State And Local Government Financial Data Are Also A Problem

The series over the past week on fraudulent government economic data focused on data published by the Federal government, the reason being that most of the economic data for the U.S. come from the Federal government.  But the state and local governments put out substantial amounts of data too, mostly about their own financial condition.  What is the level of trustworthiness there?  Not good.​

​Thankfully state and local governments have much less ability to practice financial fraud than the Feds, in part because they have restrictions on the incurring of debt, in part because they have statutory or even constitutional balanced budget requirements, and in part because they can't print their own currency to pay their debts.  But like all politicians, state and local pols have powerful incentives to use the public fisc to pay off favored constituencies today while hiding what they are doing from the voters, thus allowing obligations to accumulate out of view to spring upon the next generation after those who took on the obligations are long gone.

If your goal is to pay off your political supporters while not revealing for many years the obligations you are incurring, then probably the perfect vehicle for you is the defined benefit pension plan.  In a state or local government defined benefit pension plan, the sponsoring entity takes on obligations that are not due to be paid for 10, 20 or even up to 80 years.  It is perfectly appropriate that the obligations due many years out are valued today based on a discount rate, the idea being that you can put money aside today against the discounted value, and the money will then earn the assumed rate of return over the years, resulting in sufficient funds to pay the obligations when they come due.  Nothing wrong so far. 

Now just think like a politician for a moment.  The higher the discount/return rate that you assume, the lower today's liabilities will appear to be.  If you assume an aggressive rate of return today, then you can promise generous pensions while putting aside little money to fund them.  However, when the markets fail to produce the assumed rate of return, required contributions will gradually accelerate, but over many years.  With any luck, you will be long gone.​

The states with the worst pension problems today are probably Illinois, California and New Jersey, in that order.  New York is not far behind.  (Does anyone notice that these states have in common their deep blue politics?)  Anyway, I'll use New York City as an example, because I live here and I follow it closely.​

New York City has five main pension funds for its workers:  New York City Employees' Retirement System (ERS), New York City Teachers' Retirement System (TRS), New York City Police Pension Fund (Police), New York City Fire Department Pension Fund (Fire), and New York City Board of Education Retirement System (BERS).​  All have long assumed an 8% discount/return rate for valuation purposes.  Such returns can only be had in the stock market or even riskier investments like hedge funds, and any such investments can go down as well as up.  In fact, the stock market, after recent large gains, is only now approaching the records achieved in early 2000 -- that's 13 years with no gains whatsoever, against the 8% assumption.

​What's the result?  In fiscal 2002, when the contributions were set based on the stock market values in 2000, New York City made required pension contributions of right around $1 billion, which was about 2.5% of a budget of then about $40 billion per year.  By 2012, with the stock market flat for a decade, required contributions had soared to $8.4 billion out of a budget now at $70 billion -- 12% of the total. 

In 2012 Richard North, chief City actuary, issued a report recommending lowering the assumed discount/return rate all the way to 7%.  Believe it or not, it takes an act of the state legislature to make that change!  A bill was presented in the 2012 session of the legislature, and it never came to a vote.  I guess the legislators understand where their interest is on this matter, namely continuing to keep the public in the dark.​

In his actuarial valuations for the funds that came out in October 2012, North went ahead and used the rogue 7% rate.  The result was to reveal dramatically lower funding levels than previously advertised using the 8% rate:  ERS funding went from 78.6% funding to 64.2%; TRS from 64.1% to 58.9%; Police from 71.3% to 60.1%; Fire from 56.8% to 48.2%; BERS from 68.7% to 57.8%.  ​

But isn't even 7% rather aggressive for a public pension fund?  In a very valuable blog, John Murphy, the long time (1990 - 2005) Executive Director ​of ERS, commenting on the dramatic declines in funding resulting from use of the 7% rate, wrote on January 9, 2013 as follows:

The historical rate of return on stocks is 6.8% and for bonds it's 3.5%. Actuaries should not be playing with these rates. A standard prudent pension plan should operate within a 50/50 range of stocks and bonds depending on the level of annual benefit payments that the plan is required to make. A 5.15% interest rate should be almost a mandatory upper limit for interest rate assumptions.

