The Mayoral Candidates Are In For A Rude Surprise

Yesterday Christine Quinn -- Speaker of the City Council and a leading contender to be the next mayor -- delivered a "State of the City" speech.  I don't find a transcript anywhere, but the Gothamist web site has one of the more detailed accounts, as well as a link to a video if you want to watch the whole thing, and also another link to a report issued at the same time by Ms. Quinn titled "The Middle Class Squeeze."

A fair summary of Ms. Quinn's speech is that the City must "help" the middle class by passing out one after another of various grants, subsidies, tax breaks, handouts, free stuff and other goodies and graft from our benevolent masters.  Front and center was her proposal to have the City finance the building of 40,000 new "middle income" apartments per year for the next decade.  Next in significance was her proposal for tax breaks for landlords who make their apartments "affordable" for middle income families.  For both these purposes, middle income is defined as going well above $100,000 per year.

Completely lacking from the speech was any recognition that these kinds of proposals have a cost, and that the payment of the cost must inevitably come primarily from the very "middle income" people who are supposed to benefit.  It is not possible for anything close to a majority of them to come out ahead -- the programs are just transfers from most of them to a small minority of the politically connected.  Of course, a prime idea behind these sorts of programs is to keep the cost as opaque as possible so that no one can figure out that they are getting screwed.  But to take just the top example, the 40,000 units of middle income housing per year is completely unachievable; a realistic number might be around 10,000.  After ten years of that, you'd have 100,000 units that might house about 3 - 5% of the population.  If you assume that the "middle class" is half the population, that leaves 45% that get nothing from this program and must pay.

Of course, the other leading candidates for the Democratic party nomination immediately came out criticizing Quinn for not proposing enough handouts and subsidies.  Hey, this is New York.

But don't worry, because there is a very nasty surprise coming down the road for whoever is the next mayor, in the form of vastly increased pension contributions.  The state legislature has passed one pension sweetener after another over the past 20 years for the municipal unions, the cost of which has been largely hidden by adoption of deceptive 8% returns assumptions by the pension plans.  Failure to meet those return assumptions has led the City's annual contributions to the pension plans to go from about $1 billion per year in 2002 to $8.4 billion in 2012.  That number may hold for a while given good stock market performance in the past 12 months, but the chance of achieving 8% annual returns indefinitely is about nil.  So the $8.4 billion per year could easily shoot upwards by multiple billions during the next mayor's term.  That will wipe any new spending initiatives right off the agenda.

I don't think that any of the Democratic candidates for mayor understands the pension plans well enough to know what is coming.  (One of the Republican candidates, Joe Lhota, probably does.  He may even have a chance to win!)

Meanwhile, there is another obvious way to benefit the middle class far more than the subsidy/handout/tax break/free stuff model of Quinn and her compatriots.  And that is, lower costs for everyone, by some combination of reducing taxes and reducing the restrictions on building that limit the supply of housing in New York.  Even as that would benefit the middle class far more, it would also have far less opportunity for graft for the politicians.  This is not a model that Democratic politicians in New York find acceptable.

Who Will Censure The IMF For Bad Economic Statistics?

From the British weekly The Economist comes a report that the IMF has threatened to "censure" Argentina for putting out false economic statistics to disguise the extent of the inflation plaguing the country:

THE IMF has taken years to pluck up the courage to censure Argentina’s blatantly inaccurate inflation statistics, but it did so at last on February 1st. The official reprimand gives the government of President Cristina Fernández until September 29th to take “remedial measures” to comply with the fund’s rules on the reporting of statistics. If it fails to do so, Argentina risks escalating punishments, from losing its ability to borrow from the IMF to—eventually—expulsion.

The particular problem in Argentina is inflation.  The government has reported inflation of about 10% per year over the past several years, while independent economists have been reporting rates of more like 25% -- not an insignificant discrepancy. 

I applaud the IMF on trying to get Argentina to put out honest inflation statistics.  But in the big picture of things, the Argentina inflation rate is a very small problem in the field of false economic statistics compared to the Big Lie, which is the ongoing fallacy in calculating the GDP of every country that a dollar of government spending, no matter how wasteful, is equal to a dollar of spending in the private economy.   And who is as big a perpetrator as anyone of the Big Lie of counting government spending at full value in GDP?  Why, the IMF, of course!

