Doing the right thing is hard for both individuals and their governments. Name the goal – maintaining a healthy weight, paying off high-interest credit cards, keeping debt-to-GDP at reasonable levels, whatever – and with each missed deadline or broken promise success recedes further into the distance. And the temptation grows to just give up and pretend that the goal never really mattered.
This is happening everywhere. In the US, state and local pension plans are underfunded to the point of becoming a political (not just a long-term financial) issue. And governments, confronted with the resulting set of unpalatable options, are surrendering without admitting it. In California, for instance, the governor is proposing to fund part of its several hundred billion dollar pension liability by, believe it or not, borrowing more money:
California Proposes $6 Billion Boost to CalPERS
(Chief Investment Officer) – California Gov. Jerry Brown’s revised state budget proposes a $6 billion supplemental payment to The California Public Employees’ Retirement System (CalPERS), which he says will save the state $11 billion over the next two decades.The supplemental payment effectively doubles the state’s annual payment. It is intended to ease the effect of increasing pension contributions due to the state’s unfunded liabilities and the CalPERS Board’s recent decision to lower its assumed investment rate of return to 7% from 7.5%.
California currently has $282 billion in long‑term costs, debts, and liabilities; $279 billion are related to retirement costs of state and University of California employees, according to the revised budget.
“These retirement liabilities have grown by $51 billion in the last year alone due to poor investment returns, and the adoption of more realistic assumptions about future earnings,” said Brown in his budget.
The funding for the supplemental payment will be paid through a loan from the Surplus Money Investment Fund.
Borrowing to make a pension payment is known as a “pension bond,” and is analogous to funding your kid’s private school tuition with credit cards. It gets you through the year but at the cost of potentially-big trouble down the road. In California’s case, the assumption that the pension fund will generate a higher return on its investments than the state has to pay to borrow requires a continued bull market in stocks and bonds to work out. In a bear market – which based on history is seriously overdue, pension assets will depreciate, while the state’s debt will not. Result: An even bigger mess, very possibly resulting in some form of bankruptcy on the part of the pension funds or even the state. For a glimpse of where the pension bond mindset can lead, see Fear of junk bond ratings hangs over Illinois budget crisis.
Japan, meanwhile, is like one big, grossly-underfunded pension plan. Its government debt is the world’s highest relative to GDP and it has been trying, without success, to get its fiscal house in order for decades. Recently it came up with an excuse to stop trying:
Free education gives Abe cover for delaying debt reduction
(Nikkei Asia) – Japanese leader may be wavering on achieving a primary surplus by fiscal 2020Japanese Prime Minister Shinzo Abe is mulling a constitutional change to guarantee free education.
TOKYO — As Japan debates its core economic policy for this year, Prime Minister Shinzo Abe is seizing on a proposal for free college education as a way to stimulate spending and possibly push back the debt reduction deadline.
“Higher education must be truly available to all citizens,” Abe said in a policy speech on Jan. 20, signaling his support for amending the constitution to eliminate tuition for kindergartens through colleges. But he did not once mention achieving a primary balance — matching government spending excluding debt-servicing costs with revenues — even though it was frequently brought up in previous statements.
Abe seems to be responding to a proposal by opposition party Nippon Ishin no Kai, which wants to revise the constitution to guarantee free education. In a meeting with party chief Ichiro Matsui and legal adviser Toru Hashimoto on Dec. 24, the prime minister stressed that he needed the party’s cooperation and political expertise in achieving the agenda.
Nippon Ishin no Kai’s plan will cost Japan an estimated 5 trillion yen ($44 billion) a year. While it is almost impossible to secure such a large sum through the regular budgetary process, the government may legally be required to do so if the constitution explicitly guarantees free education.
Free tuition would be a boon to Abe’s own agenda as well. If it frees up the 5 trillion yen Japanese households spend yearly to send their children to school, they can use the cash elsewhere to help Japan overcome deflation. The government will be able to address deflation and change the constitution at the same time, while also coming up with an excuse for postponing its goal to achieve a primary surplus.
Abe found further support at an economic policy meeting on March 14. His guest, Nobel Prize-winning American economist Joseph Stiglitz, stressed the importance of investing in education while asserting that the Japanese debt load is not as grave as people thought. The Columbia University professor argued that the Bank of Japan should work with the government to cancel debt.
“Professor Stiglitz articulated what I have always wanted to say,” Abe said, welcoming the statement. He also echoed Stiglitz’s assessment that Japan’s fiscal situation did not call for much concern.
There it is: The goal was never that important, and now we have a new goal – free education – that takes precedence. So put a pin in the fiscal responsibility thing and we’ll revisit it later.
This is pure — and depressingly familiar — rationalization. Behaving with discipline turned out to be hard, so never mind. The consequences of which are the same as for a grossly overweight person who gives up trying to get in shape: a stroke, heart attack or some other catastrophe somewhere down the road. In financial terms this translates into massive cuts in public services, higher taxes, declining standards of living and eventually a financial crisis that starts in the mis-managed periphery and spreads to the core of the system.
