Current Commentary

Time to eliminate public pensions

In light of Maryland's huge budget shortfall and Baltimore City's huge budget shortfall, should we be paying for a benefit that 80% of the private sector doesn't get? Baltimore City spends over $200 million dollars a year paying people who no longer do any work for the city, an amount of money almost twice the deficit of $120 million dollars.

Mayor Stephanie C. Rawlings-Blake said in her state of the city address that "this $120 million deficit is brutal and will hit all of our citizens hard." She compared the severity of this to the 1904 Baltimore fire and the 1968 riots. The choice is simple: cut benefits to city residents, raise taxes that are already the highest in the state by a factor of two, or cut benefits to those who no longer work for the city. It would seem the answer is obvious, as the first two options will hurt everyone and the last option will only hurt those who lose a benefit that most of us don't get anyway.

When deciding whether public dollars should be spent on something, a good test is whether there is a public benefit. Be it police, fire, education, parks, trash, or roads, there is a public benefit/spillover effect that goes beyond the group that directly receives the money. Of course policemen and firemen benefit from the pay they receive, but so does public safety. Public pensions, on the other hand, fail this test as they benefit only the recipients and no one beyond the recipients. The only argument to pass the public benefit test is that public pensions are required to get people to work for the city. That might be a valid argument under normal times, but under the high unemployment we have now, it is invalid. The fact is that even if public employees did quit or strike as a result of eliminating public pensions, there are many unemployed or underemployed who would gladly fill those vacancies without the pensions. It is a textbook example of overpaying someone, and in this case it is being done at the expense of everyone who is not a government employee.

Additionally, there is a reverse socialism, or a reverse income redistribution component to most public pensions. We can debate whether it is right to take from the rich and give to the poor, but there should be no debate that the opposite is wrong, and pensions paid for out of the taxes of those who make less than the pension recipient do just that: Such pensions take from the poor and give to the rich.

Published in the Baltimore Sun

Wednesday, February 17, 2010

How to raise $500 billion to pay our debts:
The case against a VAT and other regressive taxes

Greg Mankiw recently said that "a VAT may be the best of a bunch of bad alternatives." I propose that, rather than head further down the spectrum of regressiveness, we should move in the opposite direction by ending that which is already regressive. Doing so would increase revenues and cut spending a combined half-trillion+ per year.

The biggest injustice of sales tax is that it is a regressive tax; in other words, it taxes lower incomes at a higher percentage than upper incomes. Yes, the actual tax rate is constant, but as a percentage of income it is greater on those who earn less because the less you earn, the greater a percentage of your income is used for consumption.

Fairness and justice would be much better served by doing away with the parts of our tax code that are already regressive, rather than introducing new regressive taxes. Specifically, end the 106k income cap on Social Security taxes on the employee side, but continue the cap on the employer side (as to not increase the cost of labor and thereby increase unemployment). As it is now, you pay 12.4% SS tax on your first 106k of income and 0% SS tax on every dollar over 106k. Ending this would raise an additional $300+ billion/year.

There are spending cuts that should receive broad based support: End programs that "reverse Robin Hood," programs that redistribute income from the bottom up. Specifically, end lavish public pensions that -- when combined with SS benefits -- often exceed the US median full-time worker income of 45k/year. The federal government does a good job of not lumping total pension expenses into a transparent lump sum, but estimates are that they exceed $200 billion/year.

You could save a half-trillion dollars a year, enough to close the pre-bailout era deficits, simply by ending regressive practices that distribute income from the bottom up.

Monday, February 15, 2010

Deflation is natural; deflation is good

Baltimore Sun financial columnist Jay Hancock doubts that increased inflation is possible, as advocated by MIT PhD Paul Krugman on Feb 13th. Natural forces want prices to fall; central planners want prices to rise. The recent Fed "exit strategy" can be summarized as a detailed plan to make sure that all of the new money that was created never finds its way from Wall St. to Main St. It doesn't take an MIT PhD to see that such policy is bad for Main Street. The pictures of Helicopter Ben raining money down on everyone are at this point inaccurate. A more accurate picture would be of pinpoint precision drops directly into bank vaults, wrapped in bags that said "NOT FOR PUBLIC USE. DO NOT RELEASE UNDER ANY CIRCUMSTANCES."

First, read the Bernanke Doctrine.  My favorite quote:  "The U.S. government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost." And, "Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation."  

Second, deflation is the natural result of technological progress creating more output from the same input.  To fight it is to deny the average working man his share of that progress.  Since the United States went to a religious (faith-based) currency, the metrics paint a graphical picture of the majority of the benefits of progress being captured by the top while real median incomes have been flat for over 30 years.  

Third, the period that coined the term stagflation is a textbook example that given a faith-based currency and a government bent on fighting an unpopular war, and expanding social services without significantly raising taxes can simultaneously create high inflation and high underutilization/unemployment.  

Finally, ALL ROADS LEAD TO PRINTING MONEY.  China, our biggest lender, is reducing its lending to us at the very time our borrowing needs are the greatest they have ever been.  Warren Buffet's own numbers project a nearly TRILLION DOLLAR ANNUAL SHORTFALL between what foreigners will lend us and what we will need to borrow.  The gap will be filled through quantitative easing, debt monetization, or printing money (decreasingly fancy ways of saying the same thing).  

To touch on the Fed "exit strategy" for a moment to reinforce why it is criminal to use central planning to fight deflation:  The entire exit strategy can be summarized as how to keep newly printed money in the hands of bankers and bankers only, and out of the hands of everyone else.  If the the plan is calibrated and executed with exact precision, it could achieve slight positive inflation in the institutionally accepted ideal range of 1-2%. Think about that for a second. Certainly there is an injustice and an inherent theft to a system and a plan that gives money only to a select group of rich bankers.  The theft and injustice is in denying responsible savers the lower prices they are rightly due and would reap in a money system free from central planning.  Zero sum game theory applies to much of monetary policy, and whenever policy is manipulated to benefit one group, it is certain that benefit comes at the expense of another group.