We outsiders don't have the data available to make a precise calculation, but based on average funding declines of close to 10% resulting from a 1% drop in assumed discount/return, it would be a good bet that taking the assumed return rate down to 5% would cause further declines in the funding ratio in the range of 15-20%, dropping funding ratios into the mid-30s to low 40s.  Or to put it in dollar terms, the five funds have total assets of around $105 billion.  Valued at 7%, the actuary put their liabilities at around $171 billion.  Valued at 5%, those liabilities are likely to be more like $250 - 300 billion.  In short, there are huge, huge increases coming in the required pension contributions.  While the data to figure this out are publicly available, they can be quite hard to fine.  Few people know about it.​

PS.  I have submitted an op ed to the New York Times on this subject.  They say they are going to run it, but they have been sitting on it for months.​

All Of The Government's Important Economic Data Are Fraudulent -- Part III (Social Security and Medicare)

Between and among the big three pieces of government economic data under consideration here (GDP, the poverty rate, and the accounting for retiree pension and health care obligations) it's hard to know which one is the most fraudulent.  But if the criteria are the very size of the fraudulent mis-statement of numbers and the degree to which the truth is hidden so as to be near impossible to figure out, the accounting for pension and health care obligations has a good claim to be the worst of all.​

The accounting for pension and health care obligations is part of the government's income statement, most often cited in the context of the annual deficit.  Almost everyone is familiar with the regularly-cited deficit numbers, which in the recent Obama years have been running at something over $1 trillion per year.​  Is that a number we can trust?

The answer is, of course not.  If you give just the most superficial look to the government's accounting that produces this number, you know that it is nearly pure cash in cash out accounting.  That means that the "deficit" for say 2012 is the difference between the government's cash receipts in 2012 and its cash expenditures in 2012.  The accounting was put in place back in the nineteenth century, when the main businesses of the government were things like the army, the state department, the justice department and the courts.  Pure cash accounting made a good deal of sense for those kinds of activities.  Then, starting in the 1930s and accelerating ever since, the government changed its businesses until today its main lines of business are Social Security, Medicare and Medicaid.  In other words, today the government is mainly a gigantic provider of annuities and health care, mostly for retirees.  Is pure cash in cash out accounting in any way appropriate for such an enterprise?  Not even remotely close.​

What we now have is entirely like a life insurance company selling policies to 20 and 30-somethings, finding that no policyholder dies in the year, declaring all of the premium money to be "income" and paying it all out to the shareholders as a dividend, and not even making a record of how much are the obligations being accumulated that will have to be paid out when the policyholders get old and die.  Of course, any executives of a private insurance company that tried this would promptly go to jail.  There is an entire industry of accountants and actuaries that exists for insurance companies to make reasonable calculations of the future obligations being incurred so that they can be provided for over time.   The key difference between what the private companies do and what the government does is the calculating of accruals for the prospective and inevitable liabilities.

As for the government, it's not just that they report their numbers in a completely inappropriate way, but in all the vast amount of information that they put out, you cannot find any mention of an appropriate accrual for the insurance-like liabilities.  ​Private citizens do not have all the data needed for the calculations, and can only make rough approximations.  But it is clear that the numbers are huge.  In an op-ed in the Wall Street Journal last November 26, Chris Cox (former Chairman of the SEC) and Bill Archer (former Chairman of the House Ways and Means Committee) estimated that an appropriate annual accrual just for the two largest government insurance programs, Social Security and Medicare, would be $7 trillion per year.  They didn't say what assumptions went into that number or who produced it for them.

But if the number is even in the right range, then the real deficit is not the +/- $1 trillion reported by the government, but more like $8 trillion.  Do you think that can be fixed by higher taxes?  Just for comparison's sake, the total amount of Adjusted Gross Income reported on all tax returns to the IRS in 2010 (most recent year available from the Tax Foundation) is ​$8.040 trillion.  Not much left there to live on.

