Solutions for California

When Governor Jerry Brown, back in the 1970′s, suggested that California should have its own aerospace program, he was dubbed “Governor Moonbeam,” and the moniker has stuck to this day. That’s too bad, because at the time Gov. Brown made that statement, California had the most robust aerospace infrastructure in the U.S. The nexus of companies in Los Angeles – Northrop, Hughes, Rockwell, TRW, plus the branches of dozens of others – the launch complex at Vandenberg, the vast resources of land in the Mojave including Edwards AFB – made California a natural location to further America’s space efforts.

Today half of the companies noted above have been driven out of California by over-regulation, and instead of talking about mining the asteroids, Jerry Brown is talking about a bullet train to nowhere. Before you laugh at the Gov. Moonbeam’s original idea, consider California-based entrepreneur Elon Musk, founder of SpaceX. This private aerospace company, which is already supplying launch vehicles to NASA, has just announced that their “Falcon Heavy,” the largest launch vehicle since the Saturn V moon rocket, will be tested later this year.

The asteroids will be explored and mined by robotic spacecraft within a few decades. And much of the ingenuity and entrepreneurship, risk capital, and high technology will be coming from California. Imagine if California’s dawning recapture of the lead in aerospace technology, following her existing lead in biotech and info-tech, were encouraged by California’s laws and regulations instead of occurring in spite of them?

There are [...] Read More

China’s Economy is About to Crash

Close attention has been paid to the fragmenting Eurozone, where social benefits funded by debt accumulation are bankrupting the entire aging continent. Less attention has been paid to China, where debt accumulation has financed not social benefits, but massive construction projects.

Financial strength is always ultimately found on the balance sheet of a nation, not the income statement. A nation with high GDP, i.e., strong revenues, may be funding that growth through massive borrowing. As the income statement racks up a string of impressive performances, the balance sheet may be steadily worsening.

Nearly two years ago, in “The China Bubble,” I pointed out numerous examples of asset inflation, primarily in real estate, that had already been going on for over a decade in China. Just like in the United States, these over-valued assets have been used as collateral to fund economic expansion. And just like in the United States, eventually people in China will stop buying over-valued assets and their price plummets. This is happening now in China.

One of the best economics blogs out there is “Global Economic Analysis” by Mike Shedlock. His recent post entitled “Real Estate Crash in China Underway: Foreign Funding Down 80%, Land Sales Down 57%, Starts Down 27%; Expect Chinese GDP to Plunge,” says it all. In his post, Shedlock references a report entitled “China Real Estate Unravels” by Patrick Chovanec, a professor at Tsinghua University’s School of Economics [...] Read More

California’s Government Worker Pensions Are Bankrupt

As reported today in Capitol Weekly, in a post entitled “CalPERS ignores Brown, delays pension payment” by Ed Mendel, the amount taxpayers will have to fork over to CalPERS next year will rise by $213 million, to a total of $3.7 billion. Governor Brown, quite rightly, believes the full amount of the necessary increase should have been assessed, another $149 million, instead of being “smoothed” over the next twenty years.

But CalPERS – the largest of over 30 major government worker pension funds in California, only manages about a third of the the state and local public sector pensions. And CalPERS is basing their increase on a lowering of their projected rate of return for their invested funds by one quarter of one percent, from 7.75% down to 7.5%.

People may debate endlessly over whether or not government worker pension funds in America, now managing over $4.0 trillion in assets, can actually earn 7.5% per year, every year, for decades on end. We have argued repeatedly that this rate of return is impossible to achieve any longer, because (1) high returns in the past depended on debt accumulation, which poured cash into the economy, which stimulated consumer spending, investing, and asset appreciation – enabling more borrowing – all of which caused investment returns to grow at levels that cannot continue now that borrowing has reached its practical limit, (2) our aging population means more people will be selling their investments to finance their retirements – including the pension [...] Read More

How Construction Worker Unions Can Save California

The California Labor Federation has a membership of more than 1,200 unions, representing over two million workers. And the first of seven key issues they list on their legislative agenda for 2012 is supporting high speed rail. As they put it, “Building high speed rail will grow our economy and create long-term jobs. An estimated 450,000 jobs in operations, maintenance, ticketing, and services will be needed to keep HSR up and running.”

