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2011 October 05 Wednesday
Michael Lewis On Local Government Finance Nightmares

See this Vanity Fair piece.

The smart money says the U.S. economy will splinter, with some states thriving, some states not, and all eyes are on California as the nightmare scenario. After a hair-raising visit with former governor Arnold Schwarzenegger, who explains why the Golden State has cratered, Michael Lewis goes where the buck literally stops—the local level, where the likes of San Jose mayor Chuck Reed and Vallejo fire chief Paige Meyer are trying to avert even worse catastrophes and rethink what it means to be a society.

Lewis argues that Meredith Whitney's 2007 comments on 60 Minutes about muni debt have been misrepresented and basically a straw man version of her comments has been pummeled. What's important is what she sees going wrong in state economies.

What Meredith Whitney was trying to say was more interesting than what she was accused of saying. She didn’t actually care all that much about the municipal-bond market, or how many cities were likely to go bankrupt. The municipal-bond market was a dreary backwater. As she put it, “Who cares about the stinking muni-bond market?” The only reason she had stumbled into that market was that she had come to view the U.S. national economy as a collection of regional economies. To understand the regional economies, she had to understand how state and local governments were likely to behave, and to understand this she needed to understand their finances. Thus she had spent two unlikely years researching state and local finance. “I didn’t have a plan to do this,” she said. “Not one of my clients asked for it. I only looked at this because I needed to understand it myself. How it started was with a question: How can G.D.P. [gross domestic product] estimates be so high when the states that outperformed the U.S. economy during the boom were now underperforming the U.S. economy—and they were 22 percent of that economy?” It was a good question.

From 2002 to 2008, the states had piled up debts right alongside their citizens’: their level of indebtedness, as a group, had almost doubled, and state spending had grown by two-thirds. In that time they had also systematically underfunded their pension plans and other future liabilities by a total of nearly $1.5 trillion.

Why did citizens pile up debt? One possibility: To delay a decline in living standards. Why did government spending increase faster than the economy grew?

Tyler "Great Stagnation" Cowen argues we are using tax cuts to partially make up for declining incomes. Basically, after-tax incomes haven't declined as much as pre-tax incomes. At the same time, people are trying to get more from government, again because they are poorer. The declines are quite dramatic.

The median income for Wisconsin fell 14.5% in the last 11 years. That's tanking.

If you're making do with less, you're not alone -- especially in Wisconsin.

The state's median household income, adjusted for inflation, fell 14.5 percent between 1999 and 2010, according to U.S. Census Bureau estimates released Thursday.

That 14.5% decline is with 11 years of technological advance. Do technological advances deliver higher living standards? If so, imagine what else must be going wrong to swamp out the effects of 11 years of technological advances. Nationally household median income is down 7% ($3,800) since 1999 and household median income is still declining. New Jersey's median household income is down 2.9% just last year. Since 1969 median male earnings (including those not working) have declined 28%. Also, either the value of a college degree has declined or the quality of the people getting college degrees has declined on average.

Tyler Cowen thinks the Republican drive to prevent tax increases has become an obstacle to making needed cuts in government spending.

IN a debate in August, Republican presidential candidates were asked whether they would support a budget deal that bundled $10 of spending cuts for every $1 of tax increases. All said no. They rejected any deal that involved raising taxes.

...

Furthermore, this refusal to contemplate a tax increase — which I’d characterize as an extreme Republican stance — has brought what seems to be an extreme Democratic response: President Obama’s latest budget plan is moving away from entitlement reform and embracing multiple tax increases on the wealthy. We may be left with no good fiscal options.

If living standards continue to fall then the pressures both for and against tax increases will intensify. On the one hand, government finances will get even worse as tax revenues go down on declining incomes. On the other hand, lower living standards will make people even more opposed to paying more in taxes. People won't want to give up more of a shrinking pie.

Reihan Salam reacts to Tyler saying but don't forget the potential to make government more efficient. I agree with Reihan. We need to push for higher productivity and also lower staffing governments. Do more with less. That's the only way to raise living standards (or at least slow the descent).

I see the "Occupy Wall Street" movement as a populist response to declining living standards. Just as social media helped enable Arab Spring and Arab Spring was a response to declining living standards so again social media is helping the "Occupy Wall Street" protestors to organize and express frustration that comes as a result of declining living standards. Will a further decline in US living standards lead to a much more aggressive and demanding protest movement? Is serious political instability possible in the United States?