Now that's a pretty major fraud!  Do you hear anyone talking about it?​

All Of The Government's Important Economic Data Are Fraudulent -- Part II (Poverty Rate)

Of the big three government economic statistics under discussion here (GDP, poverty rate, pension and health liabilities), one of them does not have even a hint of honesty about it: the poverty rate.  It is a scam from left to right and from top to bottom.  The basic idea is that the government publishes poverty statistics stating that millions of people are living in poverty as a device to sell the voters on spending more government money to fix the problem.  Massive amounts of government money are then voted and spent.  However, poverty is defined in such a way that little or none of the additional government spending is counted in determining who is living in poverty, and therefore billions and billions of additional spending do not decrease "poverty" in the slightest.  Next time around, despite billions of additional government spending, the "poverty" rate is the same or higher, and is used yet again to sell the voters on yet more spending to cure the poverty. 

Please take note that "poverty" as defined by the government has nothing whatsoever to do with what most people think of as real poverty, namely physical deprivation.  It has nothing to do with hunger, nothing to do with poor quality housing, nothing to do with inadequate clothing.  A family living in government-defined "poverty" may well have inadequate housing or poor clothing, or could also be receiving $100,000 or more in in kind government benefits, or could even be asset millionaires taking a year's sabbatical from lucrative jobs.  ​The government "poverty" rate statistic simply gives no meaningful information as to how many people are living in actual poverty as the term is generally understood.  Rather, the number is just a scam designed to play on the voters' emotions to sell more ineffectual government spending, none of which will or can reduce the measured rate.

Here is all you need to know about the "poverty" rate scam.  According to a compilation by Robert Rector of the Heritage Foundation, the total amount of means-tested government (Federal, state, local) anti-poverty spending as of the latest statistics (2011) is $927 billion per year.  According to the Census Bureau, the income thresholds for living in poverty, which vary by household size, were $11,170 for a single person and $23,050 for a family of four.  Also according to the Census Bureau, there were 48.5 million people in the United States in 2011 living in "poverty."

Do you sense that there is something wrong there?  Let's do a little very simple math:  $927 billion divided by 48.5 million people is $19,113 of government anti-poverty spending for each of them.  That is nearly double the "poverty" threshold even if the "poverty" population divides itself up entirely into one person households.  If we have four person households, the anti-poverty government spending is $76,452 per household, well more than triple the $23,050 threshold set by the government itself.​

By its own definitions, the government could completely eliminate poverty, with plenty to spare, by simply passing out the $927 billion in cash pro rata to the 48.5 million people.  Instead, the government is spending ​​more than triple the amount that it would take to completely eliminate poverty, and is not making a dent.  How could this be possible?

Very simple.  The government defines "poverty" totally in terms of "cash income."  And then it passes out the benefits not as cash, but rather in kind.  Think Medicaid, food stamps, public housing, school lunches, transportation vouchers, Obamaphones -- you name it.  None of it counts.  Any actual cash grant is carefully set to come out safely below the poverty line.  ​

​What's incredible to me is that discussion of the poverty rate data in the media continues to treat the information as if it is something meaningful, even as if it represents some actual measure of material deprivation of the people.  But today, with an average of over $76,000 per year doled out for every family of four in "poverty," it is not possible for any intelligent person to take the data seriously.  The continued publication of this data is just a scam plain and simple, specifically designed to deceive the public into supporting more spending.

And if possible, the scam is getting even worse.   The existing "poverty" rate data has been under criticism for a long time for exactly the reasons stated above.  (Rector of Heritage has been one of the leading critics.)  This has caused a certain amount of concern in the poverty profiteer community.   After all, it would only take the public about ten minutes of focus to realize that just counting the in kind benefits at say one-half the amount the government spends would instantaneously eliminate almost all measured poverty.   How to ward that off? 