It is difficult to imagine economic thinking more well intentioned yet fundamentally flawed. What private sector unions want, ideally, is to work cooperatively with government and industry to help create well paying jobs. But high speed rail will incur far more economic costs than economic benefits. Massive construction projects, using public/private financing mechanisms, have to benefit the economy. Otherwise they are examples of private gain – high paying jobs for workers who happen to belong to unions involved in the construction and maintenance of the project – in exchange for socialized loss – higher taxes that lower the disposable income of everyone else.

Policy activists who are critical of unions must understand that there are two crucial debates they are engaged in with unions. The first one is an economic argument – convincing union leadership that encouraging free market competition will lower the cost of living for everyone, and that when this happens all workers benefit. This is a tough sell, despite being entirely accurate. But the second debate, which regards what projects unions should be [...] Read More

Social Security Isn’t Insolvent, Public Pensions Are

In the March 19th, 2012 issue of the New Yorker magazine, as part of a full-page advertisement for MSNBC, there is a quote from Rachel Maddow that I couldn’t agree with more. She says:

“Social security isn’t a Ponzi scheme. It’s not bankrupting us. It’s not an outrage. It is working.”

Rachel Maddow is absolutely right. In one of several attempts to compare the costs, benefits, and solvency of social security to public sector pensions, in the post from November 2011 entitled “Merge Social Security and Public Sector Pensions,” I concluded the following:

“If one strips away the reliance on investment returns and compares social security to public sector pensions based on payroll withholding from current worker’s providing 100% of the funds required to make current payments to retirees, it quickly becomes obvious that public sector pensions are completely unsustainable, whereas social security can be rendered permanently solvent with relatively minor tinkering.”

The reason for this is simple enough: Social security, on average, collects about 12.5% of someone’s annual earnings for about 40 years, then when that someone retires in their mid-sixties, it pays back about 33% of those earnings for about 15 years. Public sector pensions, by contrast, on average collect not quite 20% of a government worker’s annual earnings for about 30 years, then when that government worker retires in their mid-fifties, it pays back about 75% of those earnings for about 25 years. Do the math.

Compared to public sector pensions, along with having far [...] Read More

Senator DeLeon’s Universal Retirement Security Act

The challenge of providing retirement security to all citizens is the broader issue behind the debate over what level of public sector pension benefits are both equitable and financially sustainable. California Senator Kevin De Leon’s proposed legislation, SB 1234, will hopefully further this debate.

As reported in the Sacramento Bee by Jon Ortiz on February 24th “California Democrats push pension plan for nongovernment workers,” and in the Los Angeles Times by Mark Lifsher on February 23rd, “Private-sector retirement savings plan proposed for California,” DeLeon’s bill will require every employer in the state with five or more employees to participate in the plan. If employers already offer a pension plan or 401K plan, they would be exempt.

Plenty of commentators have already weighed in with sobering missives on the many problems with DeLeon’s bill. You can read them in the San Bernardino Press Enterprise, the Pleasanton Weekly, CalWatchdog, CalWhine, and elsewhere. But when DeLeon says his bill “is designed to supplement Social Security retirement benefits,” he is on to something bigger than he may realize.

The goal of taxpayer funded retirement security, whether it is for a retired government worker or a retired private sector worker living on social security, is not to support an affluent lifestyle. A taxpayer funded retirement pension should be a modest amount, better than social security – but not some huge amount that enables an affluent lifestyle. To have an affluent lifestyle [...] Read More

Government Workers vs. Self-Employed: A Financial Comparison

When discussing what level of compensation is appropriate and affordable for government workers, it is helpful to make apples-to-apples comparisons between public and private sector workers. In this analysis, the ultimate private sector taxpayer, the self-employed worker, is compared to the typical state or local government employee in California. In both cases, the annual compensation used for comparison is $70,000, which is the average base salary paid to state and local government employees in California (ref. U.S. Census data for California: State, and Local). But the impact of benefits paid by the government employer, combined with the impact of mandatory employee contributions (taxes, retirement set-asides, and healthcare costs), yield dramatically different end results in terms of total net compensation. Both the self-employed worker and the government worker make $70,000 per year. But to say they make the same amount of money is grossly misleading.

