Government Pensions: Who Will Go Broke First?

In terms of major issues to which not nearly enough attention gets paid, state and local government employee pensions are right at the top of the list.  Nationwide the potential unrecognized and/or unfunded cost of these pensions is probably around $3 trillion.  That may sound like chump change compared to the $17 trillion bonded debt of the federal government, let alone the perhaps $80 trillion of unfunded entitlement obligations of the federal government.  But this $3 trillion is not uniformly distributed around the country, and instead is concentrated in a few places, particularly the largest cites in the big blue states, that is, New York, Chicago and Los Angeles.  Also, the Feds can borrow and pay bills in currency that they themselves issue, and can hyperinflate the currency to get out of a deep enough hole; but the states and cities don't have those options.  Several California cities (Vallejo, Stockton, San Bernardino), along with (of course) Detroit, have already been pushed to the wall and filed for bankruptcy as a result of unsustainable pension obligations.

All three of the big three cities have outstanding pension promises that I would say are obviously unsustainable.  Terms of each pension plan differ, but the problems lie in some combination of youthful retirement ages, uncapped cost of living adjustments, "spiking" of pensions with overtime in final years, and "disability" systems subject to rampant systematic abuse.  The result is that pension costs soar relative to salary costs of active employees, until pension costs equal or exceed, and sometimes far exceed, the costs of the workers who are actually doing the work.  At that point, necessary services get squeezed out of the budget, and something has to give.  But the pension costs are back-loaded, and creep up gradually, often long after the promises are agreed to.  Nobody notices or talks about the problem until a city is very deep in a hole.

Thus, as an example, going back to the 90s and even earlier, New York City has set retirement ages based on 25 and even 20 year working careers, whereby many people can take their full pensions in their 50s, or even their 40s.  As recently as 2001 they were kidding themselves that all this could be paid for by the continuation of the big stock market run-up of the 90s.  But since 2001 the stock market has not cooperated, and has reverted to a more normal pattern of ups and downs, so New York City's required pension contributions have gone from $1.5 billion per year (about 4% of the budget) to over $8 billion (about 12% of the budget, and almost 15% of the city-funded portion).

Here is my big question:  Which one of the big blue cities will get taken under first by its pension promises? (Note:  In my opinion, it is nearly inevitable that one or all of them will be bankrupted by these promises within about 10 to 20 years, perhaps sooner.)   To some degree the answer to that question turns on how well-funded the plans are currently, but actually the more important issue is whether promises themselves can be brought back to a reasonable level.  And it turns out that that is much harder than you might think.

Here is an issue that you are almost certainly not aware of and that has something like $2 trillion riding on it for the citizens of these big cities:  When your city finally recognizes that its pension commitments are unsustainable, and wants to get them back in line, can it reduce its promises for all pension accruals going forward from that day, or can it only reduce its promises as to new employees who have not yet been hired at the time of the change?  In other words, must a city maintain its pension promises, no matter how unsustainably generous, for all current employees, even those who have worked for the city for as little as one day, throughout their entire career and their retirement; or can the city reduce the promises for everybody going forward from today, honoring all pension accruals made to this point but not committing to new accruals, even for long-term active employees?

Put that way, you may say that it is obvious that a pension sponsor such as a city must honor pensions earned to date, but should be able to cut back on its promises, and accruals resulting from those promises, starting from now.  In the world of private pensions, regulated by the federal government under ERISA, this is exactly how it works.  And as it has become increasingly obvious that defined benefit pensions lead to burgeoning and uncontrollable liabilities, many and even most private pension plan sponsors have reacted by what is called "freezing" their pension plans, meaning that all past accruals are honored but going forward all accruals cease.  It is a clear line that is easy to draw.

