Rollback
Repealing Big Government Before the Coming Fiscal Collapse
Thomas E. Woods, Jr.
Copyright © 2011 by Thomas E. Woods, Jr.
Chapter 1
Is It Already Too Late?
Nobody trusts the government, pollsters tell us. In April 2010, the Pew Research Center found that only 22 percent of Americans polled said they trusted the government at least most of the time. [1]
I wish I believed it. Most Americans seem to have a childlike confidence in government. They may be skeptical of the politician who insists he's been faithful to his wife, but they buy all the major claims government makes for itself.
And although they know the government's finances can be dicey, they seem to console themselves that the experts are in charge, and that somehow everything will work out. Few entertain even the possibility of any sort of general collapse
or default.
This confidence is about to be severely shaken. A systemic crisis is poised to strike an unprepared America, as the federal government is forced to renege on its impossible promises. It will no longer be the godlike dispenser of bounties,
the miracle worker that summons bread from stones.
For even if (1) the robust economic recovery Americans have been waiting for finally arrives, (2) the federal debt becomes manageable, and (3) the nearly $1 trillion in annual interest payments on that debt -- a permanent part of the federal budget within ten years -- is a price Americans are willing to pay, we're still sunk. The federal entitlement programs on which generations of Americans have been taught to rely and to base their expectations for retirement will go bust in our lifetimes. The aging of the population guarantees it. The resources do not and will not exist to make good on these promises.
Most of the people reading this book will live through one of the most significant periods of change in American history. The scale of the coming, inevitable spending cuts will be unlike anything Americans have ever experienced during peacetime. Americans have never seen federal spending scaled back. Even when the newspapers speak of "budget cuts," they don't actually mean the budget will be lower than it was the previous year. They mean only that its rate of growth is falling. Government is never cut. But it will be.
Between now and the entitlement collapse, our representatives in government will keep trying to kick the can down the road. They will buy time with marginal reforms in the programs involved. When that time runs out, they'll try the same thing again. With default staring them in the face, they will try tax increases. They will try borrowing. They will try printing the money. None of these approaches will work, as I intend to show, though if employed vigorously enough they just might wreck the economy, including the dollar itself.
But in crisis there is opportunity.
Former White House Chief of Staff Rahm Emanuel, who notoriously observed that a crisis should never be allowed to go to waste, was on to something.
Though his meaning was clear enough -- that government should exploit crisis situations to ram through the laundry list of programs that would be politically prohibitive during times of calm -- he arrived at the wrong conclusion. The coming fiscal crisis is an opportunity to take a careful second look at government, its claims, and its promises, and to see how much of it holds up to the harsh light of reason. Forget the comic-book rendition of government achievements we were all taught in sixth grade. This book paints a far different picture. And with that picture in mind, the unavoidable slashing of the federal budget that will have to take place is cast in rather a different light. Instead of a regrettable exercise undertaken out of grim necessity, it will be an enormous stride forward into a much brighter future.
The critical first step for checking the seemingly unstoppable federal advance is to stick a dagger through the heart of the myths by which government has secured the confidence and consent of the people. We know these myths by heart. Government acts on behalf of the public good. It keeps us safe. It protects us against monopolies. Without it, America would be populated by illiterates, half of us would be dead from quack medicine or exploding consumer products, and the other half would lead a feudal existence under the iron fist of private firms that worked us to the bone for a dollar a week.
But let's suppose that the federal government has in fact been an enemy of the people's welfare, and that the progress in our living standards has occurred in spite of its efforts. It pits individuals, firms, industries, regions, races, and age groups against each other in a zero-sum game of mutual plunder. It takes credit for improvements in material conditions that we in fact owe to the private sector, while refusing to accept responsibility for the countless failures and social ills to which its own programs have given rise. Rather than bringing about the "public good," whatever that means, it rules over us through a series of fiefdoms seeking bigger budgets and more power. Despite the veneer of public-interest rhetoric by which it hides its real nature, it is a mere parasite on productive activity and a net minus in the story of human welfare.
