Is it in our collective nature to make the right choices without first suffering?

June 2, 2016

 

Back before the financial crisis, I lamented openly (to my poor co-workers, family and friends) the problems we were certain to create by allowing the large scale use of home equity to finance borrowing from the future to live at a far higher standard than was sustainable. By the time the economy started to crater in earnest I lamented openly again the hope that our political leaders would have the fortitude to make the hard choices and allow the worst acting of the banks and insolvent corporate behemoths to fail (preserving savings up to the FDIC limits, but then selling off the remnants of these zombie institutions), not impede the wave of foreclosures - except in clear cases of fraud - and in those cases prosecute the bad actors to the full extent of the law, and perhaps engage in a large scale updating of our aging transportation and electrical infrastructure to partially offset jobs lost until the economy could rebound.

 

Not surprisingly, I was in a decided extreme minority about these being the best remedies for the crisis, so the government leaped into financial action, bailing out the "too big to fail" banks and poorly managed "too big to fail" major corporations, making them the instant winners (after all, it is poor practice for a government owned business to go out of business, so survive they did). At the Federal and State level, governments simultaneously stonewalled the foreclosure process, creating legions of zombie homeowners, some staying as long as allowed, others vacating the property to make a clean break, leaving the bailed out banks with millions of vacant properties and no system by which to manage or dispose of them.

 

There is no denying the actions of the government eased the pain that would have been widespread and possibly as severe as the Great Depression for a time. There is also no denying the worst of the bad actors on Wall Street, and, in some cases, on Main Street were given proverbial slaps on the wrist. Was it the right choice?  That remains to be seen. 

 

Debt at nearly every level of society has grown since that time and it is becoming abundantly clear that the financial promises made a generation ago will not all be kept. Pension funds whose benefits were established based on annual returns (7% or more) no longer possible in the post-crisis debt-laden world are beginning to show the cracks. The most recent example is the Central States Pension Fund, a privately managed fund that appears to be on the brink of failure with few viable options to keep it running. The Pension Benefit Guaranty Corporation, the government-run insurance entity designed to protect the interests of private pensioners, is unlikely to come to the rescue without making itself insolvent in the process.

 

Meanwhile, on the public pension front, all of the same cracks are showing but the response has been decidedly different. Instead of considering so much as a meaningful haircut on the benefits to be paid out to public employees, politicians and the courts have largely been quick to insist these benefits are unassailable and that services must be cut and taxes raised to make good on the promises made there. You may say "What about the cuts in Detroit's public pensions?" To all current indications, they will have fared far far better than the pensioners of the private Central States fund. 

 

When the average public employee's wages exceed those of their private counterparts (i.e. same job with same level of education and experience) and most private jobs outside of private union jobs no longer have what are now recognized as highly lucrative defined benefit pensions, it leaves one to wonder: How long can that dichotomy exist?

 

There is a collective choice on the horizon and it extends far beyond the issue of traditional pensions. It extends into Social Security, 401ks and every other type of vehicle for building savings.  We will not be able to simply "print" our way out of this mess. There are limits to how much a government can expand the balance sheet without then being subjected to harsh financial sacrifices to restore balance. Raising taxes too much creates a disincentive to work harder and drives capital investment away. Cutting services too much risks the loss of order and leads to reduced productivity, also driving capital investment away. Staying such a course eventually debases the currency and leads to rampant inflation. 

 

There are no easy answers here. The issues are complex and it is not as simple as people spending at or below their means. The ability to earn the means in general is on the decline for too many. An over consolidation in large swaths of industry have created anti-competitive oligarchies (for example, oil has dropped in half, why haven't airline tickets budged?), which has impeded small business growth (due to lesser access to capital and higher barriers to entry) and real competition for jobs (more potential employers in the same industry is generally better for workers than having only a few). Free trade moving higher paying manufacturing jobs overseas is another.

 

Without a crystal ball it is difficult to say how far our State and Federal government balance sheets can be pushed, but a look in the rear-view mirror should give one pause. Recent global examples of reaching the limits - for slightly different reasons in each case - can be found in Greece, Argentina and Venezuela and there are a long string of painful financial re-calibrations (to put it mildly) going back as far as history has been recorded. It seems we are drawing near to such a moment ourselves. 

 

The anger fomenting in this election cycle is palpable and many argue the suffering has already begun. If so, perhaps we will collectively find our way to making the right choices sooner than later.

 

 

 

 

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