STUMP » Articles » Failed Predictions and Predictions of Failure » 4 May 2016, 06:55

Where Stu & MP spout off about everything.

Failed Predictions and Predictions of Failure  

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4 May 2016, 06:55

It’s a good idea to check on predictions made. It turns out, I’m really horrible at it, even though I tried to reel it in a bit this year.

REVISITING PREDICTIONS

My prediction post has not fared well. Even if most of the predictions weren’t mine.

Larry Correia’s prediction of a Cruz nominationnot looking good

Scott Adams’s Clinton-health-issue prediction – indeterminate

Steen Jakobsen’s economic predictions – jeez, the Fed hikes prediction is not looking good. Predictions about second half of the year are, of course, premature.

And my predictions?

1. Medicare and Social Security become huge issues in the general election race.

Unfortunately, with Trump as Republican nominee, I don’t see this happening. More about this below.

Shout out to the reader who emailed me to say he thought Puerto Rico was likely to be a bigger issue.

He was right; I was wrong.

2. Public pensions will be big battles in statehouses… not so much on the federal stage.

It’s not really public pensions that are on the federal stage, so I was correct about that. (It’s going to be the Central States pension, but that’s for later.)

That said, I’m not sure how big the battles are in statehouses. Illinois is a mess, but the budget battle seems to be in stalemate. Feh.

In short: my predictions aren’t doing any better than the others I highlighted.

SOCIAL SECURITY

I’ve seen this going around facebook:

The most recent was from a facebook repost I saw, originally posted in this pro-Trump facebook group. The person I know who re-shared this is not pro-Trump. I’ve seen something like this on Bernie Sanders fan groups. And just randomly around.

Just touching on this quickly: where do you think those trillions are going to come from?

Sure, many Congresspeople are rich, but they’re not that rich.

So where is this supposedly stolen money supposed to come from? From taxpayers.

Yes, by all means take money out of younger people’s pockets to feed poor old people. But I believe that what is going to happen is that the salary cap will be lifted for taxation purposes, but not benefit calculation purposes… a de-linking of benefits with “contributions” (i.e. taxes), which I expected would have to happen sooner or later.

We already have implicit means-testing in Social Security with the (limited) taxability of the benefits. Let’s just make it explicit.

In any case, Social Security may be in a cash flow negative net flow, but the accounting “one neat trick!” of the Trust Fund means that it’s not a paper crisis. The law that automatically cuts benefits will not be tripped for years, so people aren’t going to take it seriously.

Medicare is a similar issue, though not with regards to a Trust Fund.

The thing is, while some Boomers have retired, the Boomer peak is not going to be passing for a few more years… and even so, younger seniors are not the most expensive Medicare patients. So Medicare’s really onerous cash flows are not for some years.

Oh well.

DETROIT

Yesterday, I got Detroit Resurrected by Nathan Bomey.

An excerpt from the book:

A few weeks after investment banker Ken Buckfire started advising the City of Detroit on its restructuring in early 2013, he was sitting in his New York City office when a member of his team walked through the door.

“Ken, I’ve got good news and bad news,” his colleague said. “The good news is the art museum might be worth billions of dollars.”

Buckfire didn’t make the connection. “What’s the bad news?” he replied.

“Well, the city owns it,” the colleague explained.

…..
The DIA was a shimmering reminder of the city’s former wealth, a source of inspiration for the community, a provider of education for schoolchildren, and an anchor of economic stability for Midtown Detroit, one of the city’s most vibrant areas.

But in bankruptcy, Detroit emergency manager Kevyn Orr’s team understood that the art — potentially worth billions — would surely become a target of creditors, including financial giants and pensioners alike.

“We didn’t want to sell it because we understood that the DIA is like a park, a civic asset. You don’t sell your parks,” Buckfire said.

But what happens when there’s a need of greater proportion? When contractors, pensioners, employees and bondholders require payment? When you can’t protect your own citizens?

“The dilemma we faced was if the pension funds are so poorly funded, a retiree might see his or her pension slashed from $20,000 to $10,000 per year if we couldn’t find more funding for the pension plans. If we don’t sell the art, we deserve to get hung,” Buckfire said. “We couldn’t subject our retirees to this risk. Then the question is: What do you do about that?”

And here is an interview with the author Nathan Bomey:

QUESTION: One of the main conclusions I drew from your book is that the people who were most skeptical about the state’s takeover of Detroit — the residents who protested the appointment of an emergency manager most indignantly, the unions who opposed the bankruptcy filing most vigorously, the retirees who were sure their pension benefits would be redistributed to banks and bond insurers — turned out to be the biggest winners when the bankruptcy had run its course. Is that your take as well?

ANSWER: Ultimately, Detroit’s bankruptcy marked the moment the city finally puts it people before its creditors.

After years of cozy deals with Wall Street and unions alike, Detroit had reached a point where it would soon be paying 70% of its budget to retirees and bondholders. That was completely unsustainable, and it directly undermined basic city services, draining cash that was badly needed for police, fire, buses and abandoned-home demolition.

Residents benefited from the bankruptcy because Detroit shed $7 billion in debt and now has about $1.7 billion over the next 10 years to spend on city services. Today, the city is running a budget surplus, hiring police officers, upgrading fire equipment, bolstering mass transit, tearing down abandoned homes and turning on street lights. You can tie all of those improvements to the bankruptcy in some respect. Mayor Mike Duggan and City Council deserve credit for keeping the plan on track.

