Kevin Drum - May 2011

The Real Cause of the Pension Crisis

| Wed May 11, 2011 1:56 AM EDT

In the Washington Monthly, Sylvester Schieber and Phillip Longman take a look at the historical evidence and conclude that the state pension crisis doesn't really have much to do with the demands of public sector unions. Rather, it's due to the incentives faced by elected officials:

The real cause of the crisis is the inherent conflict of interest politicians face when they have the option of handing out or maintaining pension promises to favored constituencies, including themselves, without the public understanding what’s going on and without the bills coming due until after they are gone from office. Politicians have two basic ways of doing this. First, they can, as Republican Christine Todd Whitman and subsequent governors of New Jersey did, simply stop contributing money to the pension fund or tap their credit card to pay the pension mortgage.

....Politicians can also make benefits more lush without coming up with the money to pay for them. That’s what happened in California in 1999 under Democratic Governor Gray Davis, when the state enacted the largest pension increase in its history—one that now has become the single biggest threat to the state’s continued solvency....The pension bill passed 39-0 in the state senate and 70-7 in the assembly, while barely making the papers.

....So this is the world as we find it. Government decisionmakers face an inherent conflict of interest when it comes to making pension policy for government employees, and so do their staffs. This is true whether or not unions are involved. Beyond the enticement of self-dealing is the temptation to self-aggrandizement that comes when politicians are allowed to take credit for delivering benefits whose full cost only becomes apparent after they are long gone. That all this can be done within a tight circle of insiders without the press or the public taking much notice only further perverts the logic of decisionmaking.

It's true that public sector unions have an inherent advantage that private sector unions don't, namely that the people they're negotiating with depend on them for campaign support, but this isn't the core problem responsible for out-of-control pensions. The core problem is that politicians always prefer to pay bills in the future, not the present. If they have a choice between giving firefighters a $10 million raise that will come out of the current year's budget vs. a $30 million pension increase that will come out of someone else's budget far in the future, it's a slam dunk. They'll take the pension increase every time. As Schieber and Longman note, California's 1999 pension rise was approved nearly unanimously by both parties and adopted by virtually every county in the state, including some of the most conservative ones. The dotcom boom had everyone bedazzled regardless of political affiliation.

So what to do? Schieber and Longman suggest that significant pension changes be treated the same way as large bond issues:

Let the unions and the politicians negotiate all they want, but if they come up with a contract that puts future taxpayers on the hook for the cost of making pension and other retirement benefits more generous, it should go to a vote of the people. If the people are feeling generous, or if they feel there is indeed a strong case for why public employees need more generous pensions, they may well go along. If they feel there are more compelling purposes for which they should be spending their own or their children’s money, they will not.

It's an interesting idea. By itself, it does nothing to address the existing problem, which makes is a bit like shutting the barn door after the horse has left. What's more, it also does nothing to force governments to properly fund pensions, one of the big reasons why we're in our current mess to begin with. However, solutions to the former are pretty hard to come by regardless and shouldn't stop us from addressing the future, while solutions to the latter could probably be incorporated into the referendum language with a bit of thought. It's worth some consideration.

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Healthcare Reform in One PowerPoint Slide

| Tue May 10, 2011 8:45 PM EDT

Jon Chait commends to us a short essay in the Yale Law Journal by Andrew Koppelman explaining (a) why the healthcare reform law is obviously constitutional but (b) why it might get struck down anyway:

The constitutional objections are silly.....[So] what will the Supreme Court do? There is no nice way to say this: the silliness of the constitutional objections may not be enough to stop [conservative] Justices from relying on them to strike down the law. The Republican Party, increasingly, is the party of urban legends: that tax cuts for the rich always pay for themselves, that government spending does not create jobs, that government overregulation of banks caused the crash of 2008, that global warming is not happening. The unconstitutionality of health care reform is another of those legends, legitimated in American culture by frequent repetition.

Read the whole thing for the details. However, since our political class seems to have an attention span no longer than a PowerPoint slide these days, I figured I'd condense Koppelman's argument into a PowerPoint slide. Enjoy.

