt to independent authorities. Another is under-funding maintenance and allowing infrastructure to depreciate.

What’s the true level of state and local indebtedness in the United States? Steven Malanga explores the issue in “The Indebted States of America” in the latest issue of City Journal. Only a few years ago, state-local debt was estimated to total $2.5 trillion. But a 2012 estimate by Harvard and University of Pennsylvania institutes of government projected that, if you counted unfunded promises to government workers and money borrowed without taxpayer approval, the figure could run north of $7 trillion.

If you also included the failure to properly account for full life-cycle costs of roads, sewer and other infrastructure, you would add trillions of dollars more.

Back in the Old Dominion… As far as I know, there is no single document in Virginia that tallies the debt of state government, local government and independent authorities, as well as unfunded pension liabilities and depreciated infrastructure.

The picture is more complex than it appears. Think of the transportation Public-Private Partnerships the state has entered into around the state. Think of the billions of dollars taken on by the Metropolitan Washington Airports Authority to finance the Rail-to-Dulles project. We know that mega-transportation projects can turn sour. Anyone remember the Dulles Greenway? Anyone remember the Pocahontas Parkway? While the state may be under no legal obligation to step in if mega-projects fail, the political pressure to intervene could be overwhelming if the continuity of service were threatened. The state may be well protected under individual P3 agreements, but has anyone looked at those agreements collectively to see if they pose a systemic risk?

One virtue of Virginia’s system of government is that there are relatively few overlapping authorities empowered to issue debt. It should be easier here than in other states to keep tabs on our debt, depreciation and unfunded obligations. But it’s an exercise we have not yet undertaken.

– JAB