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  • Sandy Beaches, Meet Hurricane Sandy

    November 1, 2012 12:48 PM

    In the wake of Hurricane Sandy, many reminisce of 2005's Hurricane Katrina. With at least a dozen East Coast states in a declared state of emergency, many look toward the Obama administration and FEMA for assistance. With whispers of the incalculable amount of damage done to the East Coast, few bring up the debt that FEMA has incurred, much from the FEMA-administered National Flood Insurance Program.

    The National Flood Insurance Program (NFIP), with the Flood Disaster Protection Act, has made the purchase of flood insurance mandatory in certain areas. NFIP under-cuts private flood insurance companies by offering a lower, government-subsidized price for flood insurance.

    NFIP is around $18 billion in debt, even before the financial effects of Sandy are counted.

    Many homeowners don’t realize that flood insurance is not part of the typical homeowners insurance policy and needs to be purchased separately. Those who know may opt not to purchase it because flood insurance can be just as much as homeowners insurance.

  • On Halloween, Euro Politics Fit Right In

    October 31, 2012 12:28 PM

    All the usual characters are present this Halloween night across the Atlantic. But European leaders doing the trick-or-treating aren’t getting the sweet sugar fix they crave, as I write in RealClear Markets:

    [M]any Europeans aren't getting treats this Halloween. That's because the German and ECB houses on the block are handing out austerity apples. And only one type of trick-or-treater eagerly takes those: the nice polite ones who showed up early and go home to do their homework.

    Get the full lowdown on Europe’s list of neighborhood Halloween visitors here.

  • Southern European Bailouts Must Focus On Reform

    October 18, 2012 12:45 PM

    As European leaders meet in Brussels this week for a summit on the future of European integration, bailouts for the south will be heavy on their minds. Rescue funding for Greece’s heavily indebted government and Spain’s bust banking sector are sore topics of debate by now, but debate will continue nevertheless.

    Greece has missed, again, the preconditions for releasing its next tranche of bailout funds. I explain why in the City A.M.

    Greece has become complacent about making necessary structural changes, having received two bailouts, interest rate support from the European Central Bank (ECB), and an internationally sanctioned private debt restructuring earlier this year. It has failed to reform its public sector, privatise state-owned companies, increase competitiveness — all conditions for receiving additional international support.

    Read the full article for a detailed description of how far Greece has fallen behind the reform targets set out in its two bailouts and also behind the rest of Europe.

    As leaders discuss next options for releasing Greece’s bailout funds, Greeks have taken to the streets in tens of thousands as part of a 24-hour general strike to protest further austerity measures. But Greek austerity has been relatively mild compared to that of its Baltic counterparts, which endured harsh cuts in wages and government spending as well as some tax increases. Those countries are now outperforming the rest of Europe. For example, Estonia cut government spending and public wages. A flexible labor market also allowed for businesses and workers to agree on wage cuts in order to improve competitiveness. GDP fell by 14 percent in 2009, but bounced back the very next year with 2 percent positive growth. Unemployment shot up to 17 percent, but quickly receded to 12 percent the next year and is still declining. Greece, on the other hand, has limped along the path to reform and has brought persistent negative growth and rising unemployment along for the ride.

  • Mother Nature And Good Luck, Not Big Government, Saved General Motors... For Now

    October 15, 2012 1:21 PM

    There are lots of claims that the federal government saved the American auto industry by bailing it out. (Never mind that Ford didn't get a bailout, and "foreign" companies such as Honda and Toyota make many of their cars in America.)

    Critics of the bailout make the valid point "any company can be kept afloat indefinitely with taxpayer subsidies." They also say the bailouts have resulted in GM becoming politicized and "spending lots of money" on a politically correct car that consumers and car-buyers don't want "because of pressure from Washington rather than demand from consumers" (as even the liberal Washington Post has noted, discussing the GM Volt). But although these criticisms may be persuasive to newspaper editorialists and economists, they will be unpersuasive to an ordinary person in Ohio or Michigan who desperately wants a job, now, and does not care about how that happens or whether it costs taxpayers money. Such people are likely to be grateful for the bailout if no one explains to them that Mother Nature and good luck, not big government, saved the U.S. automakers.

    General Motors never would have recovered as it did if not for the massive Japanese earthquake and Tsunami that devastated its rivals, such as Toyota.  The tsunami so crippled Toyota that GM could regain market share despite the Obama administration leaving GM’s uncompetitive, inefficient work rules and high labor costs largely intact.