Now if this is a more accurate depiction of the federal government, and I intend to argue that it is, we are likely to have a different view of the consequences of the coming fiscal collapse. So an institution that has seized our wealth, held back the rise in our standard of living, and deceived schoolchildren into honoring it as the source of all progress, will have to be cut back? What's the catch? This is no calamity to be deplored. It is an opportunity to be seized.
Still another purpose of this book, therefore, is to demonstrate that we would not only survive but even flourish in the absence of countless institutions we are routinely told we could not live without.
Americans have given government the benefit of the doubt because they have thoughtlessly accepted a schoolboy narrative of how much worse off we would all be without it. If the coming disaster is to be averted and future crises prevented from arising, the smiley-face version of government we learned in junior high needs to be dismantled and discarded forever. Chapter 4, for instance, spends some time discussing portions of the federal regulatory apparatus.
It does so not because the regulatory agencies are themselves particularly expensive (their indirect costs on the private sector are another matter), but because they form a significant part of the mythological edifice that gives rise to the public's naïve confidence in government.
In speaking of averting the coming disaster, we can't fool ourselves into believing pain can be avoided. That horse has already left the stable. The federal government has made it impossible for us to escape unscathed. The only way to prevent the outright collapse on the horizon, a collapse that would surely be followed by emergency government policies that could destroy the dollar and with it the fortunes of the people, is by making severe cuts in the present. Some of these, as this book will argue, will be easy, and in spite of the predictable caterwauling by the interest groups involved, Americans would hardly notice them.
Others will be more difficult, particularly since they will need to be so substantial and sudden. The best we can hope for is to endure some pain now in order to avoid a systemic crisis later. The more we can do in the present, the less severe will be the problem in the future, and the less likely our public servants will be to wipe Americans out completely in the course of trying to overcome it.
Finally, this book proposes some methods by which the expansion of federal power might be halted or reversed. Most of these approaches are unconventional, as the nature of the situation demands. Some will be derided as unrealistic, the usual complaint about suggestions that would actually work and are obviously necessary. What is truly unrealistic, on the other hand, is the long-term solvency of the federal government. A historic default is coming. Wrenching changes will have to be made to prevent it. Few people in public life dream of proposing such changes. Few Americans realize the depth of the problem. Everyone thinks it can be pushed off until tomorrow, even as midnight draws nearer.
In the short run, people's lives will be disrupted, in some cases severely, and there will be much human suffering for a generous people to alleviate. But in the long run, our prospects are much brighter. When the crisis at last subsides, we will emerge with a more just and humane society. We will have learned to care for each other as families and neighbors once did. We will no longer look superstitiously to one institution to devise solutions to the problems of 309 million people. Instead of seeking subsidies taken from our fellow Americans by threats of state violence, we will have to seek wealth peacefully, by discovering how we can best please our fellow man. The federal collapse will likewise yield us a far freer and more prosperous society, in place of the maze of subsidies, taxes, penalties, special privileges, and self-perpetuating bureaucracy that afflict us now.
Federal bankruptcy, in short, may turn out to be one of the best things that ever happened to America.
The Crisis
Since at least 2006, opinion makers have belligerently commanded our assent to certain claims about the health of the American economy. According to them, in that year everything was fine. The fundamentals of the economy, including the housing market, were sound. The stock market was booming. Dissenters were incorrigible "permabears" who refused to accept good news. In 2008, their tune changed. Unless unprecedented bouts of government intervention were approved, the world was about to descend into a black hole. Dissenters were laissez-faire ideologues who hadn't learned what the talking heads claimed were the lessons of the Great Depression. By early 2009, "green shoots" were popping up as prosperity began to return. There was a light at the end of the tunnel. Now dissenters were permabears who refused to accept good news, etc. And it continues.
The "green shoots" claim of early 2009 came from a 60 Minutes interview with Ben Bernanke, chairman of the Federal Reserve System. Soon, that image was everywhere. Within months, a compliant media had taken a phrase no one had been using and made it central to discussions of the economy. A few hundred, then a few thousand articles featured it; in no time the phrase was generating millions of Internet hits. [2]
As 2010 went by, the "green shoots" grew more and more farcical. Employment figures, it turned out, had been artificially stimulated by job growth in health, education, and government itself, where state and federal money, rather than consumer demand and entrepreneurial risk-taking, was the driving force. Economist Nouriel Roubini laughed at the phantom "green shoots." The correct image for the economy, he said, was brown manure. [3] The light at the end of the tunnel was an oncoming train.
