08
Apr
10

And now for a moment of pessimistic dread

Let’s have a look at California for a minute:

California’s already in dire financial straits — that much isn’t news — but now we discover that the Golden State’s pension obligations are eight fucking times higher than officially reported.  (How high is eight times higher?  $500,000,000,000.  That’s a lot of zeros.)  How did they manage to misplace or overlook 437.5 billion dollars?

The answer is simple: For decades — and without voter consent — state leaders have been issuing billions of dollars of debt in the form of unfunded pension and healthcare promises, then gaming accounting rules in order to understate the size of those promises.

(That’s David Crane in this editorial.)

It’s not just the size of the debt that’s important — it’s the heads-in-the-sand attitude that damn near everyone is taking about the problem that’s allowing it to grow unchecked.  Whenever the debt problem looms too ominously to be ignored, the proposed “solutions” — like charging residents for 911 calls — are designed to scare people away from proposed budget cuts.  Looking at the California state budget summary — and yes, I realize that (a) this is only one piece of a much larger puzzle involving federal and municipal budgets, and (b) I’ve just pointed out that official figures are untrustworthy — the state’s biggest expenditures for 2010 are K-12 education (31%) and health and human services (25%).  I would venture to suggest that cutting state funding for public school systems is a non-starter — that’s how education budget cuts are usually spun.  “We have to cut something,” people eventually realize, “but we have to cut something else!

The trouble is, there’s no low-hanging fruit.  John Sides notes that plenty of people want to cut spending rather than raise taxes — hang on, I’ll get to “raise taxes” in a minute or three — but their usual targets are utterly trivial components of the budget relative to the ones that’re actually problematic.  Here’s his graph, based on an Economist/YouGov poll:

Social Security, Medicare, and Medicaid/SCHIP compose about 40% of the federal budget now, and the latter two are expected to grow enormously under rather optimistic assumptions.  Cuts to these programmes are inevitable — either because we recognize that we’ll run the country into the ground if we don’t scale them back, or because we refuse to cut them at all, run the country into the ground, and then don’t have money to support them — but nobody wants to be the first one to piss on the third rail.  It’s a positive feedback loop: people support politicians who promise to spend more on programmes they like, so the programmes people like get more money, which rewards (in the short term) people for supporting those politicians.

So if cutting spending is, uh, impractical from a popular-democracy point of view, what are the alternatives?  Well, taxing the rich is always popular — but it doesn’t work.  Taxing corporations sounds like an even better idea — we tend to think of “corporations” as faceless entities, rather than collections of individual human beings very much like ourselves — but it doesn’t work, either.  Both of these “solutions” are in fact counterproductive: any significant tax increase is going to bring down GDP, so trying to tax our way out of this mess will lead to an iterated spiral of higher tax rates, lower-than-expected GDP, more tax increases, more GDP shortfalls, and so on — and that makes both Art Laffer and the economummy cry.

Even if we came up with a taxation scheme that’d generate significant revenue with minimal impact on productivity, that taxation alone is unlikely to help.  Experience suggests that new sources of revenue lead to new spending, just as California’s proposed tax on wineries is allocated to fund naturopathy programmes rather than pay interest on those pension obligations.

Or I suppose we could abandon ourselves to wishful thinking, as the Canadian federal government did this year, and plan to “grow our way out of debt”.  Exactly how we can expect to manage that is somewhat obscure, particularly when the size of the workforce is decreasing as Boomers retire.  (That graph covers the Canadian workforce; I blithely assume that the United States is in much the same place.)

Now, here’s the good news: As long as nothing catastrophic happens, we don’t need to worry about paying off the debt.  We just need to worry about being able to maintain interest payments on the debt, which is much more manageable.

The bad news is that the good news is pretty fucking frightening.  Even if we manage to stabilize federal spending (which isn’t likely to happen), interest rates on Treasury bonds are going up — which makes the debt more expensive to maintain as we roll over the short-term stuff.  This means that people are starting to notice that the United States isn’t the safe financial haven it’s been assumed to be since, oh, 1950 or so: if the Dollar loses its status as the world’s reserve currency, even maintaining current debt levels would become unthinkably expensive.  Megan McArdle rightly calls it “catastrophic”.

Smile, it gets worse.  I’ve been assuming that we stabilize federal spending.  That’d mean not paying out Social Security and Medicare obligations to millions of Boomers (or paying them in IOUs, like California’s been doing with tax returns).  This in itself would probably reassure bondholders and stave off those catastrophic interest rate hikes, which is a nice idea if there was any goddamn chance at all of it happening.

Arnold Kling points out a Clay Shirky article.  I’m going to link to Kling’s post, because it’s more germane to mine, but I’m quoting Shirky:

Complex societies collapse because, when some stress comes, those societies have become too inflexible to respond. In retrospect, this can seem mystifying. Why didn’t these societies just re-tool in less complex ways? The answer Tainter gives is the simplest one: When societies fail to respond to reduced circumstances through orderly downsizing, it isn’t because they don’t want to, it’s because they can’t.

In such systems, there is no way to make things a little bit simpler – the whole edifice becomes a huge, interlocking system not readily amenable to change. Tainter doesn’t regard the sudden decoherence of these societies as either a tragedy or a mistake–“[U]nder a situation of declining marginal returns collapse may be the most appropriate response”, to use his pitiless phrase. Furthermore, even when moderate adjustments could be made, they tend to be resisted, because any simplification discomfits elites.

Remind you of anything?  “Collapse may be the most appropriate response”, as the man says, but that’s unlikely to comfort those of us who’ll get to live through it.

I don’t present this as an excuse for despondent acquiescent defeatism: huddling and whimpering like a restrained dog in a Skinner box is only going to make things worse.  I’m hoping that we can start to develop a continent-wide sense of urgency about demographic entitlement obligations before it all hits the fan, and ranting on my blog beats drinking myself to sleep.  Mostly I suspect that I’m just pissing into the wind — but what the hell, at least it keeps me warm.

If anyone would like to explain to me why I’m being unreasonably paranoid, please, feel free.

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4 Responses to “And now for a moment of pessimistic dread”


  1. 1 aczarnowski
    April 9, 2010 at 08:16

    I’m unreasonably paranoid with ya. We’re screwed.

    But in an attempt to bring hope and change to my own life, has there ever been a constitutional challenge to social security, medicare and medicade in the US? Not that I expect the SCOTUS to rule correctly on same (i.e. a big red UNCONSTITUTIONAL stamp) but I’m new to this postmodernist world change thing. If I wish it so that’s supposed to make it so right? Maybe I need more practice.

    • April 9, 2010 at 16:02

      That’d be a better question for the Volokh Conspiracy, I think.

      Now that I’ve had a reasonable amount of sleep and can imagine some ways forward, I think social security/medicare/medicaid/ACA might serve as a path of least resistance towards unfucking entitlement obligations. Think of it as a fig leaf for politicians: eliminating medicare, say, would be Unjust And Inequitable, but in order to save the programme for the Deserving Needy severe cuts must be made.


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