State governments are drowning for two reasons: 1) obligations to public employees; 2) the state share of medicare and medicaid spending. Most states are now beginning to confront the public employee problem by reigning in the some of the worst abuses of overly lavish pay and benefits (teachers top the list, by the way).
Only Republican Governor Bob McDonnell of Virginia has opted to pour on more lavish benefits for public employees and leave the taxpayer to pick up the tab, but he is an outlier. Governor Christie of New Jersey has led the charge to begin to curb the enormous pay and benefits of public employees. Other Governors, Democratic and Republican, are following Christie's lead. Even President Obama has entered the fray by freezing public employee pay for two years in a symbolic gesture toward sanity.
But, there is much to be done. California's off-balance sheet pension liabilities are estimated to exceed $ 1.5 Trillion (those numbers are not in the budget, which now $ 25 billion out of balance). So life should get interesting in California. A similar pattern exists in New York and time is no longer on their side.
Again, much like Europe, look for debt defaults and workouts by state governments as they struggle to undo the poor policies of the forty years.
Tuesday 30 November 2010
Europe and All That
First Greece, then Ireland. Now all eyes turn to Portugal, Spain, and Italy. Little noticed is that neither and France and Germany are likely to survive some type of default on their own sovereign debt. A combination of bad economics, a bad economy, and the tide of demographics will sink both France and Germany in time.
The idea that you can paper over the problems in the PIIGS (the new name for Portugal, Ireland, Italy, Greece and Spain) is ludicrous. Much of the PIIGS sovereign debt is held in German and French banks. Merkel and Sarcozy think no one knows this, I suppose.
But, in fact, the world markets know everything. Just watch bond yields on European sovereign debt. The are beginning the slow, inevitable surge toward infinity. (You reach infinity when the bonds are completely worthless.
Europe has no real shot other than defaulting and the sooner the better. Ireland will probably be the first. They will renounce their guarantee of bank bondholders and that will begin a tide of defaults and partial defaults (and workouts) that will begin to crush the holders of sovereign debt. That is as it should be. Those who make bad investments should suffer the consequences.
Anxious eyes watch California, New York, New Jersey, Illinois and host of small American cities that will default, at least partially, on their debt within the next 24 to 36 months. The idea of a federal bailout died on November 2nd. All appropriations, according to the US Constitution, must originate in the House of Representatives. Good luck with that. There will be no bailouts for the profligate states. That is as it should be. Those who make bad investments should suffer the consequences.
You can't repeal the laws of economics by pretending to backstop folks who make bad decisions. That just leads to more bad decisions.
Real economic recovery and growth cannot begin until the wave of defaults begins.
The idea that you can paper over the problems in the PIIGS (the new name for Portugal, Ireland, Italy, Greece and Spain) is ludicrous. Much of the PIIGS sovereign debt is held in German and French banks. Merkel and Sarcozy think no one knows this, I suppose.
But, in fact, the world markets know everything. Just watch bond yields on European sovereign debt. The are beginning the slow, inevitable surge toward infinity. (You reach infinity when the bonds are completely worthless.
Europe has no real shot other than defaulting and the sooner the better. Ireland will probably be the first. They will renounce their guarantee of bank bondholders and that will begin a tide of defaults and partial defaults (and workouts) that will begin to crush the holders of sovereign debt. That is as it should be. Those who make bad investments should suffer the consequences.
Anxious eyes watch California, New York, New Jersey, Illinois and host of small American cities that will default, at least partially, on their debt within the next 24 to 36 months. The idea of a federal bailout died on November 2nd. All appropriations, according to the US Constitution, must originate in the House of Representatives. Good luck with that. There will be no bailouts for the profligate states. That is as it should be. Those who make bad investments should suffer the consequences.
You can't repeal the laws of economics by pretending to backstop folks who make bad decisions. That just leads to more bad decisions.
Real economic recovery and growth cannot begin until the wave of defaults begins.
Tuesday 23 November 2010
Post mega conference
The first conference of the Financial Literacy Research Consortium was held last Thursday and Friday, November 18 and 19, in Washington, DC. The Financial Literacy Center was in charge of organizing it, and I just want to say how happy I am about the outcome. There are as many as five things I want to highlight about the conference.
