Bob Williams at State Budget Solutions has a nice chart that shows by how much states are underfunding their pensions. Budgets are always about tradeoffs. But not funding the pension is similar to skipping credit card payments without cutting into your daily expenses at all (or figuring out how to boost your income).
In addition, the article notes all the other ways states have of papering over deficits – floating bonds, revenue estimates, shifting dates around. This isn’t confined to the usual suspects (Illinois, New Jersey, California). There are plenty of examples to share from across the country.
What impressed me is not only the quality of the reporting but how Mark dug into the data made available by the state of New Jersey.
He found a story that highlights the kinds of abuses many pension reformers must tackle – double-dipping – or collecting a pension benefit while simultaneously working a government job. In this case, the job didn’t really change the employee simply figured out a way to quit and get-rehired at a higher salary while cashing out a pension for the previous pay grade. Mark’s reporting delves into the practice among New Jersey sheriffs.
The video says it better than any summary I can give.
View more videos at: http://nbcnewyork.com.
The Chicago Tribune makes a “modest proposal” this week. Discouraged by the inaction of the Illinois General Assembly on state-wide pension reform, the editorial board supports the idea that costs for teacher pensions should be shifted and shared with local governments. Republicans, fearful of property tax hikes, don’t like the notion. But the Tribune makes a good point: the cost shift should be accompanied with the ability of local governments to directly negotiate with their employees minus the influence of Springfield. It’s an interesting idea.
Ultimately, pension reform must proceed according to certain principles that clarify the following:
a) What is the true and full value of the benefit? The market valuation principle.
b) How do you incentivize such a system to properly value, steward, and fund benefits? The principal-agent problem.
c) How do you connect the full employee wage/benefit bill with taxpayers who enjoy the services? The fiscal illusion problem.
Right now, it’s a mess. Government accounting is a still a jumble. (But the real value is always knowable via market valuation.) No entity currently has the incentive to properly value and fund these systems. And in fact, we continue to see risk-taking and the shifting of assets into alternative investments, the issuance of Pension Obligation Bonds, and the deferral of reforms. Politicians have a short-term horizon.
And then there is the problem of “disjointed finance.”
Take the case of New Jersey. Local governments negotiate with their employees over wages. But pension policy is set by the state. New Jersey municipalities get an annual bill to fund their employee pensions based on the state actuary’s calculations. Local officials don’t have any sense of what those obligations look like going forward. The state’s annual funding calculations low-ball what is needed to fund the benefits. Could it be that such opacity leads local governments to offer wage enhancements, or hiring increases, that translate into total compensation packages that they can’t afford?
The Chicago Tribune’s idea only works if Illinois local governments accurately calculate what is needed on an annual basis to fund the pensions they negotiate with their workers and to have a full assessment of the value of compensation packages over time. How is market valuation incentivized? Perhaps Moody’s move to calculate pensions based on a corporate bond yield will have an effect. Or perhaps plans need to be managed by a third-party, as Roman Hardgrave and I suggest in our 2011 paper.
Tying local costs to local taxpayers is a good idea. Another phenomenon the pension problem has revealed is gradual separation of taxing and spending in American public finance over the course of the past half century. That has produced a growing fiscal illusion in finance – where things seem less expensive than they actually are since the costs are spread over larger groups of taxpayers. Local costs are spread among state taxpayers, and now the worry is that state pension costs and debts will be spread across national taxpayers. At least, it’s been suggested.
In his 2012 budget, Governor Quinn alluded to a federal government guarantee of Illinois’ pension debt. It’s not a popular idea with Congress at the moment. But it appears to have been part of the political calculations of those who are responsible designing and enforcing the rules that guide Illinois’ budget and determine pension policy.
In what has become a common practice in about a dozen and a half states, August is the month for the sales tax holiday. Whether the goal is to encourage consumer spending or ostensibly offer tax relief to families, the three-day holiday waives sales tax on certain purchases – typically school supplies and clothing. Here’s a chart listing the states and the once-a-year exemptions they offer.