But none of the states of New York, Illinois and California has recognized this rule.  Here is the status of the law:

New York.  New York has a provision in its state Constitution, Article VII, Section 5, that provides that "membership in any pension or retirement system of the state or [city] shall be a contractual relationship, the benefits of which shall not be diminished or impaired."  Does that mean that pension accruals cannot be reduced even on a prospective-only basis?  I would argue that the constitutional provision does not mean that at all; but in a series of relatively old court decisions (pre-dating the federal ERISA statute) where the issue was not squarely presented or focused on, New York's highest court has rendered decisions seemingly standing for the proposition that any government employee with a pension promise is entitled to have that promise, and accruals arising from it, continued without diminution for his entire career.  For example, in Birnbaum v. New York State Teachers Retirement System, 5 N.Y.2d 1 (1958) the Court of Appeals determined that the pension plan could adopt a new mortality table (that had the effect of reducing monthly pension checks) for "only such persons as enter the system thereafter."  And in Kranker v. Levitt, 30 N.Y.2d 574 (1972) the same court invalidated, as to all current employees, a statute that would have removed pension credit for unused vacation time.  Nobody in these or other similar cases seems to have pointed out to the court the difference between pension benefits already accrued and those not yet accrued, a question of multi-hundreds of billions of dollars interest to the taxpayers. 

Today, given what might be seen as strong headwinds from the courts, nobody in New York seems to have the appetite to take on this issue.  In a major pension reform of the state employee pension funds enacted in 2012, changes were made as to new employees only.  That means that it will take 30 years for meaningful savings to be realized, as new employees gradually work their way through the system.  Meanwhile, New York City has not really tackled this issue at all, although to be fair to outgoing Mayor Bloomberg, the issue is controlled by the state legislature rather than by bargaining between the city and its workers.  Bloomberg has made multiple speeches warning incoming Mayor de Blasio that he must pay attention to this, but, to all observation, de Blasio continues to ignore the issue completely.

California.  California does not have a state constitutional provision analogous to the one in New York.   Nevertheless, California's Supreme Court has adopted a judge-made rule of "vested rights" that has been found to protect pension plan obligations to state employees.  A fair description of the California case law is that it is highly protective of employee pensions without ever making the critical distinction between already-accrued and yet-to-be-accrued benefits.   In 2012 the citizens of San Jose (third largest city in California and 10th largest in the U.S.) passed, by a 70-30 margin, a ballot proposition called "Measure B."  That Measure had the effect of immediately reducing ongoing pension accruals for city employee pensions, while preserving pension obligations accrued to date.  Many of the city unions immediately challenged the Measure.  In a Tentative Decision on December 19, 2013 (follow link here for a copy of the opinion), Judge Patricia Lucas of the Santa Clara County Superior Court would invalidate much of Measure B.  In its decision, the court would find that the employees have a "vested right" in the city's obligation to pay "unfunded actuarially accrued liabilities" of the plans -- a concept that includes both already-accrued and to-be-accrued benefits.  The court also would find a "vested right" in future cost-of-living adjustments.  This decision is subject to change before becoming final, and then to appeal.

Meanwhile the backers of the San Jose ballot measure, led by San Jose Mayor Chuck Reed, now have underway an effort to get a measure on the statewide ballot to make clear that "changes in the future pension benefits of current public employees" are allowed.  A dispute has now erupted because the Attorney General of California, Kamala Harris (thought to be closely allied with state employee unions) has produced the summary of the initiative to appear on the ballot, and it characterizes the initiative as "eliminat[ing] constitutional protections for vested pension and retiree healthcare benefits for current public employees . . . ."  I guess for the unions, it helps to have friends in high places.  So California cities and towns, let alone the state itself, have some very serious problems trying to get these costs under control.

Illinois.  Illinois and its big city Chicago together have the worst current pension funding problem of all the states and cities, much of it stemming from simply not making actuarially required pension payments for many years.  According to data from Moody's reported here by Reuters, Chicago currently spends about 9% of revenues on pensions, but it would be about 28% if they made the actuarially-required contributions.  A contribution at that level would squeeze out huge amounts of other spending.

In early December 2013 the Illinois legislature, after years of wrangling and delay, passed a major pension reform measure that claims to save some $160 billion over 30 years.  The changes are mainly to retirement ages and cost of living adjustments.   The changes apply only to the state pension systems, not to the city of Chicago.

Illinois has a state constitutional provision (Article XIII, Section 5) almost identical to New York's:  "Membership in any pension or retirement system of the State [or any city] shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired."   According to this article from the Springfield State Journal-Register on December 27, a group of school administrators and teachers immediately filed suit to invalidate the state pension changes.  Meanwhile, the situation in the case law in Illinois is more ambiguous than in the other states, leading to dueling opinions from the Illinois legislature and from a major Chicago law firm (both available here) as to whether pension accruals can be changed prospectively under the Illinois constitution.