It’s hard to describe anyone else as a winner, since everyone had to make sacrifices. I would say that retirees got a much better deal than I expected when the case started. But the pension cuts and health care insurance reductions they agreed to accept were still very painful for some families. We can’t minimize that.

I am just starting to read the book, and will review when I’ve finished.

Back to the interview:

Q: What lessons should other cities confronting similar issues of fiscal sustainability draw from Detroit’s experience with the municipal bankruptcy process? Does that option look more or less attractive today than it did in the summer of 2013?

A: I think the key lesson is clear: Someday the bill will come due. Once you reach bankruptcy, sacrifices will be required of everybody. So cities must lead fiscally responsible lives to avoid ever reaching insolvency, which threatens the health and well-being of the most vulnerable citizens.

Cities must avoid making promises they can’t keep. Don’t promise benefits you can’t afford and don’t issue debt you can’t pay for.

I would be surprised to see a succession of big cities filing for bankruptcy because of Detroit’s Chapter 9 case. It’s an expensive process, having cost Detroit about $170 million in fees, so that scares off a lot of people.

But after you’ve hit the point of no return, municipal bankruptcy may be the only viable route for some cities.

The only question, then, is: Who’s next?

That’s nice. The problem is that cities have to deal with pension promises now that were made decades ago. So it would have been good advice to give in 1970… but in 2015, that ship has sailed.

Maybe they can get away from making new promises, but the old ones on their own are enough to bankrupt.

Another excerpt from Bomey’s book.

Question that Detroit is really being resurrected.

Yes, there is a Detroit bounceback underway but it is centered in downtown and the neighborhoods that border it. That’s it.

Then there are the facts.

The fiscal year for Detroit Public Schools ends on June 30. On July 1 there is no money for summer school or physical upkeep, unless the state rushes in for a rescue. Such a rescue should not be confused with a proposed $720 million one that will deal with DPS’ long-term debt.

I will be coming back to the Detroit Public Schools issue in a later post.

THOUGHTS ON FAILURE

I’ve seen a couple writings about societal collapse, etc., lately.

Glenn Reynolds in USA Today writes:

Nor is Illinois the only place being bankrupted this way. Puerto Rico is on the verge of financial collapse too. Its political class has been borrowing and spending for decades, and it has finally reached the point at which it can’t go on. (As Herb Stein famously said, “If something cannot go on forever, it will stop.”) Yet Puerto Ricans, such as the territory’s congressional representative Pedro Pierluisi, still resist a federal financial control board as part of a bailout because that might limit the politicians’ gravy train. Likewise, Venezuela, “a country floating on oil with a climate where anything grows,” as Fernandez describes it, is so broke it appears unable even to pay the people who print its money.

Because political leaders’ chief concern is their own power and position, they’re willing to do almost anything to stave off a collapse, except reduce their own power and position. Kicking the can down the road usually just makes the problem worse in the end, but politicians would rather do that than make any sacrifice up front.

…..
But as you vote, remember that the more resources you put under the control of the political class, the more likely it is that things will eventually go bad. Politicians seldom look past the next election, and they’re willing to sacrifice pretty much anything to hang on. And that “pretty much anything” includes you.

Reynolds links to this piece by Richard Fernandez:

The Surprising Weakness of Invincible Institutions

…..
At first glance there is nothing seemingly more formidable than the interlocking shield wall of public institutions and public sector unions. One writer argued that JFK was “the real killer of Laquan McDonald” because he first authorized public employee unions and “police unions make it impossible to get rid of bad-apple cops”. Camelot had created a Frankenstein monster able to run roughshod over everything.

Yet it’s a monster which just can’t seem to do much. For example the Washington Metro, the pride of the nation’s capital, is collapsing. Once “it was a rail system of the future. Then, reality set in.” Perhaps the most telling indicator of fundamental weakness is the public pension crisis. A study by the Hoover Institution covering 97% of all state and local governments found that politicians have little or no ability to meet their pension promises.
…..
Unsustainable bureaucratic behemoths turn out to be what Churchill described: “a cut flower in a vase, fair to see yet bound to die.” They are not invincible, but quite the contrary have the distressing propensity to die. The irony is that the gigantism voters often associate with safety is in itself a risk factor. The bloat isn’t protection, but a heart attack waiting to happen. Economists have long known that being “too big to fail” is actually a source of moral hazard.

Tell me about it.

Here is the problem: all sorts of entities directly involved in public pensions have thought that the pensions can’t fail. Because of stuff like: constitutional protections of benefits (so paying pensions would take precedent over other spending needs, like paying for current services), “government doesn’t go out of business”, the supposedly infinite taxation power of the government, and so forth.

Because they thought that pensions could not fail in reality, that gave them incentives to do all sorts of things that actually made the pensions more likely to fail. Because, after all, the taxpayer could always be soaked to make up any losses from insane behavior.

Obviously, it’s not just pensions that have this problem, but making promises that go well into the future, and just hoping that it will all work out because it has to, is childish thinking.

When it comes to children, we discount their promises, because we know they don’t have judgment or foresight to be able to follow through. We can try to teach them how to do it, by building up promises, but it’s

Maybe we should treat politicians and government the same way.


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On Dreams of Bankruptcy
Here We Go: Puerto Rico Tries for Legal Federal Bankruptcy
Puerto Rico Round-up: Trying to Determine How Bad It Is