David Rust, the Deputy Commissioner for the Office of Retirement and Disability Policy at the Social Security Administration (SSA), opened the conference. As he described the work that SSA is doing to promote financial literacy, the image of a family doctor came to my mind. In the same way that a family doctor attends to his patients over time, caring for them at each stage of the life cycle, treating illness when necessary and preserving health when possible, so Social Security has been taking care of individuals, supporting them when they face problems such as disability. And with the financial literacy initiative, SSA is aiming to preserve and promote future financial stability by making sure that people are accumulating enough for retirement and are well equipped to make savvy financial decisions. SSA is ideally situated to promote financial literacy: it is an institution that is focused on the long term and that has the patience to wait for results in the long run. And investments in financial literacy will bear fruit in the long term, in line with the horizon of SSA.
Michael Barr, the Assistant Secretary for Financial Institutions at the U.S. Department of Treasury, delivered the keynote address at lunch. Michael is also a top law scholar and a faculty member at the University of Michigan Law School. He gave one of the most articulate descriptions of the role of financial literacy and financial regulation that I have heard. He generously interacted with the audience after his talk, and the many questions that were asked are a testament to the importance of the work he is doing. The Treasury Department is playing a significant leadership role in the field of financial literacy, and I am proud that Michael Barr is at the helm of many initiatives, including the important work of building the new Consumer Financial Protection Bureau.
Punam Keller, the Charles Henry Jones Professor of Management at the Tuck School of Business, delivered the closing talk. Punam is an expert on marketing strategy and social marketing and she is also the Marketing Director for the Financial Literacy Center. She described why financial literacy needs a marketing strategy and gave many tips on how social marketing can be of help in designing programs that are effective in influencing behavior. Punam is one of the most engaging, energetic, and brilliant speakers I have heard, and I am very happy to have been able to collaborate with her on so many projects.
The conference was large, with over 500 people registered. We designed the conference for interaction, and I believe we succeeded in engaging the audience. There were a lot of questions at the end of each session, and in the sessions I was able to attend, I learned as much from the questions that were asked as from the presentations. The agenda included an hour dedicated to visiting exhibit booths at which our team members displayed the products and projects they have been working on in the past year and interacted with conference attendees. I walked through the conference foyer during breaks and took stock of the many conversations generated by the topics presented at the conference sessions. A number of people approached me to say how much they enjoyed being involved in the conference. A sense of involvement and engagement is not a given at all conferences and one lesson I took away from this event is the value of creating a dialogue between the presenters and attendees. There is much to be gained from a conference at which everyone feels part of the conversation and everyone feels they have a chance for their voice to be heard.
Some of the programs that were presented speak of the creativity and ingenuity that is being used in designing financial literacy programs. One of the most popular presentations and exhibit booths was that of Doorways to Dreams (D2D). D2D has developed a casual video game, called Bite Club, to teach financial literacy. Bite Club, which is inspired by one of the most popular casual games of all time, Diner Dash, offers players a simulated experience in which they face the real-world tension between managing debt payments and current spending needs on the one hand, and saving for the long-term goal of retirement on the other. Players must manage a “day club” for vampires which demands they successfully pay off debt, meet current consumption needs, and save effectively for retirement. The core instructional design teaches the value of three important real world behaviors: (1) saving for retirement, (2) paying down debt, and (3) managing current consumption. In case you did not think there is a relationship between vampires and financial literacy, think again!
Let me turn now to the topic of food. As I have mentioned in previous posts, I believe food contributes to the success of any event. The food at the Ronald Reagan Center was as expected: breakfast was hearty, with plenty of bagels, muffins, juices, and strong coffee (much needed!). For lunch, we had to go for popular choices: salad as the appetizer and chicken as entrée. But the chocolate dessert was delicious, a tart with fresh raspberries on top of a good layer of melted chocolate. I gulped mine down and, since Michael Barr had to rush off at the end of his presentation, I ate part of his, too!
