Posts Tagged: deficits

American Society / Justice System / Municipal Finance / Political / Uncategorized — 0 Comments
10
Mar 10

Can We Afford Our Criminal Justice System?

Based on 2007 data, the United States has 7.3 million (up from 2.4 million in 1982) in jail or prison, paroled or on probation. That is, 1 in 31 adults, compared to an earlier 1 in 77.  With the ongoing financial crisis, desperate state and local politicians are looking for any means to reduce these costs, including early release.  A recent New York Times article, Safety is Issue as Budget Cuts Free Prisoners, highlights the dilemma:

In the rush to save money in grim budgetary times, states nationwide have trimmed their prison populations by expanding parole programs and early releases. But the result — more convicted felons on the streets, not behind bars — has unleashed a backlash, and state officials now find themselves trying to maneuver between saving money and maintaining the public’s sense of safety.

One result: many of the newly released prisoners commit crimes!  How do we keep society safe against the growing cost of incarcerating the bad guys?

The State and Local Financial Crisis

In Where Are We Now? we discussed the budget deficits in 48 of 50 states, while all states but Vermont require them to be balanced.  The situation has deteriorated.  Michael Shedlock (“Mish”) has chronicled these massive budget problems and some state and local responses:

- Illinois – “The state is in utter crisis,” said Representative Suzie Bassi. “We are next to bankruptcy. We have a $13bn hole in a $28bn budget.”The state has been paying bills with unfunded vouchers since October. A fifth of buses have stopped. Libraries, owed $400m (£263m), are closing one day a week. Schools are owed $725m. Unable to pay teachers, they are preparing mass lay-offs. “It’s a catastrophe”, said the Schools Superintendent. See Rep. Suzie Bassi: “Illinois in Utter Crisis, Next to Bankruptcy, $13bn Hole in a $28bn Budget

-   New Jersey – Newly elected Governor Chris Christie found that: In the time we got here, of the approximately $29 billion budget there was only $14 billion left. Of the $14 billion, $8 billion could not be touched because of contracts with public worker unions, because of bond covenants, because of commitments we made accepting stimulus money. So we had to find a way to save $2.3 billion in a $6 billion pool of money.

When I went into the treasurer’s off in the first two weeks of my term, there was no happy meetings. They presented me with 378 possible freezes and lapses to be able to balance the budget. I accepted 375 of them. See Governor Christie: “Time to Hold Hands and Jump Off the Cliff” – Chris Christie For President?

-   California – Last year the state assured markets that it had solved its budget problem.  To meet deficits and cash shortages, the state treasurer is contemplating creditors in state IOUs, delaying payments to school programs and demanding that 80% of state tax be paid before it is earned. See California Delays Payments, Ponders IOUs Again, Demands 80% of Income Tax Paid Before It’s Even Earned

The Prison Industrial Complex

In his 1961 farewell address, President Eisenhower warned Americans against the military industrial complex.  We have created a “prison industrial complex,” with its expensive, unmanageable system of incarceration and monitoring.  One Connecticut study showed an average annual cost of $44k per prisoner.  Public sector unions with high salaries, generous overtime, defined benefit pension plans and retiree health care benefits are hugely expensive, and prison staffs are heavily unionized.

A Way Out

We have suggested in the past that government needs radical reengineering.  See Why Not Reengineer Government? Overhauling the criminal justice system should be a part of that effort. And there are possible solutions:

  • Privatize prisons.
  • Decriminalize certain offenses such as illegal drugs and gambling.
  • Non-violent criminals should pay financial penalties, be confined to their homes, placed in half-way houses or paroled immediately.
  • Community service programs should be re-thought to make best use of talents and skills of otherwise imprisoned citizens.
  • Shorten prison sentences for all but the most violent felons.

Our criminal justice system has mushroomed with little regard to the financial costs to taxpayers. We have over-criminalized non-violent behaviors to all our detriment.  A reform in that system can pay both societal dividends, fewer citizens locked up and a financial dividend, lower taxes.  Perhaps this is one silver lining from the financial crisis.