Since the lawsuit has just been filed, it will be a while before there is a decision, and even longer before appeals are resolved.  Meanwhile, Chicago, which has the worst problems of all, hasn't yet started to address its problems.  Although any fix requires action from the Illinois legislature, this Reuters article is highly critical, and in my view rightly so, of the failure of Mayor Rahm Emanuel to even try to address the problem:

This is a picture of a politician too timid to address a core issue that faces his city. . . . Pension problems will not fix themselves, especially when the black hole is as big as Chicago’s.

Same is true as to de Blasio in New York, until we see any evidence to the contrary.  Anyway, given the huge hole they have already dug for themselves, and the complete refusal of their Mayor to address the issue, I say that Chicago will be the first of the big three cities to be brought down by its pension promises.

Funny how the so-called "progressives" talk a good game about helping the poor and disadvantaged, but when you look at what they actually do, it is to pass out the big money to their union friends who helped put them in office, while using the pension mechanism to hide the problem from the taxpayers and voters as long as possible. 

The New York Times Spouts Nonsense On "Poverty"

A big source of the Manhattan conventional ignorance is that most all members of the professional class read the New York Times and somehow think that because the Times has such a condescending high-brow tone it must know what it is talking about.  Big mistake.  Sorry, but a very high percentage of what masquerades as news in the Times is just naked advocacy for government spending as the solution to all human problems.

A good example among many is a front page article from Sunday's print edition, "50 Years Later, War on Poverty Is a Mixed Bag," by Annie Lowrey.   As readers here know, one of my persistent themes is that government "poverty" statistics are deliberately misleading.  They deem to be "poverty" things that have nothing to do with physical deprivation in order to wildly inflate the numbers, and are designed specifically so that no amount of increased government spending can ever eliminate or even reduce the "poverty."   Thus they are used to justify unending pleas for more ineffectual spending.  For a few of my prior articles, see here, here, and here. 

In her piece Ms. Lowrey demonstrates both an appalling ignorance of the scam and an adamant refusal to apply any critical thinking to the subject matter.   The basic idea of the article is to bemoan the fact that after five decades of vast spending in a supposed "War on Poverty," the rate of "poverty" as measured by the government has barely budged.  Ms. Lowrey goes looking for the reasons in deep social science doublethink without ever considering the extent to which the government actually measures what it claims to measure.

Here are a few basics that are necessary for any discussion of U.S. "poverty" statistics:  (1) The amount of needs-tested benefits passed out per year from all levels of government, which is over $900 billion, is far more than enough to remove every person in "poverty" from that status if the money were simply passed out in cash. (2) Instead of being passed out in cash, the large majority of the benefits are passed out in-kind (e.g., food stamps, Medicaid, housing assistance, WIC and other "nutrition" programs, etc.) and then counted at zero in determining "income" for purposes of the poverty statistics.  Given the vast amounts that are spent without being allowed to count in the measure of "poverty," the official statistics long since ceased to have any meaning and instead are just a tool cynically used by the government to defraud the public into acquiescing in continuing government growth.

But here we have Ms. Lowrey spouting the usual statistics as if they mean something:

But high rates of poverty — measured by both the official government yardstick and the alternatives that many economists prefer — have remained a remarkably persistent feature of American society. About four in 10 black children live in poverty; for Hispanic children, that figure is about three in 10.

The "four in ten" and "three in ten" figures for black and Hispanic children are completely the result of failing to count the in-kind benefits in the statistics.  What are the real numbers after the benefits are counted?  The government won't say, and Ms. Lowrey is not curious (or intelligent) enough to ask.  There is nothing "remarkable" about the persistence of "poverty" in the United States in the face of spending that would long ago have eliminated it under honest measurement.  The whole idea is to spend the money in ways that don't count in order to have a reason to advocate for yet more spending.

Then we have this howler:

According to one recent study, as of mid-2011, in any given month, 1.7 million households were living on cash income of less than $2 a person a day, with the prevalence of the kind of deep poverty commonly associated with developing nations increasing since the mid-1990s.

