Some minority students who get into a top school with the help of affirmative action might be better served by attending a less elite institution.
Source: The New York Times
Studies indicate that children learn resilience when they hear what their relatives before them have faced.
Source: The New York Times
so its been a long time and i have no excuses. this election season (2012), the Occupation and its aftermath; the insanity or is it audacity of the GOP. Sanders gives us a warning. We’ve got to stand up and take back our country
So recently my inbox and mail box have had no small number of request from candidates asking for money. For the candidates one thing that is pretty constant is that they are all going to ‘help’ me by focusing on jobs, jobs, jobs.
So I start to thinking about how all of them are going to help create jobs - presumably for the jobless - and in order to do that they need money…from people who had better have at least a job in order to send them some money.
So it seems that in order to help a guy or gal ‘get us jobs’ you need to have a job. Which might mean that your motivation to get his or her help is a little less pumped than the person without a job. In fact, while I doubt anyone would say they don’t want “jobs” to be created even if they already have a job, I am betting that some folks would pull back from that a bit if they felt that the in helping create jobs for the jobless less might be done for them to keep their jobs.
Now figuring that the jobbed and the job-giving may be less motivated to donate to the “job creators” and jobless have less to donate to the “job creator”, it seems a system where the politician has to ask people who have jobs to give money so he or she can help people that didn’t give money is a system the eventually stands perched on a conundrum. “I want you to help me so I can help other people most of whom haven’t helped me.” This is like those steps in those Escher drawings - they go up and down simultaneously.
So isn’t it reasonable to assume that the people who helped with money pressure the politician to make sure that he or she helps them while helping the non-contributors? You betcha’! So there’s a conundrum.
Now it seems to me that as long as the election thing is fueled by private money, this process has to continue. But not only does it continue, it concentrates.
Of course all of this is warped by the fact that the politician needs votes to get elected - and both the jobbed and the jobless can vote.
With each cycle of recession, the politician calls out the need to create jobs, but seeks out the support of those with jobs…those who survived the last downturn.
And chances are those that survived near the top of the food chain have maybe moved up a link or two. And with that they may be less likely to really care about helping the jobless and the impact of their contributions grows since there are fewer people with the money necessary to support the politician. The power of the few concentrates with each cycle.
But of course with each cycle the percentage of the helpless/jobless grows. Another cycle of concentration. And with each election cycle the politician makes stronger and stronger entreatments about ‘jobs jobs jobs’ and more and more pitches to the few, the fewer, the fewest.
And we are back to the conundrum.
The crises in Japan (sounds like a Nightline News Exclusive) has brought out a few interesting points.
1 - Japan’s society ‘works’ - there was no looting, pillaging, shooting at fellow citizens trying to make their way to safety. People helped their fellow citizens make it through the troubles. You wouldn’t expect any of “community” crap here!
2 - while the nuclear reactor is in Japan and it is Japanese operating it and Japanese trying to fix it….the reactor is a GE design….and when American regulators saw that design some 30 - 40 years ago they said “hey, the containment shell is too thin. It could fail in a hydrogen explosion”. GE sold it based on its lower cost (we don’t need no stink containment!) Well damn, at that nothing.
3 - Japan is now acutely aware of “the black swan”.
4- when they rebuild, they will surpass us yet again.
By Kevin Brown
Published: March 22 2011 15:45 | Last updated: March 22 2011 15:45
In normal times, the humdrum business of shifting widgets from one location to another gets very little attention outside the supply chain management fraternity.
But these are not normal times. Japan’s terrible earthquake has raised questions about the vulnerability of global supply chains to disruption caused by natural disasters. In China, rising wages have prompted suggestions that manufacturers might shift capacity to other low cost locations, or even back to the west.
Both these issues are encouraging manufacturers to review their sourcing and supply strategies. But the focus on dealing with the immediate pain is obscuring a much bigger challenge for multinationals: whether the whole concept of globalised supply chains is being outmoded by the rise of new centres of demand in Asia and Latin America that might be best served by a return to regional sourcing and production.
There is an excellent example of the tortuous nature of the supply chain system in a recent study of the Apple iPhone by the Asian Development Bank Institute. The iPhone may be designed in the US, but it is made and assembled by nine companies in six countries.