The Obama administration has come up with a solution.​  In November 2012 they came out with a new "supplemental" measure of poverty.  The basic idea is to make "poverty" no longer an absolute measure of well-being, but rather a relative measure, defined with respect to 33% of the median level of income.  And beyond that, the new definition is completely incomprehensible.  The obvious idea here is again to maintain a measure that can't be reduced no matter how much spending on the poor there is, and no matter how much the well-being of the low income population improves in absolute terms.  Or to put it another way, the idea is to deceive the public into believing that poverty is not decreasing in order is to protect the poverty bureaucracy from any attempts to shrink its level of spending.

​Here is an article from the Daily Caller on November 16, 2012 by Mickey Kaus, titled ​MSM falls for "New coke" poverty con.  At least Kaus realizes that it is a con.  Of the many who wrote about it, almost all the rest completely fell for the scam.  Pitiful.

All Of The Government's Important Economic Data Are Fraudulent -- Part I

Perhaps the most painful aspect about reading (or watching) debates about economic policy is that everyone cites government economic data that are completely unsuited and useless for the purpose cited.  I'm not talking here about obscure data; I'm talking about the main and most widely cited and used data, about which the ignorance of just about everyone is appalling.​

In fact I assert that the principal government economic data are uniformly fraudulent.  And not in little ways; rather, in fundamental ways that go to the heart of how the data are designed to be used and how they are used.   Now, I am not accusing the United States government of systematically falsifying or putting out inaccurate data, the way, for example, Argentina puts out inflation data that everyone knows are completely made up.  ​But what our government does is just as bad or worse.  Our government issues data in categories that are defined in ways to that are designed to and do deceive the people.  And the deception is always of the same sort, namely, making bigger government appear more desirable in order to achieve the support of the people for that end.

This proposition is decidedly true with respect to the three categories of economic data that are the most important in terms of their use in the argument over economic policy.  Those categories are:  (1) GDP, (2) the rate of poverty, and (3) the cost of obligations to retirees for pensions and health care.​

Today I will start with GDP, the principal measure of the overall size of the economy, and of whether the economy is growing or shrinking and by how much.  ​There is a fundamental problem with the compilation of GDP data, which is that government spending on goods, services and salaries is added into GDP dollar for dollar.  This fact makes the GDP data completely useless in a debate over whether government spending should be increased or cut.  Of course, that is the principal use to which GDP data are generally put.

The portion of the GDP that comes from the private economy is based on the assumption that voluntariness and markets mean that transactions of equal dollar value should be given equal weight.  That assumption does not apply to government spending.  How should the value of government spending be measured?   The assumption used is that a dollar of government spending gets added to GDP as if it were completely equal to a dollar of private spending.  When the government was a small percentage of the economy, and the government thought that thrift was a virtue, this assumption may have been as good as any other.  ​

But as soon as you count every dollar of government spending at full value, you can immediately see that pure wasted spending counts to "increase" GDP just as much as the very most necessary expenditure.  Suppose you pay someone to dig holes and fill them in (an example actually extensively discussed in Keynes' General Theory).  At the end of a year he has produced exactly nothing -- but the GDP numbers add in an amount equal to whatever the government paid him.  If the government pays every one of 300 million Americans $50,000 each to dig holes and fill them in all year, they have produced absolutely nothing by the end of the year, and the government records a GDP of $15 trillion.  If the government doubles everyone's salary to $100,000, then it just doubled the GDP to $30 trillion, even though they are all starving (because they were too busy digging holes to produce any food).

