Cities and States Going Bust

A few thoughts about why Cities and States go bust, what might prevent it, and why the problem will remain.

The problem

Politicians gain from buying votes with promises of current and future payoffs financed with deferred payment arrangements.  The politicians are long gone when the chickens come home to roost.  The same is true for many of the voters that benefit from the promises.  There is little political incentive to maintain fiscal integrity over time.

Cities and States (CSs) can suffer downward financial spirals because they are not required to fully fund promises when they are made.  The result is promises of greater future payments than the CSs will be able to provide. As the cash drain from the increasing disparity between promises and financial wherewithal increases, taxes are raised, the infrastructure is allowed to decay, and services decline.  Other CSs become more attractive, and there is an exodus of firms and relatively affluent taxpayers (whose taxes support the CSs) that leads to an increasingly rapid downward spiral.

     Example: Underfunding pension funds

CSs can “underfund” pension funds, e.g., by deferring contributions until promised payments are to be made.  It becomes possible to make promises that will require future contributions beyond the CSs’ ability to pay, without material current consequences.

The answer to pension underfunding or deferring pension contributions is to disallow them.  For example, long term viability is assured if a pension fund is invested in a riskless portfolio that provides cash flows over time that match promised future payments.  This could be achieved with either an annuity or a cash matched riskless bond portfolio.  Each year’s contribution would be the amount necessary to buy an additional annuity or cash matched bond portfolio that funds the additional promises.

     Example: Funding infrastructure with long term debt

Suppose a CS wants to create a vast new infrastructure, including roads, bridges, rail systems, airports, etc.  Funding these projects with long term bonds reduces the immediate cash outflow to the interest.  If the project is large enough, the interest may consume a substantial portion of the CS’s financial resources, leaving insufficient funds to maintain the infrastructure or pay off the bonds when they come due.  Any attempt to maintain the infrastructure requires higher taxes and/or reduced services.  When the bonds come due, the CS will be unable to pay them off and will have to roll them over.  Given the CS’s financial and physical decay, any new bonds will have to be sold at bargain prices, i.e., at a much higher interest rate.

History shows that attempts to control CSs’ debt financing with either legal limits or financial responsibility don’t work.  The only answer to excessive long term debt is to disallow long term debt in the CSs’ Documents (e.g., Constitution, Charter).

Recovery

CSs that suffer financial collapse cannot recover on their own.  To be competitive with other CSs requires about the same taxes, infrastructure, and services.  Failed CSs cannot restore infrastructure and services on their own because (1) Their resources remain insufficient, (2) there is no incentive for outsiders to provide new resources, and (3) there is no incentive for firms or affluent people to move back into the CSs, which could provide more taxes, because they would shoulder the same burden they left to avoid.  That leaves only two recovery choices, bankruptcy and/or bailout.

     Bankruptcy

If bankruptcy does not forgive the failed CSs’ financial obligations, such as promised pension payments and long term debt, then the failed CSs remain without the financial wherewithal necessary for a recovery.

Even if bankruptcy does forgive the failed CSs’ financial obligations, the CSs’ financial resources remain well below those available prior to the downward spiral.  There continues to be insufficient funds to provide competitive taxes, infrastructure, and services.  Consequently, the firms and affluent people that left the failed CSs have no incentive to return.  Recovery remains problematic.

Bankruptcy that does forgive the failed CSs financial obligations is unlikely for political reasons, since the people that will be hurt include influential voting blocks, such as union workers.

In any case, bankruptcy does not guarantee that the ruling politicians will have learned a useful lesson concerning responsible fiscal management.  More likely, they will have learned that irresponsible behavior pays – because they will be gone by the time a financial collapse occurs.

     Bailout

Bailout is more likely to be politically feasible, but encourages the same unproductive fiscal behavior in the future and is unfair to those responsible citizens who must pay for it.

Privatization

Privatization of infrastructure and services on a pay as you go basis prevents CSs’ financial collapse.

