STUMP » Articles » Mornings with Meep: What Exactly is a Fiscal Crisis? When Does It Happen? » 10 June 2018, 11:11

Here’s the video:

And here’s a direct link to the video.

ARTICLES I’M REFERRING TO

First is from Megan McArdle at the Washington Post:

Saving Social Security and Medicare now seems hopeless

Just as with saving for our personal retirement, the most painless approach to sustainable entitlements is to start early and make small adjustments, rather than trying to frantically close the gap during the past few years. We could easily have done this, for the solution has always been obvious: a combination of raising the retirement age and raising the payroll taxes, with the changes phased in slowly to give people plenty of time to adjust their expectations.

We didn’t do that when it would have been easiest 20 years ago; we aren’t doing it now, when the necessary changes will be larger and harder. And, unfortunately, it’s hard to see how we will do it until the trust funds are down to the last penny and massive cuts to benefits are looming over the heads of frightened retirees.

The math of fixing our entitlement programs has always been easy, but the politics have always been difficult. The long time horizons over which such problems unfold, and over which solutions are best implemented, are ill-suited to the exigencies of the American political calendar. The political bases of the two major parties want something right now — a gargantuan tax cut, perhaps, or a massive new health-care entitlement that must be paid for by using Medicare payment reforms that could otherwise have shored up the finances of the existing program. Politicians facing a choice between giving the base what it wants, or giving the base higher payroll taxes and later retirement ages just to keep something they already have, unsurprisingly chose the easy path to fiscal meltdown, rather than the rocky road to sanity.

If politics is always short-term, perhaps governments shouldn’t attempt to make any long-term promises, eh?

Or perhaps we should be a lot more skeptical about the fulfillment of those promises.

If this seems like a daft way to handle a serious problem, that’s because it is. And yet, it’s getting very hard to envision any other possible ending. We let our finances run out of control thanks to an optical illusion. And all the evidence suggests that we’re planning to cling to that illusion until the veil is forcibly ripped from before our eyes.

Hey McArdle, check this out:

They already have been borrowing money to pay Social Security benefits. Since 2010. At what point is it a crisis?

I think even when the Trust Fund runs out, it won’t be considered a crisis… they’ll do year-to-year patches til they can come up with a way to turn it into welfare for seniors, to prevent elderly destitution. That, I think we can sustain.

Second article: Outgoing Starbucks Chairman Howard Schultz rips Democrats for veering too far left: ‘How are we going to pay for these things?’

Many leaders in the Democratic Party are veering too far left and overpromising government programs that are not fiscally possible, Howard Schultz told CNBC on Tuesday.

Without naming names, Schultz said in a “Squawk Box” interview: “It concerns me that so many voices within the Democratic Party are going so far to the left. I say to myself, ‘How are we going to pay for these things,’ in terms of things like single payer [and] people espousing the fact that the government is going to give everyone a job. I don’t think that’s realistic.”

“I think we got to get away from these falsehoods and start talking about the truth and not false promises” said Schultz, whose Monday announcement that he’s stepping down as executive chairman of Starbucks is driving speculation that he may run for president in the 2020 election.

….
“I think the greatest threat domestically to the country is this $21 trillion debt hanging over the cloud of America and future generations,” Schultz said. “The only way we’re going to get out of that is we’ve got to grow the economy, in my view, 4 percent or greater. And then we have to go after entitlements.”

Well, for how many years at that growth level? Because the entitlement cash flow problem is, again, already here. Not 10 years from now, or whatever the Trustee Report says.