With supply chains of this complexity it would have been surprising if Japan’s electricity blackouts, closed highways and damaged ports had not caused problems elsewhere. Twelve days after the earthquake, though, the surprising thing is how little international disruption there has been. Moody’s said in a study released on Monday that the impact was likely to be manageable for most companies. Peter Chou, chief executive of Taiwan’s HTC Corporation, put it more bluntly last week, saying that “everyone is overreacting”.
If they wish, companies can do two things to protect themselves: hold more stocks, and source parts from a larger number of suppliers in geographically dispersed locations. But increasing inventory undermines productivity, and using a range of suppliers squeezes profit margins by raising input prices.
Most companies will decide that the cost of holding stocks and diversifying supplies outweighs the potential cost of greater insecurity of supply. While they grapple with that conundrum, however, multinationals are also coming to grips with Chinese wage inflation.
Labour costs are rising quickly, with wages likely to climb by an average of 17 per cent annually over the next three years, according to a study by Deutsche Bank. Influential voices suggest that China’s days as the workshop of the world may be numbered. “Utopias never last,” says Matt Rubel, chief executive of Collective Brands, a US footwear group that is shifting a chunk of production from China to Indonesia.
This seems too gloomy by far. Clearly, China’s low wage advantage is being eroded as the economy develops. But the impact is less dramatic than is sometimes suggested. Manufacturing wages are still only about 9 per cent of the US level, according to Accenture. Even a 30 per cent pay rise increases total costs for most manufacturers by only 1 to 5 per cent, the firm found, most or all of which can be offset by productivity and cost savings. That is unlikely to push many manufacturers out of China.
The really tricky issue, though, is how to handle China’s accelerating transformation from a manufacturing base for exports to a consumer of finished goods. General Motors sold more cars in China in the first half of last year than in the US; Samsung Electronics says a quarter of global consumer revenues now come from China; the country ranks second behind the US in Philips ’ global league table of consumer sales. Perhaps most revealing, McKinsey said last week that Chinese sales of luxury goods would grow by 18 per cent a year to $27bn by 2015 – when it would pass Japan as the world’s biggest market.
The global supply chain made sense when most of it pointed in the same direction – from Asian producers to western consumers. As Asia and Latin America join the consuming bandwagon it will make more sense for multinationals to site production and assembly close to their customers, which has the side effect of cutting transport costs.
That is likely to mean a return to regional production centres, with Chinese factories switching from exporting to producing for Asian consumers and new factories making goods for the US being sited in Latin America. One spin-off advantage will be an increase in production flexibility for companies essentially making the same product in two or more global locations.
That will simplify those complex supply chains, helping companies to cope with shocks like the one inflicted by Japan’s earthquake. But this shift from “offshoring” to “nearshoring” is being driven by growth, not natural disasters.
Kevin Brown is the FT’s Asia regional correspondent
Read this in the Utne today and I thought it was worthwhile.