     Example

A CS contracts for a new bridge.  The firm requires the cost of the bridge to be paid as it is incurred.  The bridge may not get finished, but the CS will not suffer financial collapse.

The Armed Citizen

Minimum Wage Increases Hurt Low-Wage Employment

Here is a link to an NBER  paper "Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence From Seattle".

Here is the Abstract.

This paper evaluates the wage, employment, and hours effects of the first and second phase-in of the Seattle Minimum Wage Ordinance, which raised the minimum wage from $9.47 to $11 per hour
in 2015 and to $13 per hour in 2016. Using a variety of methods to analyze employment in all
sectors paying below a specified real hourly rate, we conclude that the second wage increase to
$13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs
increased by around 3 percent. Consequently, total payroll fell for such jobs, implying that the
minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month
in 2016. Evidence attributes more modest effects to the first wage increase. We estimate an
effect of zero when analyzing employment in the restaurant industry at all wage levels,
comparable to many prior studies.

The paper's results are consistent with several conclusions.

• The demand curve for low-wage labor is downward sloping, just as you would expect.

• If the price of a good, A, is raised relative to a substitute, B, less of good A is bought and more of good B is bought, just as you would expect.

• Minimum wage laws hurt those they are intended to help and help others.

Pictures

1929 stock market crash

Central Park, New York City 1930

Delusions of Grandeur

Turley on Recusals - Rosenstein and Mueller

Here is Jonathan Turley's blog entry concerning whether Rosenstein and/or Mueller should recuse themselves.

Jonathan Turley is the Shapiro Professor of Public Interest Law at George Washington University.

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For many weeks, I questioned the need for a Special Counsel in the Russian investigation because it seems like a coverup in search of a crime. I still do not see the evidence of a crime and simply saying “collusion” does not supply an actual crime. However, when President Donald Trump fired James Comey, I supported the appointment of a Special Counsel to investigate obstruction of justice, even though I remained skeptical of the basis for an actual obstruction charge. I still fail to see the compelling basis for an obstruction case without stretching the criminal code to the breaking point. Nevertheless, I continue to support the need for an independent investigation.

The investigation of a sitting American president however must itself be beyond question as to any bias or influence. For that reason, I have been questioning the propriety of Rod Rosenstein to continue in his current position vis-a-vis the Russian investigation. From the outset, Rosenstein seemed to me to be an inevitable and important witness. Ironically, the recent leak magnified this problem. The leak seemed calculated to protect Mueller from being terminated by publicly identifying Trump as a possible target. However, whatever benefit the leak brought Mueller, it undermined Rosenstein. If Mueller is investigation Trump for obstruction, Rosenstein should immediately recuse himself.

It is not clear if Mueller has an equal conflict of interest. There is reason to be concerned. If Mueller discussed the Comey’s termination with Trump as a candidate for the next FBI Director, he might also be considered a witness in any obstruction investigation. It would seem highly material to the investigation to learn of how Trump described his decision and what he said (if anything) to Mueller about the ongoing Russian investigation. At a minimum, the Special Counsel should address what is a reasonable question about his own knowledge of (and participation in) any meetings with Trump on the Comey termination and the Russian investigation. I do not agree with the campaign to discredit Mueller and strongly object to attacks on his character. I believe Mueller to be a person of integrity and I hope that he recognizes that such a meeting raises some legitimate questions that should be addressed.

Here is the column:

Jonathan Turley Puts the Comey Memos and CNN in Perspective

Jonathan Turley's column in The Hill.

Jonathan Turley is the Shapiro Professor of Public Interest Law at George Washington University.----------------------------------------------

The lawsuit this week by CNN seeking the memoranda of former FBI director James Comey created something of a curiosity for viewers. In court, CNN is arguing that the memos are “FBI records” and should be turned over under the Freedom of Information Act (FOIA). On the air, CNN legal and political analysts have been insisting that these memos belong to Comey and are akin to his personal diary. The irony is that the CNN litigation could answer some of the underlying questions over the status of the memos and whether Comey was a leaker in the unauthorized dissemination of FBI information.