Whether the conventional wisdom has been right or wrong since 2006, it has studiously avoided mention of the Sword of Damocles hanging over these discussions. Even if modest economic recovery were to take hold in the United States, the federal government still faces a catastrophe whose proportions, in terms of the scope of the adjustments Americans will have to make in response to them, will exceed those of the recent financial crisis. In a moment of unusual candor, Bernanke himself drew attention to this coming crisis in a largely overlooked speech of October 4, 2010, saying in the understatement of the year that the federal budget was on an "unsustainable path."
Here's what he meant. Strictly speaking, the U.S. government's debt problem amounts to $14 trillion, the amount of the national debt (the sum of the accumulated deficits of the past). But although they do not technically involve the full faith and credit of the federal government, Social Security and Medicare -- programs whose assistance millions of Americans have been taught to count on -- are inadequately funded to meet the obligations of the future. To get the full picture of the obligations the U.S. government is facing, we have to add the amount of this entitlement shortfall to that $14 trillion.
Unfortunately, that extra amount is $111 trillion. [4]
The full future expense of these programs exceeds the total net worth of the U.S. economy. [5] That is what people usually mean when they say the United States is bankrupt.
In the early 2000s, well before the Obama deficits, commentators were warning that interest charges on the United States' debt would consume half the federal budget by the mid-2030s.6 Today the Congressional Budget Office projects that by 2020 just the interest payments on the national debt will reach $925 billion per year. That is actually a rosy scenario, since it assumes a robust economy and stable interest rates. If the economic picture remains grim, or if interest rates should rise, that figure will grow much larger. [7]
But these deficits, staggering as they are, do not reflect the impending problem posed by the unfunded liabilities of Social Security and Medicare. Even if the federal budget were balanced and the deficit reduced from over $1 trillion to zero, when we factor in the unfunded liabilities problem, the U.S. government would still fall further into the hole by $2 trillion to $4 trillion a year. [8]
Of the $96.5 trillion in unfunded Medicare liabilities, $19.4 trillion was added by the "small government" George W. Bush administration's prescription drug benefit, known as Medicare Part D. The story of that bill's passage is the story of America in the twenty-first century. The White House did not want to risk the bill's passage by letting accurate estimates of its cost leak out. Richard Foster, Medicare's chief actuary, reported that its administrator, Bush appointee Thomas Scully, threatened him with his job if he revealed cost estimates to Congress -- a claim that email correspondence from a Scully subordinate appeared to corroborate. The pharmaceutical industry was thrilled with the bill, which would yield perhaps an additional $100 billion in industry profits over the next eight years. Ten days after the bill's passage, Scully left to join a lobbying firm and represented several large pharmaceutical companies. The bill's principal author, Billy Tauzin, went on to head the drug companies' main lobbying organization, a position that paid $2.5 million per year.
In 2010, the Republican Party's "Pledge to America" promised to cut an unspecified $100 billion from the federal budget. The major budget busters were to be kept off the table entirely. America is staring default in the face, and the boldest proposal we hear is for trimming $100 billion. That's like taking three dollars off a trip to the moon.
Lawrence Kotlikoff is an economist at Boston University. He is a Democrat. His Establishment credentials are considerable. He estimates the fiscal gap at an astonishing $200 trillion. He thinks some relatively painless reforms can fix a $200 trillion problem, but he never tells us what they are. The truth is, there are no such reforms. If there were, they would have been implemented long ago. If there were, Kotlikoff would have disclosed them to us instead of hinting at their existence and never mentioning them again.
But listen to him. He is saying the sort of things people were once shouted down as alarmists for saying.
We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today's dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.
This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.