Presentations, keynote speeches, and photos of conference participants will be posted soon on our new web site http://www.financialliteracyfocus.org/
David Rust, the Deputy Commissioner for the Office of Retirement and Disability Policy at the Social Security Administration (SSA), opened the conference. As he described the work that SSA is doing to promote financial literacy, the image of a family doctor came to my mind. In the same way that a family doctor attends to his patients over time, caring for them at each stage of the life cycle, treating illness when necessary and preserving health when possible, so Social Security has been taking care of individuals, supporting them when they face problems such as disability. And with the financial literacy initiative, SSA is aiming to preserve and promote future financial stability by making sure that people are accumulating enough for retirement and are well equipped to make savvy financial decisions. SSA is ideally situated to promote financial literacy: it is an institution that is focused on the long term and that has the patience to wait for results in the long run. And investments in financial literacy will bear fruit in the long term, in line with the horizon of SSA.
Michael Barr, the Assistant Secretary for Financial Institutions at the U.S. Department of Treasury, delivered the keynote address at lunch. Michael is also a top law scholar and a faculty member at the University of Michigan Law School. He gave one of the most articulate descriptions of the role of financial literacy and financial regulation that I have heard. He generously interacted with the audience after his talk, and the many questions that were asked are a testament to the importance of the work he is doing. The Treasury Department is playing a significant leadership role in the field of financial literacy, and I am proud that Michael Barr is at the helm of many initiatives, including the important work of building the new Consumer Financial Protection Bureau.
Punam Keller, the Charles Henry Jones Professor of Management at the Tuck School of Business, delivered the closing talk. Punam is an expert on marketing strategy and social marketing and she is also the Marketing Director for the Financial Literacy Center. She described why financial literacy needs a marketing strategy and gave many tips on how social marketing can be of help in designing programs that are effective in influencing behavior. Punam is one of the most engaging, energetic, and brilliant speakers I have heard, and I am very happy to have been able to collaborate with her on so many projects.
The conference was large, with over 500 people registered. We designed the conference for interaction, and I believe we succeeded in engaging the audience. There were a lot of questions at the end of each session, and in the sessions I was able to attend, I learned as much from the questions that were asked as from the presentations. The agenda included an hour dedicated to visiting exhibit booths at which our team members displayed the products and projects they have been working on in the past year and interacted with conference attendees. I walked through the conference foyer during breaks and took stock of the many conversations generated by the topics presented at the conference sessions. A number of people approached me to say how much they enjoyed being involved in the conference. A sense of involvement and engagement is not a given at all conferences and one lesson I took away from this event is the value of creating a dialogue between the presenters and attendees. There is much to be gained from a conference at which everyone feels part of the conversation and everyone feels they have a chance for their voice to be heard.
Some of the programs that were presented speak of the creativity and ingenuity that is being used in designing financial literacy programs. One of the most popular presentations and exhibit booths was that of Doorways to Dreams (D2D). D2D has developed a casual video game, called Bite Club, to teach financial literacy. Bite Club, which is inspired by one of the most popular casual games of all time, Diner Dash, offers players a simulated experience in which they face the real-world tension between managing debt payments and current spending needs on the one hand, and saving for the long-term goal of retirement on the other. Players must manage a “day club” for vampires which demands they successfully pay off debt, meet current consumption needs, and save effectively for retirement. The core instructional design teaches the value of three important real world behaviors: (1) saving for retirement, (2) paying down debt, and (3) managing current consumption. In case you did not think there is a relationship between vampires and financial literacy, think again!
Let me turn now to the topic of food. As I have mentioned in previous posts, I believe food contributes to the success of any event. The food at the Ronald Reagan Center was as expected: breakfast was hearty, with plenty of bagels, muffins, juices, and strong coffee (much needed!). For lunch, we had to go for popular choices: salad as the appetizer and chicken as entrée. But the chocolate dessert was delicious, a tart with fresh raspberries on top of a good layer of melted chocolate. I gulped mine down and, since Michael Barr had to rush off at the end of his presentation, I ate part of his, too!
Presentations, keynote speeches, and photos of conference participants will be posted soon on our new web site http://www.financialliteracyfocus.org/
Monday 15 November 2010
Relitigating the Last Two Years
When the election was over, President Obama said that voters "do not want to relitigate the last two years." Wrong.