HISTORY LESSON: FINANCE AND THE FRENCH REVOLUTION

Finally, the fiscal origins of the French Revolution:

Financial crisis

Caricature of the Third Estate carrying the First Estate (clergy) and the Second Estate (nobility) on its back
In 1774 Louis XVI ascended to the throne in the middle of a financial crisis in which the state was faced with a budget deficit and was nearing bankruptcy.³⁶ This was due in part to France’s costly involvements in the Seven Years’ War and later the American Revolutionary War.³⁷ In May 1776, finance minister Turgot was dismissed, after failing to enact reforms. The next year, Jacques Necker, a foreigner, was appointed Comptroller-General of Finance. He could not be made an official minister because he was a Protestant.³⁸

Necker realised that the country’s extremely regressive tax system subjected the lower classes to a heavy burden,³⁸ while numerous exemptions existed for the nobility and clergy.³⁹ He argued that the country could not be taxed higher; that tax exemptions for the nobility and clergy must be reduced; and proposed that borrowing more money would solve the country’s fiscal shortages. Necker published a report to support this claim that underestimated the deficit by roughly 36 million livres, and proposed restricting the power of the parlements.³⁸

This was not received well by the King’s ministers, and Necker, hoping to bolster his position, argued to be made a minister. The King refused, Necker was dismissed, and Charles Alexandre de Calonne was appointed to the Comptrollership.³⁸ Calonne initially spent liberally, but he quickly realised the critical financial situation and proposed a new tax code.⁴⁰

The proposal included a consistent land tax, which would include taxation of the nobility and clergy. Faced with opposition from the parlements, Calonne organised the summoning of the Assembly of Notables. But the Assembly failed to endorse Calonne’s proposals and instead weakened his position through its criticism. In response, the King announced the calling of the Estates-General for May 1789, the first time the body had been summoned since 1614. This was a signal that the Bourbon monarchy was in a weakened state and subject to the demands of its people.⁴¹

For what it’s worth, it’s not merely that France had a lot of expenditures in its various wars against the UK.

It’s also they had idiotic “clever ideas” for financing. This scholarly paper on tontines in France vs. the UK points out:

Tontines were used more extensively by France than Britain. Comparative tontine history illuminates the differing evolution of public finance in the two countries and its political consequences. Archival materials establish the number of participants in French tontines. Internal rates of return on tontines and alternatives show subsidy of tontines by the French government. Repudiation in 1770 contributed to the political attitudes of life annuitants, the most important class of state creditors, during the fiscal crisis of the late 1780s.

So they horrible mispriced tontines (a type of annuity), which cost the government even more… so they issued more tontines…

Wikipedia: Tontine Uses and Abuses:

Louis XIV first made use of tontines in 1689 to fund military operations when he could not otherwise raise the money. The initial subscribers each put in 300 livres, and, unlike most later schemes, this one was run honestly; the last survivor, a widow named Charlotte Barbier, who died in 1726 at the age of 96, received 73,000 livres in her last payment.¹⁰¹¹¹² The English government first issued tontines in 1693 to fund a war against France, part of the Nine Years’ War.⁶¹²

Tontines soon caused financial problems for their issuing governments, as the organisers tended to underestimate the longevity of the population. At first, tontine holders included men and women of all ages. However, by the mid-18th century, investors were beginning to understand how to game the system, and it became increasingly common to buy tontine shares for young children, especially for girls around the age of 5 (since girls lived longer than boys, and by which age they were less at risk of infant mortality). This created the possibility of significant returns for the shareholders, with significant losses for the organizers.

And back to that academic document – somebody else’s narrative based on that academic paper:

Immediately after the end of the war in 1763 public debt swelled up, tontines became a major drag on the French economy.

A royal edict in 1763 banned the issuance of any future government tontines and by 1770 tontines were brought to an end. Abbe Terray, the new comptroller general after bringing tontines to an end, froze future payments to 1769 levels and converted them to life annuities. Needless to say, converting tontines to life annuities didn’t solve the crown’s debt problem, because anticipating backlash a flat 10% interest was applied to all age groups. Although there wasn’t that much of difference between dividend payments, public perception had shifted drastically. The French by then had gained somewhat of a reputation when it came to defaulting on loans. They had mastered the art of strategic defaults. Trust in the monarchy had evaporated and the public viewed the conversion of tontines to life annuities as treacherous,… and anticipated a default. To be honest, while the French revolution was the result of great a number of reasons that are much easier to weigh. Reasons which don’t mean tontines would have played an insignificant role. Sometimes betting on a zero-sum game is really all that.