It will all come to an end, he warns, "in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills." [9]
More than likely, we'll see all three. [10]
Ronald Reagan's first White House budget director, David Stockman, noted in the summer of 2010 what had been happening for the past two years: nominal GDP had been rising at $4 billion per month, while federal debt had been increasing at $100 billion per month. That means the federal government has borrowed $25 for every dollar the GDP has increased. There's your big "stimulus." Never in American history have we seen the federal debt grow 25 times faster than the economy itself for two years running. [11]
Stockman also casts a skeptical eye on the prosperity of the past several decades. Since the last vestiges of the gold standard were abandoned in 1971, and with them the remaining restraints on how much money the Federal Reserve System (discussed in chapter 4) could create out of thin air, the economy has been taken for a ride that has looked like prosperity but has been more like a repeatedly stimulated sugar high. "It turns out," Stockman says, "that there was no miracle of economic growth, productivity and prosperity over the last several decades.…What we had, instead, was serial bubble after bubble -- fueled by a tsunami of public and private debt and printing-press money." [12]
So it is an already rickety, debt-ridden economy that will have to face the coming fiscal crisis.
One of the key reasons for the looming collapse is the aging of the population, a phenomenon that is taking place across the developed world. It is the result of three major factors: (1) the unusually large "baby boom" generation that is currently proceeding through middle age; (2) falling fertility rates, which have resulted in fewer future taxpayers to make good on governments' extravagant promises; (3) medical advances that have increased human longevity, operating in tandem with rising prosperity that has made possible additional spending on health. [13] These impossible entitlement promises were built on the assumption that productivity would grow at unrealistic rates or that ever-larger hordes of new taxpayers would indefinitely continue to enter the world (rather as a chain letter depends on ever more people being added to the scheme all the time).
If current birth rates in America continue, by 2040 the number of people aged 80 and over will outnumber children under age 5. This has never happened before in history. In 1970 there were 3.7 million Americans aged 80 and over and 17.2 million under age 5. In 2040 those figures are expected to be 26.2 million and 25.0 million, respectively. [14] In 1940, people of college age in the United States outnumbered people 65 and over (9.6 million versus 9.0 million). By 2040, college-age Americans will have increased to 20.2 million. The number of senior citizens will have multiplied by over seven times, to 75.2 million. [15]
The retirement of the boomer generation in the United States is not simply a wrenching, one-time event, difficult as that would be. It presages a future in which the elder share of the population will continue to grow, until some unforeseen change compensates for it. The elder share will rise from 13 to 19 percent between 2010 and 2030, the years when the last of the boomers become seniors (age 65 and over). But by 2075, after the boomer generation has passed from the scene, the elder share will be an even higher 23 percent. [16]
Japan is feeling this demographic change the earliest and the most intensely. Life expectancy has reached 80 in Japan, and the average Japanese woman who reaches age 65 will live until 85. Extreme age is far more common than ever before. (One 100-year-old Japanese woman, ticketed for riding a motorcycle without a helmet, explained that her 79-year-old son, who was driving, was wearing her helmet.) Japan's cultural advantage in this situation—namely, a longstanding tradition whereby the extended family cares for its members -- will help see it through the country's aging crisis, but the strain on public budgets and private households will nevertheless be great. [17]
Even as the elderly population is growing, the younger population is shrinking throughout most of the Western world, and barely holding steady in the United States. Birth rates have undergone a sharp and (at least to those issuing dire warnings of overpopulation) unexpected decline throughout the West since the 1970s. Replacement level, the figure a society needs to reach in order to maintain its population without immigration, is 2.1. The U.S. fertility rate is currently 2.0.
