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OpenMarket: Subsidies and Bailouts

  • Ignoring the Government's Role in the Financial Crisis, Five Years Later

    September 19, 2013
    When it comes to reporting on the 2008 financial crisis, many journalists are experts at ignoring the elephant in the room: the government's role in spawning the crisis through perverse mandates and incentives. Peter Wallison, who predicted years earlier that mortgage giants Fannie Mae and Freddie Mac would run into trouble, highlights this in The Wall Street Journal. As he observes, on "the fifth anniversary of the Lehman Brothers collapse, the media have been full of analyses about what happened in those fateful days." But "any discussion of the government's central role in the disaster is neatly avoided. This historical airbrushing is something of a feat...
  • New Estimate: Public Pensions Underfunded by $4.1 Trillion

    September 4, 2013
    One of the challenges in addressing the underfunding of public pensions is determining how big the funding gaps are. Estimates vary because of disagreement over accounting methods. State pension actuaries calculate pension plans' future funding using discount rates based on high rates of expected returns on investments. State officials have an incentive to engage in this kind of fudging because higher expected returns tomorrow mean lower contributions into the pension funds today. This has resulted in states low-balling their future pension obligations. Now a new State Budget Solutions (SBS) report goes some way toward clarifying the picture. The report, by SBS' Cory Eucalitto, estimates the nation's state-level defined benefit pension plans to be...
  • Detroit's Pension Fight: Coming to a City Near You?

    August 21, 2013
    The bankruptcy of Detroit is an unusual event, but its uniqueness lies mainly in its severity. Municipal governments across the nation are struggling to bring their own finances under control, and for many of them, unfunded pension obligations are a huge driver of deficits. If other municipalities want to avoid a similar fate (even if in milder form), they first need to get a handle on the size of the problem. The good news is that this is possible. The bad news is that efforts to clarify the pension obligations picture will meet stiff resistance from government employee unions. Yet, the union can only kick against fiscal reality for so long. In Detroit, a major point of dispute between public pension funds and the city's state-appointed emergency manager is just how large is the pension gap -- specifically, how it is calculated. Pension officials have argued that they are adequately...
  • ALEC Puts Forth Ideas for State Pension Reform

    August 16, 2013
    Public awareness of the scope of the state public pension crisis seems to be growing every day. That's a welcome development, in that it has led to state officials to look for ways to reform their underfunded pension systems. The question they face is: How? For ideas for reform, they should look to a new report by former Utah state Senator Dan Liljenquist, who led his state's wide-ranging and successful pension reform. The report, published this week by the American Legislative Exchange Council (ALEC), puts forth ideas for reform based on some basic principles. First, all new employees should join a defined contribution (DC) system. Second, payments that are due under state's current pension systems must be paid and reasonable adjustments to current benefits should be made...
  • Federal Income-Based Repayment Plan Encourages Skyrocketing Law School Tuition

    August 13, 2013
    A recent item in The Washington Post explains "how Georgetown Law gets Uncle Sam to pay its students’ bills," averaging $158,888 over three years, taking advantage of perverse incentives in a federal student-loan program. A federal income-based repayment plan forgives the student loan debt of law students who go to work for the government or a "public interest" law firm 10 years after they graduate, as long as they pay a small percentage of their income in the first ten years after graduation towards paying off part of their student loans. Typically, much of those law students' loans are not paid off by the end of 10 years, and thus are forgiven at taxpayer expense. But Georgetown has figured out a way to take things even further and make...
  • Not With Banks, Not With Retailers, But With Freedom

    August 9, 2013
    In explaining my policy positions, I often find myself pointing out I am neither pro-business nor pro-bank, but pro-market. My Competitive Enterprise Institute colleagues and I might have a position that lines up with a particular industry group on one issue but opposes it on another. The only guide we have is which policies further consumer choice and the free market, and which restrict it. Two events that have arisen over the past couple weeks illustrate this principle. Banks and retailers often are at opposite ends of a policy fight, and this is reflected in some high-profile provisions of the 2,500-page Dodd-Frank financial "reform" legislation. I find myself siding with bankers against retailers in one instance and with retailers against bankers in another. In one instance, the Durbin Amendment controls prices on debit card processing fees for retailers. On this, I line up with...
  • Detroit Bankruptcy Focuses Attention on Public Pensions

    July 31, 2013
    For people watching it from afar, the bankruptcy of Detroit -- the biggest municipal bankruptcy in American history -- may have brought a sense of relief in the fact that they live somewhere else. But it's also brought needed public attention to the state of city finances around the nation. While Detroit is an egregious case of municipal incompetence, corruption, and mismanagement, its problems are not unique. In fact, one of the drivers of debt that brought the Motor City to its knees is common among states and cities: defined benefit pension plans, which guarantee payments independently of the level of the plan's funding. This week's cover story in The Economist brings some needed attention to the problem:
  • On Dodd-Frank's 3rd Anniversary, "North Star" is Further Out of Reach

    July 22, 2013
    Over the weekend, President Obama hailed the third anniversary of the enactment of the Dodd-Frank "financial reform." In his weekly radio address, the president also hailed the confirmation of Consumer Financial Protection Bureau Director Richard Cordray, which occurred last week after Senate Republicans caved to Majority Leader Harry Reid's "nuclear option" threat to end the filibuster. The president began his address, "Three years ago this weekend, we put in place tough new rules of the road for the financial sector so that irresponsible behavior on the part of the few could never again cause a crisis that harms millions of middle-class families." And he concluded, "If we keep moving forward with our eyes fixed on that North Star of a growing middle class, I’m confident we’ll get...
  • The Government's Wasteful Obsession with Subsidized Homeownership

    July 22, 2013
    The government has spent vast sums of money promoting homeownership through subsidies, tax exemptions, and bailouts. For example, in prosperous Alexandria, Virginia, certain people who never saved up enough money for a down payment received interest-free loans from the federal government to enable them to make a down payment. They do not have to repay those loans until they sell their home. Thrifty people with savings were not eligible for such a handout, penalizing them for their thrift. Supporters of taxpayer subsidies for homeownership falsely claim it promotes political stability and prosperity. But As George Mason University's Michael Greve...
  • The Economist on "the muddle-headed world of American public pension accounting"

    May 9, 2013
    As state governments across the nation struggle to address a public pension underfunding crisis they can no longer deny, The Economist is the latest major news outlet to turn its gaze on the ongoing debacle. In the current issue, the magazine's "Buttonwood" column draws a sketch of U.S. public pension accounting that is not only dysfunctional, but that runs against plain common sense.
    American public-sector schemes discount their liabilities by the expected return on their assets. The riskier the asset mix, the higher the assumed return—and the lower the bill appears to be. This is an odd way of thinking. Suppose a car company borrowed $10 billion in the form of a 20-year bond to build a manufacturing plant and planned to pay...


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