The State Mess Is A-Coming


The WSJ’s OpEd page has once again highlighted the State fiscal mess — and it’s time for we as citizens, with an election coming up, to demand answers.

The slow-motion collapse of the government status quo across the Western world is obvious, but the reality is the opposite of what Twain said about Wagner’s music—it’s worse than it sounds. That’s the message of a recent report from Richard Ravitch and Paul Volcker that deserves far more attention than it has received.

Since 2010 the former New York Lieutenant Governor and Federal Reserve Chairman have been scrutinizing the balance sheets of six of the largest states—California, Illinois, New Jersey, New York, Texas and Virginia. Their conclusions make clear that Washington is not the only part of the government headed for the fiscal cliff.

It’s not just six states, of course.  Medicaid, they project, will grow at 8.1% annually over the next decade.  While this is lower than the realized expansion from 1980 to present (9.x%) the fact is that projections are almost always low simply because they’re politically expedient and rely on scenarios that are unrealistic.  As just one example of many I’ve highlighted Rep. Ryan’s “budget framework” in the US House relies on GDP growth numbers that have never been achieved in the post-war era, yet those numbers form the entire predicate of his projected revenue base for the government itself.

Simply put Medicaid (and Medicare) cannot be resolved with changes in the entitlement programs themselves — we must instead fix the medical system.  So long as we permit medical providers of all sorts (pharmaceutical companies, hospitals, etc) to create cost-shifting environments where the price of one’s own conduct is hidden and allow citizens to choose to save nothing nor buy insurance against catastrophic outcomes yet received the same medical care as someone who both takes care of their body and has a reserve (either through saving or insurance) for bad outcomes we will never find a solution to medical cost growth.

The fact of the matter is that medical care is not a right — it is a service one buys with one’s economic surplus.  Charity can and will pick up the slack to a degree, but there will be bad outcomes under such a model, and those who receive less than they would want (or “need”); this is unavoidable in any free-market economic system and pretending otherwise is foolish.

The other glaring problem that I’ve highlighted multiple times is that of pensions for public employees being protected under constitutional construct.  This makes modifications only possible through one of three paths, none of which are guaranteed to succeed.  The states can argue that the contracts for these benefits were entered into under false pretense (“fraud”), thereby eviscerating the contract as performance was physically impossible, the residents of a state could modify its constitution (again) or the residents could revolt, at least in a tax sense.  The latter, of course, has a high probability of leading to violence; we should therefore be hoping that the States come to their senses and choose one of the first two options, as the third tends to come in the throes of an all-on fiscal collapse.

Many argue that the recession “made the problem worse.”  This is a lie; the fact is that pension systems at the state level tend to claim 8% returns as “normal.”  This, however, means that they are counting on assets doubling every 9 years.  To put this in perspective this argues that the assets will increase in price by a factor of 32 over 45 years; from 1-2 in 9, then 2-4 in 18, then 4-8 in 27, from 8-16 in 36, and from 16-32 in 45. 

To be succinct this is a prediction that the DOW will stand at 400,000 (~32 times its present level of 13,000) 45 years from now.   This is utter lunacy, yet it is the prediction upon which the entire pension mess is predicated.

Ponzi schemes, of which this is one, are inherent frauds.  We are well beyond the point where we should demand that our legislators stand to account, along with the public employee unions, that have “negotiated” such benefit packages.  Under any reasonable interpretation of the law they are unenforceable as they rely on mathematical pyramiding that cannot happen; as such they must be discarded.

What makes much of what is happening in municipal and state finance worse is the gimmickry that states use.  Much of the “accounting” used to present so-called “balanced” budgets are artifices that in a private company would lead to felony criminal charges.  Yet we permit states to get away with this sort of deception on a regular basis.

In short with an election coming up we the people must insist that all state lawmakers and those who aspire to these offices, from county commissions and city boards on upward, answer to these issues.  We must demand not only honest accounting but reasonable forward projections, along with a clear and delineated strategy for dealing with the ridiculously-escalating cost profile of government retirement benefits and entitlement costs.  The medical cost situation is particularly dire but by no means the only place where attention must be focused.

If we fail to do so, demanding reform, we will only have ourselves to blame when our state fiscal environment detonates and fiscal collapse, or worse civil unrest, follows.

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