These are extreme examples, but we live in a time when the acceptance of the GDP numbers as measuring real changes in the economy is so great that the government can completely just pass out hundreds of billions of dollars of totally wasted spending to its friends, cronies and supporters, and count that as a dollar for dollar increase in GDP.   Yes, I am talking about the so-called "stimulus."  And they get virtually no push-back from the media, including most of the conservative media.  And the "stimulus" is just a small part of it.  How about "green" energy spending, specifically designed and intended to impoverish the people by preventing them from using cheaper energy and driving up the cost of electricity and driving.  Yes, that kind of destructive spending also is measured as increasing GDP dollar for dollar.​

And of course, it works the same way when there is any proposal to cut spending.  Under GDP accounting, cuts in government spending, no matter how wasteful that spending, are recorded as reducing GDP dollar for dollar.  Thus here we have President Obama a few days ago opposing the upcoming spending cuts:​

"Our top priority must be to do everything we can to grow the economy and create good, middle-class jobs," Obama said during remarks at the White House, standing alongside a group of emergency responders. "That's why it's so troubling that just 10 days from now, Congress might allow a series of automatic, severe budget cuts to take place that will do the exact opposite."

Thus, you can't ever cut any government spending, because that will shrink the economy.  Under this logic, we just head inexorably for a world where the economy is 100% government.  North Korea!​

​Over the next couple of days I'll consider poverty and pension accounting.

Climateers Making Fools Of Themselves

There's a great round-up today on the web site called RealScience (written by Steven Goddard) titled Settled Science Update:  Global Warming Means More Snow, Less Snow, Record Snow And No Snow.​

Back in the heyday of the global warming scare, many warmists made the obvious prediction that warming would mean less snow.  Many of them went even further and predicted the disappearance of meaningful snowfall in places like England within not many years.  Then, of course, the last few years have seen above normal and even record snowfall in these very places.  Obviously, that must be caused by global warming too!  If you think I must be kidding, I followed some of the links at Goddard's site to come up with a few of the best quotes.

From Charles Onians in the Independent, March 20, 2000:​

Britain's winter ends tomorrow with further indications of a striking environmental change: snow is starting to disappear from our lives. . . . .Global warming, the heating of the atmosphere by increased amounts of industrial gases, is now accepted as a reality by the international community. . . . .  However, the warming is so far manifesting itself more in winters which are less cold than in much hotter summers. According to Dr David Viner, a senior research scientist at the climatic research unit (CRU) of the University of East Anglia, within a few years winter snowfall will become "a very rare and exciting event.  Children just aren't going to know what snow is," he said.

CRU, of course, is not nowhere in the climate wars, but rather home of Hockey Team leader Phil Jones, the CRU temperature series, and the Climategate e-mails.​

Well, it seems that recent winters have turned out to be unusually cold and snowy in England and, for that matter, over the Eurasian continent.  To find the explanation, you'll have to go to Clive Cookson in FT Magazine on January 20, 2012, summarizing a recent scholarly article in Environmental Research Letters by lead author Judah Cohen and others.   ​

The past two decades have seen strong warming during the summer and early autumn over the Arctic, which has caused unprecedented melting of sea ice. The result is more moisture in the atmosphere, which, in turn, results in increased precipitation over the northern Eurasian continent . . .  [A]verage October snow cover over Eurasia – and particularly Siberia – has grown since 1988. . . .  The effect of increased autumn snow cover is to intensify the seasonal cooling of the Eurasian continent and strengthen the area of high pressure that forms over Siberia in the winter. As a result the Arctic Oscillation, the atmospheric pressure pattern in the mid-to-high latitudes, is more likely to be in the “negative phase” that feeds cold polar air across the eastern half of the US and northern Europe.  “In my mind there is no doubt that the globe is getting warmer,” says Judah Cohen, lead author of the paper.

Got that?  Don't you see how obvious it is that warmer temperatures mean more snow, rather than less snow?​  I wonder if anybody has told Viner or Jones.  Or for that matter our president, who still doesn't know that the climate campaign has collapsed into foolishness and thinks that he has the power to control the weather by pricing the poor out of the energy market.

The Handout Society As Electoral Strategy

During the recent 2012 election campaign, Mitt Romney was rightly criticized for saying that the 47% of the population then receiving some form of government handout or other would "vote for the president no matter what . . .[and] believe that they are victims."  That statement was clearly confused; far from every one of the 47% who were getting some form of government benefit voted for Obama,, and some of the 47% were among Romney's core constituents.