What exactly do sales tax holidays accomplish? Some claims:
- They save consumers money.
- They increase consumer spending on both tax-free and taxed items. On net, the result is more revenue in what the National Retail Federation calls a “win/win/win” for consumers, retailers and governments.
- A weekend tax break keeps spending in the local economy. According to Bloomberg BNA Ohio and Michigan first experimented with a tax holiday on cars in 1980. New York picked up the weekend tax holiday in 1997 to entice borough residents to keep their clothes shopping dollars in NYC rather than cross the border to New Jersey’s malls.
- It is a way for politicians to make good on tax relief without making permanent changes to the code.
Marwell and McGranahan (2010) provide another set of questions to consider for those who over-sell the benefits of back-to-school bargains for family budgets. In their working paper, “The Effect of Sales Tax Holidays on Household Consumption Patterns“, the authors ask: Who’s shopping and what are they buying? Their preliminary findings suggest it is primarily upper income households and they are mainly purchasing clothes.
On a purely anecdotal note, I calculate that if our family went shopping during Virginia’s August 3-5 tax holiday we would have saved about $9.00 on backpacks and school shoes. To avoid the back-t0-school crowds we purchased those items at Tysons Corner the weekend before. If that’s the premium for efficient mall shopping, we paid it gladly.
The recession of 2008 pulled the mask off of state budget pathologies that had been identified as institutional weaknesses in the decades leading to the crisis.
The “new normal” for state and local governments does not look like the booming 1980s and 1990s but in fact is riddled with many fiscal challenges. Revenues aren’t what they were before 2008 though they are expected to reach pre-recession levels in FY 2013. The Medicaid and employee benefits bill is rising. The stimulus pushed forward budgetary reforms. These are some of the findings of the Ravitch-Volker Report, an effort of the State Budget Crisis Task Force which assembled in 2010-2012 to diagnose the major problems facing six states: California, Illinois, New Jersey, New York, Texas and Virginia.
Much of the analysis is non-controversial: Medicaid is eating up budgets, as are pensions costs and health care benefits.
Medicaid, currently at 24 percent of state spending, will continue to increase as enrollment, medical inflation and the increasing caseloads that come with higher unemployment increase costs. This is not a surprise. What is new is that the federal government is making it harder for cost-saving measure to be enacted, and “entrenched provider groups in each state resist reductions in Medicaid provider rates….” I do not believe this is the intention of the authors of the report but the diagnosis of Medicaid’s future highlights the dysfunctional aspects of this federal-state pact which has led to the creation of special interests that benefit from inflating costs.
On the pension front the Ravitch-Volker report points to the the role discount rates have played in the pension funding problems facing the state and local governments, in particular in New Jersey. And they also note the reliance on budgetary gimmicks that may even result in a kind of budgetary “cynicism.” A point I have made in the past.
But the report also makes a few assumptions about the interplay of federal, state and local spending that I think could benefit from an expanded debate. The authors warn that cuts in federal discretionary spending will doom subsidiary governments. On the surface, that’s true. Cuts in aid mean less money in state coffers for education, transportation and other areas. But the larger question is what are the fiscal effects of grants-in-aid between governments? There is the public choice literature to consider on the role of fiscal illusion in finances. And further, does the current model of delivering these services actually work as intended?
Their recommendations are largely sound. Many of them have been made before: more transparent accounting, a tightening of rainy day fund rules (see our recent paper on Illinois), broad-based tax systems should replace narrow ones, the re-establishment of the Advisory Commission on Intergovernmental Relations (ACIR). Abolished in 1995 ACIR was concerned with evaluating the fiscal impact of federal policies in the states. Further the commission recommends the federal government work with the states to help control Medicaid costs, and the re-evaluation by states of their own local needs including municipal finances and infrastructure spending.