Ah, “strategic” defaults.

LITERARY REFERENCE: ISAAC ASIMOV’S FOUNDATION

Isaac Asimov’s Foundation series of books together are a sci-fi classic, based on the core idea behind Gibbon’s The Decline and Fall of the Roman Empire — that history is more driven by large trends, not the Great Man who is pivotal to history.

The original trilogy is still classic, though it does have whiffs of datedness… specifically the idea of the planned history.

For those who haven’t read it, I recommend the original trilogy: Foundation, Foundation and Empire, and Second Foundation.

The original book is somewhat cobbled together from earlier short stories – and it shows, but it works. It sets up the notion of psychohistory, and a little bit of info on Hari Seldon and the concept of Seldon crisis is established.

The next one, Foundation and Empire, is really two books – the first one being directly inspired by Decline and Fall (with respect to what happens when there’s a strong emperor and a strong imperial general – this did happen in the history of the Roman Empire); the second seemingly undercutting the core idea of large economic/political movements being driven by the inevitability of history instead of the Great Man.

The third one, Second Foundation, is also two main stories, though linked. It involves the search for a mysterious Second Foundation, which seems to be driving events.

I highly recommend the series, especially to people new to sci-fi. Asimov’s style reminds me of Agatha Christie — extremely easy to read, not laden with over-explanations, and seemingly natural. You need not have read any of Asimov’s other books to enjoy this trilogy.

This original trilogy later was followed by additional novels, but I cannot so wholeheartedly recommend them. First, you actually need to have read some other of his books (not telling you which, that would actually be a spoiler) to actually understand what he did. Also, a lot of people were thoroughly disappointed by what he had done in “wrapping up”. I was going through these novels as a kid (about 12 years old), and I thought the “twist” fabulous… but as an adult, I agree… it was a bit cheap. I also got the excitement of getting a book right after it came out — the original Foundation trilogy originally developed in the 1940s and early 50s, and he did the reboot in the 1980s, when I was a kid.

But you can ignore the followup books and be just fine with that.

BONUS LINK: NO ILLINOIS PENSION CRISIS

I didn’t refer to this, but I had this post from Wirepoints in mind while I prepped for today: Cullerton Renews Infamous ‘No Pension Crisis’ Claim In Interview Crammed With Dishonesty – Wirepoints Original

Five years ago Cullerton earned national and local ridicule for saying Illinois pensions aren’t in “crisis.” For example, the Wall Street Journal asked, “How is a pension system which is less than 40% funded—the lowest ratio in the country—and projected to run dry by the end of the decade not facing a crisis?” Even the Crain’s editorial board mocked him, giving him an Alfred E. Neuman award, using the cartoon on the right, and writing, “Sorry to break it to you, Mr. Cullerton, but this is indeed a bona fide, honest-to-God crisis.”

Since then, the state’s unfunded pension liabilities have jumped 30% higher but Cullerton is at it again: “Not a crisis,” he said on WTTW’s Chicago Tonight show Tuesday.

As per the image from Wirepoints:

Again, Illinois is not in crisis, really, because they haven’t been forced into making a decision. The most recent budget proves that.

Of course, once they do run out of options – once they can no longer issue bonds, one thay are unable to pay for the pensions (as in, do not have the cash to pay that year’s benefits) – it will be disastrous. That’s the point of trying to make difficult decisions early.

Oh well.

LAST WEEK’S POSTS

• Memory Monday: Puerto Rican Deaths and Fifth week of May 1918
• Taxing Tuesday: Pity the Poor Blue State Millionaires
• Illinois Budget and Pension Buyout: Much Ado About Awful
• Illinois Quickie: Pension Benefit Growth Rates
• Friday Special: Social Security and Medicare Trust Funds – What’s Real?
• Wisconsin Wednesday: Is Benefit Growth Moderate?

See y’all next week!