Asymmetrical Information

It will be a while, but eventually local govts will figure out how to underfund their pensions.

What we need to do is force local govts to use third parties to hold/invest the money and shift all liability for said pensions to those third parties.

Yes, if the third party goes under, folks lose their pensions.

We must get govt out of the biz of keeping promises that other people made. We must stop time-shifting costs.

I take it that a State can renege on its debts without any assumption that the Federal government will assume them? Has there ever been a case of a State defaulting?

I, for one, would be much happier if our government would move to a more honest accrual method of accounting rather than the weird hybrid method it currently uses.

Have states defaulted? Sure, plenty of Southern states defaulted on state bonds issued while they took part in the Confederacy. Reconstruction governments repudiated the debts of prior state governments that were in rebellion. I suppose it is possible for a state legislator to argue today that promises made by previous legislatures were invalid because those legislators were obviously out of their minds at the time the promises were made!

"It's no exaggeration to say that elected officials are shocked, absolutely shocked, by the size of these liabilities,"

Hmm, haven't I heard this somewhere before?

Ah, yes, here it is:

Captain Renault: I'm shocked, shocked to find that gambling is going on in here!
[a croupier hands Renault a pile of money]
Croupier: Your winnings, sir.
Captain Renault: [sotto voce] Oh, thank you very much.
[aloud]
Captain Renault: Everybody out at once!

from http://www.imdb.com/title/tt0034583/quotes

You're absolutely right about the benefits of sound accounting for Social Security liabilities. In the debate over personal accounts, a strong argument against them was that the transition would cause a huge budget deficit. In fact, that deficit consisted of recognizing liabilities that are already present, just not on the books.

What if we were to give current workers a legal right to the retirement benefits they have already earned according to the present system? Since nobody seriously doubts that these benefits will be paid, the law wouldn't cause any dollar to go anywhere it wouldn't have gone already --- but it would trigger more accurage accounting for what would now be an unambiguous liability.

I wonder what objections would be raised to this proposal.

Walter: I'd advocate against giving people an ownership interest in SS as the only real way to fix it is to take away people's benefits. I'd much rather move people's benefit date (to like 75 immediately for everyone under 60). Make the deficits come on the books, but not by solidifying claims to assets that don't exist.

The problem is that Social Security and Medicare's supporters (so, basically everyone in Washington) benefit in a very substantial way from keeping the liabilities off of the books. It allows them to say things like "There's plenty of money in the Social Security Trust Fund" and to claim that liabilities written to oneself are, like, totally worth something. In the case of Medicare, it allows them to ignore the problem and pander to the AARP folks who actually vote.

Back around 1830, there was a canal-boom that preceded the railroad boom. Many state governments engaged in public-private partnerships to develop those canals. Many of the canals went bust, dragging the states down with them. I don't think the federal government assumed their debts, but I might be wrong. Obviously, the federal government was much much smaller and broadly empowered than it is today...

This wave of state bankruptcies is one of the reasons why many state constitutions are much stricter on debts and deficits than the federal government.

I too applaud the shift in accounting practices.

Mike D,

I grew up in a state (Indiana) that went bankrupt after the canal boom. It declared bankruptcy, the federal government did not assume it's debts. However, as a result it has a balanced budget ammendment.

I believe that the federal government, led by Treasury Secretary Alexander Hamilton, assumed Revolutionary War bonds issued by the thirteen original states. As a practical matter, the states had defaulted on these bonds; they had no hope of paying them, and most veterans sold them to speculators for pennies in the belief that they would never be paid.

I believe Michigan went bankrupt about 1960. Not sure if there have been any more recent state defaults. One result of that was a complete re-write of the MI constitution, including a requirement to balance the budget. But the problem is, do they really balance the budget, or do they do accounting tricks while ignoring or underestimating unfunded liabilities such as employees' pensions and future medical care?

Those 19th Century state bankruptcies once made Nebraskans so nervous about debt that the Capitol building in Lincoln was constructed with no borrowing at all - each year the legislature appropriated some money out of the tax receipts, and when it ran out construction stopped until the next year's revenues were divvied up. IIRC, it took twenty-some years, but when the building opened, it was free and clear, gold-plated dome[1] and all.

[1] Yes, it's literally gold-plated, although the gold leaf is so thin that it's translucent and looks greenish rather than yellow.

As a result of the state defaults in the 1830s after the canal boom and bust, the European bond markets were closed to American states and municipalities until the 1980s. Financial markets have *long* memories.

Thanks, quadropole.

Joe Magarac -- That's right. The federal government did assume the debts of the state from the Revolutionary war. That seems like a very special case though, as there was not yet a national gov with taxing power to provide for military needs during the Revolution.

If memory serves, state-administered poor relief/unemployment were busted by the Great Depression, and the federal government stepped in to fill them back up. Maybe there will be a second quadropole with a good memory to back that up too :)

Once the new rules that require state and local governments to quantify their unfunded liabilities for retiree pension and healthcare benefits take effect, the new transparency is likely to have the following impact: (1) the debt rating agencies will incorporate the information in formulating bond ratings which could affect how much government entities pay in interest on future bond offerings, (2) taxpayers may finally demand that politicians more firmly resist any future improvements in benefits for current employees, (3) there should be more pressure to make the state shift to a less costly and less generous defined contribution pension system (from defined benefit) for new employees and to require all current employees and possibly, retirees as well, to contribute more toward the cost of their health benefits. If that happens, it would be long overdue and about time.

More transparency is more honest. The Big Lie is that the gov't can give "all voters" more of Other People's Money than they take. The winners, those who really DO get more cash than they put in, don't want this to become known; and neither the winners nor the losers much want it known how the losers are supporting such a system.

Most have the illusion that they put their money in, like in a bank, and get their money out. Or they pay taxes, and thus deserve benefits.

Transparency helps, but what is really needed is to shift from gov't grants, to gov't loans -- so the needy get cash, but with an obligation to repay it. (I support Tax Loans). Similarly, Fed. Emergency cash should go thru the states and cities, with an automatic tax to repay it (1% sales?)-- and have the states decide how much Fed. cash they really "need".

But the electeds in DC want more power and glory, and the voters keep rewarding the over-active ones. The voters know there is no free lunch, so if their guy can get the Feds to buy them a lunch, it's time to pig out.

One of the reasons it was so hard for the Confederacy to receive loans during the war was that Jefferson Davis had spoken on the floor of the US Senate in favor of defaulting on the state debts. People overseas remembered that.
There is a very real risk that the Europeans and others may simply refuse to buy treasury bonds, notes, and bills from Republican US governments. Only the Democrats would have the ability to borrow.
Would that make you more or less likely to vote for a Democrat?

> Would [Repub govts can't borrow money] make you more or less likely to vote for a Democrat?

While the premise doesn't make any sense (Dems are only fond of restraint when they're not the ones passing out the pork), that would make me more likely to vote for Repubs.

It is a good question though - let's see what the Dems who claim to be concerned about the deficit say.

I think plenty of Democrats are concerned about the deficit. However, what they will never tell you is what level of taxation (as a percentage of GDP) they would like to see the budget balanced at. Furthermore, I often get the impression that they think high income people are always ripe for further soaking no matter how much (in taxes) they are already paying. It reminds me of when I used to ask my late father in law (a blue collar factory worker) who is supposed to pay for all of these social programs. His answer: "Let the rich pay."

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