The report is timely, contains good information and brings many challenges to the fore. But this discussion can also benefit from a larger debate over the current federal-state-local spending model which dates largely to the middle of last century. This debate is not merely about how books are balanced but how citizens are governed in our federalist system. The Ravitch-Volker report is sober but cautious in this regard. The report sketches out the fiscal picture of the U.S. in broad strokes and offers general principles for states to follow and it is sure to create discussion among policymakers in the coming months.
Governor Chris Christie has announced his plan to tackle New Jersey’s pension shortfall. Officially estimated at $46 billion, Andrew Biggs and I estimate the figure is closer to $174 billion (using the risk-free discount rate to assess the size of the liabilities).
Today’s Philadelphia Inquirer reports Christie will ask for a rollback the 9 percent benefit enhancement enacted in 2001 for current workers. This is a good step to putting New Jersey’s pension plan on more stable footing.
In addition to this announcement, Orin Kramer writes in the New York Times about the role investment assumptions played in the pension crisis. He points to government standards that allow pension systems to measure their asset values looking back over a period of years which ultimately gives the plan the appearance of a higher level of funding.
Both articles emphasize the impact of decades of pension deferrals and also raise the issue of the role of government accounting standards in creating the pension crisis. As these issues are hammered out states will continue to face increasing fiscal pressures as benefit payouts increase making public employee benefits, in Governor Christie’s words, “the public issue of this decade.”
City Journal‘s Steven Malanga writes at RealClearPolitics about the possibility of a municipal bond bailout on the horizon. The canary in the coalmine is the SEC’s cease-and-desist order to New Jersey for misleading investors by omitting key information in their bond offerings between 2001-2007. Specifically, the SEC charges that New Jersey misrepresented the state’s pension liabilities. The state indicated it was taking actions to ensure the solvency of its pension funds when in fact pension deferrals were frequently undertaken.
What’s interesting is that the day after this announcement, New Jersey easily sold an offering of short-term notes to banks. The state didn’t have to pay a premium to attract investors. Why aren’t investors more cautious? And why wasn’t New Jersey fined?
As Malanga noted earlier this week in the Wall Street Journal, for years states have been hiding the true size of their fiscal problems behind a range of fiscal manipulations (for a catalog of those, see my latest paper on Fiscal Evasion). Yet the signal sent by the SEC is that there is no penalty or risk for bad behavior. The question Malanga asks: do politicians and muni bond holders simply expect that in the event a state can’t pay its bondholders a federal bailout will pick up the tab?
Last summer I had the experience of learning how cost-prohibitive it is to obtain local budget records for Woodbridge, New Jersey.
Only the current year budget is online. Previous year budgets were not available electronically. So I went to City Hall expecting they would be available to the public. Instead, I was asked to file an Open Public Records Act (OPRA) request with no guarantee the request would be fulfilled.
The costs were jaw-dropping. The first 10 pages cost 75 cents. Pages 11-20 dropped to 50 cents a page. And for each page thereafter the cost was 25 cents.
For 10 years of municipal budgets I would be charged roughly $242.50.
Undeterred, I went across the street to the Woodbridge Public Library. The librarians were incredibly helpful. They carted forty years of budgets to my table. And, told me if I called ahead they would have them ready should I want to do future research.
I spent about an hour copying at fifteen cents a page. Turns out, I only needed five pages from each document. (Something I could not have specified through an OPRA. In order to know what pages I needed I had to look at the documents first.)
I spent $30 for 40 years of specific budget data.
A New Jersey court has ruled that the state should reduce copying fees at state agencies. It seems my complaint is shared by good government groups and many New Jersey residents.
While reducing copying fees grants greater accessibility to public records, why not go a step further and put more online? Is it that costly for New Jersey’s local governments to keep a record of budget data on their websites? In the time it took to photocopy 40 years of budgets the pages could have been scanned into a computer.
Eileen Norcross and Andrew Biggs have a new paper out this morning entitled “The Crisis in Public Sector Pension Plans: A Blueprint for Reform in New Jersey.” While it’s focused on New Jersey, it does an excellent job of outlining the larger problem with state pension plans nationwide and what policy makers can do about it.