Please, Ms. Lowrey, how does "living on cash income of less than $2 a person a day" equate with the "deep poverty" of "developing nations"?  She is just completely omitting that people in the United States may have lots of reasons to have little or no "cash income" in a given year, but still have plenty of resources to live on.  Who are these people in "deep poverty" living on less than $2 per day?  Just give it a moment's thought (something Ms. Lowrey appears incapable of) and you will realize that you know lots of them and you had no idea that they were in "deep poverty."  Examples:

(1) Students, particularly students in graduate and professional school who are over 21, live apart from their parents, and for whatever reason do not take a paying job during the year.  They live off (a) scholarships (don't count as "cash income"), (b) student loans (don't count as "cash income"), and (c) support from the parents or other family members (doesn't count as "cash income").  In lieu of a summer job, perhaps they think it is to their advantage to take that unpaid internship this year.

(2) Early retirees who live for a few years by consuming savings before taking their social security.  Consuming savings does not count as "cash income."  Also in this category are those who have large equity in a home and take a reverse mortgage to get a monthly check.  That also does not count as "cash income."

(3) Small business owners who have a losing year.  Oddly enough (given all the other arbitrary exclusions), losing money in a business actually does count as "cash income."  Yes, it is entirely possible to have "cash income" that is negative.  In fact, if you have a large enough business, you can have a very large negative cash income, even millions of dollars.  Is that what they mean by "deep poverty"?  Of course, people who have a business large enough to lose millions of dollars in a year are likely in real life to be "rich" by any normal definition of the term, although not by the absurd definitions that the government uses to measure "poverty."

(4) Young people out of school who take a year or two to enjoy themselves before starting work.  Maybe they travel in Europe.  Maybe they hike the Appalachian Trail.

And I haven't even gotten to people who make their money off the books where the government doesn't count it, like drug dealers and many casual construction workers.

When you think about it, you will realize that in the context of today's United States, going a year without any meaningful "cash income" is far more likely to be a luxury than a hardship.  (Clearly I am not saying that no one in the United States lives in conditions of hardship.  Undoubtedly there are many.  It's just that the government statistics do not give us any meaningful information on how many, nor does the "cash income" measure give any meaningful indication of which people are the ones in real hardship.) 

Given the many reasons why a person may go a year without earning money, it is actually surprising that the government statistics only come up with 1.7 million people reported as living in families with "less than $2 per day per person" cash income.  In my own circle of extended family, friends and acquaintances, there are multiple people who likely fit this definition.  If you met any of them, you would think that they were upper middle class, or even wealthy in some cases.  It would never occur to you that they are what the government -- and Ms. Lowrey -- mean by "deep poverty."

And I have only scratched the surface of the flaws in this preposterous article. 

Another Nomination For The Worst Possible Public Policy

Back on September 16 I made a nomination for the worst possible public policy, namely "affordable housing" in Manhattan.  I described it as "the most expensive possible way to help the smallest number of people."  Actually that's a charitable description.  Large numbers of the beneficiaries of "affordable housing" in Manhattan don't have any credible claim to being poor, and many of the affordable housing programs explicitly use scarce government funds to benefit the middle and even upper middle classes to the tune of $40,000 and up per family per year.  Is it really possible for any public policy to be worse than that?

Well, I have another nomination: beach restoration on the Long Island oceanfront.  This time we are not talking about just benefiting the middle and upper middle classes with government handouts; no, this is the very richest of the rich.

My interest got piqued when I read in the Real Estate section of today's NYT that Billy Joel's oceanfront estate on the beach in Sagaponack has recently gone back on the market with a new asking price of $23.5 million, up from a recent asking price of $16.75 million.  Here is a picture of the estate from the Times article:

Among reasons given for the price increase were the following:

Also factoring into the higher price is a $26 million beach-nourishment project underway in Sagaponack, Water Mill and the Town of Southampton to help buffer homes from future storms.

It can't possibly be that the government is making that kind of giveaway to a handful of the super rich like Billy Joel, can it?  Well, thankfully, it's not quite that bad.  But almost.