Defunding the Left, Part XVIII

| Tue May 10, 2011 3:58 PM EDT

Republicans have lots of tactics for trying to debilitate the Democratic Party. They go after unions, they support tort reform, and they support voter ID laws that are transparently aimed at reducing Democratic voter rolls, just to name a few. Texas, naturally, has just passed a voter ID law, but just in case they weren't being obvious enough in their targeting of potential Democratic voters, they decided to put a cherry on top by passing a second law to go along with it. Patrick Caldwell explains:

The other measure is less overt but should have an equally powerful impact in blocking voters' participation. The state House approved an amendment that only allows Texas voters to register new voters in the state. Previously, anyone could collect voter-registration forms, but the new bill will restrict that activity to only people from the state of Texas. Someone registered to vote in a different state would no longer be able to work as a volunteer registrar, damaging Democrats far more than Republicans as the left is more reliant on the resources of national organizations to parachute organizers in from out of state.

If only Texans can register voters, there will be fewer mobilization efforts to boost key Democratic constituencies such as college students or Hispanics. Political groups on college campuses often mount drives to register their fellow students, even though the organizers of those efforts still send absentee ballots back home to a different state. Hispanics are also essential for Democrats' desire to one day win another seat in state office, but first they will need to actually be registered to vote. Hispanics are almost 38 percent of Texas' population, according to the 2010 census, but they constitute only 20 percent of registered voters. National organizations could add their expertise and manpower to local efforts to bring Hispanic voters into the fold, but these new restrictions will make get out the vote drives difficult to conduct on a wide scale.

Lovely, isn't it? They really don't even try to be subtle about this stuff anymore.

Suffering From Schumeritis

| Tue May 10, 2011 3:07 PM EDT

Chuck Schumer is, basically, a good liberal senator. But here's my question: how many stupid, illiberal things does he need to support before we should all give up on him? If the rule is three strikes, his stands on the Dubai ports issue, the carried interest rule, and now his superlatively idiotic proposal of an Amtrak no-ride list, would put him out on the streets. And that's not even counting his leading role in making the Democratic Party a handmaiden of Wall Street over the past decade.

But I guess he's politically invulnerable, isn't he? And he's not up for election until 2016 anyway. And any replacement would probably be even worse. Blecch.

Behind the Commodities Crash

| Tue May 10, 2011 1:46 PM EDT

A few days ago I read that high-frequency trading in stocks had died down recently, apparently because the stock market has been a little too stable lately. "Hmmm," I thought as I read this. "If they're dropping out of equities, I wonder what the supercomputers are up to now?"

The answer, it turns out, is commodities, and Reuters reports that algorithmic trading is likely responsible for a big part of the rout in commodity prices over the last couple of weeks:

In many cases, computer algorithms sold for technical reasons, as oil dropped through levels that, once breached, could trigger ever larger waves of selling yet to come...."Computers don't care. Momentum just increases until nobody wants to stand in front of it," said Peter Donovan, a floor trader for Vantage on the New York Mercantile Exchange.

Some big Wall Street traders watched their own systems sell into the down trend but couldn't know for sure who had initiated the selling spree. They only knew that similar machines at other firms, from New York, to London, Geneva and Sao Paulo, would be automatically selling in much the same manner.

...."We believe the magnitude of the correction appears in large part to have been exacerbated by algorithmic traders unwinding positions," Credit Suisse analysts wrote in a report. High frequency trading and algorithmic trading accounts for about half of all the volume in oil markets.

What else? George Soros started selling silver, everyone else piled on, and eventually traders started selling oil too. Before long, panic set in. Cheap money was also to blame:

A range of factors, both economic and political, were also at play. The recent rise in raw goods has been fueled in part by the U.S. Fed pumping cash into the markets by purchasing $600 billion in bonds. This program has pushed interest rates extraordinarily low, making borrowing essentially free once adjusted for inflation. Investors have been using the super-cheap money to buy into commodity markets. But the Fed's program is slated to end on June 30.

