The Trouble With BABs

Wall Street Journal: The ‘Build America’ Debt Bomb

Meanwhile, investors are realizing that states and localities face long-term costs in addition to their muni debt, especially retirement obligations. Joshua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester assess the 50 states’ unfunded pension bill at $3 trillion, and they say that the municipal tab for pensions could reach $500 billion. That is on top of some $2.8 trillion in outstanding state and local borrowing, according to the Federal Reserve.

The Securities and Exchange Commission drew an explicit link between pension liabilities and municipal debt in August, when it charged New Jersey with fraud in its municipal bond offerings. The SEC cited the state for not revealing the true extent of its pension woes in its bond offerings—a clear indication the agency thinks growing pension debt may impede the ability of some states to meet other obligations.

The governments that have made the most use of BABs have been those with the greatest fiscal problems. The biggest issuer of BABs, California, has relied on an unprecedented number of gimmicks to balance its books in the last two years—such as temporarily increasing tax withholding rates and issuing IOUs to vendors.

A friend of mine brought up this article on Facebook.  My immediate thought was that the second Republicans oppose the extension, it will be framed as though they are taking funds away from police and fire and what not.

The same thing happened, in a way, with money in the stimulus package for unemployment benefits. States received the money, but along with the money came strings, and when the federal stimulus money for said benefits ran out, the states were left with an unfunded mandate that wasn’t there before. That’s why Gov. Mark Sanford here in SC wanted to refuse he stimulus money and, in the alternative, asked the White House if it would be okay to use it to pay down state debt. The White House refused, and Sanford (along with Mississippi’s Haley Barbour, Louisiana’s Bobby Jindal, Texas’ Rick Perry and Alaska’s Sarah Palin) were painted as ideologues who put political gamesmanship ahead of the needs of their states.

We need a constitutional spending limit amendment, capping federal spending at one-fifth of GDP, and proportional cuts now to get us there. We need an earmark ban as a symbolic gesture that Washington’s spendthrift ways are history. And even though I believe we have a spending problem and not a revenue problem, we need across the board tax cuts–or, even better, the implementation of a purely consumption-based tax system–in order to attract business and boost revenue. And that’s just a start.

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Comments

  1. Anonymous says:

    We are a house of cards.

  2. Randy Wills says:

    Thanks, Jeff, for bringing the “BAB’s” issue to the fore. The unintended consequences are immense.

    I’ve been immersed in financial reading this past week from the NYT, McClatchy, the recent cover story in The Economist, and, of course the WSJ, including the special secion over weekend regarding the role that China will increasingly play in our economy and public affairs.

    I am totally beside myself over how the economists and the politicians have taken over the will and the welfare of the American public. They couch everything in terms and concepts that relatively few of the common folk fathom, and in most cases, I think that they obfuscate the fundamental economic issues for their own benefit and purposes. What’s going on at the Fed right now is the equivalent of giving a loaded gun to a child.

    After reading yesterdays special section in the WSJ reporting on the conference of the business and political “elites” regarding what it will take to get “the economy booming” and “people back to work”, my ire only increased. In my opinion, they are living in a fantasy world with little understanding of the basic problems within the American workforce. I could not find one practical solution to the fact that the middle class is going the way of the dinosaur as a result of the competitive dynamics of the global economy and the concommitant loss of large segments of basic industry in the U.S. Yes, there will be job opportunities at the low end of the wage scale and, as Warren Buffet said, the wealthy, who are “doing better than ever” will continue to widen the income gap between the bottom and the top.

    The bottom line from the elites? Free trade will solve all of our problems. I’m a free-trade capitalist, but an uncompetive cost structure will always be on the losing end of any economic battle.

    I guess I should write an article rather than a comment, so I’ll give it a rest, but I’d like to end up by saying that the government is NOT the answer. It won’t be until the people kick the politicians and the elite prognosticators and economic manipulators out of the way and go about solving the problems with common sense and personal commitment and sacrifice that we’ll begin to regain our economic footing. And, considering the hole that our government has put us in, it’s going to be a long, hard, slog. Are we up to it? I don’t know, but our children and grandchildren will suffer immeasurable harm if we aren’t. Our country will become unrecognizable.

    Randy

  3. Jeff Schreiber says:

    I think you should write one, too, Randy! Your “Job Creation” piece was fantastic, and it shows a command of this issue.