Long Islanders have been working for decades to get the Feds to put up big money to maintain their beaches, but thankfully the Feds have pushed back at least a little.  Notably, the Clinton administration, to its credit, would have none of it.  But Hurricane Sandy in 2012 gave the Long Islanders their opening.  After Hurricane Sandy, at the end of 2012, Congress appropriated some $3.5 billion for construction projects to restore areas impacted by Sandy.  Most of that money remains unallocated.  But according to this from the East Hampton Patch in June 2013, OMB has approved release of $700 million out of the $3.5 billion, and one of the first beneficiaries has been Montauk, the farthest-east hamlet on Long Island.

The specifics have not yet determined, but detailed planning and design of the Montauk beach re-nourishment project can begin with 100 percent federal expense, [Congressman Tim] Bishop's office said in a statement.

Montauk is not as super-rich as Sagaponack, but still, this is pretty over the top.  And how about that project over at Sagaponack?  It turns out that the $26 million beach restoration currently going on is actually funded, at least for the moment, by the super-rich homeowners themselves.  According to Sag Harbor Online on February 6:

Oceanfront property owners in Sagaponack, Bridgehampton and Water Mill approved a referendum on Saturday night that will allow homeowners and the Town of Southampton to spend $24 million to replenish eroded beachfront. A beachfront only made worse by Hurricane Sandy’s impact this October.

But will that stick, with billions of federal funds sitting out there for the asking?  Don't count on it.  From the same article in Sag Harbor Online: 

Whether or not this [Sagaponack] project will benefit from Federal Emergency Management Agency (FEMA) funding for those impacted by Hurricane Sandy remains unclear. Beaches in both Bridgehampton and Sagaponack, having already contended with significant beach erosion, were hammered by the fall storm, whole stretches of beach literally washed away.  “We are pursuing that and the town is pursuing that very aggressively,” said Terchunian.

I think it is virtually certain that the Feds will put up the money as soon as everyone's back is turned.

Meanwhile, Billy Joel is taking no chances, making himself a fixture on the Democratic Party fundraising circuit.  He played at Andrew Cuomo's birthday fundraiser on December 4.   On the federal front, here is Joel palling around with Senator Schumer on September 16, 2013.  

Whether or not the Feds ultimately put up the money for the restoration of beach on the super-rich stretch of Sagaponack, the whole idea of multi hundreds of millions of federal money for Long Island beach restoration is very, very hard to top as bad public policy.

UPDATE, January 8, 2013:  Not wasting any time in fulfilling my prediction above, Gov. Cuomo issued a big press release yesterday, January 7, setting forth his program to "strengthen New York's communities against extreme weather."  The "strategy" is a list of all kinds of projects, with an overall price tag of $17 billion stated on the first line of the release.  Who's paying for it?  Well, it's some indication that VP Biden was there at the announcement along with Cuomo, although the numbers in the release don't have any breakdown between state, federal and (maybe?) local share.  There's also no time line for when all this will happen.  If you scroll down a ways, you will find this as one of the projects:

Coastal Protection - $1,794,461,757

The US Army Corps of Engineers, in concert with NYS Department of Environmental Protection, and the NYS Department of Parks and Historic Preservation, is embarking on a long-term program to protect 83 miles of exposed coastline.

That 83 miles of "exposed coastline" would look to correspond more or less to the large majority of the south shore of Long Island.  In fact, you can't really get to 83 miles without including most or all of the super-rich areas like Westhampton, Bridgehampton, Southampton, Sagaponack, East Hampton, and Amagansett (that stretch is over 40 miles), as well as the not exactly poor Fire Island (another 32 miles).  So, too bad taxpayers, you are going to pay at a minimum hundreds of millions to "protect" the ocean-front homes of the richest of the rich.

Sorry, But "Income Inequality" Is About To Increase

Yesterday, New Year's Day, new Mayor Bill de Blasio was sworn in on the steps of City Hall.  He gave an inaugural address reiterating all his major campaign themes.  Chief among these was what he calls the "crisis of inequality."

New York has faced fiscal collapse, a crime epidemic, terrorist attacks, and natural disasters. But now, in our time, we face a different crisis – an inequality crisis. . . .  It’s a quiet crisis, but one no less pernicious than those that have come before.  Its urgency is read on the faces of our neighbors and their children, as families struggle to make it against increasingly long odds. To tackle a challenge this daunting, we need a dramatic new approach. . . .   A city that fights injustice and inequality — not just because it honors our values, but because it strengthens our people.