"Funds were likely to take profits before June when the direct (Fed) bond purchases stop. All were eyeballing each other to see who would take profits first," said a London-based oil trader.

It would be nice if Wall Street were using the Fed's cheap money to invest in real-world goods and services. But apparently the real world just isn't ready for any investment yet, and the private sector has boatloads of cash on its hands anyway. So instead the money gets shoveled into whatever financial markets are the most volatile, since those are the markets that promise the highest short-term rewards. This doesn't actually benefit anyone other than Wall Street traders, but that's the world we live in these days.

Via Felix Salmon, who has some additional comments.

Fracking Takes Another Hit

| Tue May 10, 2011 1:06 PM EDT

Natural gas fracking holds out the promise of producing enormous amounts of domestic energy for the United States. But is it safe? Among other things, one concern with fracking is that it releases methane into nearby groundwater:

A 2009 investigation by ProPublica revealed that methane contamination from drilling was widespread, including in Colorado, Ohio and Pennsylvania. In several cases, homes blew up after gas seeped into their basements or water supplies. In Pennsylvania a 2004 accident killed three people, including a baby.

In Dimock, Pa., where part of the Duke study was performed, some residents’ water wells exploded or their water could be lit on fire. In at least a dozen cases in Colorado, ProPublica’s investigation found, methane had infiltrated drinking water supplies that residents said were clean until hydraulic fracturing was performed nearby.

But is this just anecdotal and coincidental, or do fracking operations really pose a systematic danger to nearby water supplies? Via Stuart Staniford, here are the results of a new study of methane concentrations in drinking water near fracking operations, and as you can see, the levels are quite high and quite dangerous anywhere within a kilometer of the gas wells. The industry will undoubtedly push back against this and demand further study while simultaneously doing everything it can to inhibit further studies. But the possibility of serious danger is pretty obvious here. Further studies really do need to be done, they need to be done quickly, and safe levels need to be established. This isn't just anecdotal anymore.

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Alan Simpson, Social Security Illiterate

| Tue May 10, 2011 12:12 PM EDT

Is it true that life expectancies have gone up dramatically since 1940, when Social Security first went into effect? Sort of. In 1940, lots of children still died young, and this skewed the average way down. Fifty years later those kids mostly didn't die, so the average was higher.

But childhood mortality doesn't affect Social Security one way or the other, so we don't really care about that. What we care about is the people paying into the system — working age adults — and how long they live after they retire. So how much longer do retirees live these days? Answer: For men, life expectancy at age 65 has gone up from 78 to 83. Since the Social Security retirement age has also gone up, from 65 to 67, this means that over the past 60 years the expected payout period has increased by about three years.

Hilariously, though, Social Security scold Alan Simpson simply has no clue about this. Ryan Grim asked him about it recently:

HuffPost suggested to Simpson during a telephone interview that his claim about life expectancy was misleading because his data include people who died in childhood of diseases that are now largely preventable....According to the Social Security Administration's actuaries, women who lived to 65 in 1940 had a life expectancy of 79.7 years and men were expected to live 77.7 years.

"If that is the case — and I don’t think it is — then that means they put in peanuts," said Simpson. Simpson speculated that the data presented to him by HuffPost had been furnished by "the Catfood Commission people" — a reference to progressive critics of the deficit commission who gave the president's panel that label.

Told that the data came directly from the Social Security Administration, Simpson continued to insist it was inaccurate, while misstating the nature of a statistical average: "If you’re telling me that a guy who got to be 65 in 1940 — that all of them lived to be 77 — that is just not correct. Just because a guy gets to be 65, he’s gonna live to be 77? Hell, that’s my genre. That’s not true," said Simpson, who will turn 80 in September.

Simpson is a guy who's taken very seriously on Social Security issues inside the Beltway. He's studied it for years. And yet, as he makes clear later in the interview, he simply had no idea any of this was true. No idea. And he doesn't believe it, even though this stuff is Social Security 101.

