Rhode Island is the Problem

It is a sign of the myopia of the establishment Press (not to mention the left thinkocracy and some of my favorite bloggers) that it is preoccupied with a recent CBO report on growing income inequality. That is worth pondering, to be sure, but it is also abstract. Whether, how, and to what degree it is a bad thing depends on a lot of assumptions. More assumptions are required to speculate on its causes and possible remedies.

There is less interest in a much more concrete problem facing us, one of which the danger is crystal clear. The New York Times, to its credit, brings a vivid example to our attention. Here is Mary Williams Walsh on the dilemma in Rhode Island:

ON the night of Sept. 8, Gina M. Raimondo, a financier by trade, rolled up here with news no one wanted to hear: Rhode Island, she declared, was going broke…

If current trends held, Ms. Raimondo warned, the Ocean State would soon look like Athens on the Narragansett: undersized and overextended. Its economy would wither. Jobs would vanish. The state would be hollowed out.

It is not the sort of message you might expect from Ms. Raimondo, a proud daughter of Providence, a successful venture capitalist and, not least, the current general treasurer of Rhode Island. But it is a message worth hearing. The smallest state in the union, it turns out, has a very big debt problem.

After decades of drift, denial and inaction, Rhode Island's $14.8 billion pension system is in crisis. Ten cents of every state tax dollar now goes to retired public workers. Before long, Ms. Raimondo has been cautioning in whistle-stops here and across the state, that figure will climb perilously toward 20 cents. But the scary thing is that no one really knows. The Providence Journal recently tried to count all the municipal pension plans outside the state system and stopped at 155, conceding that it might have missed some.

Let's boil that down. Rhode Island has a public pension system that is about to bankrupt the state. Very soon now the state government will face a choice between keeping its promises to retired public workers and providing basic services like plowing snow off roads and putting out fires. Assuming it won't stop doing the latter, some retired workers will be lucky to get back a few dimes on every dollar they invested in their pensions. Municipalities are already past that point, and they are declaring bankruptcy to get out of pension obligations and cutting basic services.

For decades this has been on the horizon. It could have been addressed with relatively little pain thirty years ago. Instead, "drift, denial, and inaction" was the legislature's response.

Illinois, California, Connecticut, Oklahoma, Michigan — the list of stretched states runs on. In Pennsylvania, the capital city, Harrisburg, filed for bankruptcy earlier this month to avoid having to use prized assets to pay off Wall Street creditors. In New Jersey, Gov. Chris Christie wants to roll back benefits, too.

In a very powerful essay, Walter Russell Mead has a name for this.

Years of blue social policy have wrecked local and state government finance in the country's smallest state, and now the bills are coming due. Services are being cut to the bone and elderly retirees are losing money they thought was secure.

Blue social policy. Is this fair? The Rhode Island House of Representatives has 65 Democrats and 10 Republicans. Its Senate has 29 Democrats and 8 Republicans. That's about as blue as you get, and that's after the 2010 election. Connecticut and California are similarly Democrat heavy. Illinois not so much, though it remains about two to one dominated by Democrats in the state legislature. In Michigan the Republicans controlled the state senate before 2010 and the House after 2010. Only Oklahoma, from the list above, has been solidly Republican.

Republicans are just as capable of being fiscally irresponsible as Democrats. It remains to be seen whether Democrats are as capable of fiscal responsibility as Republicans. New Jersey may the place where this is decided.

One thing is for sure: the blue state social model is finished for the foreseeable future. The pension crisis is both broad and deep and it will challenge every level of government from the U.S. Congress to the small town city council. This is the real problem facing us. Republicans may not benefit from being right on principle, if they have to be the ones to impose all the pain. Democrats may not benefit either if all they know how to do is to resist the inevitable.

Comments

[Donald Pay]

This is a big issue to the righty supporters of Wall Street rip offs. The big righty think tanks have been putting out "papers" on this as cover for the financial industry, and they seem to be steaming about the fact that they haven't gotten much press out of their papers.

