Mish's Global Economic Trend Analysis

Merle Hazard Song - US Racing Towards Fiscal Cliff; Submit Lyrics For Merle's Next Song For Fame (Certainly Not Fortune)
Stockton CA Bankrupt; Unions (Not Housing Bust) Primarily to Blame; Pension Death Trap for Cities; What's the Solution?
Laugh of the Day: "No Risk of Housing Bust" says Australia Central Banker
Monti Lashes out at Germany; Merkel Hardens Position; Reader from Italy Explains Why Early Elections Might Lead to "Deadlock"

Merle Hazard Song - US Racing Towards Fiscal Cliff; Submit Lyrics For Merle's Next Song For Fame (Certainly Not Fortune)

Posted: 27 Jun 2012 09:05 PM PDT

I received an email this morning from "Merle Hazard" about his latest song. It's one of his best.

US Racing Towards Fiscal Cliff

If the video does not play, or if you wish to submit lyrics or ideas for his next song, please click on A Q-and-A, Plus a Ditty and Contest as U.S. Races Toward the 'Fiscal Cliff'

Merle Explains ...

Though I'm a country singer, I also love surf-style music. The only thing wrong with the genre is that these songs are always -- of course -- about surfing, as well as teenage romance and drag races. There should be more on macro-economic topics and political economy. So I'd like to do another one like 'Fiscal Cliff,' but I'm out of ideas. I'm hoping NewsHour audience might help. I have in mind a song contest. Submit a topic, a key phrase, or a whole lyric. Whatever you like. The Making Sen$e team and I will jointly select the winner. Assuming we get a good idea or two, I will turn it into an original song. There is no money involved, as the market for econ surf songs is somewhere between inactive and inconceivable. But the winner will garner Internet fame on Making Sen$e, perhaps even go viral, and will in any case earn a heart-felt thank-you from me. At the very least, you should have fun and a story to tell.

This is clearly a way to get free publicity for Making Sen$se as well as free ideas for a new song, but hey, I don't mind as long as a good song comes out of it.

I asked for a song about the pension crisis, pointing Merle to my post Stockton CA Bankrupt; Unions (Not Housing Bust) Primarily to Blame; Pension Death Trap for Cities; What's the Solution?

I did not provide any lyrics or a background melody, so have at it, if you like my topic.

There is a form on the above link to submit ideas. May the best pension song win!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Stockton CA Bankrupt; Unions (Not Housing Bust) Primarily to Blame; Pension Death Trap for Cities; What's the Solution?

Posted: 27 Jun 2012 11:14 AM PDT

The city of Stockton, California, is Bankrupt. It has stopped making bond payments and will become the largest city in the US to seek protection via US bankruptcy law.

The bankruptcy was inevitable.

California law requires blame to be assessed. To be sure there is plenty of blame to go around.

Here are a few paragraphs from the LA Times that explain the setup.

How Stockton found itself so mired in debt can be seen everywhere in the city's core. There is a sparkling marina, high-rise hotel and promenade financed by credit in the mid-2000s, mere blocks from where mothers won't let their children play in the yard because of violence.

During the economic boom, this working-class city with pockets of entrenched poverty tried to reinvent itself as a draw to Bay Area refugees and a popular site for conventions. It offered generous city employee pension plans and benefits.

When the bust came, few places fell as hard as Stockton. The city has the second-highest rate of foreclosures in the country and the second-highest rate of violent crime in the state.

The city made $90 million in drastic cuts from the general fund in the last three years, including reducing the Police Department by 25%, the Fire Department by 30%, and cutting pay and benefits to all employees. There is a state investigation into whether Stockton's financial devastation was entirely due to shortsighted optimism or if there was corruption. The state mediation law requires assigning blame.

Public Union Pensions, a Death Trap for Cities

I added emphasis to the two sentences that explain what really happened and where the blame will be placed. Sure, Stockton politicians made gross errors in its budget. Yet, that is not what did Stockton in.

The thing Stockton could not correct over time is ever-escalating pension promises and public union salaries. Union pensions wrecked Stockton. The only way to escape the death-grip of inane pension promises is bankruptcy.

Things like parks and marinas are one-time foolishness that can be corrected over time.

Ever-escalating public union wages and pension costs cannot be corrected over time (Indeed they are 100% guaranteed to get worse). Prevailing wage laws that force cities to overpay for every city project cannot be undone over time either.

Both have to be fixed big-bang. The former by bankruptcy, the latter by brute political force, preferably at the national level.

Scapegoating Short-Sighted Optimism

Blame will not be placed where it most belongs. Here is the key sentence: "There is a state investigation into whether Stockton's financial devastation was entirely due to shortsighted optimism or if there was corruption."

Note the two choices.

Political pandering by politicians to unions is not on the list. Nor are pension plans. Nor are public unions salaries.