Here’s the abstract:
New Jersey’s defined benefit pension systems are underfunded by more than $170 billion, an amount equivalent to 44 percent of gross state product (GSP) and 328 percent of the state’s explicit government debt. Depending on market conditions, the state will begin to run out of money to pay benefits between 2013 and 2019. The state’s five defined benefit pension plans cover over 770,000 workers, and more than a quarter million retirees depend on state pensions paying out almost $6 billion per year in benefits. Nationwide, state pensions are underfunded by between $2.8 trillion and $5.2 trillion, some 20 to 37 percent of America’s annual output as much as $3 trillion, approximately 20 percent of America’s annual output..
This path is not sustainable. In order to avert a fiscal crisis and ensure that future state employees have dependable retirement savings, New Jersey should follow the lead of the federal government and the private sector and move from defined benefit pensions to defined contribution pensions. While significant liabilities will remain, the first step to addressing the pension crisis is capping existing liabilities and providing new employees with more sustainable retirement options.
Specifically, the paper recommends that policy makers:
- Extend the defined contribution plan already available to state university faculty and staff and the state’s Defined Contribution Retirement Program to all state employees.
- Reduce or freeze cost of living adjustments (COLAs) to reduce the state’s unfunded liability.
- Transition non-vested workers to defined contribution plans.
Whole thing here.
What’s gotten in to the governors? Across the country, a number of them seem to be fed up with their respective budget crises and are proposing bold action. As Eileen has written in the New York Post, New Jersey’s Governor Christie has shown remarkable resolve in tackling “the third rail of New Jersey’s budget: union-negotiated contracts and control.”
On Tuesday, I wrote about New York’s Governor Paterson and his plans to lay-off nearly 10,000 government workers (effective upon his successor’s first day in office). Now the Governor has gone a step further, announcing that he is “taking over” the budget cuts in order to keep the state afloat. After weeks of fruitless negotiations with state lawmakers, the state budget is more than 2 months overdue and there seems to be no consensus about how to deal with the $9.2 billion gap. So Paterson plans to impose dramatic cuts by including them in an emergency spending plan.
A little further west, in Illinois, Governor Pat Quinn and the state legislature are wrestling with a yawning $13 billion gap. Yesterday, the governor declared his intention to make the tough cuts that legislators seem unwilling to make. Of course, when pressed for details, he declined to offer a substantive plan. Hopefully, he’ll come around.
Hopefully, all of the governors will come around. A new report by the National Governors Association and the National Association of State Budget Officers (NASBO) will be released this morning. According to the Wall Street Journal (gated), it shows that states across the country still face a $127 billion gap over the next two years.
Thus begins David Halbfinger’s Week in Review essay on New Jersey in today’s New York Times.
New Jersey’s tough-talking new governor, Christopher J. Christie, the first Republican elected in 12 years, is grappling with a deficit in the billions by squeezing nearly everyone — school children, the elderly, mass transit, cities, suburbs, subsidized renters and home owners.
But what’s most surprising about New Jersey is how in such a blue, labor-dominated state, Democrats and union members seem to be cracking under the pressure of the state’s tax burden, revealing a kind of split-personality disorder.
The syndrome surfaced last summer during Mr. Christie’s campaign, when he vowed to bring New Jersey’s property taxes, the nation’s highest, under control. As a candidate he saved his sternest threats for the teachers’ and state workers’ unions, whose healthy pay and benefits packages, he argued, were slowly strangling the schools and running the state’s finances into the ground. Union members, state workers and teachers, it turned out, weren’t offended by his rhetoric. In fact, public opinion surveys showed they ate it up.
Whole thing here.
In my recent op-ed on the structural flaws of public pension systems, I argued that politicians, union heads and bureaucrats use their positions to play taxpayers against public employees for political and financial gain. Monday, the New Jersey Star Ledger reported on a growing backlash against public employee benefits:
In internet postings and on talk-radio shows, government workers are being called “greedy” and “bloodsuckers.” Commenting on the teachers union, one writer called its members “the worst human beings on the face of the planet.” Criticizing the police, another wrote, “The typical criminal could never steal what these cops are walking out the front door with.”