The voters voted to encourage those who were opposed to Obama policies to reverse them. That's what relitigating the last two years is all about.
The White House says it is time to move forward constructively. That is not what the voters seemed to favor in exit polls. They favored rolling back government, repealing Obamacare, and extending the Bush tax cuts for everyone. In short, they were completely anti-Obama.
Let the relitigation begin this week with the convening of the "lame duck" Congress!
The voters voted to encourage those who were opposed to Obama policies to reverse them. That's what relitigating the last two years is all about.
The White House says it is time to move forward constructively. That is not what the voters seemed to favor in exit polls. They favored rolling back government, repealing Obamacare, and extending the Bush tax cuts for everyone. In short, they were completely anti-Obama.
Let the relitigation begin this week with the convening of the "lame duck" Congress!
Saturday 13 November 2010
Embarassment in Asia
President Obama's Asian trips is a catastrophe. Obama has managed to reduce America's role to whining, finger pointing, ineffective posturing. Not a single world leader agreed with any of the President's agenda, so, in that sense, Obama forged a consensus -- of opposition to Obama. Looks like world leaders hare the same view as average American voters -- Obama's policies are the problem, not the solution.
You wonder if this President is ever going to figure out why Americans have lost faith in his presidency and why world leaders no longer have any respect for him and his sidekick Tim Geithner.
This is truly an embarassing moment in history for a once great economic power.
You wonder if this President is ever going to figure out why Americans have lost faith in his presidency and why world leaders no longer have any respect for him and his sidekick Tim Geithner.
This is truly an embarassing moment in history for a once great economic power.
Wednesday 10 November 2010
Obama is Confused
Obama's comments leading up to the G20 meetings this week show a serious confusion about why America is stuggling. As usual, Obama blames someone else. This time Obama's targets are other countries with high levels of exports to the US and substantial positive trade balances with the US. He thinks they should stop doing this. Why? Americans are buying, so why should they stop selling to them.
What Obama does not understand is the reason why Americans buy and do not save. The reason is simple. Americans assume that government will take care of them in their old age through social security and medicare, so why save? Why not live for today and let future generations fund your old age? That's the Obama way.
The result is Americans borrow from abroad, don't save and consume like crazy. The only way to stop this is to dismantle social security and medicare.
China doesn't have social security or medicare nor do any important countries that are currently experiencing economic growth. Only Europe has an elaborate welfare structure like the US and it is now beginning to dismantle it piece by piece.
Obama just doesn't understand simple economics. Fortunately, the rest of the world does.
What Obama does not understand is the reason why Americans buy and do not save. The reason is simple. Americans assume that government will take care of them in their old age through social security and medicare, so why save? Why not live for today and let future generations fund your old age? That's the Obama way.
The result is Americans borrow from abroad, don't save and consume like crazy. The only way to stop this is to dismantle social security and medicare.
China doesn't have social security or medicare nor do any important countries that are currently experiencing economic growth. Only Europe has an elaborate welfare structure like the US and it is now beginning to dismantle it piece by piece.
Obama just doesn't understand simple economics. Fortunately, the rest of the world does.
Saturday 6 November 2010
Maybe "No" is the Right Answer
Paul Krugman, one of many NY Times partisan Democrats masquerading as a columnist, has once more asked: "What would they have done different?" How about doing nothing?
When recessions begin, politicians look for quick fixes, sometimes called "stimulus plans." Republicans look for quick fixes; Democrats look for quick fixes. In Economics, we have a subject called "Macroeconomics," which is supposed to provide guidance to the correct macroeconomic policy. What Macroeconomics is, in truth, is a collection of random fairy tales and simplistic equations, that bear little resemblance to hard science. When you ask someone, "do you favor spending increases or tax cuts," the answer you get tells you the political party of the person doing the answering. Some science!
The cold hard truth is there is no specific government policy known to be helpful in moving the economy from recession to recovery. Doing nothing may well have been the right answer in 2008 and 2009. Sometimes, time alone heals and no amount of well-intentioned policies will help. Indeed, in Obama's case, it seems pretty clear that the legislative activity by Obama-Pelosi-Reid has inhibited the economy's ability to recover.
