Winning the Battle, Losing the War: Part I

The current political dispute between Wisconsin Governor Scott Walker and the state’s public employee unions is the first battle in a struggle that will dominate the public policy arena at all levels of government in the next 10 years -- how to pay for public employee retirement benefits, what role public employee unions will play delivering government services and their role in the future of the Democratic Party.

I seek to explore these ideas in a series of forthcoming posts. My initial post will cover the cost of retirement benefits to state and local governments (SLGs). Future posts will cover what Walter Russell Mead calls the blue model, the problems of federal deficit spending and the how these disputes will change the political environment of America. Although I expect battles between Republican governors and public employee unions to energize the base of the Democratic Party in the 2012 elections, helping Obama secure his second term, the core public policies in dispute threatens to tear apart the Democratic Party – and will force a substantial political realignment.

Pensions & Unfunded Liabilities

Unlike the federal government, every state in the union (except for Vermont) has a legal requirement of a balanced budget. Although this can be offset in deficit years by relying on the bond market to cover shortfalls SLG’s don’t have the luxury of printing the world’s reserve currency to keep interest rates low, much less pay back the loans.

The wretched standing of SLG budgets has been a victim of the Great Recession. California alone saw revenues fall from $103 billion in 2007-08 to $83 billion in 2008-2009, and will only recover to an expected $94 billion in 2010-11. Revenue figures will improve as our nation’s economic recovery continues. Nevertheless, larger budget problems have been exposed during the crisis and loom ominously in the future.

Rather remarkably, the money discussed in the Troubled Asset Relief Program (TARP) is just a mere fraction compared to the amount of money needed to right SLG pension obligations. Originally estimated to cost taxpayers $300 billion, recent Congressional Budget Office (CBO) figures estimated TARP will end up costing taxpayers $25 billion. This does not include bailing out Fannie and Freddie Mac, which has cost $153 billion so far with the potential of an addition $68-$210 billion needed by 2013.

Estimates on the unfunded liabilities of the states vary. The Pew Center recently estimated the total to be $1 trillion at the end of fiscal year 2008, yet this study used the accounting standards of state pension boards. Using standards required by the private sector the total could be as much as $3 trillion – and this doesn’t even include local governments! These unfunded liabilities has been recognized from figures across the political spectrum, from Reason to the Heritage Foundation to Washington Post progressive pundit Ezra Klein.

As the daunting dilemma has revealed itself investors and public officials have taken notice. Moody’s, the rating agency that rated junk housing derivates as AAA, recently announced they would factor in pension obligations into their credit ratings – even though these figures are not listed on their audited financial statements. This will certainly lower state credit ratings, increase interest rates on state issued debt and augment the strain placed on state budgets. An additional long term issue SLGs will have to confront is increasing health care costs for retired employees; not only will the number of retirees increase, so has the inflation rate for health care.

The same New York Times article linked above revealed states already have $2.8 trillion worth of outstanding bonds. This set of financial realities doesn’t paint an appealing picture for the future of state government budgets.

What in the World to Do?

Reserve Chairman Ben Bernanke: "We have no expectation or intention to get involved in state and local finance.” The states "should not expect loans from the Fed."

Felix Rohatyn, the longtime advisor to the Democratic Party and legendary financier who helped save New York City from bankruptcy in the 1970’s, recently told the New York Times “it seems to me that crying wolf is probably a good thing to do at this point.”

Former Los Angeles Mayor Richard Riordan: “throughout the country, 90 percent of cities and states are going to go bankrupt within the next five years, many of them sooner.”

SLGs are looking at financial armageddon in the next 10 years and the Fed won’t bail them out. What we are about to witness is best describe by astrophysicists as an “Impact Event.” The governance and political alliance structure of SLGs will never be the same after the dust settles.

Losing the 60th Seat

Imagine if the ghost of Election Future told Teddy the day after the '08 election that he would die soon and that the fate of health care reform depended on the results of the special election to replace him. I'm quite sure the lion of the Senate would've slammed down a scotch in celebration (or equivalent)!

It is absolutely remarkable how the Democrats have revived a completely disorganized, dysfunctional political party. It really comes down to the "economy stupid". Three major mistakes were made by the Obama administration and the leadership of the Democratic Party:

1. pushing health care ahead of economic reform, including financial regulation;
2. trusting that Keynesian economics work; and
3. realizing, because of the branding efforts by the Obama Presidential campaign, voters projected their own interpretations of him, and often times with radical different results.