As New Jersey’s unemployment hovers at 10 percent and 401(k)s are dented by stock-market losses, retired public workers find themselves on the receiving end of “pension envy.”
“I understand that I retired with a good pension and the taxpayer contributed to it,” said Tevlin, who kicked in 8.5 percent of his salary toward his pension, which is about $4,000 a month. In his mind it was a fair bargain: In exchange, the public received reliable emergency services. “I don’t apologize to anybody,” he said. “I did a dangerous job.”
This kind of infighting doesn’t serve anyone’s interests. It highlights the problem inherent in the defined-benefit pension system. Theoretically, public employees work for the taxpayers, providing public goods like public education, safety, and emergency services. In reality, taxpayers have little if any direct control over public employees. Those employees are hired by, paid by, and responsible to either public sector unions or directly to bureaucracies. Those middlemen finance their outfits with taxpayer money. Playing one group against the other is an easy way to remain in power.
A 2008 study by the Hudson Institute analyzed collectively negotiated (i.e. union) pension plans versus non-union plans. The results are staggering. These numbers encompass both public and private plans:
- Privately negotiated plans are 98% funded. Union plans are only at 88%.
- For large plans, 37% of non-union plans are fully funded, versus only 19% of union plans.
- For large plans, 2% of non-union plans are in critical financial situations, while 11% of union plans are in crisis mode.
In short, the Hudson study shows that union negotiated plans are significantly worse off than private plans. Similarly, Monday Barron’s reported that the public pension crisis is far worse than the Pew Center study I referenced:
More debt defaults and bankruptcy filings probably lie ahead, unsettling the $2.7 trillion municipal-bond market. The possibility of taxpayer revolts and likely insolvencies has shaken some investors’ confidence in general-obligation bonds — those backed by the “full faith and credit” of the states or localities. Once the gold standard for munis, GOs are under a cloud in financially troubled areas.
The size of the legacy-pension hole is a matter of debate. The Pew report puts it at $452 billion. But the survey captured only about 85% of the universe and relied mostly on midyear 2008 numbers, missing much of the impact of the vicious bear market of 2008 and early 2009. That lopped about $1 trillion from public pension-fund asset values, driving down their total holdings to around $2.7 trillion.
When you can promise public employees lucrative salaries and benefits, while paying for it all with someone else’s money, it’s easy to imagine running up such a ludicrous tab.
No one, of course, would dispute that public servants deserve adequate retirements, particularly the 25% to 30% that lack Social Security coverage. But the old saw that rich retirement packages are a necessary inducement to attract good employees to public payrolls because of below-average pay scales no longer is true.
According to the latest compensation survey by the Bureau of Labor Statistics, the average state and local employee outearns his counterpart in the private economy with an hourly wage of $26.11, versus $19.41. That’s before benefits (pensions, health care, paid vacations and sick days and leaves) drive the disparity even higher, to $39.60 an hour for public employees and $27.42 for private workers.
In public pensions, we allow politicians to play us against real servants of public health and safety. The system needs to change.
Public policy often seems that it should be intuitive. If a state needs more revenue, the easiest way to raise some is to increase taxes (easiest for elected officials, that is). Who has the most money to appropriate? Millionaires, obviously. Connect the dots, and raise taxes on millionaires.
Maryland did just that, but their experiment shows why political common sense and real life common sense are distinctly separate things. From the Wall Street Journal:
We reported in May that after passing a millionaire surtax nearly one-third of Maryland’s millionaires had gone missing, thus contributing to a decline in state revenues. The politicians in Annapolis had said they’d collect $106 million by raising its income tax rate on millionaire households to 6.25% from 4.75%. In cities like Baltimore and Bethesda, which apply add-on income taxes, the top tax rate with the surcharge now reaches as high as 9.3%—fifth highest in the nation. Liberals said this was based on incomplete data and that rich Marylanders hadn’t fled the state.