$51.71-an-Hour Summer Job Program

Let's turn our focus to New York for a second, but the problem described by the New York Post applies to California, New York, and every prevailing wage state. If federal funds are involved, it applies to every state.

Please consider NY's $51.71-an-Hour Summer Job Program

The small Hudson Valley city of Poughkeepsie is now home to some of the best-paying summer jobs ever: $51.71 an hour.

That's right: $51.71 an hour.

The project started off as perfectly sensible. The work involves restoring Fallkill Creek, damaged in last summer's post-Hurricane Irene flooding. To get the job done and put up to 150 unemployed young people to work, the state Labor Department tapped a federal storm-cleanup grant.

Clearing debris and lifting heavy objects isn't easy, but why pay temporary manual laborers the same hourly rate as a skilled employee in a $100,000-a-year full-time job?

The ultimate source of funding for the Fallkill cleanup is a federal National Emergency Grant, whose terms require paying wages at the highest of the federal, state or local minimum wage or at the comparable rates of pay for individuals employed in similar occupations by the same employer.

The state Labor Department decided that this meant the prevailing wage for public-works projects. But "prevailing wage" is a term of art that actually means a pay rate based on collective-bargaining agreements between labor unions and private employers.

For the Mid-Hudson region, the prevailing hourly rate for laborers comes to $51.71 — $30.71 in wages plus $21 in benefits. But the temporary workers on the Fallkill won't be union members, so they'll get the entire amount as a wage, the Labor Department ruled.

If not for the prevailing wage, the Fallkill grant could've provided seasonal employment for 1,000 young people at the minimum-wage rate of $7.25 an hour — which might have gotten the job done sooner, to boot.

Or the state might have employed the same number of people, paid them $10 an hour and saved taxpayers $219,000 a week.

The project illustrates how government all too often works — that is, as wastefully as possible. It also stands as a testament to the power of unions in dictating government wage rates.

Who Benefits From This?

Bear in mind that government spending (even deficit spending, no matter how ill-advised), adds to GDP by definition. It does not matter how little product is actually produced, or even if the results are negative.

In terms of deficit spending, spending power is stolen from consumers and investors because government never allocates resources wisely.

Fixing 1 bridge instead of 10 adds as much GDP if the amount spent is the same.

Want to create 1,000 jobs for the summer or 140? If you are one of the politically well-connected the answer is 140.

Want to bet who got those jobs? My bet is sons and daughters of the politically well-connected. I would like to see a report.

Let's return our focus to California.

University of California Faces Mounting Pension Costs

Here is an interesting article that came my way a few days ago: University of California faces mounting pension costs.

The cost of pensions and retiree health benefits are soaring at the University of California, increasing pressure to raise tuition and cut academic programs at one of the nation's leading public college systems.

The 10-campus system is confronting mounting bills for employee retirement benefits even as it grapples with unprecedented cuts in state funding that have led to sharp tuition hikes, staff reductions and angry student protests.

The UC system, including medical centers and national laboratories, is scrambling to shore up its pension fund as it prepares for a wave of retirements and tackles a roughly $10 billion unfunded liability.

"The regents made a serious error and the Legislature made a serious error by not putting money aside for 19 years while accumulating this obligation," said Robert Anderson, a UC Berkeley economist who chairs the system's Academic Senate. "Now we have to pay for it."

Notice the self-serving attitude and blame-placing by Robert Anderson, essentially whining that taxpayers did not dole out enough money to give him his expected benefits.

What benefits are we discussing? The article explains.

The UC system faces spiraling pension costs for 56,000 current retirees and another 116,000 employees nearing retirement.

As of May, there were 2,129 UC retirees drawing annual pensions of more than $100,000, 57 with pensions exceeding $200,000 and three with pensions greater than $300,000, according to data obtained by The Associated Press through a state Public Records Act request.

The number of UC retirees collecting six-figure pensions has increased by 30 percent over the past two years, according to Californians for Fiscal Responsibility, an advocacy group that has analyzed UC pension data.

Topping the list is Marcus Marvin, a retired professor of dentistry and public health at UCLA, who receives an annual pension of $337,000.

If UC President Mark Yudof, 67, serves for seven years, he would receive an annual pension of $350,000 — in addition to regular benefits he accrues through the UC Retirement Plan, according to university documents.

The university caps employee pensions at the IRS limit of $250,000, but that ceiling does not apply to the "supplemental retirement benefits" promised to Yudof.

With inane pension benefits like that, is it any wonder the system went unfunded?

Those benefits cannot and will not be paid. The system is bankrupt. Sadly, young kids graduating from college tens or hundreds of thousands of dollars in debt are bankrupt as well. However, student loans cannot be discharged in bankruptcy.