First, one example from among many of how counting government spending at full value in GDP statistics leads to results that are completely preposterous.  Where else to look but Argentina's blood brother in bad governance, Venezuela?  There the local strongman, Hugo Chavez, was up for re-election last fall.  How to make that a sure thing?  Well, obviously, just increase government spending by 67% (about 20% of GDP) and hand the money out to your core supporters.  Which is exactly what Chavez did last fall, according to this article from Bloomberg News last September 12 (much of the increased spending in the form of a crash program to build public housing).  Now, anybody who thinks about it for a moment knows that such a massive increase in government spending would be hugely destructive of real economic activity.  How did it turn out in the official economic statistics?  From Salon, December 27, 2012:

Venezuela’s gross domestic product grew 5.5 percent in 2012 compared to the previous year, consolidating an economic recovery that began in 2010.  The growth was fueled in part by government spending, especially on a program to construct low-income housing. Construction grew 16.8 percent.   Central Bank President Nelson Merentes announced the figures Thursday.

So then, how are things going in the real productive economy?  Again from the current issue of The Economist:

Cooking oil, sugar, wheat flour, coffee and the all-important pre-cooked maize flour that goes into many Venezuelan dishes are among the staple items that have largely disappeared from the shelves. Both the Central Bank, which tracks the level of supply, and private economists reckon that shortages are at their greatest since 2008. . . .  Under a plan announced in 2005, Venezuela should have produced 5.8m barrels [of oil] a day by 2012. Even by the government’s reckoning, it pumped little more than 3m; private sources suggest the number was around 2.8m.

Lots more in the article, including this picture of a store shelf:

And now back to the IMF.  In October 2012 the IMF put out a World Economic Outlook report that caused a huge stir by criticizing regimes of "austerity" as causing decreases in employment and output.  Here is a link to the IMF report.  Needless to say, the left wing press/blogosphere was ecstatic with the news, from Mother Jones, to the Washington Post, to the Huffington Post.  (Washington Post headline: IMF: Austerity is much worse for the economy than we thought.)

This IMF report represents nothing more than complete acceptance of the fallacy that a dollar of government spending counts the same as a dollar of private spending in GDP accounting.  This IMF report was several orders of magnitude more destructive to the world economy than some cooked Argentine inflation figures.  But who is going to censure the IMF?

UPDATE:  Daughter Jane sends along this excellent cartoon illustrating the basic principles of Keynesian economics:

Let's Start A Pool On How California Will Do Over The Next Five Years

Froma  Harrop, writing today at RealClearPolitics, issues a confident prediction that California will succeed with its latest round of progressive policies.  Well, anything is possible.  Ms Harrop's article has a good list of several of the latest initiatives.  They include:

• The tax-raising Proposition 30, passed last November by the voters, that raised the sales tax by a quarter point and also created new income tax brackets of 10.3%, 11.3%, 12.3% and 13.3% on income over $250,000, $300,000, $500,000 and $1,000,000 respectively.
  
• Intentional efforts to increase the price of electricity through a California-only cap and trade system and also though a so-called "renewables mandate," passed in 2011, that requires California utilities to get 33% of their electricity from renewable sources by 2020.
  
• The high speed rail project, backed again by California voters who approved a referendum in 2008 to issue close to $10 billion in bonds.
  

All I would advise is, don't let yourself be taken in when the results over the next year or so from these policies don't appear to be all that negative.  First of all, the tax increases were retroactive back to January 1, 2012.  So the entire first year's revenue increase will come without an opportunity for anyone to avoid it by restructuring income or moving away.   But in the meantime, nearby states like Nevada and Washington, not to mention major competitors like Texas and Florida, have no income tax at all.  My bet is that people will notice, but the migration will be very gradual.

On the renewable energy front, California issued a report in August 2012 claiming to have already reached a milestone of 20% of electricity from non-nuclear renewables.  I admit that I am extremely skeptical of this assertion, but I'll assume it's true for the moment.  What is also true is that other than hydro, the main renewables (wind, solar) suffer from intermittency (solar doesn't work at night, or wind when it's calm).  Because of that, renewables become more and more costly as they provide a higher and higher percentage of the electricity.  Getting to higher levels requires more and more duplicate back-up generation capacity.  But it will be a while before we see how far they can push this.

Over in the high speed rail department, the $10 billion bond issue came at a time when the total cost was projected at about $35 billion.  In 2011 the projection suddenly went to $65 billion.  They seem to expecting that the Federal taxpayers will pick up most of that.

They do have very nice weather in most of California.  They also have a massive amount of oil and gas in "frackable" formations within their boundaries, but my bet is that the greens will prevent that from being developed.

