As dictators escaping the wrath of their former subjects flee to the Red Sea resort of Sharm El-Sheikh, so, apparently, do Democratic state legislators avoiding votes they oppose in their home state legislatures flee to Illinois. Not only do we have a cabal of Wisconsin state senators in a Motel 6 somewhere in northwest Illinois Best Western in Rockford we have a covey of Indiana state representatives holed up in Urbana:

INDIANAPOLIS — Indiana’s Republican House speaker says he’s willing to wait another day or two before deciding whether to impose fines on boycotting Democrats.

Most of the House Democrats are expected to skip Thursday’s floor session, extending their stay at an Urbana, Ill., hotel to an 11th day and again preventing legislative action.

John Kass is characteristically acerbic:

First would be to the Southwest Side of Chicago, to the home of Illinois House Speaker Michael Madigan. He won’t answer the door, but the refugees should still touch their foreheads to the sidewalk several times, their behinds facing their home states, as they pay homage to the warlord of Madiganistan.

That would make a really great T-shirt. And then it’s on to Springfield, where the refugees could get a hug from the governor and a pat on the head from a friendly Illinois Legislature.

The refugees might even win assurances that if they can just find a way to keep spending and spending like there is no tomorrow, they might be qualified to work in Illinois government someday.

As you may recall one of my reservations about Dean Baker’s paper yesterday was that his findings weren’t robust, i.e. a modest change in the assumptions can make a big change in the findings. Apparently, I’m not the only one who thought that. David Leonhardt, writing in the New York Times:

If state and local governments instead assumed a future return of 7 percent, their funding gap would nearly double, to $1.3 trillion, according to Alicia Munnell and her colleagues at the Boston College retirement center. If they assumed a 6 percent return, the funding gap grows to $1.8 trillion.

Hat tip: Tyler Cowen. Tyler also catches Dr. Baker making different assumptions about stock market returns when discussing the privatization of Social Security than when discussing public employees’ pension funds. A peculiar discrepancy to say the least.

Add to it that, as I documented yesterday, Illinois manifestly does not meet the assumptions the Dr. Baker makes in his paper then, yes, in Illinois at least there is a public employees’ pension crisis.

It never ceases to amaze me the degree to which articles of faith, apparently not subject to scrutiny, dominate our political discourse. I have yet to hear anyone make a coherent rights argument in favor of unions, for example. There is no irony perceived in, on the one hand, arguing that collective bargaining is a fundamental right on the basis of freedom of association and then, on the other, arguing for a closed shop.

As I’ve written before I think that collective bargaining is a power that is useful and prudent to bestow under certain circumstances and that those circumstances are more relevant in the private sector than in the public sector. But that’s heresy for a lot of people.

Dean Baker has produced an interesting paper (hat tip: Felix Salmon) on the origins and severity of the crisis in public pensions. He finds, unsurprisingly, that the proximate cause of the problems that are causing an uproar in many state capitols is the decline of the stock market after the collapse of the housing bubble and the attendant financial crisis:

In sum, most states face pension shortfalls that are manageable, especially if the stock market does not face another sudden reversal. The major reason that shortfalls exist at all was the downturn in the stock market following the collapse of the housing bubble, not inadequate contributions to pension funds.

I have a number of reservations with respect to Dr. Baker’s findings. First, the problem states face with respect to public pensions is a cashflow problem. The problem may go away next year or it may continue for a decade; there’s no way to tell. If states borrow to meet these obligations, it will worsen their future fiscal situation since they will have not only the future pension obligations but the principal and interest to deal with as well.

Second, we have experienced the collapse of two bubbles over the period of the last fifteen years. Unless you’re predicting another bubble in the near term or claiming that the bubbles had little to do with stock earnings over the period in question, shouldn’t we assume that stock earnings will be significantly lower for the next fifteen years? That doesn’t seem to be the case in the paper.

Third, the year-on-year earnings from a stock portfolio aren’t based on 30 year averages. It’s the year-on-year earnings that determine how much money you’ll be able to disburse.

