Imagine the top executives of a corporation voting each other shares of stock, enriching themselves and diluting shareholder equity. Imagine elected officials getting together with the lobbyists for a select group of interests, handing out billions of dollars in favors, and immediately raising taxes and cutting services to pay for it. In that case, people might finally realize what is happening in this country in general, and in Albany in particular, and do what it takes to stop it. But that isn't the way it works. What you generally have is a two-part fleecing,and by the time the hammer falls on the victims everyone has forgotten all about the beneficiaries.
In business, in good times stock options are issued but offset by share buybacks, so stockholder's equity is not diluted — until later when unfortunately "circumstances beyond anyone's control" require that new stock be issued and capital infusions sought. And in politics the winners, the abusers, get their favors paid out of the public treasury funded by debts, deferred costs, advanced revenues, and higher returns. And then when pension funds are going broke and debt service starts eating the budget, there is "no choice" but to make "tough decisions" and raise taxes, cut benefits, cut spending, and raise fees. Those tough choices somehow never include taking back any tax breaks, excessive spending levels, and rich pensions and benefits for those cashing out. "Realism" requires that others pay the price, and since the price has been deferred as part of the two-part fleecing, it must be paid with interest.
In the current round, elected officials and private businesses have come up with an interim step — putting off the day of economic reckoning with debts people can't repay, and turning them into investments that can be projected to have "above average future returns," thereby increasing the amount of money, tax breaks and pension promises that can be handed out today based on those expected returns. When the high expected returns turn into easily foreseen losses, well, realism will require "shared sacrifice" — shared by everyone who will be around in the future.
One sees this in Flordia, where school districts are going into debt to pay operating costs to offset losses on investments with above average returns. And, according to the Boston Globe, the small City of Springfield Mass faces an "investment nightmare" because AAA rated short-term investments previously worth $14 million are now worth $1.2 million. "Some perspective: Thanks to aggressive collections and cost-cutting, Springfield has managed to generate surpluses in the last two years. That surplus was about $17 million two years ago and $30 million in the most recent year, so it hurts when $12 million goes up in smoke." That city plans to sue Merrill Lynch. If it wins, Merrill Lynch will have less profit, and New York City and State will have lower tax revenues. Meanwhile Orange County in California is going broke again, San Diego’s public services are collapsing as money is diverted to pensions, and New Jersey still is contributing very little to it’s public employee pension funds as it spends what is left of all future transportation trust fund revenues.
But I have a more pressing concern. The City and State of New York, at the height of the dot.com mania, handed out a pension enhancement which Carl McCall said would be "free" based on an assumption of an eight percent rate of return from that point forward. Well, the gain in stock prices since then has been around zero, the pay of public employees hired since then has been cut (again!) due to "circumstances beyond our control," our taxes are higher, services have been restrained, all to pay for that pension enhancement and the inadequate money contributed to the pension plans in the 1990s, money that was diverted elsewhere. So the City and State Comptrollers, to reduce the soaring burden of those pensions, have decided they needed to diversify into investments with higher returns. I say it again — what is in those pension funds? How much has been lost? And who will be sacrificed to pay for it?
You've heard about the losses at financial companies on the the portions of mortgage securitizations they retained. But they only retained a small fraction, selling the rest to greater fools. And those greater fools — insurance companies, mutual funds, pension funds — have yet to report any equivalent losses, let alone to start charging us to pay them back. They are putting it off as long as possible. Perhaps they can make it until there is no chance of any objectors getting on the ballot in 2008. Perhaps billions will be borrowed, as in 2002, to postpone the pain until after the November 2008 election. Then a deficit will be "discovered" and, in the words of a Russion proverb, "the shortage will be divided among the peasants." That shortage will NOT be due to "circumstances beyond anyone's control," because alternatives are theoretically available that are politically impossible given the small number of people who matter and the large number who do not.
The right approach is the one former President Clinton took in the early 1990s — the beneficiaries in the boom should make the sacrifices required for deficit reduction in the bust. That should be the approach to any city and state budget deficits. The question is, and bares repeating, are the same victims going to be hit up again? It's the same movie over and over.