by Lydialyle Gibson, from University of Chicago Magazine Two years ago, Chicago psychologist John Cacioppo cowrote the book Loneliness, which advances a novel theory for this elusive emotional state. Loneliness, Cacioppo argues, isn’t some personality defect or sign of weakness—it’s a survival impulse like hunger or thirst, a trigger pushing us toward the nourishment of human companionship. Furthermore, he writes, “people who get stuck in loneliness have not done anything wrong. None of us is immune to feelings of isolation, any more than we are immune to feelings of hunger or physical pain.” Being lonely isn’t the same as being alone, Cacioppo is careful to clarify. Lonely people can be surrounded by coworkers, neighbors, friends, and family. They’re no less attractive or intelligent or popular. What sets the lonely apart is a sense that their relationships do not meet their social needs. That uneasy feeling goes back aeons. Loneliness was, Cacioppo believes, a powerful evolutionary force binding prehistoric people to those they relied on for food, shelter, and protection, to help them raise their young and carry on their genetic legacy. Cacioppo also points to the long years children spend utterly dependent on their parents. “It’s a good decade before they’re going to be able to survive on their own,” he says. Small wonder that isolation makes people feel not only unhappy but also unsafe. Which is why loneliness can work: It prods people to reach out to those around them. “Some people get stuck,” Cacioppo says, “but on average, when you get lonely you do something to get out of that aversive state.” Like other evolutionary adaptations, loneliness varies from person to person. There are extroverts and introverts. There are those who don’t seem to need friends at all. “That makes great sense because those are the explorers,” Cacioppo says. “We need them.” But for those who feel warmer near the communal fire, isolation works as a civilizing influence. “When children are acting selfish and narcissistic, you put them by themselves,” Cacioppo explains. “Well, that’s not a dramatic punishment, is it? And yet it’s painful.” Children cry; they beg to be allowed back into the group. When they do come back, “they’re better social citizens. They’ll now take the other child’s perspective; they’ll share their toys.” Cacioppo’s interest in the subject began in 1988 when he read a Science paper whose conclusions seemed inconclusive. Three sociologists conducted an analysis showing that a lack of social contact predicted death from a broad range of maladies. The researchers suggested that “social support” from friends and family might foster “a sense of meaning or coherence that promotes health” and encourage loved ones to exercise, eat better, sleep more, and drink less. “But what I knew was that no matter what social species you’re talking about, all the way down to fruit flies, if you isolate them they die earlier,” Cacioppo says. “That’s probably not due to social control from friends and family. There’s something more interesting and more direct.” In 2002 Cacioppo launched a longitudinal study of middle-aged and older Americans around Chicago, tracking their health and daily habits. This work has shown that loneliness predicts not only depression but also higher blood pressure and increased cortisol, a hormone released in response to stress. It also makes sleep less restful because of tiny, subconscious awakenings throughout the night. Some of its most troublesome effects are cognitive: Social disconnection contributes to Alzheimer’s disease and impairs “executive functioning”—the ability to control thoughts, emotions, and impulses. Twenty percent of Americans, about 60 million people, Cacioppo estimates, suffer from loneliness that is chronic and severe enough to be a major source of unhappiness. One study, for instance, asked respondents to list the number of confidants they had. In 1985 the most frequent answer was three. In 2004, when researchers repeated the survey, the number had dropped to zero. One-fourth of participants, drawn from a cross section of the American public, reported having no one to talk to intimately. The reasons for this rise in social isolation are well documented: American life is less rooted and more hectic now than in the past. Jobs and friendships are transitory; rates of divorce and single parenting are high. More people move away from home, and more people live alone—that number has increased by 30 percent in the past 30 years, Cacioppo says. Onto this landscape, social media—Facebook, MySpace, Twitter, LinkedIn—erupted, exerting an influence more complicated, Cacioppo says, than some people might think. People who use the Internet to generate or enhance in-person relationships benefit, he says. But when online connections substitute for face-to-face ones, users become lonelier and more depressed. Lonely people are likely to use the Internet as a crutch, the nonlonely as a leverage. “So,” Cacioppo says, “the rich get richer and the poor get poorer.” In December 2009 Cacioppo copublished a paper suggesting that loneliness is contagious. Using data from a longitudinal study in small-town Framingham, Massachusetts, he and his colleagues charted a social network of more than 12,000 ties among 5,124 people, determining that having one lonely friend raised one’s chance of loneliness by 40 to 65 percent. A lonely friend-of-a-friend raised the chance by 14 to 36 percent. By the third degree of separation, the increased likelihood was slighter still, and beyond that the effect disappeared. The phenomenon makes sense to Cacioppo. “When I’m lonely, I’m more likely to interact with other people negatively,” he says. That bad feeling spreads. “Think about it: You have a bad day at work, you go home, your spouse suffers. Well, so do strangers and friends you interact with.” That study helped inform a new project. Working with sociologists, Cacioppo is constructing a spatial map of Chicago’s South Side, in which each of the 82 neighborhoods is subdivided based upon where people feel more and less lonely. The next task is to explain the map. Cacioppo is looking at features such as block parties, well-kept homes, clean streets, public facilities, and crime. How much difference does a community center make? What about flower boxes along the sidewalks? An even more delicate task is figuring out how to solve individuals’ persistent loneliness. In August, Cacioppo and three other coauthors published a sweeping analysis of every study on loneliness intervention from 1970 to 2009. Treatments fell into four types: fostering “social contact” by connecting lonely people; offering “social support” from visitors; teaching social skills; and training in “social cognition”—the ability to understand and navigate social interactions. Of these, the last yielded promising results. In Loneliness, Cacioppo laid out general recommendations for fighting loneliness; he and a clinical psychologist are working to shape them into a course of cognitive behavior therapy. He advised readers to reach out, even in small ways, to those around them, to volunteer, to say hello to someone at the grocery store or the library, and eventually to find compatible, fulfilling friends. To open their lives. Excerpted from University of Chicago Magazine (Nov.-Dec. 2010), an enlightened bimonthly publication aimed at alumni but relevant to a wide range of readers and interests. http://magazine.uchicago.edu Lonely Together
Read more: http://www.utne.com/print-article.aspx?id=2147489413#ixzz1GS04d9Xl
Source: utne.com
I was at the National Constitution Center in Philadelphia today. They have a great exhibit called Freedom Rising. It brought fresh to the front of my mind these words and what they mean:
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
Someone was thinking “sustainably” when they wrote that. Now we need to ask and answer ”who are we and what do we want?”
