Illinois is mentioned prominently in the New York Times article on the prospects for a federal law implementing a method for states to declare bankruptcy:

Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.

Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.

But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.

without considering whether bankruptcy would actually help Illinois to resolve its problems. I strongly suspect that Illinois’s unique constitutional protections for public employee pensions would cause a bankruptcy that didn’t preserve those pensions to run afoul of the Takings Clause of the Fifth Amendment to the Constitution:

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

The emphasis is mine. Any bankruptcy for Illinois that did not preserve public employee pensions would undoubtedly be challenged in the courts and the question would be whether Illinois’s constitutional provisions create a property right to those pensions.

I think they do. Public employee pensions are about a fifth of Illinois’s budget; healthcare costs, mostly mandated by the federal government, are about a third. Will an Illinois bankruptcy that preserves half of its budget accomplish much? I don’t see it. Not to mention that many of the state’s creditors are city and local governments. How does pushing the problem down to already over-burdened local governments, restrained from seeking additional revenues by state law, help?

The courts would probably mandate further increases in the state’s income taxes. I’ve already documented that solving Illinois’s fiscal problems without substantial cuts would make Illinois the most highly taxed state bar none. There’s a formula for growth. We could put it on the license plates. From “Land of Lincoln” to “Highest Taxes”.

I’ve just published a foreign policy-related post at Outside the Beltway:

OTB Foreign Desk

Recently I’ve been a bit chagrined at OTB’s increasing movement in the direction of headline-of-the-day and domestic partisan bickering. In reaction to that I’ve started a new feature there, tentatively called OTB Foreign Desk, in which I’ll give short takes on a number of overseas stories and stories with international relations implications.

In my first edition of the feature I comment briefly on Hu Jintao’s state visit, Australia’s floods, the return of “Baby Doc” Duvalier, and the Tunisian revolution with links to the NYT, Washington Post, Bloomberg, and BBC.

I’m hoping to put more focus on South and Central America, Africa, Asia, less on Europe and the Middle East. As the series develops I plan to go farther afield for my media news sources, more from the foreign press, more from the non-English language press.

I welcome suggestions, links, etc. Just as an aside my strongest modern languages are English, Russian, French, German (in that order). I can read most Slavic languages with fair facility, some Italian (because of my Latin). I can struggle through others.

As I think I’ve made clear I don’t think much of Rahm Emanuel’s candidacy to be Chicago’s next mayor. However, I’m open-minded. Could somebody make the case for Emanuel?

Specifically, if his resume crossed your desk without his name on it, would you think “Wow! He’d make a good mayor for Chicago. Obviously, he’s been preparing for this all along.” I don’t see it.

Indeed, that may be one of the things I’m not comfortable with in his candidacy. Is he just looking for another item on his resume?

Arnold Kling summarizes his explanation for why jobs have not returned with the recovery:

1. There is no aggregate production function any more
2. Health insurance costs have more than doubled over the past ten years. Wages have not fallen far enough to offset this…
3. The ongoing trend to use less labor in the manufacturing sector has continued or even accelerated…
4. Two potential leading sectors–education and health care–are sclerotic because of credentialization.
5. Many people are operating at a different point on the labor-leisure trade-off than was the case in past recessions.

Read the whole thing. To that I would add that education and healthcare both suffer from bureaucratization as a consequence of which they’re actually producing fewer outputs with each additional unit of input. A each of them grows, they drag the economy as a whole farther down. And when the means of production are themselves portable Ricardian comparative advantage doesn’t work any more.

The Consumer Metrics Institute, an organization that measures online sales, has posted its assessment of 2010:

The last of the BEA GDP reports issued during 2010 indicated that the “real final sales of domestic product” were growing at an anemic 0.9% rate during both the second and third quarters of 2010. This number is calculated by reducing the headline GDP number by the net amount of goods being added to manufacturing inventories (and therefore not being sold to end consumers). Their characterization of the number as the “real final sales” within the economy is telling, and a 0.9% annualized growth rate over the course of the six middle months of the year is statistically indistinguishable from a dead flat economy.

In addition they make the following observations:

• GDP growth rates can be significantly impacted by non-consumer line items
• This recession was not a shared experience
• At year-end 2010 consumers were still cautious about the long term
• Recession-fatigued consumers can self-medicate with holiday spending while still adhering to long term outlooks
• Infrastructure spending by governments is poor way to stimulate the economy
• Corporate earnings can be a misleading indication of the health of national commerce
• In time the unemployed simply disappear
• Rescuing banks does not stimulate the economy
• Ben Bernanke can’t force people to borrow money that they don’t want
• By “feeling the economic pain” among their constituents, politicians have promised results they don’t have the means to deliver

Read the whole thing. You’ll need to scan down towards the bottom of their clumsily designed web page to find the year end assessment.