I'm certainly not predicting an imminent collapse for California.  The consequence of making yourself way out of line in taxes and costs is not rapid collapse, but slow relative decline.  As I have pointed out many times, when New York got itself almost 20% out of line in top income tax rate with its immediate neighbors New Jersey and Connecticut from the late 60s to the late 70s, the relative decline speeded up dramatically, and New York City lost some 12% of its population in the 70s.  California is not that out of line, and Nevada is not nearly as close to the major California cities as northern New Jersey and southwestern Connecticut are to New York.  It will take quite a while for the decline to become significant.  But over five years, and even more so over ten, I don't see how they avoid it.

Gov. Cuomo's Latest Plan To Buy Out Sandy Victims

I know I keep coming back and back to this topic, but the latest from Governor Cuomo confirms all my worst fears about upcoming Hurricane Sandy giveaways.  Thomas Kaplan has the story in yesterday's New York Times.

With both houses of Congress having passed the $51 billion Sandy relief bill, Cuomo aides met with Federal officials in Washington on Friday to present plans for use of some large part of that money for "buyouts" of people whose homes were damaged.

For the 10,000 or so homes in the 100-year flood plain that were substantially damaged by Hurricane Sandy, Mr. Cuomo would offer owners the pre-storm full market value of their houses. Homeowners who chose to relocate within their home county would receive a 5 percent bonus above the market value, as part of a government effort to encourage them to stay nearby. State officials said they were planning for the possibility that 10 to 15 percent of those eligible would take the buyout.

Residents of more vulnerable areas would receive a further enticement: they would be allowed to sell their homes even if the homes suffered little, or possibly even no, damage from the hurricane, and the state would pay them an additional 10 percent bonus, above market value, to sweeten the deal.

In a few dozen blocks located in areas of extreme risk, the state would offer another 10 percent bonus if every homeowner on the block agreed to sell. Local officials would be expected to determine how best to use the new open space, though they would not be allowed to build on it.

Or, to put it in simple terms, if you didn't buy the flood insurance you get a far, far better deal than if you did buy the insurance.  For those who don't know, all the Federal flood insurance you can buy for a 1 - 4 family house is $250,000 for the house and $100,000 for contents; and the premium for that is $3289 per year if you are in Zone A.  Well, forget that, you suckers who bought flood insurance, now we're going to pay full pre-flood value of the house plus up to 20% for those who didn't bother to buy the insurance.

And by the way, what is that about "a few dozen blocks located in areas of extreme risk."  As far as I know, the entire run of the barrier islands is an "area of extreme risk."  New York has 100+ miles of them and New Jersey has another 100+ miles of them, and the rest of the East Coast and Florida and Texas have hundreds and hundreds of more miles of them.

The article suggests that Cuomo says this won't cost all that much because most people will want to rebuild and won't take the buyouts.  Well, maybe this time, but once the word of such a program gets out sooner or later every house on the whole coast of the United States is going to get bought out.  I just wonder if any of our governing geniuses understand how impossible this is.  Cuomo gets to look like a sugar daddy to the beleaguered Staten Islanders for a few moments, and next time around the taxpayers have to buy out the mega-billionaires in East Hampton or Palm Beach.

Meanwhile, suppose your house just burns down.  As of today, we still have that old-fashioned rule that you either buy insurance, in which case you get whatever it pays, or you don't, in which case tough luck.  And the poor souls in Toledo or Topeka whose houses burn down aren't playing heads-I-win-tails-you-lose with the taxpayers looking to live the good life on the beach for a few years and then get bought out at a premium when the flood comes.  The press should be all over Cuomo with the mindlessness of this.  Are they?  Well, here is the lead editorial from this morning's New York Post.  "We'll have to see the details, but the governor's plan strikes us as an excellent way to save lives and dollars."  And the Post is usually at least somewhat sensible on issues of government spending.  Is there no hope?

Remembering Mayor Ed Koch

Much in the news these past couple of days on the passing of our larger-than-life former mayor, Ed Koch.   Koch was a man of great energy and enthusiasm, always in good humor and good spirits.  He took the helm of the City at about its lowest point (1978), and left it far better off twelve years later.  But what about an objective assessment of how much credit we can give Koch for the improvement in the City since the 70s?