Obama and his campaign made a very conscious effort to prevent the brand of Obama from becoming labeled by traditional political definitions. Although he had a perfect liberal rating as a U.S. Senator and was known for advocating rather liberal beliefs such as expanding the rights of Americans to health care and other social justice issues, he avoided being categorized as a traditional liberal through advocating for a "realist" foreign policy, a more efficient, results oriented approach to government services, charter schools and praising Ronald Reagan.

While this was a brilliant campaign strategy that was incredibly effective, it was extremely vulnerable once public policy was made and the vision of brand Obama was clarified by American voters. This vulnerability was further compounded by, frankly, the arrogance of the Obama administration. We saw this after Iowa, when team Obama was overly confident about New Hampshire. This overconfidence led to numerous mistakes and nearly cost him the nomination.

I would speculate team Obama became enamored of their poll numbers early on and sought to strengthen the depth of positive sentiments towards Obama by continually keeping Obama front and center of the media cycle. What ensued was overexposure. Press conference after press conference, announcement after announcement... it was soon all Obama all the time... even more that it would already naturally be as the first minority President that was the hope of saving the country from the previous administrations seemingly disastrous policies.

Furthermore, this overexposure was compounded by an apparent supreme confidence that his policies would turn around the economy and unemployment rate. This is where mistake #2 enters.

In many ways Obama is extremely fortunate to even be where he is at right now. Imagine if that jihad advocating cat from Nigeria had actually succeeded in blowing up that plane during the holidays. Obama's rating would be in the low 30's and next November would be a complete bloodbath at the polls.

At the end of the day I'm still quiet stunned how Obama managed to destroy so much of the good will he accumulated with the American people.

On Octo-Mom

My friend Lindsey Horvath recently published an article at the Huffington Post regarding Nadya Suleman (aka Octo-mom). My thoughts below:

I think Miss Suleman has been an easy target for our society at large to blame for being irresponsible. America has been angered at the current state of affairs engulfing our country and our personal lives -- our troops are still in Iraq, the worst financial crisis in 80 years, surging insecurity regarding one's job, etc. -- and while we blame failed politicians, bankers and variuous corporate shenanigans for these massive issues, our search for solutions defies simple explanations.

Thus we turn back to Miss Suleman. Her circumstances are essentially of her own choosing, and has resulted in her own personal government bailout of sorts. While this story would be a media sensation in any news cycle, it has gained greater prominence due to external cultural and economic difficulties.

Anytime a woman decides to bear a child society must support her decision -- not necessarily for the mother's sake but for the child's future. However, I believe a financial test for fertility treatments is not against the goals of feminism, and would actually provide incentives for woman to better gauge if they can provide for a new life's well-being.

In regards to the matters of feminism, I think it is essential for woman's groups to be pushing for greater financial literarcy with women. I'm not sure if this would have helped Miss Suleman all that much, yet -- thanks in large part to the previous generation of feminists -- as women increase their financial earnings they need the tools to empower themselves to be more responsible for the lives of their children, family and their own personal future.

Small, but Needed Step, to Greater Government Transparency

In a significant step towards greater government transparency -- and how our taxpayer dollars are being spent -- the stimulus bill requires government agencies to report disbursed monies via an optional RSS feed.

For each of the near term reporting requirements (major communications, formula block grant allocations, weekly reports) agencies are required to provide a feed (preferred: Atom 1.0, acceptable: RSS) of the information so that content can be delivered via subscription.

Real time reporting of how money is allocated will provide advocate organizations greater ammunition to push for a more effective, productive use of government resources -- and our tax dollars. I fully expect this development to create a few firestorms in the blogging world... which will consequentially be covered by radio, broadcast and print media outlets.

Hat tip: Steve Rubel

The People's Republic of Santa Monica

One would think if you were going to subsidize social services for the homeless and mentally-ill woman you would look to minimize costs not related to the service to maximize outreach. This basic logic apparently does not exist with the public policy makers in the city of Santa Monica.

In 1973 the city purchased a mixed-use building a block away from the Santa Monica pier with ocean views. Since then the building has been used by nonprofits to provide services to the homeless and mentally-ill woman. One would think if the city sold this property they could use the proceeds to find a building that is not in a prime commercial real estate area to increase the center's size and scope of reach. Not in Santa Monica however:

More than 35 years after purchasing a mixed-use building on scenic Ocean Avenue, City Hall is preparing to lease the property for affordable housing.

The City Council is expected tonight to authorize the City Manager to negotiate and execute a lease with OPCC and allocate $100,000 to the nonprofit homeless service provider for architectural, legal and consulting purposes...

City Hall purchased the 19-unit property at 1614-1616 Ocean Ave. in 1973, leasing the rent-controlled spaces to residents and OPCC's Daybreak Day Center, which offers social service programs to homeless and mentally-ill women. About seven units are currently vacant to make way for future building rehabilitation.