There are problems with states not funding their defined benefit plans when they get into a financial pinch, but until the latest downturn, there really wasn't much of a problem.

http://www.cepr.net/documents/publications/pensions-2011-02.pdf

In Wisconsin under Walker we've seen increases in the state budget and tax breaks to the rich and corporations at the same time we've seen decreases in state contributions to the pension system for the middle class workers. The fact that this is another Republican income distribution upward from the middle class to the wealthy is seen by the fact that the hole in the pension created by Walker's budget giveaways to the wealthy are being made up by Walker reaching into the pockets of state workers and stealing their money to pay for the hole he created in the state's pension obligation.

And here's the kicker. One of the reasons Wisconsin doesn't have a problem with its pension system is that we had strong public sector unions that insisted on fiscal sanity in this program. Destroy the unions' ability to negotiate on this, and you allow Walker and the Republicans to raid the program for more money for their rich friends.

One of the rights big issues is to destroy defined benefit plans and switch employees over to defined contribution plans, thus further enriching the Wall Streeters. And the way to do that is to scare people into thinking there's a huge problem. Ahh, no thanks, KB. The problem is manageable. We don't need your crooked friends in the financial industry raiding yet another middle class benefit to enrich themselves.

[Jon S.]

Donald,

Is allowing people to keep their money the same as "enriching them"? Is using the power of government to take money from some people and give it to yourself "fiscal sanity"?

[Bill Fleming]

Jon, maybe you should be asking Wall Street that question.

[Jimi]

Riddle of the Day:

Who can explain what Donald has correct about the situaiton in Wisconsin involving Collective Bargaining?

Watch the video to see what it is:

http://youtu.be/bLSyaNIrjjA

Answer: tcerroc gnihtyna steg ylerar ohw goloedI nevird adnegA a si dlanoD. noitseuq kcirt a si tI:gnihtoN

Solve the riddle and win a prize!

[Stan Gibilisco]

Jimi,

I believe the correct spelling is "uegoloedi" not "goloedi" ...

I'm not certain we can simply say "blue states fail." Isn't Vermont doing pretty well? They're just about as liberal as you get. As far as tax structures go, North Dakota and Montana are a lot more liberal than South Dakota and Wyoming, yet all four states seem to be doing pretty well (relatively) in the ongoing economic recession.

In my opinion, the tax and social structure of a state (or country) have little to do with economic success or failure all by themselves. Moreover, I think that the same principle applies across all scales: If spending exceeds income, you'll fail. If spending doesn't exceed income, you'll succeed (or at least survive).

Aw, heck. Rhode Island has nothing to worry about. We'll bail 'em out, us suckers, us teddy bears, we'll bail 'em out.

[Jimi]

Stan,

Oops!....Yes I did spell it wrong, but so did you :)

Ideologue:
1.) "An adherent of an ideology"
2.) See Donald

Anyway....I find it a little odd that you pick Montana as North Dakota as Blue states.

"In the past 40 years only one Democrat, Bill Clinton, has won the Montana presidential contest."

http://www.usnews.com/news/campaign-2008/articles/2008/05/30/montana-primary-facts-and-figures

"North Dakota has participated in 30 presidential elections, voting Republican in 24 of them."

http://www.270towin.com/states/North_Dakota

I can't remember, but these two states may have voted for Obama, but a snap shot now shows these two states voting heavily Republican in 2012. Also, if you are going to talk "Blue States", why wouldn't you point out the economic disasters in Illinios, California, New York, and Michigan? These states are the real heavy hitters of "Blue States." You weren't trying to spin anything were you?

[larry kurtz]

Montana with a personal income tax IS running a surplus under a Democratic governor and was prematurely called for the President in 2008 by at least one media outlet. South Dakota is in deep doodoo, Ken. Nice swerve.

[Stan Gibilisco]

Jimi,

Shame on me for my spelling errors. Oh well, that's what editors are for, eh?

When I refer to North Dakota and Montana as "blue," I refer to their tax policies. They both have state income taxes, while Wyoming and South Dakota do not. North Dakota has a sales tax, too. Montana, as I understand it, has no sales tax, so they're the most "progressive" of the four when it comes to tax structure.

I recall reading somewhere, long ago (well, a couple of years), that Montana is one of the few states where educators are relatively happy with their funding. Evidently the state of Montana hasn't been sued by the school districts ... Larry would know about that.

But Larry, I really can't agree with you that South Dakota is on the road to ruin. Things are pretty rough, especially here in Lead with the loss of funding from the National Science Foundation; but we ain't done for quite yet.