Share |      By Randall Parker at 2011 October 05 10:04 PM  Economics Living Standards


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Comments
A.Prole said at October 6, 2011 12:32 AM:

You notice how strong the correlation of the onset of mass immigration and declining incomes is.

WJ said at October 6, 2011 5:15 AM:

"IN a debate in August, Republican presidential candidates were asked whether they would support a budget deal that bundled $10 of spending cuts for every $1 of tax increases. All said no. They rejected any deal that involved raising taxes."

You would expect them to say that, because the people who fund their campaigns demand that they say that. The problem is that middle class Republicans want them to say it, too.

The middle class doesn't get it. The wealthy are not on our side. They are fighting to keep a larger and larger share of the output, and one way to do that is to reduce pay for the middle class. Another is mass immigration. The top 1% have captured about 80% of the income gains over the last 30 years. So what are we doing to counteract that? Reducing their taxes, of course. We've reduced capital gains taxes to their lowest rates ever, and recently even reduced the estate tax, despite no link whatsoever to economic growth. We had faster economic growth in the 80s and 90s despite cap gains rates that were at times twice as high.

Over and over again you see this problem with middle class Republicans - they refuse to question the pro-business lobby bullet points they've been brainwashed with over the years. Over at Steve Sailer's site they're seriously arguing over whether a higher minimum wage would reduce the demand for illegal immigrants. Well, duh - of course it would. However, don't tell that to the Great Deluded.

Mark said at October 6, 2011 5:32 AM:

A.Prole,

I support strict immigration enforcement, but I feel like the fact that household income in Wisconsin (hardly an illegal immigrant magnet) fell twice as much as household income nationwide suggests there's more going on.

solaris said at October 6, 2011 6:54 AM:

>"Do technological advances deliver higher living standards?"


Not necessarily. In fact technological advances can result in lower living standards for some people and localities.

solaris said at October 6, 2011 7:02 AM:

>"Over at Steve Sailer's site they're seriously arguing over whether a higher minimum wage would reduce the demand for illegal immigrants. Well, duh - of course it would."


It would also reduce the demand for low-paid and low-skill workers of all sorts - American citizens, legal immigrants, and illegal immigrants. In that sense using a sharp hike in the minimum wage as an anti-illegal-immigrant measure is like using a nuclear bomb to kill mosquitoes.

map said at October 6, 2011 9:55 AM:

WJ -

"The middle class doesn't get it. The wealthy are not on our side. They are fighting to keep a larger and larger share of the output, and one way to do that is to reduce pay for the middle class. Another is mass immigration. The top 1% have captured about 80% of the income gains over the last 30 years. So what are we doing to counteract that? Reducing their taxes, of course. We've reduced capital gains taxes to their lowest rates ever, and recently even reduced the estate tax, despite no link whatsoever to economic growth. We had faster economic growth in the 80s and 90s despite cap gains rates that were at times twice as high."

And what do you think the rich did with all of those income gains? They bought the Democrat Party...the same party that wants to "Tax the rich." Right...Nancy Pelosi became Speaker of the House then House minority leader for the purpose of raising taxes on herself. Goldman Sachs gives 100% of their political donations to the Democrats for the purpose of...raising taxes on themselves.

The middle class is not stupid. Between the Democrats who only want to raise taxes on "the rich" and the Republicans that want to raise taxes on no one, how did middle class taxes (overall government charges) keep going up over the last 50 years? Answer: lying Democrats. Democrats would say that so and so increase is for "the rich", but the Dems give rich people loopholes, while eventually socking the middle class with those taxes.

Black Death said at October 6, 2011 11:54 AM:

Almost thirty years ago, Ronald Regan made a "deal" with the Democrats in Congress - $3 in spending cuts for each $1 in new taxes. Well, the taxes materialized, but the spending cuts never did. Congress just took the new tax money and spent it and never cut anything. I'm not a big fan of the Republican party in general or any of the Republican candidates, but their skepticism about such an arrangement is understandable.

Michael L said at October 6, 2011 2:25 PM:

raising taxes on the rich is not the only thing that Democrats want. As the healthcare bill illustrates, by this point they are openly seeking a totalitarian regime, which will obviously hurt the poor and middle class the most. So from the standpoint of the non brainwashed prospective victims of such regime the Republican plutocrats are "our SOBs". They may be thieves, but they are not trying to destroy the productive economy and drag people off to a global, environmentally-conscious, nanny state gulag.