On Thursday, CNN filed for the release of the documents as “FBI records” in “unredacted” form and “without further delay.” There are two copies of these memos in FBI possession this week. First were the original versions created by Comey while he was FBI director. The memos were prepared on an FBI computer during the course of Comey’s investigation of the Russian matter. The memos were made in direct relation to the ongoing investigation and shared with his top staff as potentially relevant to the investigation. Second, there are the copies of the memos that were collected from Comey’s friend, Columbia Professor Daniel Richman, who received the memos from Comey to leak to the media.

I have previously written how these memos fit the broad definition of “FBI information” contained in federal rules and regulations. As such, the transfer of the memos to Richman and the sharing of the information with the media constituted a serious violation of legal and professional standards by Comey. Tasked with finding leakers, Comey became a leaker himself in order to strike back at the president.

Worse yet, Comey was fully aware that these memos would inevitably be collected as evidence by both the congressional committee and any special counsel — in addition to his own former team of investigators. Indeed, Comey was aware that he was being called to testify and could have shared these memos in a legal and professional way. Instead, he chose to use a friend to leak the memos early to the media.

CNN analysts came out immediately after Comey’s admission in his testimony, saying that first, this was not a leak because leaks are only classified (something I previously explained as entirely and facially incorrect), and second, these memos were like personal diaries that Comey had a right to disclose. Former FBI special agent Asha Rangappa on CNN balked at the suggestion of any leak as absurd because these were just Comey’s “personal recollections” like a personal diary. Others referred to the memos as being a private record or account of a private conversation.

By filing the lawsuit, CNN could force the FBI to legally identify the status of the memos. There should be multiple copies of these memos unless Comey deleted copies on his FBI computers (itself a potential violation of federal law). Each copy could be addressed in any FOIA production.

I previously noted that Comey’s suggestion that these memos belonged to him (and thus could be leaked to the media) would likely not pass muster with folks at the FBI who have to make such decisions. Indeed, it would not have passed muster under FBI Director James Comey. Leakers were pursued under his tenure as FBI director, and many of those investigated may be rather perturbed by the image of someone who went from chief law enforcer to high-profile leaker when it was to his advantage.

The FBI restricts material generated in relation to investigations “FBI information.” The agreement Comey presumably signed clearly encompassed these memos as FBI material and he swore to comply with their bar on “unauthorized disclosure” — not just during his time at the FBI but “following termination of such employment.”

FBI rules cover any “documents reflecting advisory opinions, recommendations and deliberations comprising part of a process by which governmental decisions and policies are formulated.” He is not at liberty to remove such documents after termination by the FBI, let alone leak them to the media. He also agreed that violation would terminate his security clearance and subject him to both criminal and civil liability, including injunctive relief.

Weeks ago, I raised the issue of whether the FBI would have turned over these documents under FOIA if they were demanded by the media. I expressed considerable doubt over such a notion as someone who has dealt with FOIA fights with the FBI for years.

The FBI would likely deny the requests under a number of exceptions. First, it could object that the documents were “related solely to the internal personnel rules and practices of an agency,” under 5 U.S.C. § 552(b)(2). Second, they could claim that they fell under  documents which are “records or information compiled for law enforcement purposes,” (assuming they fell into one or more of six categories), under 5 U.S.C. § 552(b)(7). Third, and most importantly, they would also likely claim that the documents were “inter-agency or intra-agency memorandum or letters” which would be privileged in civil litigation, under 5 U.S.C. § 552(b)(5).

The FBI specifically would rely on the deliberative process privilege in making such a finding. It has insisted that the release of such information is harmful to “the integrity of agency decision-making by encouraging both full and frank discussions of policy proposals and to prevent premature disclosure of policies under review.”

Any of these claims would seriously undermine Comey’s suggestion (and those of many at CNN) that these were his personal notes and that he was free to leak them to the media.