This is the kind of thing that explains why so many people think Social Security is some kind of fiscal time bomb. They just flatly don't understand the arithmetic. The plain fact is that Social Security is only modestly underfunded and can be fixed with a basket of quite moderate changes over the next 30 years or so. Anyone who understands the numbers knows this. People like Alan Simpson don't. But guess who gets the most press coverage?

Boehner's Bluff

| Tue May 10, 2011 1:15 AM EDT

It's hard to know how to react to the latest calculated blast from John Boehner:

House Speaker John A. Boehner defined the GOP’s terms for raising the legal limit on government borrowing Monday, demanding that President Obama reduce spending by more than $2 trillion in exchange for an increase big enough to cover the nation’s bills through the end of next year....For the first time, he signaled that Republicans would come to the negotiating table with the expectation that the White House and Senate Democrats be prepared to discuss major reductions in federal spending — and enact them immediately. That’s a sharp shift from Republicans who just last week talked of finding “commonality” on less-ambitious measures.

....The extent of Boehner’s demands was unclear.

That last sentence is the tell. Unless Boehner is proposing his $2 trillion in savings to come over 20 years or so, he has to be targeting Social Security and Medicare. There's no way to save that kind of money otherwise. So what's his proposal? Answer: he wants "honest conversations."

I'll bet he does. What he really wants is probably simpler: he wants President Obama to propose something. Boehner may be talking big because otherwise his tea party base will feed him to the dogs, but the last couple of weeks have made it pretty clear that he doesn't have the stomach for putting the Republican name to a concrete proposal to slash Medicare. That hasn't worked out so well for him. Much better to have Obama put his name to it instead.

Whether Obama will be willing to do this is unclear. There's really no reason he should since he holds all the cards and knows that eventually Boehner has to cave, but he's already indicated that he's willing to compromise and Joe Biden is already leading negotiations with congressional Republicans. So maybe he is willing to put his name to something and save Boehner's bacon. If he does, though, I sure hope Boehner gets him a nice Christmas gift this year.

The Rise and Fall of Sarah Palin

| Mon May 9, 2011 7:10 PM EDT

Howard Kurtz says that Sarah Palin is losing her mojo:

16 months after   [Fox] network chief Roger Ailes closed [a $3 million TV] deal in a meeting with Palin and her husband, Todd, the excitement has cooled. Palin’s regular appearances as a commentator no longer move the ratings needle without a promotional push. Palin was supposed to host prime-time specials dubbed Real American Stories, but Fox insiders tell me the idea was shelved early on. The first one bombed, losing a chunk of its audience as the show progressed.

....Between February and April, according to an analysis for Newsweek by General Sentiment, a company that tracks and measures online content, posts involving Palin fell 38.3 percent, to 235,032, over the past 30 days. Social-media mentions dropped in lockstep, down 32 percent over the same period, to 135,421.

Maybe this is due to her Tucson misstep, or her "blood libel" inanity, or maybe her semi-defense of birthers. But I think Kurtz has missed the real reason: Dana Milbank's one-month boycott of all things Palin in February. I joined in on that, and you know what? After 30 days of cold turkey I was pretty much cured. Ignoring Sarah Palin turned out to be a lot easier than I thought, and by the time March rolled around I didn't much care about her anymore. I think I've only mentioned her once or twice since then.

Fame is a fickle thing, I'm afraid, especially when you have nothing of actual substance to be famous about. In that department, it turned out that Sarah Palin's half-life was even shorter than the Kardashian family's.

Quote of the Day: Dumb Quiz Show Answers

| Mon May 9, 2011 4:19 PM EDT

From the Guardian, on two "Million Pound Drop" contestants who incorrectly guessed that Roger Bannister was "the first man ever to put the toilet seat down":

This may have cost them their shot at wealth, but Andrew and Vanessa shouldn't get downhearted. They've entered the immortal ranks of the all-time most stupid quiz show answers ever.

More entertaining quiz show idiocy at the link.