Taking the merits of the program aside, is it really in the best interests of taxpayers to be subsidizing ocean front views for the homeless?

Is Santa Monica the only city in the state not to face a budget crisis?

But if You Ask Really, Really Nicely They May Stop!

The federal American government has spent more than $1,500,000,000 in taxpayer dollars since 1996 in abstinence-only until marriage sex education.

On one side of the debate we have Derek Dye the Abstinence Clown (the video is absolutely unreal -- and paid for by your tax dollars!), Sarah Palin and the Pope; on the other side we have the American Psychological Association, the American Medical Association, the National Association of School Psychologists, the Society for Adolescent Medicine, the American College Health Association, the American Academy of Pediatrics and the American Public Health Association. Hmm...

The hypothesis we can "educate" teenagers to go against their fundamental primordial drive is fairly ludicrous to begin with. No surprise then that the evidence reveals abstinence-only sex education fails to reduce teen pregnancy, STD or the proclivity of teenagers to explore their budding sexual desires.

From global warming to the Big Bang (seriously!) to this it is clear science played a back seat to ideology and political gain in the George W. Bush administration.

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Thanks for e-mailing me the Derek Dye the Abstinence Clown story Kaner.

End the "War on Drugs"

Unfortunately, I do not expect American public policy makers to come to terms with the absolute fact that the "War on Drugs" has been a colossal failure of epic proportions any time soon. Although the "War on Drugs" has resulted in:

• $49 billion spent per year by local, state and federal agencies -- money that could have been going to education, health care, etc.;
  
• 80 percent of the increase in the federal prison population was due to drug convictions between 1985 and 1995;
• somebody getting arrested every 17 seconds for violating a drug law (for cannabis alone its ever 38 seconds);
• more than half of all sentenced federal prisoners are drug offenders; and
  
• 17 percent of State prisoners and 18 percent of Federal prisoners committed their crimes in order to obtain drug money.

The only winners in the "War on Drugs" are criminal enterprises and politicians who appease public sentiments (I'm looking at you Rahm Emanuel, Eric Holder, Joe Biden, Ronald Reagan (for increasing mandatory sentences) and essentially the entire GOP/American Right). While these costs are relatively hidden to the American public and media outlets, the disastrous consequences are very apparent in Mexico.Here is just a taste from a blog post at Cato-at-Liberty:

Mexican soldiers are being killed and beheaded, and police officers are being assassinated (warning: violent content)... For more on this topic, click here, here, or here.

More recent evidence from the Washington Post:

After a long, controversial career, Brig. Gen. Mauro Enrique Tello Quiñones retired from active duty last month and moved to this Caribbean playground to work for the Cancun mayor and fight the drug cartels that have penetrated much of Mexican society. He lasted a week.

Tello, 63, along with his bodyguard and a driver, were kidnapped in downtown Cancun last Monday evening, taken to a hidden location, methodically tortured, then driven out to the jungle and shot in the head. Their bodies were found Tuesday in the cab of a pickup truck on the side of a highway leading out of town. An autopsy revealed that both the general's arms and legs had been broken.

The audacious kidnapping and killing of one of the highest-ranking military officers in Mexico drew immediate expressions of outrage from the top echelons of the Mexican government, which pledged to continue the fight against organized crime that took the lives of more than 5,300 people last year. Military leaders, who are increasingly at the front lines of the war against the cartels, vowed not to let Tello's death go unsolved or unpunished.

The underlying problem here for Mexico is simple; their isn't a damn thing they can do to address the root cause of the violence -- demand from American consumers. As America pumps in billions of dollars to cut off supply chains the money to be made from the drug trade is increasingly found not necessarily in producing the stuff -- it is in getting substances across the border.

Their is a full on war going on south of our border. One that CANNOT be won. The question we must ask ourselves is what is it going to take for our country to wake up and demand real change.

"The Problem with Socialism is that you Eventually Run Out of Other People's Money"

The title of this blog posts is one of the best quotes from Margaret Thatcher. The market economy is far more efficient than government at allocating resources and identifying investments in a cost-effective manner. When government grows as a percent of GDP it crowds out the true engine of American society -- entrepreneurs -- to the detriment of future economic growth.

The forthcoming cover story for the February 16, 2009 edition of Newsweek declares "We Are All Socialists Now." Key passage:

Whether we like it or not—or even whether many people have thought much about it or not—the numbers clearly suggest that we are headed in a more European direction. A decade ago U.S. government spending was 34.3 percent of GDP, compared with 48.2 percent in the euro zone—a roughly 14-point gap, according to the Organization for Economic Cooperation and Development. In 2010 U.S. spending is expected to be 39.9 percent of GDP, compared with 47.1 percent in the euro zone—a gap of less than 8 points. As entitlement spending rises over the next decade, we will become even more French.

