The End of Wimpy

Time for a language lesson. “Con mucho gusto te pagaré el Martes la hamburguesa de hoy.”  The English equivalent is “I’ll gladly pay you Tuesday for a hamburger to-day”.  J. Wellington Wimpy would feel at home in Madrid. “Spain is asking for an international bailout to rescue its debt-laden banking sector, its finance minister announced tonight, as sources suggested the package could total £81bn. ”

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“The amount on the table at the moment is as much as up to €100bn but this hasn’t been decided yet,” a senior EU official told AFP during the nearly three-hour call. The money will come with conditions attached entailing a “clean-up of the financial sector”, the source said.

Sure they’re going to clean it up. Just like in Illinois, where Wimpy would do just fine. Walter Russell Mead says public sector pensions in that state are a scam. “$44 billion in promised benefits isn’t going to be there unless something magical happens.”

Specifically, the Illinois Teachers Retirement Fund is one of the country’s worst funded pension funds. According to accountants — who use softer methods to measure the health of public funds than they do of private pensions — teacher pensions in Illinois are only 45 percent funded — the fund is expected to be able to pay less than half the pensions Illinois politicians and union heads have been promising for years…

How crazy is that? In their defense, it can be argued that this is just projecting historical experience: in the last 30 years, investments actually achieved a 9.3 percent rate of return.

But those were highly unusual years. The two longest US economic expansions in history came back to back. While we could all get lucky and have the same kind of run in the next future years, most analysts don’t think anything like these results are possible. New York’s Mayor Michael Bloomberg, a man who knows something about finance, says that assuming an 8 percent rate of return is “laughable” and “absolutely hysterical.” In fact, any assumptions over 7 percent are “indefensible.”

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Then it will be like Detroit, which has given up any pretense of being able to pay back anything. Motor city is simply living from hand to mouth, borrowing from organizations which already owe them money. “With Detroit teetering over a monetary abyss, Mayor Dave Bing and the city’s new chief financial officer issued a clarion call Friday, warning bluntly that the city will run out of cash next week if a lawsuit challenging the financial agreement the city made with the state to avoid insolvency isn’t dropped.”

Deputy state Treasurer Thomas Saxton told the city Thursday that Crittendon’s suit could force the state to hold back on revenue-sharing payments that were used, essentially, as collateral for refinancing bonds issued in March so Detroit would not run out of cash.

Detroit already has used $35 million of the $80 million. The money is in an escrow account, but based on Saxton’s letter, city officials will not be able to draw down any more of the money, Martin said…

Crittendon filed a lawsuit Monday saying the consent agreement was “void and unenforceable” because Michigan owes the city $224 million in revenue sharing plus unpaid water bills, parking tickets and other debts. The city charter forbids Detroit from entering into contracts with entities in default to the city, so Crittendon challenged the consent agreement.

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The moral of the story, according to Kevin Williamson at the National Review is that you can’t spend more than you earn. You can’t eat more hamburgers then there are Tuesdays. “Detroit is evidence for the fact that the economic limitations on tax increases sometimes kick in before the political limitations do.”

One lesson to learn from Detroit is that investing unions with coercive powers does not ensure future private-sector employment or the preservation of private-sector wages, despite liberal fairy tales to the contrary, nor do protectionist measures strengthen the long-term prospects of domestic firms competing in highly integrated global markets. We cannot legislate away comparative advantage or other facts of life. But the problem of unions’ coercing distortions in the private sector is at this point a relatively small one, given the decline of unionization outside of government. Organized labor being a fundamentally predatory enterprise, its attention has turned to the public sector, where there are fatter and more stable rents to be collected.

In the end, even those generous pensions aren’t worth much if the money’s already been spent. “Detroit … which looks to be running out of money in a week … is what liberalism’s end-game looks like.” It will be interesting to see who goes broke first: Detroit or Spain?

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Things must be bad when even the search for extraterrestrial life is feeling the pinch. The Telegraph writes, “Once, it was just described as the ‘global’ recession. But now, it seems that hard times around the world may also be felt on other galaxies”. SETI is about to close unless it can find more hamburgers. “The respected SETI Institute in California, which scours for clues to the origin, nature and prevalence of life in the universe, will be forced to curtail its radio telescope operations, which sweep the heavens for signals from other worlds, unless it can plug a multi-million dollar funding gap.”

Maybe SETI can try luring interplanetary visitors to earth with promises of gambling and entertainment. “Seeking a quick fix to its revenue problems, Detroit chartered several casino-gambling operations, only to see taxes from them begin to decline (by 1.5 percent last year) after a period of early growth. Detroit, once the wealthiest city in the United States by per capita income, is today the second-poorest major U.S. city.”

Well, it was a good gig while it lasted.


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