There were no specifics in the speech as to what de Blasio intends to do about the crisis, or why he thinks he can solve it, if indeed it is a problem.

I have a prediction for de Blasio that he might not like:  income inequality, as measured by government statistics,  is going to increase over the next four years, both in New York and in the United States as a whole.  That will occur literally no matter what de Blasio does, no matter how much in the way of taxpayer resources he devotes to the issue.  The reason is that government policies beyond his control, largely at the federal level, have a powerful effect of increasing measured income inequality.  The big three policies driving measured income inequality are food stamps, Medicaid, and Obamacare.  The third has just begun to work its destruction.

President Obama is also all over the income inequality issue.  He gave a big speech on the issue in Kansas on December 4 (where he called income inequality "the defining challenge of our time"), and the smart money is betting that this will also be the big theme of his upcoming State of the Union address.  And of course government benefits for low income people have exploded during Obama's five years in office.  So has measured income inequality increased or decreased on Obama's watch?  The answer is that it has increased.  Not only has it increased, but it has increased faster than it increased during the eight years of GW Bush.  Among many articles discussing this seeming anomaly, here is one from the Huffington Post of September 1, 2013.  An excerpt:

The difference between America’s median and average wages grew at a rate of 0.28 percent under President Bush, while it’s grown at a rate of 1.14 percent -- or about four times that -- under Obama, according to The New York Times. The median wage is the midpoint of all workers’ wages, so it only ticks up when everyone is earning more. While a small group of people earning higher pay can push the average wage up.  So, as the difference between the two rises, it means that those at the bottom of the income scale are making fewer gains compared to those at the top.  This data point is one of many that illustrates that in Obama’s America the rich are gaining while the rest of us are struggling to get by.

How could this possibly be?  The answer is that increases in government benefit programs are actually the main cause of the increase in measured income inequality.  This happens because the government benefit programs have the effect of suppressing the measured income of the lowest tiers of the income distribution.

To understand why, you need to know two things: (1) government in-kind benefit programs do not count at all in the measurement of "income" that then goes into the measurement of "income inequality," and (2) at the bottom tiers of the income distribution, government benefit programs seriously discourage the formation of families with a breadwinner.  And thus we have large numbers of single-parent households, living largely or entirely off government benefits, all of which count as zero income.  No amount of new jobs in the economy, no amount of increases in minimum or average wages, no amount of union organizing, and for that matter no amount of increases in the in-kind government benefits, is going to provide these families with measured income. 

The increase in measured income inequality on Obama's watch corresponds to the explosions in food stamp and Medicaid enrollment during this period.  This is not a coincidence.  Put yourself in the position of a woman who has had a couple of children at a young age without marrying and has been able to make a go of it with a suite of government benefits, including housing, food stamps, and free medical care.  All of those things count at zero in the income statistics.  Now a hard-working young man comes along, interested in being with you, and he has a lower- to middle-class income, say $30,000 to $40,000 per year.  You would be out of your mind to marry this man.  Instantly you are disqualified from all the benefits (or in the case of the housing, your rent shoots up).  And why, when you can hang out with the guy four or five or six days a week, you keep the apartment and the food stamps and the Medicaid and he keeps the money (and maybe gives you some of it on the side)?  Ninety-nine percent of people facing this situation are going to make the same choice.  As more people get the benefits (the number on food stamps has increased by about 20 million since Obama took office), more will make the decision to perpetuate an income-free family unit to keep the benefits flowing. 

Meanwhile, at the higher reaches of the income distribution, income continues a slow but steady rise.  The effect of that, combined with government-caused stagnation at near zero levels at the bottom, is steady increases in measured income inequality.  

Suppose now that the government substantially increases all the benefits that it provides to the poor.  This has absolutely no effect on measured income inequality, since none of the benefits count in the statistics.

And into this mix, now throw Obamacare.  Beginning basically today,  Obamacare offers very substantial subsidies on medical care premiums to households depending on where their income stands relative to "federal poverty level" (FPL).  Subsidies continue all the way up to 400% of FPL, which for a family of four now approaches $100,000.   Here is a basic summary of the workings from Kaiser Health News.   To put it in simple terms, lots and lots more people are going to find it to their major economic advantage to not be married, which will in turn mean that there will be lots and lots more low and zero income households that previously would have been combined with other households to make middle income families.