This is an extremely alarming trend. Politicians, in my experience and perspective, are far more concerned being viewed as "doing something" to address perceived problems than actually solving them. An incredible amount of money is wasted and misallocated by government bureaucrats. When firms fail they go out of business. When firms stop being competitive they lose market share to competitors. Entrepreneurs and businesses thus have powerful incentives to continually look to innovate, increase productivity and seek creativity ideas and solutions. The largest incentive for government bureaucrats is to protect their turf and budgets.

Furthermore, these figures only add to my firm belief George W. Bush was by far the worst President in the history of our republic. Beyond that fact that he did not produce one significant piece of legislation in regards to public policy (Medicare Part D? the education bill? Please...) his assault on liberty was simply stunning:

1. Iraq. If misleading the public and resorting to fear tactics to drive our nation into a war of choice was not bad enough, this misadventure saddled our nation with an incredible debt that only adds to our future massive financial liabilities with the retirement of the baby boom generation.

2. The Patriot Act.

3. Implicitly condoning torture as an acceptable interrogation tactic.

4. Allowing government to grow as a percent of the economy PRIOR to the financial meltdown:
5. Failure to prevent the extent of the financial meltdown. As 43 claimed he was a man who favored less government and the virtues of free trade (despite the steel tariffs in his first administration, allowing the Democratic Party to push Fannie and Freddie to take increased risk with the goal of increasing the home ownership rate, etc.). Consequentially, the ideology that he claimed to adhere to, and aided by his incredibly high disapproval ratings, has has led many to question the virtues of the free market and provided greater credence to the belief that government can and should "solve" people's problems.

edit: Per an op-ed from John Taylor, professor of economics at Stanford and originated of The Taylor Rule:

My research shows that government actions and interventions -- not any inherent failure or instability of the private economy -- caused, prolonged and dramatically worsened the crisis.

6. Bailouts. The government had to prevent the complete meltdown of the financial sector. However, the rush to approve TARP and the failure to have any kind of transparency was simply stunning.

7. Failure to reform long-term entitlement spending.

I'm probably missing a few more. So much for 43's belief that "the advance of liberty is the path to both a safer and better world."

Chronicles of Politicians Gone Mad

I could not make this up... per the Independent Institute's blog The Beacon:

Earlier this month, Rep. Pete King (R-N.Y.) introduced a bill in the House of Representatives that would ban camera phones from having a silent mode when taking a picture.

The Camera Phone Predator Alert Act (H.R. 414) would “require any mobile phone containing a digital camera to sound a tone whenever a photograph is taken.”

You know you have been in office far too long when you introduce crap like this. Leaving aside the issue on whether the government should be regulating the free market in the first place (if consumers wanted the feature a phone company would certainly enable this option -- it's just a simple software update) can anybody -- somebody? -- please explain to me why it is in the public's interest for the government to get involved in something as trivial as this.

Least Politically Astute Comment of the Month

"Frankly, we're spending like crazy so there's no concern about the deficit for the next two or three years. That's one of the good news is that we can do health care now because we have to grow the economy. We must do it. That's a good thing."

Emphasis added. Question for Bill Clinton.... when do we NOT have to grow the economy?

Although their are a myriad of reasons why we must reform how Americans receive health care, I highly doubt any effort to reform health care in America is going to substantially aid the economy in the short term. This is not China where many save up to 40 percent of their incomes to ensure they have the resources to pay for a catastrophic medical event.

This is Change I Can Believe In

Jim Webb is truly a phenomenal United States Senator. He has the confidence and intelligence to tackle tough public policy problems that lesser politicians (99 percent of his colleagues in the country) dare not tackle out of concern of taking a hit in popularity, upsetting interest groups and/or upsetting established media narratives.

Per the Washington Post:

"I enjoy grabbing hold of really complex issues and boiling them down in a way that they can be understood by everyone," Webb said. "I think you can be a law-and-order leader and still understand that the criminal justice system as we understand it today is broken, unfair, locking up the wrong people in many cases and not locking up the right person in many cases."

I wish him all the best in his efforts to reform our incarceration infrastructure. The fact that more than 1 percent of the U.S. population is in jail is not only immoral, a serious indictment on the failings of our society (a black man without a high school diploma has a 60 percent chance of going to prison!), culture and public policies... it is bankrupting our state and local governments.

Furthermore, Webb is one of the few public officials with the credibility and the desire to challenge drug enforcement advocates. It is no secret our "War on Drugs" has been a complete unmitigated disaster.