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Business / Economics / Financial / Media / Political — 0 Comments
20
Nov 09

The Macroeconomic Picture or Connecting the Dots

In our current world of finance and economics specialization is rampant to the point of being emblematic of our age.  There are specialists in credit derivatives, traders of all stripes, equities, bonds, distressed debt, emerging markets, private equities, municipal bonds, high yield bonds, repos and a host of other financial vehicles.  Since each of these specialists operate in their own “silo” there are few big picture specialists who can look at the entire macroeconomic environment and connect the dots.   Listening to Bloomberg Radio yesterday morning, noted bank analyst Meredith Whitney returned to her bearish stance on both bank stocks and the stock market in general. Ms.Whitney said she examines all economic data.  Unfortunately, Ms Whitney is a rarity on Wall Street and in Washington.   The mantra has been “green shoots and recovery” but coverage has ignored reality.   Examine recent financial headlines which rarely make the mainstream media:

Connecting the Dots

To stem a financial collapse after the bursting of the internet bubble, the Federal Reserve dropped interest rates to near zero.  This sparked the boom in real estate and the “FIRE” economy: finance, insurance and real estate.  As a nation we exported our productive capacity off shore and we embraced a real estate, retail and service economy.  This bubble burst in 2008. The cycle of ever rising asset prices and credit prices ended.

The above headlines suggest an economy seriously unbalanced with collapsing commercial and residential real estate prices, already high and increasing unemployment, contracting bank and consumer credit, trade imbalances, deficits at the federal and state level, collapsing personal finances and falling tax collections.

Too Much Debt and Too Little Income

The hangover from a decade of financial excess is too much debt and too little income to support that debt.  The rest is mere commentary.  Trying to re-inflate the FIRE economy bubble will ultimately prove to be costly and futile.  The country needs more people like Meredith Whitney who recognize that the emperor has no clothes and realize that there will be continuing tough times ahead.

As they used to say on Hill Street Blues:  “Hey let’s be careful out there.”

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American Society / Economics / Financial / Political — 0 Comments
18
Nov 09

Consistently Inconsistent

Attorney General John Mitchell  ”Watch what we do, not what we say.”

The Obama Administration was elected on a platform of “hope and change” and transparency.   Americans want their leaders to be honest and fair.  The first year of the administration has been nothing short of a disappointment.   Economic policy making has been elitist, deceptive and unfair to the constituency who voted for this President.  Let us examine just three programs and initiatives: the stated goal, the outcome and the inconsistencies.

  • Cash for Clunkers – A program to provide incentives to Americans to trade in their “gas guzzlers” for a new car and a government rebate.  Outcomes – Why are we incenting car purchasers when we are running out of oil and mass transit is in disarray?  Doesn’t this continue to promote the inefficient model of suburban homes, driving long distances to work or shopping?   The program also adds to the debt burdens of consumers who took out auto loans.  Auto analysts at Edmunds.com estimate that each car costs the taxpayer $24,000. The program had additional energy costs in destroying the clunkers.  Finally, it added to the trade deficit as many of the cars purchased were imports.  Inconsistencies: trade deficit, energy conservation, debt.
  • Zero Per Cent Interest Rates – The Chairman of the Federal Reserve vowed to keep interest rates at zero as long as the economy was weak. Outcome- This policy has encouraged consumers and speculators to take on more debt. It has discouraged savings and it has had a particularly pernicious effect on elderly retirees.  It has revived leverage and the same risk taking behavior in the financial community that caused the initial crisis.  By allowing banks to borrow at zero percent and either park the money in safe treasuries or lend to consumers and speculators at higher rates, they have been able to earn risk free profits and pay large bonuses.  And since we manufacture little here, the trade deficit has risen. Finally, the dollar has weakened with the side effect of commodity prices soaring and most importantly, the price of a barrel of oil doubling from its low. Inconsistencies: More speculation and risk taking, inflation in key commodities, added debt and discouragement of desperately needed savings.
  • Health Care Reform – The Administration has a monomaniacal focus on achieving some form of national health care.  Outcome:  If passed Obama’s favored proposal will add enormous costs to employers at the same time that employers need to cut costs to remain competitive.  The Congressional Budget Office conservatively calculates that these proposals will add at least $239 billion to the already out of control government budget deficit.   Finally, taxes will increase to pay for the “reforms”  further delaying economic recovery.  Inconsistencies:  deficits expanded, businesses made less competitive through added costs and tax increases.