I might add that several analysts appear to take the paper as proof positive that structuring public employees’ pensions as defined benefits plans with the principal sums heavily invested in equities is superior to structuring them as defined contribution plans (however invested). Why doesn’t that argument apply to the Social Security system? I should mention that I am not a supporter of privatization of Social Security and I’m wary of plans for putting a substantial portion of its funds into equities whether privatized or not.

Finally, I’m concerned that his findings may not be robust. For example, Dr. Baker includes a length inventory of state pension obligations in Table 2. For the Illinois Teachers’ pension obligation Dr. Baker finds that the unfunded liability of this obligation amounts to .19% of the state’s future income. This determination is predicated on an assumption:

Of course, this estimate of the size of the shortfall will be overstated or understated if a state has growth that exceeds or falls behind the national average.

In other words rathers than making reasonable assumptions about growth on a state-by-state basis, Dr. Baker has assumed that all states will grow at a more or less uniform rate to draw his conclusion.

Consider this chart of Illinois gross state product from the University of Illinois:

or, in other words, Illinois’s growth is below that of the U. S. generally and it has fallen behind U. S. growth consistently over the period of the last 15 years. For Illinois, Dr. Baker’s paper is an Emily Litella moment: never mind.

Additionally, Illinois is the largest state in the worst shape with respect to its pensions. I don’t know that you can reasonably draw any conclusions without analyzing the financial prospects of each state on on an individual basis.

Update

See also Josh Barro’s critique. It’s pretty hard to excerpt meaningfully but here’s a snippet:

To understand how the states got into their current sorry predicament, it is essential to examine the structural flaws in the state-pension edifice. There are two fundamental problems with the pension plans offered by state and local governments all across America: One is that, in many cases, the benefits are excessively costly, insofar as they are larger than is necessary to attract qualified talent to government work. The other is that, by guaranteeing annuity-like streams of income in retirement—regardless of whether the pension funds’ assets and market performance can support those payouts—such plans expose taxpayers to enormous risk. After all, those taxpayers are the ones who will be responsible for making up any shortages.

Both of these problems are driven by the structure of most public-employee retirement plans, which follow what is known as a defined-benefit model. As the name would suggest, a defined-benefit pension plan guarantees some fixed level of income to workers upon their retirement; benefits are determined by a formula that is typically based on the number of years worked and average earnings in several years leading up to retirement. (Under some defined-benefit plans, workers are also entitled to annual cost-of-living adjustments in retirement.)

In principle, defined-benefit pensions are designed to be pre-funded. Employers are supposed to set aside money during a worker’s career to pay for his benefits in retirement; in many cases, the employee is required to make some portion of the total contributions himself. The employer—in the case of public workers, the state—then invests these assets, mostly in equity investments (such as mutual funds or stocks) with a minority in fixed-income vehicles, such as bonds.

The key to defined-benefit plans, however, is that the employee’s benefit payments are not affected by the market performance of those assets. In this sense, defined-benefit plans are explicitly designed to shift investment risk from employees to employers. In the case of public pensions, if a plan misses its target investment return, state workers don’t see their benefit checks shrink: Instead, taxpayers hand over more of their earnings to the government, so that it can make good on its promises to public-sector retirees.

and Tyler Cowen’s:

Beware of the 30-year comparison I say. A lot of sums look small compared to thirty years’ worth of output.

In 2000 the Chicago Board of Education had about 440,000 students enrolled and employeed about 40,000 people. Today it has about 400,000 students enrolled and employs about 45,000 people.

I’ll report back if I find out how many teachers the CBoE employed in 2000 vs. today. I’m guessing that the additional 5,000 people aren’t teachers or even involved directly in instruction.

There’s a joke around here that the only qualifications required for a $100,000+ a year job with the CBoE are a political sponsor and no teaching experience.

Information derived from various Chicago Tribune articles

It just occurred to me that a ray of sunshine in the state’s share of education funding in Illinois being among the very lowest in the U. S. is that decreases in state funding for education won’t have quite as much effect here as they would somewhere that expected more from the state. I’ve been railing against the state’s low share here for decades as patently unfair to the poor (rich school districts spend a lot more than poor ones do) but it does have that advantage.

Unfortunately, I also think it will make the gap between rich and poor that much the greater and more permanent in Illinois.

