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January 12, 2012

The Daily DOOM


Here's a long article from a relatively pro-public sector standpoint that reinforces the basic point that there is a crisis, and it’s going to require painful and costly sacrifices to remedy. Miller makes an excellent point about moving public sector employees to defined-contribution plans like a 401(k) -- this really does nothing to reduce the burden related to current retirees and those near retirement, and in fact may make those problems worse in some scenarios. This is not to say that a move to a defined-contribution plan for public-sector workers is a bad idea -- in fact it’s probably necessary -- but it won’t solve the immediate problem.

I think this article is correct: if the economy improves dramatically over the next several months, we’re going to get a second Obama term. This is even more true now that it looks -- mutatis mutandis -- like Mitt Romney will be his GOP opponent in the general. That said, I don’t expect the economy to improve all that dramatically (if at all).

Thank you for taking out a loan from your friendly local Italian bank! Your account manager is a friendly gentleman named Luca Brasi. If you’re thinking of defaulting on this debt...I’d advise against it.

I’d quibble with this article only to this extent: Europe’s problem is spending and growth. Europe’s welfare-state gobbles up an inordinate (and growing) share of national GDPs, and that can’t continue. This is in part why they turn to borrowing to fund their operations; their taxes are already sky-high and can’t realistically go up by much more (that fabled “Laffer curve” at play again). But the lowest-low birthrate and moribund economies in countries like Italy and Greece will have profound effects, and some of those effects are already coming into play.

Note to Germany: Italians will continue to behave like Italians; Frenchmen like Frenchmen; Greeks like Greeks; Spaniards like Spaniards. The hope that any of these peoples will become more German in outlook or comportment is the height of naivete. I keep saying it: there is no such creature as a “European”, and this was one of the founding fallacies of the EU and the Eurozone.

Angela Merkel is like many a creditor before her, confronting a debtor who owes huge sums of money. On paper, the creditor looks omnipotent, but in reality, the big debtor holds some high cards. “If you owe the bank ten million dollars,” as they say, “you are in trouble. If you owe the bank ten billion dollars, the bank is in trouble.”

The “socialist calculation debate”. Mises and Hayek's great insight as to why Socialism/Communism would never work is the complexity problem: there is no possible way for any group of people to comprehend an economy’s various pieces and parts well enough to allocate goods and services efficiently. (This complexity is also why I think that macroeconomists are pissing into the wind. A national economy is like the weather: there are just too many variables, and too much chaotic change, to accurately predict outcomes beyond the very short-term.)

Capitalism without capital. Human beings have always been the most important ingredient in any capitalist enterprise; it’s just that technology has amplified rather than diminished the importance of certain individuals within a firm. It’s important to note, however, that in many cases a firm needs far fewer employees than in times past for the same (or better) results. Just don't forget that ultimately any successful economy must still be grounded in the world of real things.

A sign of the times: thieves won’t even steal CDs or DVDs any more. This reflects the reality that these goods cannot be profitably resold, and thus do not remotely offset the opportunity costs of illegally acquiring them.

Senator Jeff Sessions holds the USDA’s feet to the fire on food-stamp (SNAP) fraud.

Scotland may tell Britain to sod off in 2012...or not. Scotland barely has an economy, and it has a grotesquely bloated public sector in proportion to its size. Whatever nationalist pride may counsel, Scotland probably cannot survive as a sovereign nation at this point.

Using taxpayer money to fund projects that the private sector won’t touch is rarely a good idea, and this story is a good example of why that’s true. Never mind the likelihood that taxpayer dollars are often directed at politically-correct boondoggles (high-speed rail leaps to mind); a more fundamental problem is that these efforts are usually “feel good” projects with little economic support. I used to live in Denver, and I loved the Tattered Cover bookstore -- it was a vast warren of all kinds of books. I probably spent months of my life in that place when I was in my 20’s. However, read this comment and rolled my eyes:

Joyce Meskis, owner of Tattered Cover, said her business — like other retailers in the city — has been affected by the economic downturn.

"When we made the transition from Cherry Creek to Colfax, we knew we would have to rebuild our customer base," Meskis said. "Sales have not materialized as was anticipated over time. That's not to say that they won't. We are very happy with the site. Our customers are happy. We just need more of them."

When I read the story about your bankruptcy in a year or two, I’ll be really interested to see how you rationalize that decision to move from a successful old location to an underperforming new location.