And get busy.
Ben Commons
So I am having this debate with a buddy today and we get into a familiar quagmire. He is largely libertarian and so has an allergic reaction to anything that even resembles a “government revenue enhancement” (aka “tax”) even from a quarter klick away in a dense fog after a sandstorm at night. Anyway, he trots out his ol’ reliable “the wealthy pay 80% of the income tax in this country” (prompted by Michael Moore’s speech in Wisconsin in support of the state workers - see link below) and I run a small ‘thought experiment’ which yields a bigger delta than….I…thought.
The experiment is pasted below, but as if to punctuate my…thought…an op-ed appeared today which i thought I might share.
Posted on Mon, Mar. 7, 2011Big business has long pulled the levers of government. Now it’s cutting out the middleman and moving on to other projects - like education. Charter schools are touted as an entrepreneurial anecdote to traditional public schools in spite of decidedly mixed results. And CEOs are the model new educators - the less relevant experience, the better.
In New York, the meteoric rise in test scores under Mayor Bloomberg and former media executive turned Chancellor Joel Klein were shown to be largely inflated. Bloomberg, according to a deputy mayor quoted in the New York Times, “uses data and metrics to determine whether policies are failing or succeeding.” So it was puzzling when he named Hearst Magazines Chairwoman Cathie Black as Klein’s replacement, precisely because of her corporate background and lack of educational experience.
The CEOs demand results, and their harried minions strive to deliver. In Georgia, accusations of teacher tampering with standardized tests are spreading. According to the Atlanta Journal-Constitution, one-fifth of state schools are now under suspicion.
The contagion has long since spread to higher education. Parents and students take U.S. News and World Report’s college and graduate school rankings as gospel truth. The numbers offer a comforting certainty: this one is best, this one worst.
Last month, it was revealed that Villanova Law School had inflated the LSAT scores and GPAs of its incoming students to secure a higher ranking. Just a few weeks beforehand, the New York Times reported that law schools were counting graduates as “employed after nine months” even if they didn’t have jobs that require a law degree. “Waiting tables at Applebee’s? You’re employed. Stocking aisles at Home Depot? You’re working, too,” the Times wrote.
That schools are allowed to “self-report” obviously courts creative accounting. But the real problem isn’t dishonesty. The problem is that our society lives and dies by numbers that are increasingly unhinged from reality - corporate profits, the stock market, test scores, rankings - reducing everything to interchangeable units that can be ordered on a spreadsheet. On Wall Street, bankers continue to be handsomely rewarded for the sort of short-term balance sheet boons that brought our economy to its knees.
Statistics indisputably serve many good purposes. They can tell us about how segregation persists throughout our cities and suburbs, the rising numbers of people who need food stamps in this or that neighborhood, or an area’s high cancer rate that might point to unacceptably high levels of pollution from a nearby factory. The only number Republicans in Congress care about is the deficit - but that is just one important number among many, including the innumerable proposed service cuts that will hit the most vulnerable the hardest.