Zorkmid said at October 6, 2011 2:48 PM:

Whether it's $10 in spending cuts for $1 in increased taxes or, like 'Black Death' wrote, $3 in cuts for $1 in taxes, it makes sense to reject the deal, because there is obviously no need to raise taxes: in the first hypo, we could cut $9 and leave taxes alone to achieve the same fiscal balance, in the second hypo we could just cut $2 and leave taxes alone to end up in the same place. The folks who want to spend more (whatever their rhetoric) never offer the cuts-only option, because as Black Death pointed out, the tax increases always stick and the spending cuts never happen--it's all Lucy and the football in Washington--so naturally all rational people reject phony combination "spending cut with tax increase" deals.

WJ said at October 6, 2011 8:39 PM:

"In that sense using a sharp hike in the minimum wage as an anti-illegal-immigrant measure is like using a nuclear bomb to kill mosquitoes#"

1# I'm not in favor of the $12/hour#?# Unz proposal, because it's almost certainly too high# But a higher minimum wage would force downward pressure on immigration numbers# Looking at the last 3 decades, as the relative value of the minimum wage fell below $7/hour in real dollars the rate of illegal immigration picked up. Raising the minimum wage will cut demand for cheap labor and therefore immigration.

2) Realistically we're never going to cut $1.3 trillion in spending, which is what it would take to balance the budget. Not. Gunna. Happen. We'll have to raise taxes, but yes, we need to see real and permanent cuts first, and that means welfare and entitlement reform.

3) I wonder if the calculations of decline in income even factor in the disappearance of defined benefit pensions, and the fact that private sector employees have to save for a larger share of our retiremens than we used to.

Big Bill said at October 7, 2011 4:11 AM:

When poultry plants in North Carolina and Tennessee were raided and the wetbacks expelled a couple years ago, the owners raised wages by 1.50 or 2.00 an hour (voluntarily) and found plenty of black and white American workers lining up looking for work on their doorstep. You don't have to raise minimum wage. All you have to do is expel the wetbacks and the wage will automatically rise.

Enforcing immigration laws raises wages and puts Americans to work.

Big Bill said at October 7, 2011 4:24 AM:

"How can G.D.P. [gross domestic product] estimates be so high when the states that outperformed the U.S. economy during the boom were now underperforming the U.S. economy—and they were 22 percent of that economy?” It was a good question."

What does GDP have to do with the economy? It has to do with spending. If, rather than live on my income, I let my wife follow her female instincts and p!ss away an additional $10k per year on shiny girly trinkets and run up an additional $10k on our family credit card, our family GDP will increase by $10k. I will be deeper in debt and have nothing to show for it except a pile of trinkets that I STILL have to pay for. So why is Meredith so surprised? Piling up debt grows GDP. According to GDP calculations, the Indians who sold Manhattan Island for $24 in beads and trinkets were just as well off GDP-wise before the sale as after the sale. Debt is not wealth and GDP is not "production".

sg said at October 7, 2011 4:26 PM:

"Is serious political instability possible in the United States?"


Now more than ever as we have a higher percentage of low performing, violence prone foreigners from the third world than ever

WJ said at October 7, 2011 8:36 PM:

"Is serious political instability possible in the United States?"

It's not just the foreigners, but Americans, too. So long as people are able to pay for food and other basic necessities, they won't commit violence. When will this change? When budget necessities force the government to stop transfer payments to the large and growing number of poor. The lower middle class who have barely been treading water the last three decades won't take long to join them. It won't necessarily be violent, but open contempt of the law, refusal to pay taxes, refusal to defer to legal authorities, open disregard for private property, and more. And it WILL happen - within the next 20 years, certainly. We are rapidly running out of money.

Randall Parker said at October 10, 2011 8:47 PM:

WJ,

I agree the middle class doesn't get it. They are behind the learning curve. They are also a shrinking portion of the population. The lower class is growing.

I actually favor Unz's high minimum wage proposal, especially combined with vigorous enforcement of immigration laws at employers who pay the least. Open up more jobs for Americans and raise the living standards at the bottom.

Never going to have $1 trillion in spending cuts? As the economy fails to grow and then shrinks we'll get both big spending cuts and higher taxes.

In California we are going to have large numbers of municipal bankruptcies. Vallejo shows the way. They cut their retirement liabilities down to 20% to 30% of what they were before bankruptcy. Read Lewis' full article to appreciate how inevitable that is.


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