16 thoughts on "Really Bad Ideas, Part 2: Giving Up Without Admitting It"
“Higher education must be truly available to all citizens,” Abe said in a policy speech on Jan. 20, signaling his support for amending the constitution to eliminate tuition for kindergartens through colleges.” One reason that the most explosive debt explosion, college student debt in the U.S., has occurred is because the colleges saw the availability of low-cost loans to students as an opportunity to jack tuition costs far above the general level of inflation. Two generations ago when I attended a top-ranked university, the tuition was $2,000/year, and it cost $350/yr to live in the freshman dorm. It is now over $40,000. Vulture capitalism applied to education.
Really bad Idea #1): Believing that Pay-As-Go (that every pension fund is) fund should be prepaid. That is just showing the lack of understanding of how pension funds work- Pay-as-Go funds and then forcing it to change so that it collapses. This is warning about non-existing problems so that change to it to prevent it would destroy the object that is well functioning.
So, such fake writing and warning about funds of CalPers is to avoid writing about scandals that are currently shaking CalPERS about missmanaging the funds by being looted by managers using private fund management to loose money. Yes, they are hiding how much money is given to banks for managing the funds from CalPers. If it was under its own management as it started it would be kept under expected return, but all the return gains were paid off to banks that are investing the money. The realization is slowely creeping up to public that with fee waivers and up fron fees the fund is not producing returns. All returns are going to bankers and nothing to pensioners. Ths is what this article about CalPers problems is about: hide the fact that CalPers is being looted using 2:20 fund management fees and fee waivers to avoid paying taxes on such loot.
You can read all about it from Yves Smith at Naked Capitalism.
Yes, but you do not want to know about it, right. Just like you guys do not want to know about not being under Gold Standard.
Really bad Idea #0.1):”keeping debt-to-GDP at reasonable levels,”
By whose reason “at reasonable levels”? By a person that doesn’t know that US Dollar is not pegged to gold for last 80 years? There is no reason in a person with fake knowledge like those from people that doesn’t know that there is no Gold Standard anywhere in the world anymore.
Even UK cancelled it’s pegg to DOllar in 1995 after realizing how bad such an Idea is, and UK is not constrained by anything anymore to spend as it wants and increase its debts as Japan or as it used to have it 200 years ago at 250% debt/GDP. Did Britain collapse with its debts of 250% of GDP or was it a leading Empire untill after US overtook it in 1945? Yes, Britain 200 years ago used to have around 250% debt and became an world controlling empire for another 150 years.
SO, what means “reasonable” by a person that doesn’t understand tht Japan, USA, UK, Canada, Australia is not under Gold Standard anymore?
Now, go ahead and attack me for bringing you the “news” that USA is not under GS anymore.
Really (really, really, really,,…) bad Idea #0) is idea that US or any advanced country like Japan is still under Gold Standard which is how writer of the post above believes.
Anyone here have heard about USA getting off GS in 1934?
You guys need to update your knowledge that is late about 80 years.
80 YEARS late. You still believe that Dollar is constrained by a pegg to gold.
Have you heard the news from 80 years ago that USA is not pegging it’s currency to gold anymore?
By all account you guys have not heard those 80 year old news. Do you know what fiat money is?
The news is that US got cancelled pegging the Dollar value to gold internally in 1934 and cancelled pegging it to gold internationally in 1972 as soon as it hit the first constraint by Bretton-Woods Agreeement. I do not believe that the writer here comprehends what such “news” for you guys implys. It implys that there is no constraint to USA debt (or Japan) except by legislating a debt ceiling which is a political decision to do, and they cancell it and increase as soon as that constraint to spending/debt is hit.
I hope CA holds on fiscally until after they secede & all the illegals (& most “legals”) in other parts of the US make a run towards CA to become citizens there. It would fundamental improve social & economic outcome for the rest of USA.
CAL-EXIT NOW!
The illegals need to make a run back to the country they came from.. And now. Not California.
Get the facts straight
One problem: Africa for Africans, Asia for Asians, White countries for Everyone IS White Genocide.
The answer for California, believe it or not, is to defund Prog Ed in K-12, university and grad schools; replacing the anti-republic, anti-brain, anti-human and debt-crazy pedagogy with Western Enlightenment. Folks, you can’t solve Prog problems by addressing the individual problem as Prog problems just morph into more decline, always. The trick is to kill the thing that makes Prog problems come into existence and stay in existence. And that thing is the huge number of Hydra-Head-Idiocracy-Idiots created for, by and of Prog Ed.
So you can spend your life making articles about various Prog problems, or spend your life reading articles about various Prog problems… but if you are tired of even the conservative writers who endlessly write about Prog problems as being such a “I’m shocked, I’m shocked” moment… with no solution in sight…. well then, remember this post.
The answer of all answers is to defund Prog Ed, ASAP. The people who cannot be un-Mesmerized by the idiocy of Prog Ed… will be called the lost generations. But starting tomorrow, no more idiots will be purposely made on the tax dime, if… Prog Ed is defunded!
Just take a look at Venezuela to see where all this leads!