The highly ranked schools should lead the way in refusing to cooperate with U.S. News. My alma mater, Reed College, has not cooperated since 1995. Reed even discourages students from looking at grades, which are lower than average thanks to a strict policy against grade inflation - just 10 4.0’s over the past 26 years. But Reed is an outlier and the campaign for perfect numbers continues. Which means that I will not be sharing my GPA in these pages - I was not one of those 10 students.
Daniel Denvir is a Philadelphia journalist. He can be reached at daniel.denvir@gmail.com.
The Experiment:
[a thought experiment - take what you might guess to be of the total income of the ***** Club membership - assume ~300 people@ $100k per = $30,000,000; compare it to the total income of the Miami Heat players - ~$65,000,000 @ 12 men. The total would be $95 million for 312 people but as a “group” the 12 Heat players make +2x what the ***** Club makes with less than 5 % of the bodies. At an assumed uniform 30% tax rate, the total collected revenue would be $28,500,000 with the Heat paying $19,500,000 or ~68% of that while only being ~4% of the “population” - so your hairshirt and chest beating about “80%” frankly looks like its pretty fair especially since we doubt that “$100k/yr” is a good number for “average” income across the “96%” of the “freeloaders’. Oh the games you can play with numbers!!! ]
Michael Moore’s Piece
http://www.huffingtonpost.com/michael-moore/america-is-not-broke_b_832006.html
The growing fact (or appearance) of insolvency in states and municipalities is a major cause for alarm in the US. Obviously there is concern about the loss of services to citizens but more alarming to me anyway is the fact the debate seems to rotate around two themes - which or whose ox do we gore to make our current numbers work and what ‘group’ of union employees is responsible for the problem in the first place. I think that is wrong headed and frankly part of the big play to shred services to the average person orchestrated against most of us.
The first question should be what do we want our country/society to be? Not at some trivial matter like “gay marriage” (if you hate gay marriages you probably weren’t going to be invited anyway and since your not in some couples bedroom or “stuff drawer” how could you tell the difference between gay married types and gay shacking up types anyway?) Do we want compulsory education up to high school? do we want roads and bridges and dams that work? Do we want drinkable water and breathable air? do we want a national defense that every citizen has a stake in?
Who are we and what do we want?
Ben Commons
BROKE TOWN, U.S.A. By Roger Lowenstein
March 3, 2011
Vallejo, a city about 25 miles north of San Francisco, offers a sneak preview of what could be the latest version of economic disaster. When the foreclosure wave hit, local tax revenue evaporated. The city managers couldn’t make their budget and eliminated financing for the local museum, the symphony and the senior center. The city begged the public-employee unions for pay cuts — all to no avail. In May 2008, Vallejo filed for bankruptcy. The filing drew little national attention; most people were too busy watching banks fail to worry about cities. But while the banks have largely recovered, Vallejo is still in bankruptcy. The police force has shrunk from 153 officers to 92. Calls for any but the most serious crimes go unanswered. Residents who complain about prostitutes or vandals are told to fill out a form. Three of the city’s firehouses were closed. Last summer, a fire ravaged a house in one of the city’s better neighborhoods; one of the firetrucks came from another town, 15 miles away. Is this America’s future?
Cities across America are facing dire financial distress. Meredith Whitney, a banking analyst turned independent adviser who correctly predicted the banking meltdown, has issued an Armageddon-like prediction of mass municipal defaults. Others — notably Newt Gingrich — have suggested that state governments as well as cities should be allowed to file for bankruptcy. Congress held a hearing to examine the idea.
These forecasts of apocalypse have touched a nerve. Americans, still reeling from the devastating impact of the mortgage debacle, are fearful that the next economic disaster is only a matter of time. To anyone reading the headlines of budget deficits and staggering pension liabilities, it takes little imagination to conclude that the next big one will be government itself. The problems of cities are everywhere. The city council of Harrisburg, the capital of Pennsylvania, has enlisted a big New York law firm to explore bankruptcy as a means of restructuring a crushing debt. Central Falls, R.I., is in receivership. Hamtramck, Mich., a small city within Detroit’s borders, says it could run out of money next month. Hamtramck has only 90 employees, yet it is saddled with the pensions and health care obligations of 252 retirees. Detroit itself is at risk. Large deficits will mean closing about half of the city’s schools and will push high-school class sizes to 60 students.