Well, the state comptroller’s office now has the final tax return data for 2008, the first year that the higher tax rates applied. The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million.
Don’t feel sorry for the poor poor millionaires; that’s not the point I’m trying to make. Taxes are a serious driver of out-migration, be it small states like Maine, or more populous states like New Jersey:
New Jersey out‐migrants tend to move to states that have much lower property values (35% lower), property taxes (41% lower) and overall costs of living (17%lower). Destination states also have notably lower average incomes, substantially higher crime rates, higher infant and child mortality; slightly lower school quality, but somewhat warmer winters. Overall, it appears that net out‐migration is due to the high cost of living (especially the high cost of housing and property tax) in New Jersey.
Policy makers and their hangers-on have often regard taxpayers as little more than fiscal sheep, and periodically shear them. But people, unlike sheep, can vote with their wallets and feet. Usually the powers that be see this as something akin to letting the home team down, or not doing one’s “fair share.” The word “selfishness” is also thrown around.
Policies like the levels of taxes, services, and entitlements that a government prescribes are hardly a form of science. Law makers and interest groups would like to portray them as a serious commitments, and not self-interested social experiments. Again from the Journal:
Thanks in part to its soak-the-rich theology, Maryland still has a $2 billion deficit and Montgomery County is $760 million in the red. Governor Martin O’Malley’s office tells us he wants the higher rates to expire “as scheduled at the end of 2010.” But there are bills in both chambers of the legislature to extend the surcharge. The state’s best hope is that politicians in other states are as self-destructive as those in Annapolis.
The “Soak the Rich” phenomenon is a common-sense argument for redistributive policies, but it has significant flaws beyond the simple fact that it doesn’t work. Take a look at this chart of how tax burdens are distributed in Federal taxation. (here, either insert or link to this: http://www.mint.com/blog/wp-content/uploads/2009/11/MINT-TAXES-R4.png)
Libertarians and liberals can mostly agree that there is too much money and influence in politics, but the policy prescriptions each group suggests are dramatically different. Advocates of punishing the rich ignore the simple fact that when a certain group bears so much of the tax burden, they have massive incentives to care about and influence politics. It’s that or leave the country, or just stop making money (by, for instance, not hiring new employees.)
See this graphic (or click below) for a good visual explanation:
Mercatus Senior Fellow and Neighborhood Effects leading lady Eileen Norcross appeared on Fox Business this afternoon, discussing her recent article in Reason. She discussed the fiscal situation in New Jersey, and how it got so bad. From the Abbot court cases to public sector unions, she covers a lot of ground. Watch the interview here.
In the Reason article she dives into the union stranglehold on state finance in more depth:
Since 1990 local governments have added 45,500 new jobs. Nearly all of them are represented by one of a dozen unions, which have helped secure some of the plushest public sector jobs in the nation. It’s easy to see how property taxes have grown at twice the rate of inflation over the past decade. A government worker in New Jersey earns an average of $58,963, a police officer averages $84,223 (the second highest in the nation), and six-figure public sector salaries are commonplace. Compare this to neighboring Philadelphia, where the average police salary is $49,000. According to one estimate, of the $23 billion New Jersey raised in property taxes in 2008, $18 billion was spent on police, municipal, and teacher salaries.The tab for public workers doesn’t end there. Factor in the state’s pension plan, currently under-funded by $34 billion. The New Jersey Taxpayers’ Association calculates pension payouts for the average teacher range from $1.6 million to $2.5 million, per retiree. For the average police officer, that range totals between $3.2 million and $6 million, per retiree.
Eileen Norcross has an op-ed in the Asbury Park Press arguing that Governor-elect Christie must deal with New Jersey’s education system before it will be possible to deal with the budget deficit, property taxes, income taxes, and outmigration:
School funding is a mess not because of decisions by the Legislature, but edicts from the state’s Supreme Court. For more than 30 years, the courts have controlled the schools through the Abbott decisions (which number 20 separate rulings over 24 years).