As Internet piracy and the ongoing recession continue to erode my income, Montana starts to look more attractive because the taxes are based largely on one's ability to pay, rather than having an absolute value (which amounts to a regressive tax when one gets poorer and poorer, unless one does not eat); property taxes are quite low, too, I think. Plus it's such an unspoiled place ... and Larry, you have an arts center there in Basin, don't you?

Well, enough late-night blanting. I don't think any of us want to emulate Rhode Island or California or Michigan; I reckon we can all agree on that. Of course, those places to have certain assets, if you like large cities where you have to walk around from nanosecond to nanosecond wondering if the next point in time will constitute your last instant as a denizen of this earth (nine grams to the head and you is gone my friend). Again, topic for future blant.

[Donald Pay]

Jon S. asks: Is allowing people to keep their money the same as "enriching them"? Is using the power of government to take money from some people and give it to yourself "fiscal sanity"?

Your questions don't make any sense. What money are you talking about? The money in the defined benefit plan belongs collectively to the people who obtain and are to obtain the benefits from the plan. That money is managed by someone who has the authority to manage it for the benefit of all the beneficiaries. Regarding taxation, yes, it is fiscal sanity for a government to balance revenue and spending.

[larry kurtz]

Stan, as South Dakota was, Montana's diverse legislature was slaughtered in the Rove/AFP 2010 'red map strategy.' As you know, the results have been catastrophic for women, children, the elderly, and the Arts. Alas, the Montana Artists Refuge has closed and the historic buildings in it resided are for sale.

Hence, my hauntings of blogs like Ken's will continue in efforts to create doubts about the GOP's ability to wipe its own ass let alone govern a free society.

[larry kurtz]

in which it resided.

[Bill Fleming]

Exactly, Donald, Jon doesn't follow the money. The ill-gotten gains on Wall Street are a result of jobless, cynical, insidious gambling schemes based on socialized risk and privatized profits. (i.e it wasn't ever their money in the first place.)

It's time to pay back the grubstake and change the house rules in the late, great Wall Street casino.

Rule of thumb: What the people giveth, the people can take away:

"If the workers took a notion they could stop all speeding trains; every ship upon the ocean they can tie with mighty chains.” — Joe Hill

[Jimi]

Stan,

"as "blue," I refer to their tax policies."

Arizona has a State income tax and it is as Red as Red can be.

[larry kurtz]

Don't hold your breath, Meidinger. Obama is currently crushing all the earth haters in Arizona.

http://blogs.phoenixnewtimes.com/valleyfever/2011/10/poll_barack_obama_leads_all_re.php

wait a minute...go ahead and hold your breath.

[Jon S.]

Socialized risks and private profits, Bill? Exactly. Precisely because Wall Street had a reasonable expectation that they would get bailed out by the government they took on unreasonable risk. That is not the only cause of the 2008 collapse, but it is a part of it.

My point is this. It is not "enriching people" to let them keep their money. The money people make is earned by doing valuable work. It is not "enriching them" when the government stops taking it. And I work on a basic assumption that most of the time (but not all) what they do with the money will be more worthwhile than what the government will do.

Those who, like me, work for the government and have defined benefit plans have their pensions subsidized by tax payers. This year I will contribute over $4,000 to my South Dakota Retirement, but my employer, ie the taxpayers of South Dakota, will also contribute to that fund. I contribute 6% of my salary and the people of South Dakota match that amount. What was happening in places like Wisconsin is that the taxpayer was on the hook for virtually ALL of the pension contribution. I think that is taking from some people (tax payers) to give to others (public employees). I think public employees should pay their fair share of their retirement. I think "fair" is somewhere above 0%.

Don't forget those "greedy" Wall Street types are the people who provide capital for entrepreneurial activity. Those "gambling schemes" are what provides the money to create new businesses and new jobs. This is called "investing" and it's what creates "jobs." Steve Jobs didn't just start Apple. He needed investors with lots of money to give some to him so he could get the thing going. The continuation of investing in what is called "buying stocks" helps business keep up the capital they need to operate. Yes, it is a damn shame that investors took big risks and now we have to pay the costs, but as Peter Schiff is pointing out these days, that is not capitalism that corperatism. I am agnostic about whether TARP was a good idea. I certainly don't blame those who voted for it as they were in a desperate situation where it looked for a time like the whole damn economy may collapse. But there is no doubt that it continued a policy of 30 years in which large financial institutions were not allowed to fail and that creates perverse incentives.