BTW, here in Illinois we have more independently taxing entities than anywhere else in the country. Every school district, forest preserve district, sanitary district, and on and on has the power to raise taxes (mostly property taxes) on its own. Watch for big increases in property taxes from these entities here as the state tightens its belt.

To what degree (if any) is quantitative easing responsible for the wave of food and freedom riots spreading across the world?

There’s an excellent post at Of Two Minds chock-full of nice charts and graphs (for those of you who like nice charts and graphs) in a similar vein to my earlier post this morning. Here’s the 30 second summary:

1. GDP growth has averaged about 2% since 2000.
2. GDP growth has been flat since 2007.
3. GDP growth since 2007 would have declined 11% without massive federal spending.
4. Public employee healthcare costs in many jurisdictions have grown by 11% per year since 2000.
5. Adjusted for inflation stock gains since 2000 have been negative.
6. Public employee pension promises assumed annual gains in the vicinity of 8%.

These charts make it clear where we’re going in terms of public pension and healthcare costs. The real economy isn’t growing at all, or is actively shrinking if we remove massive Federal stimulus, and long-term returns in stocks are negative.

But let’s make the happy-story assumption the U.S. economy is about to resume its long-term GDP growth rate of abour 2% per annum.

A 2% (inflation-adjusted) growth rate in the real economy compounds to a 24% increase over 11 years, while an 11% annual increase in pension and public employee healthcare costs compounds into a 315% increase.

Is that disparity sustainable? Clearly, it is not.

You can’t fix that with tax increases, unless you’re planning on increasing taxes every year. The best you can do with that strategy is divvy up the ever-decreasing pie. This is no way to run a railroad.

Doug Mataconis posts at OTB on a chart from Henry Blodget I’d planned to comment on, too:

The take-away? If we’re going to fix this problem, most of the work is going to have to be done on the spending side of the ledger.

I won’t bother posting the chart. Cruise on over to one of the links above to take a gander at it. It illustrates, depressingly, the discrepancy between federal income and outlays and the scope of the outlays for Social Security, Medicare, and Medicaid.

I made a comment over there that I’ll repeat here.

Arithmetically you cannot balance the budget simply by cutting defense spending. Strategically it would be ill-advised. Arithmetically, you can balance the budget simply by cutting discretionary spending—barely (if you include military spending). Strategically it would be ill-advised and operationally nightmarish. Do we really want to eliminate funding for courts, the FBI, food inspections, and so on? That doesn’t mean that defense or discretionary spending must be absolved from cuts, merely that we can’t achieve fiscal sanity just by cutting defense and other discretionary spending.

Although arithmetically we can bring the budget into balance by increasing taxes practically I think the idea is suspect. Two reasons: deadweight loss and it does nothing to control the growth in spending. That doesn’t mean that tax increases must be off the table, merely that it’s pretty unlikely we’ll be able to balance the budget simply through tax increases.

Theoretically we could achieve something resembling fiscal sanity through economic growth. Practically I think it’s extremely unlikely. Consider this chart of year-on-year GDP growth. Over the period of the last 25 years we haven’t even netted 3% growth in GDP per year. If we were growing like China, maybe. 3%? Not a chance. If you think we’ll grow our way out of our fiscal problems without raising taxes or cutting spending, I welcome your demonstration of how that will be accomplished. A hint: it won’t be accomplished by insulating buildings as the governor of Colorado recently suggested.

Practically I don’t believe it’s possible to arrive at anything resembling fiscal sanity without cutting healthcare costs (particularly at the state and local level). In order to cut healthcare costs while preserving some reasonable level of public health all of the stakeholders will suffer: insurance companies, hospitals, physicians, Medicare beneficiaries, and on and on to include nearly all Americans. Proposing suffering is never popular and, generally speaking, not a good way to get elected or re-elected.

Politically arrving at anything resembling fiscal sanity will require tax increases, defense cuts, cuts to discretionary spending, and cuts in entitlements, particularly Medicare. The formula proposed by Simpson-Bowles was probably about right although I’m not as convinced about the details.

Today neither political party is convinced of that.