It is possible that the FBI could dodge this thorny issue by releasing copies received from Richman or finding a way to finesse the status of the original memos. However, the lawsuit could prove highly illuminating on not just the legal status of the memos but the lawfulness of Comey’s conduct. He could be vindicated or implicated by the results. On one end of the spectrum is the suggestion by many that these memos are like diary entries by Comey.

As I have said before, that seems rather hard to square and treats the account like some eHarmony date gone bad (with awkward dinners and uncomfortable silences). On the other end of the spectrum are field reports, often called 302s, where agents memorialize meetings with potential witnesses or important discoveries. This clearly falls somewhere in the middle.

Of course, if these documents were viewed as FBI information at their creation, there remains the question on who would take the lead in investigating Comey as a possible leaker. The Justice Department as cut Robert Mueller a great berth. Yet, Comey is now a witness for Mueller — as the recent leak confirmed by telling the media that Trump is now being investigated for obstruction. It is not clear if Mueller would view Comey’s possible violations are falling within the scope of his mandate or whether he would be willing to investigate his own key witness in the obstruction investigation.

Ironically, Comey may have preferred for this to remain somewhere in the middle — undefined and uncertain. CNN could have just taken a critical step toward removing that ambiguity by forcing the FBI to classify the status of the documents. It is the type of clarity that could prove exceptionally helpful or harmful for James Comey.

From the Daily Caller

It speaks for itself.
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July 2016:
-A Hillary Clinton supporter lights a flag on fire and attacks a Trump supporter in Pittsburgh.

-Protesters jumped on cars, stole hats, fought with and threw eggs at Trump supporters outside a Trump rally in downtown San Jose. Trump supporters sued San Jose over the violence.

August 2016:
-Anti-Trump protesters attacked pushed, spit on and verbally harassed attendees forced to walk a “gauntlet” as they left a Trump fundraiser in Minneapolis, Minn., and beat an elderly man. Protesters also attacked Trump’s motorcade.

–A Tennessee man was assaulted at a garage sale for being a Trump supporter.

-A Trump supporter in New Jersey was attacked with a crowbar on the street.

Frederic Bastiat in1847

A quote from Frederic Bastiat in 1847.  FB is on target.

Economic sanity has been available for centuries, yet the majority of voters have yet to absorb it.

Here is the quote.
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The illusion arises from the fact that there is something we do not see. This is that foreign superiority only ever blocks national production in a specific area and makes it redundant only in this specific area by putting at our disposal the output of the very labor which has been destroyed in this way. If men lived in bells under water and had to provide themselves with air by means of a pump, there would be a huge source of work in this. Damaging this work while leaving men in this situation would be to do them frightful harm. But if the work ceases only because there is no longer any need for it, because men are placed in a different milieu in which air enters effortlessly into contact with their lungs, then the loss of this work is no cause for regret, except in the eyes of those who insist on seeing the value of work only in the work itself.

It is precisely this type of work that machines, free trade and progress of all sorts are gradually destroying; not useful work, but work that has become superfluous, redundant, pointless and ineffectual. On the other hand, protection restores it; it puts us back under the water in order to supply us with the opportunity to pump, it forces us to demand gold from our inaccessible national mine rather than from our national looms. Its entire effect is encapsulated in this term: wasted efforts.

Bryan Caplan Quote

Here is a quote from Bryan Caplan's book "The Myth of the Rational Voter".

BC is on target.

As Pogo said long ago, "We have met the enemy and he is Us".
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Mountains of legislation and bureaucratic diktats testify to the truth that central to the state’s business is satisfying the populace’s demand for illusions.  Legislators proclaim that wages rise for all low-skilled workers when minimum-wage legislation is enacted.  Jobs are saved and none are destroyed when tariffs are imposed.  Terrorism is thwarted and nations built when more soldiers and bombs from ‘good-guy’ countries are unleashed abroad.  The easy fix for gun violence is gun-control legislation.  Seizing the earnings of the rich and giving this booty to the poor will “grow” the economy, engender domestic peace and harmony, and ensure that politicians are never again tempted into corruption or venality.  Illusions all.