  4. Jordan Bell says:

    For those that would like to follow up with a lot more indepth information regarding economics, the Ludwig von Mises Institute is an excellent source for free articles, videos, and audio. They are a lot more than just economics, with an excerpt from their website “world center of the Austrian School of economics and libertarian political and social theory.”

    http://mises.org/

    http://mises.org/about.aspx

  5. Anonymous says:

    Randy, write it before we are all having to read/write Mandarin.

  6. Randy Wills says:

    Well, one advantage in writing an article is that I would have access to Spell Check. I just can’t understand why I don’t pick up those errors when I’m writing a comment, but when I read it after it’s posted, they stand out like a sore thumb.

    Sorry.

    Randy

  7. Good bye Obama says:

    WASHINGTON – Federal Reserve officials have become more pessimistic in their economic outlook through next year and have lowered their forecast for growth.

  8. Chuck in San Diego says:

    As a current resident of California I am faced with the certainty of facing the likelihood of relocating within a couple of years if I want my family to have a future. The recent elections totally prove Albert Einstein’s quote: “Insanity is doing the same thing over and over again and expecting different results.” This state truly is insane with their fiscal posture and their choice of politicians.

    So, as a backup plan if I can’t move, I’m starting to learn some phrases in Chinese that will help me survive. For instance:

    你想薯片吗?

    (Translation: “Do you want fries with that?”)

  9. Anonymous says:

    Debt, not good. -Thomas Jefferson

    http://news.yahoo.com/s/ap/world_markets

  10. John Buyon says:

    @ Randy
    your grasp of economics is definitely better than the rest of your kind up in this website.
    But I have a question. you seem to be able to understand the exact results of free trade. ie. less good manufacturing jobs for Americans, hyper capitalism called “globalization” a widening gap between middle class and uber rich.

    You are a person who believes that the dead ideology of socialism and state planning was just a theory that doesn’t apply to real life.

    I propose that you bury the ideology of unmitigated free trade in a shallow grave next to the deep grave of socialism.

  11. Randy Wills says:

    Strange that you should bring that up, John (Buyon). Somewhere along the line I must have failed to mention that for free trade to benefit any given nation, they must be competitive in all areas of commerce which are required for a stable domestic employment environment. Otherwise, free trade will always drain jobs from the non-competitive participant. In our case, the politicians attempt to mask this by debt-financed “stimulus” money.

    On the other hand, imposing tariffs on incoming products in order to make domestic-equivalent-products competitive is inherently counterproductive because it typically leads to trade wars, closing foreign markets to domestic products that are competitive.

    So, what to do?

    My position is that it is incumbent on an educated citizenry to take control of the commerce of the nation in which they live, and they can do this only by understanding the consequences of their monetary (and political) choices. In addition, they must be willing to do whatever it takes to create a competitive cost structure in markets (and jobs) that they want to hold on to, including adjusting their standard-of-living expectations. If they don’t, they will mindlessly forfeit a large swath of employment opportunities that will likely never return.

    But good point, and thanks for your comnent.

    Randy

  12. John Buyon says:

    I agree but
    rather than a race to the bottom to make costs competitive by cutting wages, off-shoring, and polluting, as recommended by the corporate capitalists of this world

    I would rather see a race to the top by making sure that free trade only occurs between nations when certain environmental, social and political preconditions are satisfied such as lower toxin use in industry labor union rights and free press before free trade deals especially with 3rd world countries.

    I think that should make the theoretical benefits of free, open trade realized by both parties.

  13. Randy Wills says:

    “John Buyon” @ 10:14 PM:

    I was thinking about your comment/question late last night as I was walking my Collie compamion (in the snow, of course) and realized that my position on free market capitalism has to be qualified by the reality of unregenerate human nature. By this I mean that free trade, unfettered by morality and fueled by avarice, fails, by its very nature, to take into account what is fair and just beyond the realm of the individual seller and buyer.

    But the solution is not in trade barriers or top-down control but rather it rests on the shoulders of the consuming public. I’m prone to making overly-broad statements, but I used to say that nothing that a business does makes any difference until the customer’s money changes hands and becomes the company’s money. All of the dynamics of the free market converge at that point, and therein lies the power to regulate the process.

    Verbose again.

    Randy

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