It will not be long before these demographic changes put serious strains on entitlement programs and change people's lives in drastic ways that they do not today anticipate. In 1960, there were 5.1 taxpaying workers funding each retiree. By 2030, that figure will fall to 2.2, which means every single working couple will need to support a retiree. [18]
Moreover, people over 65, but especially over 85, tend to incur disproportionately high medical bills, which an ever-shrinking base of current workers will somehow have to shoulder. Total per capita health spending for the "old-old" (85 and older) is three times higher than for the "young-old" (65 to 84). [19] Older Americans consume about four times as much in medical services as younger Americans, and seven times as much as children. [20]
Ah, say optimists, but various government programs, including the Obama health plan, will help to bring down health costs. (Such costs would have to come down quite a bit indeed in order to make possible all the additional health services demanded by a rapidly aging population.) Rarely do we hear specifics regarding these alleged cost reductions or how they will come about in the absence of some form of rationing of services, as will indeed begin happening more and more around the world. Additionally, as we'll see in chapter 2, the alleged savings from the Obama plan are an illusion. But let us suppose that these mysterious cost cuts will in fact occur. That still doesn't solve the problem, since for whatever reason Medicare's trustees have already factored cost reductions into existing projections. According to businessman and former U.S. Secretary of Commerce Pete Peterson:
- The official projections already build in a dramatic cost slowdown. The trustees assume that the growth in real per capita Medicare spending will decelerate from its historical rate of 5 percent per year to just 2 percent per year by the 2020s. The trustees fail to point to any change in medical technology, or health status, or social expectations that might account for the slowdown. The only justification they offer is that if Medicare spending did not slow down by then, it would rapidly take over our entire economy. Let us all take a collective gulp: The unsustainable official cost projections already assume tough, perhaps even draconian cost-control measures that today we do not even contemplate. [21]
The aging of the rest of the world poses an additional difficulty for a U.S. government whose budget is increasingly financed by credit from foreign sources. Even in the unlikely event that the Treasury's credit rating remains perfectly strong over the long term, the challenges associated with global aging guarantee that those foreign sources are going to dry up. Savings will be needed at home, and will no longer be available to buy up Treasury securities. China, in addition to wanting to finance its own industrial expansion, likewise faces an aging problem. That means much less lending to the United States. [23]
Taxing our way out of this problem, as left-liberals might be inclined to propose, can't be done even if it were desirable. It would require raising payroll taxes by as much as 350 percent by 2040.24 The Congressional Budget Office calculated that for the federal government to balance its budget while continuing on the same trajectory of expenditures, marginal income tax rates would need to skyrocket. The lowest marginal rate of 10 percent would have to rise to 26 percent. The 25 percent marginal rate would have to be increased to 66 percent. And the top rate of 35 percent would need to be raised all the way to 92 percent. [25] This presumes that tax rates at these levels would have no negative effects on economic activity, a rather heroic assumption.
Since the 1970s, mortgage payments, health insurance, and car payments have all increased in absolute terms. But not nearly as fast as taxes. Todd Zywicki, a law professor and bankruptcy expert, finds that "the increase in tax obligations is over three times as large as the increase in the mortgage payments and almost double the increase in the mortgage and automobile payments combined. Even the new expenditure on child care [as more and more households have seen both parents enter the workforce full time] is about a quarter less than the increase in taxes." He finds the tax bill for the typical middle-class family to have increased by 140 percent over the past generation. The fall in the real value of standard exemptions, combined with rising payroll, property, and state income and sales taxes, has put more and more pressure on average households. [26]
Leaving aside the moral objection to tax increases, raising taxes won't in fact solve the problem. For one thing, our public servants always seem to find something new on which to spend the additional money, and it isn't deficit reduction. But more to the point, tax policy can go only so far, given the natural brick wall it has run into for the past fifty years. Economist Jeffrey Rogers Hummel points out that federal tax revenue "has bumped up against 20 percent of GDP for well over half a century. That is quite an astonishing statistic when you think about all the changes in the tax code over the intervening years. Tax rates go up, tax rates go down, and the total bite out of the economy remains relatively constant. This suggests that 20 percent is some kind of structural-political limit for federal taxes in the United States." [27]
The public has been lulled to sleep about these problems in part because such topics are generally excluded from political discussion, and in part because people have been led to believe that their Social Security money is waiting for them in a "trust fund" in Washington. Only a small sliver of the public realizes the alleged trust fund is a fiction. The "trust fund" mythology actually exacerbates the problem, since it leads the public to believe the need to save is not really so urgent, since adequate savings for their future are already being accumulated in trust funds.