California Governor Jerry Brown’s plan for salvation has always been to shake down the wealthy, but he forgot that the wealthy aren’t shackled to the land -- they’re bidding California adios, and taking their money with them. Now Brown must either find a way to plug the gaping hole in California’s budget, or find some way to cut $4.8 billion from the scool system (and thus face the wrath of the teachers’ union, who went all-in for him in the last election). This has always been the problem with the “tax the rich” philosophy so beloved by the Democrats, especially at the state level: the rich can just take their ball and leave if the game isn’t worth it.

Another BRIC turns out to be cracked.

The hits just keep on coming in the Eurozone: Spain’s industrial output plunges by 7% in November 2011.

You shoulda listened to Benjamin Franklin when he said, “A penny saved is a penny earned.” In this case, a penny saved is about 138,000,000 pennies earned. More or less. (Thanks to lauraw for the link.)

VDH writes a good essay on how outdated our perception of “poor” is these days. I’ve said it myself: if you can afford an iPod, a TV, internet service, a cellphone, a car, shelter, and enough food to eat, you’re not poor. “Poor” Americans have access to technologies and life-experiences that would have fetched a king’s ransom in treasure in past ages. But it is to our discredit that we forget how hard-won this civilization of ours was: how much sacrifice, privation, misery, effort, blood, sweat, and tears went into building it. We simply take it as our natural due and whine that we can’t have even more of it at less cost.

It’s hardly news anymore that public-sector pension promises will be made good (or not) on the backs of taxpayers, but I still think that the average private-sector packmule has no idea of the amount they’re going to have to pony up to vouchsafe the various municipal, state, and federal pension promises. The amount required over the next several decades beggars the imagination. In fact, the amount is preposterous: there’s no way the money is ever going to be paid out as promised. Even if it were mathematically possible (which it isn’t), taxpayers would revolt over the massive increases that would be required. If I were a public-sector worker, I’d be making a point of saving every dime of my own money that I could, because that fat public sector pension is unlikely to ever be paid out in full. (And I’m not even getting into the healthcare benefits, which are even more onerous than the pension benefits.) Basically, the bedrock truth is this: money that can’t be paid out, won’t be, no matter what agreements were signed or what the courts say.

The Feds are talking about how to resolve the state pension crisis, but I suspect that "talk" is all that will come of it. The pension crisis was not "caused" by the 2008 crash, either; it's been building for decades.

6 in 10 Greek households to avoid paying their taxes? So it’s business as usual in Greece, then.

Hostess has $860 million in debt. That’s a big Twinkie.

Has the Chinese economy started turning into a consumption-based one rather than an export-driven one? Maybe, but the published Chinese figures are highly untrustworthy. This is the crux of the problem when trying to divine trends in the Chinese economy, really: their “official” numbers don’t bear much resemblance to what’s really going on there. (Tyler Cowen recently posted on exactly this problem.)

Jon Corzine as Voldemort.

How much does “intention” matter in a financial transaction or decision? It matters a lot to the primary counterparties, obviously, but how about the outside stakeholders and investors who can only see the effects of this decision (and profit from it, or not)? I have never thought that laissez faire was a synonym for moral neutrality; there are some deals I will not do no matter the profit to be had from them, simply because I find them distasteful. I wouldn’t invest in companies specializing in slave-trading, for example, even if slavery was still legal. It would be an odious enterprise regardless of the legal status, and I would be shamed to profit from it. Still less would I work for or found a business in such an endeavor, even if this decision put me into extreme financial hardship. However, I would invest money in a manufacturer of cigarettes or liquor, or in a company engaged in the production of pornographic films if the promise of a decent return was offered. It’s a question of personal tolerance, I suppose. The point is, “intent” does matter in economics -- to most people it matters not just that companies do things or manufacture products, but why they do those things.

Boy, that Greek bailout just keeps getting bigger and bigger. At some point the Eurocrats are going to have to face up to the inevitable and just let Greece default.

Nonprofit organizations are feeling the fiancial pinch as the public sector is forced to prioritize funds. This is yet another area where public sector pension and healthcare funding has an unexpected bite: money spent on pensions and healthcare is money that cannot then be spent on Meals on Wheels or any number of other private (but publicly-funded) non-profits.

In California, not even a felony conviction for misappropriation of funds can touch your pension benefits. This is just another way that California tells the packmules in the private sector “Pay up, you chump sucka!”

UPDATE 1: Remember all that giddy talk about how the robust holiday-season retail spending would signal an uptick in the economy more generally? Yeah, not so much. (Thanks to slublog for the link.)

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posted by Monty at 08:49 AM

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