Students are the one who have paid the highest price for our corrupt education system. Nothing is done "for the kids". It is all done for grossly overpaid administrators and public union employees.

School tuition has to be ridiculously high to support $350,000 a year pension plans for life.

What's the Solution?

The immediate solution is bankruptcy. Expect to see more cities file. However, longer-term structural problems must also be addressed.
Untenable pension contracts need to be tossed out by the courts and benefits reduced. Every taxpayer not on the public dole should cheer bankruptcy, not resist it.
End defined benefit pension plans for public union workers.
End collective bargaining for public union workers. Governor Scott Walker in Wisconsin has proven that can be done.
Scrap Davis-Bacon and all state prevailing wage laws.
Institute national right-to-work laws.
Merit pay for teachers
More competition from accredited online schools to drive education costs way down
Scrap student loan programs that only benefit administrators and educators, not the kids.

It's time to stop overpaying for all government-sponsored services including but not limited to police, fire, prison-workers, and education. The vicious, self-serving grip that unions and their political supporters have on this nation has to end. Governor Walker partially paved the way in Wisconsin. Other states must follow through. At the national level, we desperately need right-to-work laws while ending prevailing wages.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Laugh of the Day: "No Risk of Housing Bust" says Australia Central Banker

Posted: 27 Jun 2012 08:40 AM PDT

"No Risk of Housing Bust"

In case you need some humor today, please consider No risk of housing bust: RBA

Australia is not at danger of a collapse in the housing market, a top central banker says, again playing down concerns that Australia could suffer price falls like those seen in the United States or parts of Europe.

Speaking at a mortgage conference, Reserve Bank assistant governor Guy Debelle said he was more concerned about the outlook for the European Union and the uncertainty that was causing globally.

Asked about fears of a housing collapse in Australia, Mr Debelle said there was no oversupply of housing in the country, households were well able to manage their debt levels and mortgage arrears remained very low.

"This (housing risk) is not something that keeps me awake at night," he added.

No Oversupply?

For years I have had people emailing me that a housing bust was impossible because there was a critical shortage of houses in Australia.

I calmly point out we heard the same story in the US for years as well. Of course, in the midst of a bubble, no one wants to hear any rational explanations.

Thus, a few days ago I had to laugh at this Bloomberg headline: Vanishing Households Undercut Claim of Australia Shortage

Australia has almost 1 million fewer households than assumed in government forecasts of a housing shortage, raising doubts about a supply shortfall cited as the main reason the nation will avoid a U.S.-style crash.

The Pacific nation had 7.8 million households, data released yesterday from the 2011 Census showed. That compared with estimates of 8.7 million as of June 2010, according to the latest figures used by the National Housing Supply Council, a group created by the government in May 2008 to monitor housing demand, supply and affordability. Australia's population also grew by 300,000 less than previously estimated, to 21.5 million.

"There's been a bit of a disconnect between the estimates between the census points and the actual census data," said David Cannington, Melbourne-based economist at Australia & New Zealand Banking Group Ltd. (ANZ) "My feeling is that some of the underlying housing demand numbers will be revised down."

Home prices across Australia have seen quarterly declines since the beginning of 2011 as global economic uncertainty and fears of overpaying for properties in the English-speaking world's most unaffordable housing market kept buyers sidelined.

Dwellings in Australia cost 6.7 times the average annual income as of the third quarter of 2011, Illinois-based consulting company Demographia said in a report in January.

The increase in the number of people living in group households and in apartments and townhouses backs this up, said David Collyer, campaign manager at tax reform advocacy group Prosper Australia.

"Young adults have gone back home with mum and dad, or are sharing houses," said Collyer, who argues that Australia has an oversupply of housing based on statistics showing water usage and new building data. "Household sizes have gone up even more than people think, and the oversupply of housing will be revealed to be even worse than we thought."

As more Australians live with friends or parents to combat falling affordability, the number of vacant dwellings rose to 934,471 in the 2011 census from 830,376 in 2006.

Housing Shortage With 934,471 Vacant Homes

Allegedly there is a housing shortage with close to a million vacant homes.

At the peak of every bubble there always appears to be a shortage. There appeared to be a shortage of Florida condos in 2005 as well.

The nutcases really believed Florida needed more condos. The nutcases at the RBA now believe "no risk of housing bust" in Australia, right in the midst of what I believe will be a decade-long implosion. What a hoot.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Monti Lashes out at Germany; Merkel Hardens Position; Reader from Italy Explains Why Early Elections Might Lead to "Deadlock"

Posted: 27 Jun 2012 01:43 AM PDT

Merkel Hardens Position

The EU summit is a day away and pre-summit bickering is so intense that it will be difficult if not impossible to get any major agreements.