The money that the federal government takes in from payroll taxes earmarked for the Social Security program is not actually saved in a "trust fund." The federal government takes this money and hands it to current retirees. Current retirees, in other words, are not being paid back the money they themselves put in, plus interest from all the wise investments the government made with it. The government has already blown the money that current retirees put into the system all those years ago. The money they receive comes from workers today, who will in turn -- according to the logic of the program, at least -- be taken care of by a future generation of workers.
Now if the federal government takes in more in Social Security taxes than it pays out in benefits, it of course enjoys a surplus. Surely at least this surplus of receipts over outlays goes into a trust fund, right? Not exactly. The government takes this surplus and spends it on current expenditures. But don't worry -- it drops an equivalent amount of IOUs into what it laughingly calls the "trust fund." We are then told everything is fine -- why, the trust fund is full of government bonds it can cash in one day!
There's just one problem. When the Social Security "trust fund" begins cashing in these IOUs, where does the government get the money to honor them? By taxing the public. So it's rather misleading to say that the trust fund is just full of resources for when the time comes to start drawing it down. What it's full of are promises to tax the American public. But the public has already been taxed to pay for Social Security. The IOUs mean it has to be taxed again for the same thing. And this is how supporters of the program actually try to claim it's working just fine, and that anyone who points out the problems is a wicked plutocrat who doesn't care about the poor and suffering.
The political class avoids the truth about the trust fund like the plague. When Pete Peterson asked then-President Bill Clinton if he really thought a trust fund existed that could see Social Security through to 2037, the president replied, "You and I know that this is a pure cash-in, cash-out program and that it will be draining revenue from the Treasury decades before the formal bankruptcy date." But shortly thereafter, Peterson saw the President on CNN pointing to a chart purporting to show that the "trust funds" would "totally safeguard" Social Security until 2037. [28]
Even if Social Security can be saved yet again by another partial default -- in the form of higher "premiums," lower benefits, and an older retirement age, program modifications a private insurer would be imprisoned for -- it is Medicare that will sink the system. As we've seen, that is where the lion's share of the unfunded liabilities is coming from. The numbers do not add up. Or, put another way, they do add up -- to default.
These are not the speculations of an incorrigible doomsayer. This scenario is going to occur. It does not rely on fanciful models or wild extrapolation. The people who will become elderly in the first half of the twenty-first century have been born and are progressing toward old age. But we are supposed to pretend this is not happening.
One participant in a federal commission appointed in 1994 to look into the entitlement problem later spoke of the obstacles to serious public discussion of the issue. The commission prepared a report detailing the cost projections for federal entitlement programs. The report warned that by 2030 the entire federal budget would be consumed by Social Security, Medicaid, Medicare, and federal civilian and military pensions. There would not be a dime available for any of the other areas of the federal budget, including education, child health, and the military. Before it even reached the stage at which reforms were proposed, the commissioners had received 350,000 preformatted "outraged" postcards from seniors. No matter how utterly impossible it is to maintain benefit levels where they are, and no matter how unjust the arrangement is to the younger population, the issue cannot even be discussed. [29] The commission's report fell into a black hole. [30]
The elderly are in fact by far the wealthiest segment of the population.