    General Motors also benefited from another factor that has often been overlooked: the massive Thai floods in 2011, which inundated and shut down Japanese car-parts factories in Thailand for many months, crippling Japanese automakers’ global supply chains. On Dec. 8, Toyota “cut its profit forecast by more than half after Thailand’s worst floods in almost 70 years disrupted output of Camry and Prius vehicles.” The World Bank estimates the floods did $45 billion in damage to the Thai economy and left half its factories under water for substantial periods. By harming Japanese automakers, the Thai floods gave a huge boost to their competitor, General Motors, enabling it to survive despite the Obama administration’s costly coddling of the UAW union in the bailout, which threatens the automaker with future losses in the billions.

    GM also benefited from good luck -- primarily the huge safety issues and recalls that befell Toyota in 2010. This helped GM and Ford move forward at a time when overall auto sales were rising rapidly. As The New York Times noted in March 2010 "Toyota Motor, estimating that it lost 18,000 sales in the United States last month while its chief competitors enjoyed big gains, introduced incentives Tuesday as it tried to restore consumers’ confidence in its vehicles after three big recalls," as the company "acknowledged that the recalls had hurt Toyota’s ability to attract new buyers." Toyota rebounded after it turned out its vehicles were safe, and that crashes of Toyota vehicles were the result of driver error, except for one crash that resulted from a dealer improperly installing a floor mat.

  • Suffocating Athena: Public Sector Unions Kill Greek Salvation -- Again

    October 4, 2012 11:26 AM

    On October 1, the Greek government unveiled an austerity package that aims to reduce public spending by $15 billion (11.5 billion euros) for 2013-2014, which includes cuts to welfare as well as salaries and pensions of government employees.

    The reductions are necessary to receive a 31.5 billion euro installment from the 130 billion euro (second) bailout that has been keeping Greece’s head above the wine-dark sea. The International Monetary Fund, European Commission, and the European Central Bank, collectively referred to as the Troika, have assured that no more money will be given without credible steps being taken to ensure a sound investment.

    As necessary as the measures are, unions are pitching a fit at the thought of decreased government funding. Two of Greece’s largest unions called for a 24-hour strike in late September in anticipation of the proposed austerity measure. The General Confederation of Greek Workers (GSEE) and the Civil Servants Confederation (ADEDY), which represent half the nation’s work force, mobilized 50,000 teachers, lawyers, civil workers, and other Greek employees to protest in Athens, promising more to come if the cuts are implemented. This is the third strike this year, but perhaps one of the most significant Greece has had in a while, as it has brought together people of varying political beliefs who collectively oppose austerity.

    Union officials want to negotiate with the government for fewer salary and pension reductions, and they don’t seem to care how the government gets the money to pay them. Sotires Martalis, a high school physics teacher in Athens who was on the National Council of the Public Employees Union Federation, spoke to Labor Notes in 2010, claiming:

    “The rank and file is so angry,” he said. “Their main idea is ‘we don’t pay for your crisis, not even one euro. Take the money from the rich.’ So the leaders of the federations have had to support and call strikes."

    Greece’s finances are spinning out of control. If nothing is done, public debt could reach 179.3 percent of GDP by next year. But this does not concern unions. They are fighting the austerity measures that could give Greece its first budget surplus in 10 years.

  • The Real Spanish Bank Bailout Cost: 113 Billion Euro

    October 1, 2012 8:39 AM

    Don’t be fooled by the optimism overflowing from the stress test of Spain’s banking system released on Friday. American Consultancy Oliver Wyman, which performed the test under the steering committee tasked with assessing Spain’s bank recapitalization, uses two disingenuous assumptions to drastically underestimate banks’ financial needs by up to a whopping 60 billion euro. Cries of relief that Spain will not have to request rescue funding in excess of the 100 billion euro in already granted European aid are suspect at best.

    The Wyman report offers two different scenarios spanning the course of 2012-2014 -- one baseline and one adverse. Media focus has centered upon the adverse case, which is the projected upper bound of a potential bailout’s size. That figure is 53.75 billion euro. Unfortunately, this calculation is victim to the same two major errors contained within Wyman’s June 2012 report, which Colin Lokey at Seeking Alpha pointed out upon its release.