The economy will recover, regardless of the foolishness of the Obama regime. But, had they done nothing, we might be looking at 8 percent GDP growth (like much of the rest of the world) instead of limping along at 2 percent GDP growth. Maybe, just saying "no" is the right answer.
When recessions begin, politicians look for quick fixes, sometimes called "stimulus plans." Republicans look for quick fixes; Democrats look for quick fixes. In Economics, we have a subject called "Macroeconomics," which is supposed to provide guidance to the correct macroeconomic policy. What Macroeconomics is, in truth, is a collection of random fairy tales and simplistic equations, that bear little resemblance to hard science. When you ask someone, "do you favor spending increases or tax cuts," the answer you get tells you the political party of the person doing the answering. Some science!
The cold hard truth is there is no specific government policy known to be helpful in moving the economy from recession to recovery. Doing nothing may well have been the right answer in 2008 and 2009. Sometimes, time alone heals and no amount of well-intentioned policies will help. Indeed, in Obama's case, it seems pretty clear that the legislative activity by Obama-Pelosi-Reid has inhibited the economy's ability to recover.
The economy will recover, regardless of the foolishness of the Obama regime. But, had they done nothing, we might be looking at 8 percent GDP growth (like much of the rest of the world) instead of limping along at 2 percent GDP growth. Maybe, just saying "no" is the right answer.
Thursday 4 November 2010
Bernanke Has Lost It
QE2 is a disastrous mistake and will only inflate asset and commodity prices and provide a major impetus to future inflation. Bernanke is misreading his mentor, Milton Friedman. Today's Wall Street Journal has an excellent article by Alan Meltzer, one of Friedman's most famous disciples, laying out exactly why Friedman would not have agreed with Bernanke's current path.
QE2 is the announced future purchases of $ 600 billion of treasuries by the Federal Reserve. This would be a major expansion in the money supply. The dollar, of course, will collapse with this kind of money creation and economic policy makers around the world are looking toward imposing capital controls to try to offset Bernanke's policies. They view this as a trade war of epic proportions.
Ironically, Bernanke is too worried about the economy. Economies recover on their own when government gets out of the way, witness the 19th century in American. The period from the civil war until 1914 was the fastest economic growth in American history. It was characterized by deflation, not inflation; financial panics every ten years on average, but no government bail outs. The end result: a massive increase in the standard of living of the average American.
A healthy economy has ups and downs. Obama and Bernanke should get out of the way and let this economy recover.
QE2 is the announced future purchases of $ 600 billion of treasuries by the Federal Reserve. This would be a major expansion in the money supply. The dollar, of course, will collapse with this kind of money creation and economic policy makers around the world are looking toward imposing capital controls to try to offset Bernanke's policies. They view this as a trade war of epic proportions.
Ironically, Bernanke is too worried about the economy. Economies recover on their own when government gets out of the way, witness the 19th century in American. The period from the civil war until 1914 was the fastest economic growth in American history. It was characterized by deflation, not inflation; financial panics every ten years on average, but no government bail outs. The end result: a massive increase in the standard of living of the average American.
A healthy economy has ups and downs. Obama and Bernanke should get out of the way and let this economy recover.
Finally
It looks like the business community may finally begin to get some relief from the oppressive taxes, regulations, and rhetoric that has flowed constantly from the first two years of the Obama regime. The historic repudiation of the Obama program sets the stage for possible progress on reducing the obstructions to economic recovery that have been put in place by the Democratic Congress and President Obama.
Watching Obama's press conference yesterday, I was struck by how little Obama understands about the economy and how little he understands about the average American. His view that voters "don't want to relitigate the past two years" completely misreads the November 2nd landslide for the Republicans. In fact, the voters do want to relitigate the past two years. They are demanding it. That's what the tea party movement is all about.
If Obama continues to misread the electorate and stand in the way of economic recovery, then we must wait until the Fall of 2012 for free markets to really begin to power us out of this economic slump. That would mean slow growth and high unemployment until at least 2013. That doesn't seem to bother the President, but, as we found on Tuesday, it bothers lots average folks and they vote.
