Arnold Kling  

Not a Fable, Unfortunately

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Think on the Margin... Break Up the Banks...

From The Telegraph:


On Saturday Jurgen Stark, an executive board member of the ECB, warned that a restructuring of debt in any of the troubled eurozone countries could trigger a banking crisis even worse than that of 2008.

Of course, rumors are flying that Greece will restructure its debt. Many economists, particularly here in the U.S., have argued from the beginning of the Greek crisis that restructuring as inevitable.

Meanwhile, the Washington Post has an editorial praising the Maryland legislature for standing up to the public-sector unions and curbing pension costs. The kicker comes near the end:


the goal of covering 80 percent of the fund's liabilities by 2023 depends on what may be an over-optimistic 7.75 percent annual return on the system's investments.

Oh. So after this heroic effort, in another 10 years the pension might be just 20 percent under-funded...assuming a rate of return over three times the likely growth rate of the economy. (A standard result in growth theory is that the return on capital should on average be the same as the rate of economic growth.)

My fiscal fable was evidently too subtle for a number of readers, who thought I really was talking about a hypothetical private corporation. I was of course talking about over-extended governments. What we are seeing in Europe, Maryland, and the United States is the unraveling of a situation in which the governments have made promises that are impossible to keep. I don't know how the economics will play out, but I can predict with some confidence that the politics will get really, really ugly. For example, Euro-populism comes across as even less libertarian than Euro-elitism.

Have a nice day.


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CATEGORIES: Fiscal Policy



COMMENTS (6 to date)
hsearles writes:

"What we are seeing in Europe, Maryland, and the United States is the unraveling of a situation in which the governments have made promises that are impossible to keep."
Don't forget California, The Economist actually has a special report on that state in this week's issue. http://www.economist.com/node/18563638

nazgulnarsil writes:

economist is being very pro civil service: "Behind these cuts is human hardship"

HA! who says cutting back on state spending ends in a net loss for standard of living?

Kyle writes:

The very high discount rates used by public pension systems is a common source discussion on the Actuarial Outpost (an online internet forum). There's no doubt they're inflated, though you can find some dissenters who feel the bigger problem is that they aren’t actually contributing the full amount anyways.

But here’s where I get my giggles. Ask your local state employee or teacher to please swap to a 401k. They’ll often throw up their arms in disgust at the thought of being “subject to” or “victim of” the stock market (never mind the fact they don’t have to allocate their funds that way). But then ask the people who run those state employee’s pensions how they can possibly justify the discount rates they’re using. Know what one answer they often give is? “Look at the stock market returns!” That’s a response given on a CSPAN interview; I could dig it up for a dollar.

roo writes:

Even conceding that euro-populism holds anti-trade and anti-immigrant sentiments, so long as it's a decentralizing influence I think on the margin each additional euro-populist elected will produce a more libertarian Europe.

Lord writes:

As for promises, I am skeptical any are being made when Social Security tells everyone it may only be able to cover 75% of benefits, the PBGC guarantees only an amount similar to Social Security, and investments carry returns not guaranteed disclosures.

Yancey Ward writes:
I am skeptical any are being made when Social Security tells everyone it may only be able to cover 75% of benefits, the PBGC guarantees only an amount similar to Social Security, and investments carry returns not guaranteed disclosures.

And which political party is running on this realistic point of view?

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