The table below, “Total Compensation – Gov’t vs. Self-Employed Worker,” begins to illustrate this disparity. The difference between total compensation and gross earnings in the case of the self-employed worker is zero. There is nobody paying for benefits beyond what the self-employed person earns. Whatever amenities they need to purchase, they have to pay for out of their gross earnings.

In the case of the government worker, there are a host of employer funded benefits; only the basic ones are covered here, using conservative assumptions. If it is assumed the average household health insurance coverage is $500 per month, [...] Read More

Pricing A Taxpayer Bailout of California’s Pensions

Last month both of California’s largest government employee pension funds, CalPERS and CalSTRS, released their portfolio earnings numbers for the most recent twelve months. In a statement released on January 24th, “CalSTRS Calendar Year-End Investment Returns Show Slight Gains,” CalSTRS disclosed “Investment returns for the California State Teachers’ Retirement System (CalSTRS) ended the 2011 calendar year posting a 2.3 percent gain.” CalPER’s statement released on January 23rd, was titled “[CalPERS} Pension Fund earns 1.1 percent return for 2011 calendar year.”

These funds, and the rest of California’s many local government employee pension funds, are still clinging to long-term rate of return assumptions of between 7.5% and 7.75% per year. So how much would taxpayers be on the hook for if rates of return stay this low?

The first step towards determining this would be to estimate the average pension paid out to a state or local worker in California, based on recent retirees who have worked a full 30 year career. Despite the claim that “The average CalPERS pension is $2,220 per month” (made yet again in the final paragraph of their above-referenced press release), for a more accurate figure, one must look at the average pension awarded recent retirees, based on a full 30+ year career. The problem with the low figure used by CalPERS and others is that it includes people who retired decades ago [...] Read More

Preserving America’s Middle Class

To say America’s middle class is threatened is a common refrain. But there is no malevolent force operating to shrink America’s middle class. America’s middle class is challenged by the momentum of history. Technology automates jobs at the same time as the capacity of foreign manufacturers continuously improves. At the same time, American taxpayers confront the challenges of providing for an aging population as well as choosing what is affordable from an expanding array of social welfare and safety-net choices. In some respects, America’s middle class is a victim of its own success – we live longer, we have better medical technology, our productivity is continuously improving, and American military power – expensively purchased – enables competitive global commerce. Here then, relieved of ideological cant, are the reasons for America’s shrinking middle class:

(1) More money is needed to take care of retirees, and investment returns will no longer cover most of the costs. America’s aging population creates higher demand for liquidity, because retired people need to sell assets to generate cash to pay bills. As an ever higher percentage of America’s population are retirees, there will be more sellers in the investment market, dampening prices and price appreciation. This will lower rates of return on retirement investments and, in turn, all assets.

(2) Advancing technologies have automated millions of jobs. From office information systems to robotic manufacturing, innovation has eliminated the need for millions of highly educated, highly skilled workers. Despite rising productivity, workers have been relentlessly displaced. Entire [...] Read More

The Faces of the Forgotten 33%

Last month a post entitled “America’s Forgotten 33% ” described those Americans who are not members of the elite 1% super-rich, nor part of the privileged 20% who work for the government, nor among the nearly 50% of America’s population who are, apparently, poor enough to avoid taxes altogether.

Who are these forgotten 33%? Who is this one-third of America, people who, compared to the other two-thirds, pay far more in taxes than they receive in return? Who are the faces of the forgotten 33%?

They are small business owners who can’t compete with the crony capitalist captains of big business, who use their financial influence with legislators to enact regulations that small businesses can’t possibly afford to comply with. They are independent contractors who work multiple jobs to earn a mid-five-figure annual gross income, yet pay nearly 50% in taxes on every extra dollar they make (25% federal, 9% state, 13% social security and medicare). They are small investors whose retirement savings lose value at the same time as government employee pension funds beat the market using high-frequency trading and other manipulative tactics that individual value investors can’t hope to emulate (and hold taxpayers accountable to cover the difference when they don’t beat the market). They are parents who can’t get a decent education for their children in public schools, because the teacher’s union makes it impossible to fire bad teachers, and creates a self-serving bureaucracy where administrators outnumber teachers. Parents who have no chance to influence local or [...] Read More