These and other struggling locales do not begin to approach Whitney’s forecast of hundreds of billions in municipal defaults this year. (It would take defaults by 40 cities with as much debt as Detroit to reach even $100 billion.) Some industry experts accuse Whitney of exaggerating the crisis and of worsening the cities’ problems by frightening away investors. Whitney’s theory is that states, whose finances are also in desperate shape, will cut off local aid to preserve their own budgets; cities that have been subsisting on government transfers would become fiscal orphans and, in a financial sense, unworkable. She has not elaborated on her thesis beyond a few well-chosen television appearances. (She declined to talk to me.) But in the two months following Whitney’s warning, investors unloaded about $25 billion in shares of mutual funds that invest in municipal bonds. The selling spree sent the prices of these munis, typically among the most reliable investments, into a free fall.
If muni bonds were to default (causing investors permanent harm, as distinct from the temporary discomfort of price fluctuations), ordinary Americans would lose big. Munis are bonds issued by state and local governments, as well as agencies like hospitals, with the interest going to bondholders tax-free. Their relative safety, plus the tax break, has made them a favorite among individual investors, who own about two-thirds of the total, either directly or via mutual funds.
But what if the burden of municipal woes falls elsewhere than on bondholders? Yes, cities and states have creditors. They also have citizens who rely on their services and who pay the taxes, and they have public employees who are dependent on stable public-sector jobs and often-ample benefits. Whitney isn’t wrong about a crisis in local government; the crisis is here. The question is, will it be articulated in terms of bond defaults or larger kindergarten classes — or no kindergarten classes at all? The efforts in Wisconsin and elsewhere to squash organized labor suggest that politicians are no longer so willing to protect public employees. Teachers and nurses are likely to suffer well in advance of investors.
The United States has nearly $3 trillion in municipal bonds outstanding. Though some are backed by specific projects like airports and toll roads, most are general-obligation bonds; local taxes are used to pay the interest on those bonds before other expenses. Unlike a corporation, whose revenue can disappear, cities do not go away — or at least, most of them don’t. Detroit is in trouble because of its shrinking population, as are any number of towns in the former steel region of Western Pennsylvania. Many former industrial cities are burdened with governments that are out of proportion to their shrunken tax bases. Local budgets were stretched even before the recession; now, diminished tax receipts have threatened their ability to balance budgets. Bondholders in those municipalities have reason to sweat.
For areas with a stable economy, however, solvency is largely a matter of political will. Historically, far fewer than 1 percent of municipal bonds fail, and most that do tend to be issued for quasi public projects rather than cities. Typical is a monorail that links Las Vegas casinos — and that defaulted for lack of riders. In 2008, a record 166 issues defaulted, but the great majority were Florida land developments; essentially, builders used the tax code to finance sewers and water lines and then walked away when the mortgage bubble burst. The issues were small; defaults in 2008 totaled $8.5 billion. Last year, defaults fell to $2.8 billion.
Chastened by their failure to foresee the mortgage bust, the credit agencies have downgraded munis as the cities’ troubles have accelerated. But the agencies that evaluate muni bonds are paid to worry about bondholders, not about kindergartners or local fire departments; consequently, they are not alarmed. Moody’s says it expects defaults to rise in 2011. But the agencies do not predict a default epidemic. “Munis are not like subprime bonds,” Eric Friedland, a managing director at Fitch Ratings, said.
Government entities do seem less exposed to the sort of chain-reaction panic that undid banks. Lehman Brothers needed financing every day; when confidence disappeared, Lehman disappeared, too. Cities are generally not dependent on short-term financing. (A sizable exception involves some $80 billion in variable credit lines expiring over the next six months — which could force some governments to scramble.)
Another factor that tilts against default is that states and cities carry much less debt relative to the size of their economies than do troubled national governments like those of Greece or Spain (or the United States, for that matter). And muni debts generally come due in a steady stream — not all at once. Robert Kurtter, a managing director at Moody’s, says, “State and local governments really don’t have a crushing debt problem.”