Three-quarters of elderly homeowners have paid off their mortgages. Their median net worth is much higher than that of any other group. Their poverty rate is barely over 10 percent. The younger generation, which is expected to work to exhaustion to keep these programs afloat (only to watch them collapse anyway), isn't so lucky. A poll in May 2010 found an incredible 85 percent of college seniors saying they planned to move back in with their parents after graduating. Then they'll figure out how to cope with the $23,000 in debt with which the average college graduate begins his productive life. [31]
Their outlook continues to be grim. In late 2010, 60 Minutes reported: The economic jam we're in has topped even the great depression in one respect. Never have we had a recession this deep with a recovery this flat. Unemployment has been at 9.5% or above for fourteen months. Congress did something that it's never done before. It extended unemployment benefits for 99 weeks. That cost more than $100 billion, a huge expense for a government in debt. But now, for many Americans, 99 weeks have passed and there is still no job in sight. [32]
Many of the states are going bust as well. California's budget shortfall has been legendary, but it's far from alone. In March 2010, it was reported that the Missouri state budget unveiled by Governor Jay Nixon may have overestimated revenues by as much as $1 billion. According to State Senator Kurt Schaefer, vice chairman of the Appropriations Committee, "This is a crisis in the state budget that we have never, ever seen before in the state of Missouri.…We are way beyond cutting a few hundred thousand here, a few hundred thousand there. This is a whole-scale restructuring that's going to have to occur." [33] In Washington state, lawmakers were confronted with a $2.8 billion shortfall, and public unions that refused to budge on pay or benefits.34 In Indiana, month after month for nearly two years revenues fell short of projections, leaving the state $869 million below its initial expectation. [35]
In New York, the New York Times found in May 2010 that 3,700 retired public workers were receiving six-figure pension payouts (which are tax exempt) every year. (The state has tried to obscure the huge pension payouts by averaging them in with those of people who worked in government part time or for only a few years.) The pension system is becoming an enormous strain on New York's budget. So in 2010 the governor supported a plan that would bail out the pension fund by borrowing from…the pension fund. [36]
Seven states -- Connecticut, Hawaii, Indiana, Louisiana, New Jersey, and Oklahoma -- will see their pension systems fail by 2020, with another thirteen by 2025. (Federal pensions are themselves underfunded by about $1 trillion.) That is assuming the pension funds earn an annual return of 8 percent. If they do not, the bust will come all the sooner. None of this, it goes without saying, has stopped these states from continuing to expand their payrolls. [37]
Dozens of cities are contemplating bankruptcy. Miami came close. Its pension expenditures ballooned from $16 million in 2000 to $70 million in 2009.
Meanwhile, with the average salary of a Miami city resident at $29,000, the average Miami city employee salary was $76,000.38 The city government avoided bankruptcy through a series of salary and pension cuts, and increased health-insurance deductibles, for city employees. But next year the budget shortfall is projected to be even larger than it was this year, which means drastic measures remain on the table. [39]
"The Worst-Run Big City in the U.S.," a story that ran in SF Weekly in late 2009, tells the almost unbelievable story of San Francisco, a city in which "despite its spending more money per capita on homelessness than any comparable city, its homeless problem is worse than any comparable city's. Despite its spending more money per capita, period, than almost any city in the nation, San Francisco has poorly managed, budget-busting capital projects, overlapping social programs no one is sure are working, and a transportation system where the only thing running ahead of schedule is the size of its deficit." [40]
Detroit is in a class by itself. Here was the very model of subsidies, welfare programs, and regulation. And all of a sudden, it simply collapsed. Half the population has fled since 1950. One-quarter of the city's schools are closing. The money is gone. The city's budget deficit is approaching half a billion dollars. But home prices tell the real story. Median sales prices of homes in Detroit went from $41,000 in 1994 to $98,000 in 2003. By early 2009 the median price was $13,600. That was bottom, right? Wrong. By March 2010 it was at $7,000. [41]
In relation to the scale of the collapse, the story of Detroit went completely unreported.
But guess who's doing well? The tax-eaters.
At a time when private-sector workers have seen jobs slashed and salaries frozen or cut, government employees never had it better. Washington, D.C., has seen demand for new homes rise faster than in any other major American city, and its median household income of $85,824 (as of 2008) is the highest of the country's twenty-five largest metropolitan areas.42 "Federal workers are enjoying an extraordinary boom time -- in pay and hiring -- during a recession that has cost 7.3 million jobs in the private sector," wrote USA Today in December 2009. The average federal worker's salary at the time of USA Today's report was $71,206, while private-sector employees were earning an average of $40,331. The number of six-figure federal salaries jumped from 14 percent to 19 percent in the first year and a half of the recession. Nearly 1,700 employees of the Department of Transportation were earning more than $170,000 by that time. At the beginning of the recession, by contrast, exactly one person in the Department of Transportation earned such a salary. [43]
They'd better enjoy it while they can. When Americans find themselves faced with a choice between unplugging Granny and cutting federal salaries, jobs, and departments, Granny will be safe. Our so-called public servants won't be.
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