Bloomberg Washington Summit

Unemployment

A few in the first panel suggested the new normal for unemployment was 6.5%-7.0%.  I think it should be higher. To Alan Krueger, Chairman of the White House Council of Economic Advisers, my question was asked,

Given global competition in the labor markets, if our wages on the low end don’t reduce, isn’t that a significant reason why our labor force participation rate so low?

He mumbled for a bit and partially agreed and disagreed.  The answer wasn’t that coherent.  He did say at the end that low-paid workers in the US don’t compete against foreign workers, which is partially true.

Healthcare Spending

A number said the PPACA [Obamacare] will bring down health costs.  That’s not true, costs have already risen significantly, and will rise more, as sicker patients now get insured.  That’s the “affordable” in the “Affordable Care Act.”  It makes insurance more expensive for most people, while making it affordable for the sick.  More of the discussion on healthcare spending came under discussions of state finances, and Medicare.

On the State of the States

Tom Corbett, Governor of Pennsylvania hangs his hat on selling the state liquor monopoly and fracking.  The former is a one-shot deal, and isn’t large enough to significantly affect unfunded liabilities.

He mentioned that 1 in 6 people in Pennsylvania on Medicaid would become 1 in 4 under Obamacare. Pennsylvania is 2nd highest state for expenses per head in Medicaid because of optional coverages that Pennsylvania covers.  Perhaps the optional coverages will get dropped.

Pennsylvania also leaves the benefits/fees of fracking to local governments, where it is needed.  Some municipalities have reduced taxes as a result.

On pensions he was asked how current policy was sustainable, because it wouldn’t fly in private sector.  He did not have a good answer.

The estimable Cate Long sent me this: Report: Pension Litigation Summary Across the States. It summarizes all of the cases that the States are trying to fight in order to reduce the pension & retiree health benefits they pay to employees.

On the Pension & Other Post-Employment Benefits panel, they made the case that the states are in deep trouble, with little way out.  Ed Rendell made the case for a single payer health system. I say the same point can be made for no health insurance, which would lower costs more.

Ed Rendell made the comment “If a city goes bankrupt, it can’t borrow again.” Bloomberg’s Glasgall replied, “Orange County went bankrupt and can still borrow.”

Ravitch commented “Wall Street keeps going to cities and convincing them to borrow against future revenues. It should stop.”  It is a trap, but municipalities can borrow against the future, like the Poway School District in California.

Rendell made the case for telling truth & shared sacrifice. He thinks the voters aren’t dumb and that if you made the case to them, they would agree to higher taxes.

Ravitch commented that municipal bankruptcy is an admission that democracy has failed.  He added the threat of bankruptcy can make all of the parties focus; the biggest state risk is confiscatory tax levels, not reduced benefits. He also said the upping Medicare age to 67 would not just help the deficit; money would have to come from somewhere to pay 65-66 medical costs.

The moderator made a point about the frenzy in the junk municipal market, where the returns were comparable to equities over the past year.  Ravitch commented that cities & states have no choice but to have access to debt markets

Governor McDonnell of Virginia was supposed to speak about sequestration, Instead, he got grilled by interviewer on perceived conflicts of interest regarding Star Scientific.  This was newsworthy, but not what the conference was supposed to be about.  Bloomberg should have had its interviewer stick to the topic at hand.  This was an economic conference, and not a general interview.

Once the intended interview got going McDonnell said: “Everyone knows we are broke. At some point the crushing amount of debt will catch up with us.”  He then went on to talk about our unfunded entitlement liabilities.  He then added as a Governor his state’s budget had to be balanced, as it was with the rest of the states.

Sadly, states only balance on a cash basis, which means if they have a penny left in the till at the end of year, they are balanced. Various pension, healthcare and other liabilities are not fully funded all states in the Union. There is no state in the union which has all of its future liabilities funded.

Not one.

More in part 3

By David Merkel, CFA of alephblog