Which is not to say they don’t have a problem. For most of the past decade, local government was a growth business. Avid consumption and the real estate boom spurred an abundance of sales- and property-tax receipts; with dollars flowing in, governments got used to spending more and borrowing more. Then, in the recession, tax revenues dried up, while demands for services kept rising. For the last few years, both cities and states have faced severe, recurring budget gaps.
As part of the 2009 stimulus package, Washington gave the states $150 billion. The states became dependent on a higher level of federal aid — 35 percent of their budgets, compared with about 25 percent before. But the stimulus is ending, and the states will have to cut.
Determining who will suffer from budget cuts is a political and a legal calculation. The cities’ problem is that annual spending is greater than revenue; that imbalance does not entitle them to walk away from bond payments. Moreover, states and cities devote less than 10 percent of their revenue to annual debt service. In other words, they have ways of balancing budgets without defaulting. Lately, governments have been taking a chain saw to ordinary spending. The cuts sometimes reflect a retreat from what was once conceived as the essential mission of government. Education is being hit hard. Arizona is seeking a federal waiver to remove 280,000 adults from Medicaid rolls. Massachusetts is stripping out funds for homeless shelters. New Jersey has canceled a commuter-rail tunnel under the Hudson River. If the government doesn’t build a rail tunnel, who will?
States are also cutting aid to cities — much as Whitney forecast — aggravating the loss of local tax revenues. Camden, N.J., which has one of the highest crime rates in the country, has dismissed nearly half its police force. Michigan cities have seen aid diminish by $4 billion. In San Diego, where the city has cut other spending to pay for spiraling pension costs, residents have formed 56 “maintenance assessment districts” to take care of parks and patch up sidewalks. When the city failed to pass a hospitality tax, local hotels banded together and agreed to charge a 2 percent visitors’ fee. Scott Lewis, who writes about politics for the Web site Voice of San Diego, says, “I think the city is dissolving.”
In Wisconsin, Scott Walker, the new governor, declared that the state was “broke.” He does not mean that Madison intends to default on its obligations to debt holders; he means that public employees will have to increase contributions toward their benefits in an amount equal to 7 percent of their pay. For some employees, the cuts will mean real hardship. Public institutions like schools are also likely to suffer. Though elected officials prefer not to mention it, taxpayers will also have to ante up. Illinois sharply raised its income tax; Arizona voted for a sales-tax increase. Both of those states had markedly low tax rates to begin with, but Illinois’s case should be troubling to bondholders. Even after raising taxes, the state is planning to borrow about $12 billion to cover pensions and past-due bills — pushing both benefit costs and current expenses into the future.
The deficit problems have, at times, seemed to blend with the issue of pensions into a single, giant mess. As E. J. McMahon of the Manhattan Institute observes, “This is a conflating of different things.” States and cities have to put money aside to pay for future pensions, and the portion of that obligation that is “unfunded” represents a huge liability — from $1 trillion to $3.5 trillion, depending on your assumptions about future pension-fund investment returns. This underfunding won’t be felt in a big bang but as a continuous burden for years to come.
Nonetheless, because governments are required to make catch-up payments to those funds, the pension problem is worsening the current budget squeeze. In some cities, the pressure is suffocating. In Miami, according to Fitch, the pension-fund obligation eats up 25 percent of the city budget. In Philadelphia, which has neglected to make payments, the pension fund could be exhausted as early as 2015, says Joshua Rauh of the Kellogg School at Northwestern. Rob Dubow, the city’s finance director, insists that “we’ll make contributions to make sure that doesn’t happen.” The city has budgeted a huge $460 million contribution next year. “The real story” of the pension debacle, Dubow says, “is that it will leave less money for police and fire and sanitation.”
For a long while, government budget-cutting obeyed a distinctive political calculus: pensions were considered untouchable, so jobs were eliminated instead. Now, governments are going after pensions. Many states have taken the easy step of reducing benefits for new employees. Benefits for existing workers were considered inviolable. But some, like New Mexico and Mississippi, are dunning employees for higher contributions, and Wisconsin may follow. Minnesota and Colorado have watered down pension cost-of-living increases; both have been sued.