Koch had one huge achievement as mayor, which is that he got the City budget under control by dramatic cuts in spending.  The number of City employees shrank by close to 100,000 in his first term.  By 1980, that number was down to about 200,000 total.  It then gradually crept back up until it was back to about 250,000 when he left office.  Here is a graph post-1980.  (The number today is around 280,000.)  Koch did not meaningfully lower City taxes, but he also did not meaningfully increase them, which is a great achievement compared to his predecessors.

There were two major issues that needed tackling during Koch's tenure and that he did not tackle:  public safety and welfare.  Crime did not meaningfully decline.  Here is a chart of number of murders in New York City over the years.  The number was 1504 in 1978 and 1905 in 1989.  (In 2012 it was 414.)  Welfare recipients numbered well over 1,000,000 throughout his tenure.  (NYC had 343,000 welfare recipients by 2011 according to this NYT article.)

In the 1980s when Koch was mayor, the real estate market in New York took off, and the population of the City, which had shrunk by almost a million during the 70s, started a rapid recovery.  Koch certainly deserves some credit for the rebound, for showing that the budget could be tamed.  But I would give far more credit to something else that was not in Koch's control:  the lowering of the New York State top income tax rate from almost 15% to about 8%.  Main credit for that goes to Koch's contemporary, Governor Hugh Carey, who served from 1975 to 1982.  Also, don't forget the huge assist added by New Jersey, which had no income tax at all before 1976, and was eating New York's lunch.  Their top rate started at 2% in 1976, but once they had it it just went up and up.  Today, their top rate is almost 9%.  Today, nobody moves to New Jersey to save on taxes.  

One other major (and unappreciated) factor in the revival of New York City has been the (painfully slow) phase out of rent regulation.  Again, that came well after Koch, and at the initiative of the State government (mainly Governor George Pataki), not the City.

You Can't Come Out Ahead Buying Lunch Insurance

On the front page of yesterday's New York Times, Robert Pear has another of his many long articles on the back and forth over the HHS regulations requiring all insurance policies under Obamacare to pay for birth control.

If you get your news on this subject from the New York Times, seemingly the big and only issue is how to deal with the objections of religious organizations who assert that they are being forced against their principles to pay for something they find objectionable on religious grounds.   The latest is that on Friday the government came up with a new proposal for a  "complicated arrangement " whereby the insurers would have to pay for the contraceptives and the government would give them a kick-back in the form of some kind of credit, and it would all be so opaque that nobody would be able to follow the money.  Needless to say, spokesmen for the religious groups were not satisfied. 

I don't mean to make light of the religious freedom issue, which I think is important.  But in all this discussion of the contraception mandate, not just in the New York Times, I can find almost no mention of an issue I think is at least as important, namely the preposterous idea that it makes sense to buy "insurance" for this kind of thing.  By "this kind of thing," I mean an ongoing, low-level expenditure that is expected and planned for. 

In the voluntary world, we buy insurance for the unexpected loss or destruction of valuable assets, such as destruction of your house by a fire or of your car by an accident.  Does anybody buy insurance against the cost of eating lunch every day?  Nobody ever really thinks much about it, but if you do give it a few moments' thought, you quickly realize that the reason there is no insurance market for such a thing is that you couldn't possibly come out ahead.  The premium would be the amount you were going to spend anyway, plus a mark-up for the profit of the insurance company.  Not to mention that some of the people with lunch insurance would immediately take advantage of the situation to go out and have steaks every day, and that would promptly get figured into your premium.  Before long, we'd all be broke.   

There is no sense in which third party payment of ongoing, expected and planned expenditures is "insurance."  It is just a particularly poorly designed form of income transfer.  If you're going to do an income transfer and just hand out the cash, at least you know how much cash you are going to hand out.  If you are going to do an income transfer and give people carte blanche to buy whatever kind of birth control (or lunch, or whatever) they want, you can be sure that they will buy the most expensive options and that the cost will zoom out of control.

Apparently this "free" birth control thing was a material part of our president's very successful campaign to get the backing of young and single women for his re-election.  Well, young women, now that you've bought into the income transfer state, here's your deal:  you get "free" birth control (worth maybe a couple of hundred dollars a year) and in return you get to pay (1) additional health care premiums that will go up by the cost of the most expensive birth control plus some profit for the insurance companies, plus (2) you pay for totally free health care for those over 65 (which will not still be around when you are that age), plus (3) you get to have a hopelessly indebted Federal government which will have had a massive retrenchment before you reach the age of getting the real benefits.  How many of you are able to figure out that you are big, big losers in this trade?