So starting now, a young lady just getting started with a low income from freelancing and a little waitressing goes to healthcare.gov to look for a plan, and they ask her her household income.  Does she include the live-in boyfriend's income or not?  That could easily be a $5000 or $10,000 per year issue.  I'm guessing that maybe 97.23% opt for not including him.  OK, if she's really conscientious about honesty maybe he has to go and stay with his parents one or two nights a week.

There is no question but that Obamacare is going to have a large effect on increasing measured income inequality.  Sorry, Bill, but there is nothing you can do about this.  The good news is that little or none of it is real; it's just an artifact of the statistics.  But of course, de Blasio doesn't know that, or at least he hasn't shown any awareness of these issues in anything he has said to date.

There Are Two Ways Of Looking At The World. Is One Of Them "Right"?

On multiple occasions I have commented on the very divergent world views of progressives versus libertarians like myself -- a divergence that plays out, for example, in the repeated inability of Congress to reach agreement on basic things like a government budget.   A remarkable facet of this divide is the conviction of many, particularly on the progressive side, that their view is objectively "right," and therefore anyone disagreeing must be wrong, indeed evil and immoral.

To get us ready for the new year, I thought I would look around for a good example of the extreme version of this psychosis, and I have come up with this article by Egoberto Willies from the Daily Kos on December 8.  The particular subject of Mr. Willies is opposition to Obamacare, specifically opposition that goes to the point of advocating to the young and healthy that they should refuse to sign up.   Yes, I have definitely done that here at the Manhattan Contrarian.   Well, in the view of Mr. Willies, that is "immoral," "immoral and evil," and also "evil and immoral."  (Mr. Willies appears to be a bit challenged in the vocabulary department, but he does have the bare minimum number of words to get his point across.)

It is immoral and evil to encourage young people to forego insurance when you have no intentions of being there if they get sick or get into an accident. It is immoral and evil to build websites that trick citizens into accessing them while providing them with misleading information that dissuades them from getting the health care they need. It is evil and immoral to create false stories mimicking real people’s circumstances in an attempt to curtail the number of enrollees to Obamacare.

Now why would opponents of Obamacare stoop to this evil and immoral behavior?  Mr. Willies thinks he has the answer:

Opposition to Obamacare has characteristics of an addiction. One knows intrinsically when one is doing wrong or doing something detrimental. However, the cravings make one disregard reality and acquiesce to the drug. What is the drug? The drug is hate for all things Obama.

Well, trying to convince the likes of Mr. Willies is undoubtedly not worth the time and effort.  But if there are any on the progressive side at least a little interested in how a sane human being could disagree with them, I would offer two main reasons:

The Fallacy Of Perfect Knowledge.    Meaningful advances in human well-being come from a vast process of trial and error conducted by people acting in their own self-interest mediated by exchange of goods and services in markets.  The reason that meaningful advances must come about in this method is that no one, not even any group of people working together as a team, is smart enough to figure out a really meaningful advance on his or her or their own within the span of their lives.   And thus we have come up with things as simple as metal or agriculture, or as complex as a pencil or a computer.  But the people who have devised Obamacare think that these processes of trial and error are no longer necessary and that they can solve the problems of healthcare once and for all by the device of having a group of really, really smart people (themselves) utter a two thousand page statute containing the final answer to everything.  Might they make errors in this process?  No way -- after all, they are really, really smart.  They are so smart that they can impose their solutions by compulsory law that everyone else must obey, and can with complete confidence cut off the processes of self-interested market exchange, and instead compel people to act against their own self-interest to achieve higher goals of justice and fairness.

If these people are so smart, I might suggest that we should give them the challenge to make a pencil from scratch and put them out in the forest and see how long it takes them to do it.  The answer is, they will not be able to make a pencil in this lifetime.  But they are smart enough to remake the healthcare system into permanent perfection?  I wouldn't count on it. 