Whether such efforts will significantly ease the states’ burdens may depend on the courts. In Illinois, where the pension underfunding is among the most egregious, the state constitution says that “benefits shall not be diminished.” This language has long been interpreted to mean that when a public employee is promised a pension that increases with each year of service, the rate of accrual can never be changed. Sidley Austin, a law firm in Chicago hired by a pro-business civic group, has circulated a memo arguing that the clause refers only to benefits already earned — not to the rate of accrual in the future. That interpretation, if acted on by the Legislature, would shatter previous notions of pension protections. Sidley also makes the even-more-explosive argument that if Illinois’s pension funds dried up, the state could not be forced to contribute more. Let pensioners go hungry.
That is unlikely. Even in Illinois, pensions will be paid. Failure to do so would embroil the government in court for years. That may be the hope of ideologues, who envision that the courts — or possibly even a bankruptcy filing — could be used to alter employee contracts. In the 1930s, progressives persuaded Congress to let cities declare bankruptcy to escape the clutches of creditors. Now, conservatives want Congress to authorize states to file for bankruptcy. “Some people on the right see it as a chance to whack the public unions,” says David Skeel, a law professor at the University of Pennsylvania who has written in favor of state bankruptcy. It’s not hard to fathom why Gingrich, who as speaker of the House in the 1990s briefly shut down the U.S. government, would favor default by the states.
But the fantasy of using bankruptcy to suspend government runs up against a hard truth: even in bankruptcy, cities and states don’t disappear — nor do their obligations. Orange County, Calif., which entered bankruptcy in the mid-1990s after its treasurer ran up massive losses in derivatives, ultimately paid every cent it owed. “Among the reasons so few [cities] choose to go this option is, it’s not clear what they gain,” Kurtter of Moody’s says.
Another reason is that cities are creatures of their states, which fear a negative impact on their own credit. Connecticut prevented Bridgeport from declaring bankruptcy in the ’90s, and Michigan is stopping Hamtramck now. In Pennsylvania, about 20 municipalities are operating under a program to nurse insolvent cities back to health. The program has helped Pittsburgh, despite its woefully underfunded pension plan, to slowly improve its credit.
Harrisburg is a different story. A former mayor wanted to create a destination city with a series of ambitious projects, including a Wild West museum. He also approved an expensive plan to refurbish an incinerator so that it could become a moneymaker — a project that has buried Harrisburg under a mountain of debt. There are other Harrisburgs, cities undone by foolhardy projects, but these cases are particular, not systemic.
Vallejo, which ran out of money when the economy imploded, is more representative. A blue-collar city of 110,000, it had been hurting since a naval base closed in the 1990s. In 2007, the Wal-Mart left town. Then, with the recession, property taxes crashed from $29 million to $20 million. Vallejo cut back on street repairs and vehicle maintenance and reduced its staff by a third. The city sought pay cuts from the police and fire unions, whose members’ pay and benefits accounted for about 80 percent of the budget; the unions offered to defer pay raises. The council considered, but rejected, the idea of putting a tax increase to a referendum. Rob Stout, the outgoing finance director, who noted that the police chief is retiring on a $200,000 pension, says the general attitude was one of resistance to footing the bill.
Vallejo was a failure of political will. It is also an example of why bankruptcies for cities don’t work. All the constituencies who might have hoped to avoid hardship are being walloped anyway. Labor costs are being cut (though not pensions) and holders of $54 million in city bonds will suffer losses — how much won’t be known for years. Even Marc Levinson, a partner with Orrick, Herrington & Sutcliffe, which represents the city, calls the bankruptcy a waste of money and time. “It’s better to cut a deal than go through the pain we have in Vallejo,” he says. Pain is coming regardless. In some cities, bondholders will be burned. But America’s failing governments may be one of those crises whose full impact is not registered in the muni market, or in any market. Until voters can agree on what government services they want and will pay for, it is possible that bondholders will bank the profits while taxpayers, employees and citizens share the losses.
Roger Lowenstein (elrogl@gmail.com) is a contributing writer and the author of “While America Aged” and, most recently, “The End of Wall Street.”
Page 1 of 2