But on the other hand, the ongoing increase in the number of benefit recipients has to be good for the party promising to continue and increase the benefits.  Since only about 5 million votes separated the candidates by the time all were counted, could the increase in numbers receiving benefits have had something to do with the outcome?

It turns out that the number of benefit recipients in many categories exploded during Obama's first term.  This is particularly notable since the recession officially ended in June 2009, shortly after Obama took office.  Shouldn't the number of benefit recipients have started to go down after that?  But consider what happened in various benefit categories:

Food Stamps.  Now officially known as the Supplemental Nutrition Assistance Program ("SNAP"), this program completely exploded during Obama's first term.  Here is a chart going back to 1975.

The number of recipients had actually gone down during Clinton's second term from around 27 million to 17 million, and then crept back up to about 28 million at the end of the GW Bush administration in 2008.  And then the numbers took off, reaching about 47.7 million by the end of 2012, an increase of almost 20 million in four years to a level far above any precedents.

Why did this happen during a recovery?  Well, one key reason (via CNN) is that the government undertook an advertising program to get people to sign up!  By the way, don't just blame Obama -- it started under W.  But it's hard not to conclude from the chart above that Obama and his team fully realized the electoral benefits of maximizing this giveaway.  It only took about a quarter of those 20 million incremental food stamp recipients in Obama's first 4 years to provide his entire margin of victory.

Are you wondering how so many people are even eligible for food stamps?  It doesn't hurt that lots of things don't count against eligibility, no matter how great their amount.  Exhibit A is equity in a home, and Exhibit B is retirement accounts such as 401(k)s.  You can easily have many millions of dollars in assets and still qualify for food stamps.  As USDA under secretary Kevin Concannon says in the CNN article linked above, "Research has shown that many people -- particularly underserved seniors, working poor, and legal immigrants -- do not understand the requirements of the program."  Or in other words, lots of relatively affluent retired people foolishly thought that if you had half a million dollars of equity in your house and another half a million in retirement accounts, you couldn't possibly be eligible for food stamps; but now that they have been educated by the ads, they feel like dupes for not having signed up earlier.  And how about that other downtrodden category, graduate students?  Yes, another rapidly growing segment of the program; Concannon refers to them as the "working poor."

Disability.  According to figures from the Social Security Administration reported by Investors Business Daily, the number of people added to the Federal disability rolls during Obama's first term (through April 2012) was 5.4 million.  Although the number of disability recipients also increased under both Bushes and under Clinton, IBD reports that the number of applications in 2011 was up 24% compared with 2008.  With food stamps, at least a lot of people eventually get off.  But as IBD reports,

The problem is that few people who get on disability will ever participate in the labor force again. In fact, the vast bulk of those who exit Social Security Disability Insurance do so either because they hit retirement age or died.

Obamaphones.   A viral youtube video late in the campaign had a screaming Obama supporter bragging about her free "Obamaphone" available to all welfare recipients.  Snopes took apart the underlying facts, finding the worst allegations partly true and partly false.  Turns out that the program started as something called "Lifeline" back in the Reagan administration, well before cell phones, to give poor people some access to phone service for emergencies.  Who could be against that?  Best part about it was that it was funded by so-called "universal access fees" paid by incumbent service providers -- a nice off-budget slush fund available when needed for vote buying.  Otherwise known as an irresistible temptation to electoral corruption.  Like the other programs above, it crept up little by little under succeeding presidents, barely noticed, and then exploded under Obama.  According to Snopes, the number of people with "Lifeline" phones grew from 7.1 million in 2008 to 12.5 million in 2012.   There you have yet another incremental 5 million potential votes!  These people weren't taking any chances.

The basic problem here is that all of these things are one form or another of Ponzi schemes.  Will it take an another 30 million or so incremental handout recipients to secure the next election?  How about the one after that?  This can't go on for very long, but it sure can do a lot of damage.