  • State Pension Bailout Threat

    September 24, 2012 10:36 AM

    The state pension underfunding crisis has grown so severe that it has prompted most U.S. states to cut benefits, according to calculations by The Wall Street Journal and Boston College's Center for Retirement Research. However, cuts to date have only put a $100 billion dent in a nationwide funding gap of $900 billion. Clearly, states need to do more to lower their pension liabilities.

    Government employee unions are bound to oppose further proposals to curb benefits or increase employee contributions toward their pensions. For lawmakers in some states, this will make reform a harder sell. In the case of Illinois, Governor Pat Quinn (D) seems willing to give in to union demands from the get-go. In his 2012 budget proposal, he raised the idea of a federal guarantee for the state's pension debt.

    What will this mean for the rest of the nation? To answer that question, the Illinois Policy Institute (IPI) recently launched No Pension Bailout, which maps out which states would gain and which would lose under a federal bailout. The bottom line: A federal bailout of state would punish fiscally prudent states and reward profligate ones. (Subscription needed for Wall Street Journal links.)

    For more on public pensions, see here.

  • The European Central Bank's Losing Game Of Chicken

    September 21, 2012 7:54 AM

    European Central Bank (ECB) President Mario Draghi is losing a game of chicken with the Euro Area’s distressed peripheral countries. Earlier this month, Draghi announced that the ECB would buy an “unlimited” amount of Euro Area sovereign bonds provided that the distressed party follows austerity conditions set forth by the European Stability Mechanism (ESM). But countries like Spain, Italy, Portugal, and Greece are content to continue evading painful reform while eeking-out bailout funding from the Eurozone core.

    Since the financial crisis hit European shores in early 2009, the ECB maintained that it would not bailout indebted sovereigns or banks. Such is consistent with the central bank’s mandate prohibiting bailouts of other member states. Yet Draghi and his predecessor, Jean-Claude Trichet, have bent this rule further and further with every new cry for help from the Eurozone periphery. Indeed, the ECB had already been indirectly buying sovereign bonds through over 1 trillion euro of Long Term Refinancing Operations extended to Eurozone banks between July 2011 and April 2012. The ECB called this “providing liquidity” instead of calling it a bailout, and for a time, the central bank could still pretend it was operating within the confines of its mandate.

    But Draghi bent the no-bailout rule past its breaking point earlier this month when he introduced “Outright Monetary Transactions” (OMT), in which the ECB would directly buy sovereign bonds in secondary markets. Although Draghi explained that there was no limit to the amount of bonds that the ECB would buy, OMT is not necessarily a blank check for unreformed governments. The sovereign in question must have already requested rescue funds from the ESM, which are conditional upon the implementation of strict austerity measures. But these are the same reforms that Southern European countries have skillfully avoided since international financial markets began to question their solvency three years ago.

  • California Pension Reform Plan A Step In The Right Direction But Not Enough

    August 29, 2012 11:16 AM

    California Governor Jerry Brown (D) yesterday announced a pension reform agreement, which if approved by the legislature, likely will help narrow the Golden State's huge public pension gap. Brown's proposed reforms take several steps in the right direction, but they do not address the fundamental problem that could lead to renewed pension shortfalls in the future: the structure of defined benefit pensions.

    Defined benefit pensions operate on a pay-as-you-go basis. Under such a system, a defined benefit pension plan's liabilities can continue to grow regardless of its ability to pay. Thus, an increase in benefits when times seem flush can lead to significant shortfalls in later years, when the boom times end. That is exactly what happened in California under former Governor Gray Davis (who was recalled by voters in 2003).

    And therein lies the danger in not moving away from a defined benefit pension system to a defined contribution one. At the slightest sign of economic recovery, labor-friendly politicians find it hard to resist the temptation to reward their union allies with ever more generous compensation -- a real likelihood in a blue state like California.

    Unfortunately,  Governor Brown backed away from a proposal to create a hybrid pension plan that includes a 401(k)-style defined contribution component.

    Still, Brown's pension reform agreement includes some sound and significant reforms. Among its provisions, it:

  • CEI Podcast for August 23, 2012: Bailouts as Corruption

    August 23, 2012 2:35 PM

    Senior Fellow Matt Patterson argues that when government is big and powerful enough to dispense favors like bailouts, special interests will flock to Washington to get a piece of the pie. Corruption is the inevitable result, as the GM/Delphi/UAW bailout showed. The only effective way to limit corruption, Patterson argues, is to limit government.

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