[Jimi]

Larry,

"doubts about the GOP's ability to wipe its own ass let alone govern a free society."

Ahhh.....who is charge now? The economy couldn't be much worse, and Americans are less free by the day. Why are Democrats not responsible for anything when they control 2/3 of the government?

The Mommy Party blames Republicans when they are in control
The Mommy Party blames Republicans when they have half control
The Mommy Party blames Republicans when they have no control

It sounds like to me the solution in Larry's World is simple, to only have one party politics. The Mommy Party should control everything all the time. That kills two birds with one stone. The Mommy Party will have no one to blame anymore, and we will be a pure Socialist State, so nobody will be free to complain. You guys on the Left are real thinkers....Way to think it through!

[Jimi]

Larry,

Ever wonder why the Mommy Party Logo was a Donkey? And isn't quite amusing that the Party has lived up to it's Logo? I know that since Obama has been elected there has been a big push to attempt to forget that Legacy. Now they claim their offical logo is a Capital "D" surrounded by a circle. From my understanding though, it will be rejected after Obama is outted do to it's similarities to the Obama Logo, and many Mommy Party loyalist don't want to have Obama as a reminder for the future, because they know the damage he is doing. It's all part of the typical Leftist manipulation they enjoy.

The Mommy Party was originally stuck with the logo when opponents to Andrew Jackson refered to him as the "Jack Ass" of Presidential Politics during the 1828 Presidential election.

It occured to me while making some notes for a Book I'm writting that the Motto they have recently chose to go along with the new Symbol is so pathetic, I laugh everytime I hear it. The supposed new Slogan is "Change that Matters." This is gonna come back and bite the Mommy Party in the Ass......see what I did there?

[Donald Pay]

Jon S.,

Wrong. The contributions to Wisconsin's pension plan were actually deferred compensation for each employee. It was part of a negotiated salary and benefits package in which the pension was part of an employee's compensation. Wisconsin's plan is one of the best funded plans in the nation. This year the unions agreed to pay a portion of the pension contribution. The Walker decided to bust the unions. Then Walker and the Republicans in the Legislature unilaterally took the pension contribution and made employees fill the hole he had created in the pension plan by stealing it from the employee's salary. If you're really interested in an employee keeping the money they earned, you ought to abhor what Walker did.

Wrong again on Wall Street's funding entrepreneurs. Wall Street does little investing in small businesses or entrepreneurs.

[duggersd]

While I opposed the bailout of Wall Street, I also believe our government had a lot to do with the problems we had in Wall Street. I read an interesting interview of Dr. Sowell, and his main point had to do with how the government messed with the market and the market came back and messed with us. People were getting houses that should not have gotten them. Fred and Fanny sounded like they were backing the loans. The bundled bad loans with good ones. Since Fred and Fanny are quasi government companies, who would have thought they were dumping bad loans?
Personally, I like it when Wall Street does well because that means my personal portfolio is doing well and my state pension fund is doing well.

[Bill Fleming]

Come on, Jon. Credit defaults swaps and other derivatives, selling short, bundling bad house loans and selling them off, betting on companies to fail and making sure that they do... none of that is about capitalizing small business and crating jobs. It's about a gambling addiction, pure and simple. And people like you and duggerSD are the enablers.

[Donald Pay]

Duggersd

You and your source need a lesson in how the mortgage market works. Fanny and Freddie don't write the loans, and don't screen people for loans. It's true that some people were getting loans on flimsy or fraudulent information. It's also true that mortgage originators were being encouraged to sell risky mortgages and pushing people into riskier products, even though they qualified for better loans. That was done by mortgage originators, not Fanny and Freddy.

Why would mortgage companies want to push risky loans? There was money to be made by creating higher risk tranches for securitization. Certain Wall Street companies made out very well by purposely bundling low risk and high risk loans and selling the securitized products. The higher risk tranches could be sold for higher prices, sometimes to unsuspecting buyers. Then they would place bets on the high risk securitization products failing, and collect huge sums on the downside. It was a total scam that resulted in a financial meltdown due to lack of regulation, and Fannie and Freddie were not the cause.