To wit, 31 court-designated Abbott districts must spend the same amount per student as the highest-spending district in the state. While other state courts have ruled on state funding formulas for education, none have effectively taken over the Legislature’s policymaking functions as the New Jersey courts have.
Regardless of what type of reforms Christie and the Legislature choose to undertake, one thing is certain: Without reforming education, New Jersey will continue to raise taxes and engage in reckless fiscal gimmickry that would make an Enron accountant blush.
The citizens of New Jersey know that something is deeply wrong. An increasing number of New Jerseyans are leaving the state for lower-tax pastures. Rutgers University economists Joseph Seneca and James Hughes have found some 377,000 people left New Jersey between 2000 and 2006 alone — the combined populations of Newark and Woodbridge. With the worst tax climate of all the 50 states, according to the Tax Foundation, New Jersey is paying a great deal and getting little in return. [NB: Links added in this post.]
Eileen Norcross has an op-ed in today’s New York Post in which she argues that only substantive reform can fix New Jersey’s budget problem.
[Governor-elect Chris] Christie inherits a state that’s in arguably the worst financial condition in its 233- year history. Last year’s $7 billion shortfall, closed with stimulus dollars and tax hikes, has resurfaced at an even larger $8 billion for 2010. Residents face crippling property taxes (an average of $7,000 per capita), high income and sales taxes, $45 billion in debt and the net loss of 400,000 people since 2000.
This is not the time to tinker at the margins with rebate programs and line-by-line budget deliberations. Without question, turning Trenton on its head means tackling the state’s two greatest and most immediate threats: the Property Tax Relief Fund (PTRF) and unfunded mandates on municipal governments.
Christie has his work cut out for him. Reviving New Jersey will take hard work and persistence, not just by the new governor, but by the people who elected him. They must demand a fundamental rewrite of the rules under which the state and municipal budgets are drafted — and hold their elected leaders to account if they stray off course.
Read the whole thing here.
The New York Post reports that New Jersey Governor Corzine’s office suggested Cabinet members find him speaking events that show job creation or economic development in the private sector, writing in an email, “I know that it might be a stretch for some of you, but please be creative.”
Rather than find fault with political actors acting (unsurprisingly) in their own self-interest, it’s bad policy resting on weak theory that lends itself to creativity in economic calculation.
My Mercatus colleague Veronique de Rugy explains what this fuzzy stimulus-math has to do with the job creation multiplier, a Keynesian-inspired calculation that sits on shaky theory.
First the theory. Keynes asserted that during downturns consumers hoard money. Thus, less is spent in the economy. The policy solution was for government to spend to spur economic activity. In 1930, Richard Kahn built on idea, creating the “Keynesian multiplier,” demonstrating how a government dollar stimulates more spending in the private economy.
Simply put, when the government spends $100 million on workers to pave a road, the workers spend that money in different businesses, which now have more money to spend — i.e., hire more people, who will now have income to spend. Sounds simple. But the theoretical problems are many:
- In his model, Keynes separated saving from investment, a fatal flaw. Saving is not necessarily money hoarded, it is money put in the bank and lent out; that is, invested.
- Keynes’ model is based on an “aggregate consumer” which abstracts away from the reality of an economy comprised of individuals all facing their own unique circumstances.
- The government cannot create wealth, it can only redistribute it from the private sector. At the other end of government stimulus are taxes.
Then there is the problem of calculating the effects of government spending on the economy. When wading into multiplier territory, it can get technical fast. Here’s a discussion of different approaches.
In every method used, economists are forced to imagine an alternate reality — one built on assumptions that are easily challenged. For example, to compare present unemployment rates to past rates may be straightforward but it fails to account for other economic forces that were going to affect unemployment with or without the stimulus.
Given the “alternative reality” problem, is there really much difference between jobs figures stretched for political effect, and those generated via sophisticated models? Depends on what parallel universe you like to live in.