Two days ago, in a speech in German parliament, Bloomberg reported Merkel Hardens Resistance to Euro-Area Debt Sharing

Chancellor Angela Merkel hardened her resistance to euro-area debt sharing to resolve the region's financial crisis, setting Germany on a collision course with its allies at a summit of European leaders this week.

Merkel, speaking to a conference in Berlin today as Spain announced it would formally seek aid for its banks, dismissed "euro bonds, euro bills and European deposit insurance with joint liability and much more" as "economically wrong and counterproductive," saying that they ran against the German constitution.

"It's not a bold prediction to say that in Brussels most eyes -- all eyes -- will be on Germany yet again," Merkel said. "I say quite openly: when I think of the summit on Thursday I'm concerned that once again the discussion will be far too much about all kinds of ideas for joint liability and far too little about improved oversight and structural measures."

"There must not be an imbalance between liability and control," she said today. "For instance, we would do a European deposit insurance immediately if it doesn't lead to common liability but to improved oversight possibilities and standards."

Monti Lashes out at Germany

In response to his own falling support as much as his displeasure with Merkel, Monti lashes out at Germany ahead of summit

Italy's technocratic prime minister's frustration with Germany surfaced in a combative speech to parliament, saying he would not go to Brussels to "rubber-stamp" pre-written documents and was ready to extend the two-day summit until Sunday night if needed to reach agreements before markets reopen on Monday.

Speculation over the fate of his government has become so feverish in Rome that officials were forced to deny that the prime minister had threatened to resign if he were to leave Brussels without success.

Singling out Jens Weidmann by name, Mr Monti said the Bundesbank president had "badly misunderstood" his proposal to deploy eurozone rescue funds to bring down the borrowing costs of countries such as Italy and Spain that had honoured obligations to implement reforms and bring down their budget deficits.

Italy on Tuesday was forced to borrow at 4.71 per cent for two-year bills, its highest level since December, and will face a testing auction on Thursday of up to €5.5bn in five and 10-year bonds.

Italian officials said they were extremely concerned how markets might react Monday if the Brussels talks fail to break new ground. The summit was heading towards "complete uncertainty", Mr Monti said.

Mr Monti is said by aides to be furious with Mr Berlusconi's recent anti-European tack which is seen as undermining Italy ahead of the summit. Mr Berlusconi reportedly repeated on Tuesday that it would not be a bad thing if Germany exited from the euro.

Explaining Italian Politics

Reader Andrea who is from Italy but now lives in France, has some observations and comments on Italian politics in response to Monti Threatens to Resign if No Eurobonds; Specter of Early Elections

Hi Mish,
I have a few comments on your article.

First: Former prime minister Silvio Berlusconi made a third call for a euro exit, this time asking Germany to exit if the ECB will not print.

Berlusconi has a certain ability in "feeling" what people wants to hear and use it as his message. In my opinion he is testing the public opinion. I expect he will run polls to check if his anti-euro stance is allowing his party to increase consensus. In this case, I strongly believe that he will raise the level of his anti-euro stance given he has nothing to lose as his party is in freefall.

Second: Monti's days are indeed numbered because he will step down at the end of legislature (spring 2013) and he will not seek for renewal of his mandate in the new one.

However, his term could be even shorter. There could be early elections before the natural term.

In the Italian constitution, the President of the Republic appoints the prime minister, but the appointment must get Parliamentary approval. If a PM resigns or loses majority approval, a search is on to find another person. If parliament cannot find a coalition leader with sufficient votes, the only choice left is to call early elections.

Berlusconi's PDL party has the numbers to make Monti step down and to not allow any new majority. He may do just that.

Berlusconi is increasingly uncomfortable in supporting Monti. So are others. Government bond yields are back at very high levels and now Monti is losing popular support. Backing Monti has cost PDL to lose a lot of votes.

However, with early elections, a dangerous competitor like Beppe Grillo's Movimento 5 Stelle (Five Star Movement) will not have enough time to present candidates everywhere. Thus, Berlusconi might also use a poor EU summit as reason to withdraw support to Monti, given the side benefit of holding elections before the Five Star Movement grows stronger.

Third: the most likely outcome of the next election in Italy is a deadlock, assuming recent polls are accurate.

The reason is the electoral law. The current electoral law gives additional representatives and senators to the "coalition" that scores first. Coalition is the key term. Even if Grillo's Five Star Movement wins as a party, he will be politically isolated whereas the center-left can form a coalition.

However, additional share is given on national basis for the Chamber of Representatives and on regional basis for the Senate. For this reason, the Senate will most likely be fragmented with no majority at all. To govern, you need majority on both.

What would happen then? Very hard to guess.

Best regards,
Andrea

For more on the Five Star Movement and Beppe Grillo's plan to dump the euro, please see ....

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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27.6.12

Mish's Global Economic Trend Analysis

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