One of the greatest misconceptions on the left may be the suggestion that “us” refers to workers (hopefully unionized workers), along with government programs and regulations, and “them” refers to big business, their friends on Wall Street, and their puppets in government. At the risk of merely presenting an opposing paradigm that is equally over-simplified, here are some alternative scenarios. The open-minded reader may find them instructive.
For over a decade, Wall Street has enjoyed an incestuous and exploitative relationship with public sector unions, because public employee pension funds have poured more new money into their equities markets than any other single source. This isn’t leveraged money or trading turnover, either, this is new money, cold hard cash that is transferred from the pockets of taxpayers into government payroll departments and turned over to the pension funds. In the United States each year, the pension fund contributions of 25 million government workers – at $10,000 per year each, which is probably a very conservative estimate – pour over 250 billion dollars into Wall Street.
The way Wall Street seduced public sector unions into thinking they could ask for retirement benefits that, on average, are quadruple what the average private sector worker can expect from social security is the single biggest example of how Wall Street seduced the entire nation into believing they could enjoy a quality of life far in excess of what they actually were earning. Public sector union leadership can hardly be blamed for believing that their trillion dollar pension funds could earn 8.0% per year, forever, during an era when debt in general was exploding, asset bubbles were inflating relentlessly, and collateral-generated cash was inundating the economy. But now the party is over, and while the Wall Street barons smoke the proverbial cigarette and consolidate their winnings, public sector union officials are still doing their dirty work – intimidating politicians into raising taxes to continue feeding money into Wall Street pension funds that cannot hope to achieve 8.0% annual returns.
Who else has a vested interest in suggesting an 8.0% annual rate of return is feasible forever, with trillion dollar investment funds, other than Wall Street and Public Sector Unions? At least in the case of Public Sector Unions, their leadership believed this nonsense, and now find themselves backed into a corner. During the real-estate bubble boom, Wall Street suckered everyone, by lobbying for the left-wing policies of lending money to people who couldn’t afford to borrow the money, which built the financial house of cards, and by lobbying for the right-wing policies of deregulating investment banks, so they could collateralize the mortgage-debt house of cards into 50 trillion dollars of phony money. And when the whole ridiculous scam collapsed, Wall Street took all the money off the table, collected bail-out money, and turned the United States into a debtor’s prison.
The choice of the term “axis” to describe how public sector unions are the unwitting partners of Wall Street is not accidental. Because as the historical use of the term “axis” suggests, these alliances are pragmatic partnerships of entities who have become corrupt and grandiose, and are doomed to tragic dissolution. The only question is what equivalent of wars and poverty will we now have to endure as we struggle to reform Wall Street and roll back the delusional and unsustainable level of entitlements currently expected by Public Sector Unions. Here are some factors to consider as we hopefully move towards an economy based again on realistic and sustainable financial principles:
1 – “Big Business” has been just as victimized and suckered by a poorly regulated Wall Street as the public sector unions. Unlike these unions, however, big business didn’t collude with Wall Street to impose trillions of dollars of liability onto taxpayers in order to fund unsustainable and inequitably generous public sector employee compensation packages.
2 – The industrial products of corporate America, i.e. “Big Business,” create wealth. The financial products of Wall Street – properly regulated and at an appropriate scale – can assist in capital formation, liquidity, and economic growth, but that scale has been exceeded by at least an order of magnitude. At their current scale, Wall Street financial products are simply engines to expropriate massive amounts of wealth from the economy, producing nothing in return.
3 – Passive investments such as the giant, trillion dollar public employee pension funds, will not see returns of 8.0% (inflation-adjusted 5.0%) again for a generation. There is too much money out there chasing too few genuine investments. You can’t saturate an economy with near-zero interest rate credit, then expect trillion dollar investment funds to perform at high single digit rates of return. The spread is too big.
4 – Local public governments who issue bonds at tax-free rates of return of 5.0% or more to finance investments in their pension funds where they expect to generate rates of return that exceed 5.0% (notwithstanding the tax-free subsidy that is a further economic drain) are delusional. This practice of issuing “pension obligation bonds” is based on assumptions that are false. Pension obligation bonds will hasten a local public entity’s descent into bankruptcy, not alleviate it.
5 – Public sector bond holders and public sector pensioners represent the same phenomenon – non-productive members of society (passive investors and retirees) who have placed demands on the economy that can no longer be fulfilled. The level of bond interest rates is too high, the level of public sector pension benefits is too high, the amount of money tied up in these obligations is too high a percentage of our national wealth, and as a result, both of these groups are destined to see their returns and their benefits reduced – and the sooner this happens, the less severe the resulting economic hardship will be to the nation.
6 – There is NO comparison whatsoever between the “crisis” facing Social Security and the catastrophe facing public sector pensions. As argued in “Funding Social Security vs. Public Sector Pensions,” the U.S. is on track, within a generation, to be paying as much in absolute dollars to public sector retirees each year as they will be paying to social security recipients, despite the fact that social security recipients will be four times as numerous. Social security can be fixed with moderate adjustments: slightly lower benefits, slightly higher retirement ages, slightly higher withholding, and a slightly higher cap on wages before withholding ceases. Only the Wall Street / Public Sector Union axis has a vested interest in equating the moderate financial challenges facing social security with the totally insolvent public employee pensions.
7 – The solution to restore solvency to taxpayer-funded retiree benefit plans is to move to a pay-as-you-go system, where current workers support retired workers, not rely on passive investment returns. As noted in #6, this will be easy to achieve with respect to social security, but it is impossible to achieve with respect to public sector pension funds unless the benefits are dramatically reduced. And why shouldn’t they be? Public sector employees already make more in current wages and benefits – why shouldn’t they just receive social security like the taxpayers who support them? And why should the government invest taxpayer’s money into the equities market with public employees holding all the upside, and taxpayers holding all the downside?
In order to move back to a financially sustainable economy, the United States has a unique window of opportunity to reform Wall Street and reduce the benefits enjoyed by unionized public sector employees. This is because, as argued in “The China Bubble,” the United States still enjoys crucial advantages vs. the rest of the world’s national economies, a fact that grants us another decade or so to make some hard decisions and get back on track. But the beginning of that process depends on voters realizing that “big business” and Wall Street are not in collusion, they are in opposition. Big business creates products and wealth, and Wall Street, along with their henchmen in our unionized government entities – at least in their currently grotesquely overgrown versions – expropriate wealth and create nothing.