A Visit to Never Never Land

I have picked three policy areas but there are more, ranging from adding troops to Afghanistan to bonus pay for bankers. There is an air of total unreality or naiveté emanating from President Obama. Today’s statement from the President unfortunately says it all:

BEIJING, Nov 18 (Reuters) - President Barack Obama gave his sternest warning yet about the need to contain rising U.S. deficits, saying on Wednesday that if government debt were to pile up too much, it could lead to a double-dip recession.

After piling up one debt laden program or initiative after another, the above statement is incomprehensible and amazing. Where is the mainstream media to criticize the Administration on these inconsistencies?  Obama’s statement only strengthens my view that this Administration is consistently inconsistent.

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Economics / Foreign Policy / Political — 0 Comments
23
Oct 09

Relying on the Kindness of Strangers

Whoever you are, I have always depended on the kindness of strangers.

Blanche DuBois  – A Streetcar Named Desire by Tennessee Williams

The United States has one of the world’s largest and most well-equipped militaries. A truism about military might: it requires a lot of money and a sound budget.  But we are unable to finance our trade deficits from domestic sources and have imperiled our international standing.  We now rely on the kindness of foreign financing and have created a self-defeating “Achilles Heel” in our US foreign and military power.

Projecting Power Throughout the World

Through its system of international bases, large annual military budgets and sophisticated weapons systems, the US projects global American power. These expenditures dwarf expenditures of other countries:

The 2009 U.S. military budget is almost as much as the rest of the world’s defense spending combined and is over nine times larger than the military budget of China (compared at the nominal US dollar/Renminbi rate, not the PPP rate). The United States and its close allies are responsible for about two-thirds of the world’s military spending (of which, in turn, the U.S. is responsible for the majority).

The Iraqi army learned that direct confrontation with American armed forces is a losing strategy.  Unfortunately, we are undermining this American military supremacy by owing massive amounts of money to foreign creditors.

Owing your Banker

There is a wise old shibboleth: “If you owe a bank thousands, you have a problem; owe a bank millions, the bank has a problem.”   Over the next ten years, new estimates project cumulative budget deficits of 9 trillion dollars. Health care proposals will swell even that projection.  Who is going to finance this deficit?  With traditional funding sources, pension funds and private investment under pressure, the answer has to be foreign investment.  Despite promises to the contrary, the US dollar has been in a controlled decline.  Our fiscal and monetary policy is punishing our foreign creditors by reducing the value of their dollar holdings.

The Intersection of Economics and Politics

Can we keep up our level of spending and direct military intervention in light of the ever-cheapening dollar?  More importantly, how will our foreign creditors react to American intervention?  If we embrace the realistic probability that countries like China and Russia do not wish us well, deficits have handed these antagonistic creditors a counterweight and serious threat to our military power.

Let’s assume you are the foreign minister of mainland China.  Taiwan has always been a thorn in the side of the Beijing government.  Assume also that you wish to minimize loss of Chinese lives and destruction of military hardware.  Why not reach an understanding with the US that your government will not dump its hoard of cheapening US treasury securities and for goodwill purposes China will buy even more.  The quid pro quo: no United States opposition to the peaceful reuniting of Taiwan and the mainland.  Such a diplomatic initiative in a Congressional or Presidential election year would present a quandary to both political parties.  Electoral political expediency would enable China to reunite.  In this scenario, the nukes remain in their silos, our expensive military hardware remains unused, and T-bills become more powerful than hydrogen bombs.

Bad Habits Always Catch Up With You

Bad economic habits weaken the global position of the United States. But where is the fiscal and monetary discipline in Washington?  While we focus on bailing out bankers and making JP Morgan and Goldman Sachs richer, our enemies are thinking about how to take advantage of our economic disarray.  Is it smart to continue to rely on the kindness of strangers?

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