The Illusion of Infinite Resources.  Do some people have less than full provision of perfect health care services?  Well, we'll just order that they must get what they need!  There are no limits here.  Where will the resources come from?  We'll order that people who already thought they coudn't afford health insurance must now buy it!  We'll order that they will pay double or triple the fair price for their level of risk!  But won't people have to give up things that they think are more valuable in order to achieve these goals?  That is not something that a progressive needs to think about.

And of course the healthcare overreach is just one example of the infinite resources illusion.  To consider a couple of current issues here in New York, how about ordering that all hospitals currently operating must remain open forever!  (Result: multiple uneconomic hospitals limping along and losing money hand over fist, including one in Brooklyn, LICH, with 1400 employees and a current 10 or so patients kept open by court order and costing millions a month.)  And then we'll order that anybody who wants to live in Manhattan can do so at taxpayer expense!  We'll build them all "affordable" apartments in the most expensive location in the country!  

And why stop there?  For our next move, we will eliminate income inequality!

Well, sadly resources are not infinite, and government overspending on low priorities is a prescription for impoverishment of the people.  And thus you have the overspending states like New York and Illinois losing status and population to those who keep spending under control; and the European nations having followed the progressive prescriptions to their logical end and going into permanent stasis.

As Margaret Thatcher said, the problem with socialists is that they "always run out of other people's money."

The Cure For Income Inequality Is Malaise

The new theme for Obama and de Blasio is the "crisis of income inequality."  And with the top guys having adopted it as the theme, it now gets talked up all over the place by the parroters of the approved talking points.  For example, here we have Jason Furman, Chair of the President's Council of Economic Advisers, in a Business Week interview on December 19:

Two trends have made life harder for middle-class families. First, the overall growth rate in the economy slowed after 1973 as our productivity slowed. The second is that income inequality began a steep increase, starting in the late ’70s. 

The late '70s?  Yes, that was the low point for income inequality as measured by government data for the share of national income going to the top 1% of earners, as compiled by left-wing economists Piketty and Saez.

But was the late '70s a good time for Americans?  For those too young to remember, July 15, 1979 was the date that President Jimmy Carter went on TV and delivered what is forever known as the "malaise" speech, although the word "malaise" was not actually used.  Read the speech to get an understanding of Carter's sense of the national mood at the time.  Here is an excerpt:

I want to talk to you right now about a fundamental threat to American democracy. . . . The threat is nearly invisible in ordinary ways. It is a crisis of confidence. It is a crisis that strikes at the very heart and soul and spirit of our national will. We can see this crisis in the growing doubt about the meaning of our own lives and in the loss of a unity of purpose for our nation.  The erosion of our confidence in the future is threatening to destroy the social and the political fabric of America.

Why the erosion of confidence?  Two reasons stand out.  One was the government price controls on energy that led to shortages throughout the economy, including long waiting lines to get gasoline.  And the other was ludicrously high marginal income tax rates, including a top rate of 70% at the Federal level.   In New York, combined state and local income tax rates approached 19%.  In simple terms, the government was taking away the ability of the people to get ahead by hard work.

Measured income inequality has increased substantially since that time.  Mostly it is an artifact of the government policies and statistics, but there is also a real element.  With marginal tax rates (federal plus state and local) for top earners in the 80+% range for many people in the late '70s, people stopped reporting or recording income at high levels.  In 1979, most tax shelters were legal, and their use was an art form.  The basic idea was to defer income from one year to the next, and then the next, by various rollovers and non-cash deductions.   Or you could just hold on to appreciating assets and not sell them.  Some people with good connections and lawyers could get ahead by owning the right assets and gaming the tax system; but nobody could get ahead by working hard and earning cash income subject to ordinary income tax.  Is it any wonder that Americans had "lost confidence in the future"?    

In 1986 a major federal tax reform under President Ronald Reagan brought the top federal marginal rate down all the way to 28%.  Most tax shelters also became illegal at that time.   Suddenly many high incomes started getting reported and taxed.  Equally as important, it became possible again to get ahead by the straightforward method of working hard and earning cash taxable as ordinary income.  

So we know how to reduce income inequality as measured by the government data.  Just jack up the income tax rates high enough that nobody can get ahead by hard work any more, and all those high incomes will go away.  Of course, we should also expect the return of "malaise."  That's the cure for income inequality.