Watching Obama's press conference yesterday, I was struck by how little Obama understands about the economy and how little he understands about the average American. His view that voters "don't want to relitigate the past two years" completely misreads the November 2nd landslide for the Republicans. In fact, the voters do want to relitigate the past two years. They are demanding it. That's what the tea party movement is all about.
If Obama continues to misread the electorate and stand in the way of economic recovery, then we must wait until the Fall of 2012 for free markets to really begin to power us out of this economic slump. That would mean slow growth and high unemployment until at least 2013. That doesn't seem to bother the President, but, as we found on Tuesday, it bothers lots average folks and they vote.
Tuesday 2 November 2010
Mega conference
I am writing this blog to make sure all my readers are aware of the First Annual Conference of the Financial Literacy Research Consortium. The conference, titled “New Insights and Advances in Financial Literacy: Translation, Dissemination, Change,” will be held on November 18 and 19, 2010, in Washington, D.C., at the Ronald Reagan Building and International Trade Center.
For those of you who do not know it, the Financial Literacy Research Consortium (FLRC) consists of three centers: (1) the Financial Literacy Center, which is a consortium of three institutions under the coordination of the RAND Corporation, (2) the Center for Financial Literacy at Boston College, and (3) the Center for Financial Security at the University of Wisconsin-Madison. The FLRC was established in October 2009 and is supported by the Social Security Administration.
We (the Financial Literacy Center) are hosting this conference and have been very busy preparing for this day-and-a-half event, which will bring together scholars from the Consortium to present their research and discuss how programs, educational products, and policies can best promote financial planning and financial security.
The conference is designed for interaction. For example, it include a series of workshops on innovative products, small seminars that focus on different stages of the life cycle, and a product fair at which participants can try out new educational products and interact with the developers. We are expecting as many as 400 attendees and the agenda features topics that span from video games that teach the perils of debt to building an effective web site for financial literacy to discussions of effective financial education programs. You can find the program and the link to the conference registration at http://www.rand.org/events/2010/11/18/.
A short description of the projects that our center has done in our first year and that will be presented at the conference is posted at http://www.rand.org/labor/centers/financial-literacy/projects/ .
I was attending the Pension Research Council’s Board meeting two weeks ago at the Wharton School, and one of the Board members asked Olivia and me: “So, what are the dates of your mega conference?” I was caught by surprise, but “mega conference” is a pretty good description of our upcoming event, and that’s how we’ve been referring to it ever since!
You are invited to attend the conference, or better, the mega conference! We hope to see you there.
For those of you who do not know it, the Financial Literacy Research Consortium (FLRC) consists of three centers: (1) the Financial Literacy Center, which is a consortium of three institutions under the coordination of the RAND Corporation, (2) the Center for Financial Literacy at Boston College, and (3) the Center for Financial Security at the University of Wisconsin-Madison. The FLRC was established in October 2009 and is supported by the Social Security Administration.
We (the Financial Literacy Center) are hosting this conference and have been very busy preparing for this day-and-a-half event, which will bring together scholars from the Consortium to present their research and discuss how programs, educational products, and policies can best promote financial planning and financial security.
The conference is designed for interaction. For example, it include a series of workshops on innovative products, small seminars that focus on different stages of the life cycle, and a product fair at which participants can try out new educational products and interact with the developers. We are expecting as many as 400 attendees and the agenda features topics that span from video games that teach the perils of debt to building an effective web site for financial literacy to discussions of effective financial education programs. You can find the program and the link to the conference registration at http://www.rand.org/events/2010/11/18/.
A short description of the projects that our center has done in our first year and that will be presented at the conference is posted at http://www.rand.org/labor/centers/financial-literacy/projects/ .
I was attending the Pension Research Council’s Board meeting two weeks ago at the Wharton School, and one of the Board members asked Olivia and me: “So, what are the dates of your mega conference?” I was caught by surprise, but “mega conference” is a pretty good description of our upcoming event, and that’s how we’ve been referring to it ever since!
You are invited to attend the conference, or better, the mega conference! We hope to see you there.
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