The news of the day seems to be about President Obama’s op-ed on regulatory reform at the Wall Street Journal:

For two centuries, America’s free market has not only been the source of dazzling ideas and path-breaking products, it has also been the greatest force for prosperity the world has ever known. That vibrant entrepreneurialism is the key to our continued global leadership and the success of our people.

But throughout our history, one of the reasons the free market has worked is that we have sought the proper balance. We have preserved freedom of commerce while applying those rules and regulations necessary to protect the public against threats to our health and safety and to safeguard people and businesses from abuse.

From child labor laws to the Clean Air Act to our most recent strictures against hidden fees and penalties by credit card companies, we have, from time to time, embraced common sense rules of the road that strengthen our country without unduly interfering with the pursuit of progress and the growth of our economy.

Sometimes, those rules have gotten out of balance, placing unreasonable burdens on business—burdens that have stifled innovation and have had a chilling effect on growth and jobs. At other times, we have failed to meet our basic responsibility to protect the public interest, leading to disastrous consequences. Such was the case in the run-up to the financial crisis from which we are still recovering. There, a lack of proper oversight and transparency nearly led to the collapse of the financial markets and a full-scale Depression.

Over the past two years, the goal of my administration has been to strike the right balance. And today, I am signing an executive order that makes clear that this is the operating principle of our government.

This order requires that federal agencies ensure that regulations protect our safety, health and environment while promoting economic growth. And it orders a government-wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive. It’s a review that will help bring order to regulations that have become a patchwork of overlapping rules, the result of tinkering by administrations and legislators of both parties and the influence of special interests in Washington over decades.

While others have been most impressed (or alarmed or amused) by the equation of child labor laws with the Clean Air Act and credit card reform, I was left with a question. What would a regulatory regime suitable for the 21st century look like? How would it operate? I honestly have no idea.

The present Federal Register, the compendium of all proposed and operational federal regulations is upwards of 80,000 pages in length. The Occupational Safety and Health Administration (OSHA) standards alone run to tens of thousands of pages and in its 30 year history the 1,000 employee agency has produced only a dozen criminal convictions. It might be a good place to start. IIRC it’s impossible to comply with the OSHA standards—some of their requirements are in mutual contradiction.

Off hand if I were king I’d change the funding of regulatory enforcement towards user fees and the incentives of the regulators to reward richly based on results. As I’ve written here before I think that financial regulators in particular should be awarded a portion of the fines that are exacted.

What other features would characterize a regulatory regime for the 21st century?

Advice to the New York Times editors. Butt out of issues about which you know little and probably don’t care enough about to become better informed:

After 22 years of not raising income taxes, Illinois saw its budget shortfall grow to $15 billion. It had the lowest state credit rating in the nation, and it wasn’t paying its bills to hospitals and schools.

The Illinois tax rate was low before and remains low for big states. The income tax will rise from a flat 3 percent to a flat 5 percent. That will cause pain at the lower and middle levels of the economic scale, but the state’s millionaires will probably stay put. (The top rate is 10.55 percent in California, 8.97 percent in New Jersey and New York, and 7.75 percent in Wisconsin.)

Illinois’s corporate tax is going up to 9.5 percent from 7.3 percent, but that by itself is unlikely to send businesses packing. What businesses crave most is a stable environment in which to make profits, and Illinois was anything but stable. Businesses tend not to like it when health and education systems break down.

As I have documented before, Illinois won’t solve its fiscal problems by raising taxes alone. Illlinois was already among the highest-taxing states before the bill was passed; raising taxes to the level required to solve Illinois’s fiscal problems would make Illinois the highest taxing state and Illinois does not enjoy some of the special conditions of other very high-taxing states, e.g. Vermont, a very small, homogeneous state many of whose residents are there for lifestyle reasons.

Illinois’s flat tax rate is based on a fixed percentage of federal adjusted gross income. This renders the tax even more regressive than it would otherwise be since those who don’t itemize (2/3s of Illinoisans) pay a higher proportion of their gross incomes than do those who itemize (almost entirely those in the top income quintile). Nonetheless the difference between 3% and 5% of a million dollars in adjusted gross income is $20,000. I think the NYT is underestimating the willingness of Illinois’s wealthy to leave the state.

I also think they’re underestimating the willingness of Illinois businesses to leave the state. The governments of Indiana and Wisconsin certainly think so.

The tax hike might be justified if it actually solved Illinois’s fiscal problems; it doesn’t. The more than $6 billion in new taxes only accounts for about half of Illinois’s shortfall. The legislature plans to raise an additional $4 billion by borrowing and defer payment on the remaining $2 billion. Borrowing to pay operating expenses will result in less money available in future years to pay operating expenses then: it’s a sucker’s game. Part of the reason that Illinois is in deficit now is that it’s servicing the debt that it incurred in 2003 when Gov. Blagojevich borrowed $10 billion to pay operating expenses. And deferring payment does nothing to reduce the amount the state owes; it merely kicks it down the road a bit to a point where Illinois has less available revenue, is paying interest at a higher rate, has reduced economic activity as a consequence of its prior fecklessness, and has blown its wad on income tax increases as an alternative for addressing the situation.

The tax hike will at least at the margins reduce economic activity, particularly retail sales, in Illinois. In Illinois city and county governments do not have the power to levy income taxes and, consequently, are mostly dependent on sales taxes, property taxes, and fees for revenue. The effect of reducing retail sales is to rob city and county governments of the revenues they need to operate. This may be one of the reasons that no Illinois mayor has come out in favor of the state legislature’s actions.

Illinois’s legislators’ pledge to limit the growth in Illinois’s expenditures to 2% a year is wishful thinking. All that needs to happen to exceed that level is for healthcare, public employee pension costs, and child welfare expenses to grow at their expected rate. Additionally, the Illinois legislature does not have the power to bind future Illinois legislatures other than by amending the constitution and, consequently, a future legislature, faced with the same revenue issues and incentives that the present one is, is more likely to amend this legislature’s actions which it can do by simple majority than it is to grasp the nettle the present legislature has refused to.

In summary the NYT editors have come out in support of a tax hike that doesn’t solve Illinois’s fiscal problems, reduces the state’s competitiveness relative to nearby states, benefits Illinois public employees at the expense of practically everybody else in the state, particularly the working poor, increases state revenues at the expense of city and county revenues, and poisons the well for future action. What are they thinking?

John Taylor sounds a theme that has been a pretty constant one around here—the U. S. economy needs a higher level of business investment than it’s seeing:

Either way you look at it, the relationship between unemployment and the investment share is remarkably close. It holds for both non-residential and residential investment, and is a subject of my current research. Of the four shares of GDP (the other two of course being consumption and net exports), the investment share shows by far the largest negative association with unemployment.

Encouraging the creation and expansion of businesses should be the focus on government efforts to reduce unemployment. The recent compromise agreement to prevent the increase in tax rates on small businesses and the move to lighten up on the anti-business sentiment coming out of Washington are two steps in the right direction.

and he presents three graphs supporting the view.

Unfortunately, we’ve seen an accelerating trend, beginning more than 30 years ago and intensifying over the last decade, to support consumer spending rather than business investment. Now we’re living with the consequences.

Increasing the level of business investment will be no quick fix; it’ll take decades to overcome the decades of bad policy. Further, it will be a challenge to insure that what we encourage is investment here in the United States rather than overseas investment on the part of U. S. investors.

Embedded in an interesting post on creating the illusion of prosperity over at Zero Hedge is this snippet noting the difference between a tech bubble and a housing bubble:

The bubble of 2000 reflected the dramatic expansion of technology companies. A complete saturation even if many of these companies did indeed play a pivotal role in enhancing the nation’s capital stock. But corporate balance sheets expanded dramatically to a point where the gap between tech-heavy capital spending budgets and internally generated funds surged to unprecedented levels. The bears of 1998 and 1999 weren’t exactly wrong as much as being early.

The bubble of 2007 reflected the rapid expansion of the housing stock (not a productive asset) and the speculative leverage that ignited the boom. This was about a radical expansion in two balance sheets at the same time ? household balance sheets and banking sector balance sheets. The extent of the excess leverage made the previous debt-induced dot-com bubble look like a mild affair in comparison.

I think that this distinction may go some distance in explaining the difference in the employment situation between the recessions that followed each of the bubbles. The tech bubble enhanced capital stock; the housing bubble expanded housing stock. Enhanced capital stock set the stage for at least some further expansion which prevented employment from collapsing to its pre-bubble levels. The housing bubble did no such thing.