Moody’s Caves In to Political Pressure on Municipal Bonds
Moody’s has announced that it will change its methods for rating debt issued by state and local governments. Politicians have argued that its current ratings ignore the historically low default rate of municipal bonds, resulting in higher interest rates being paid on muni debt, or so argue the politicians.
First this argument ignores that the market determines the cost of borrowing, not the rating. And while ratings are considered by market participants, one can easily find similarly rated bonds that trade at different yields.
Second, while ratings should give some weight to historical performance, far more weight should be given to expected future performance. Regardless of how say California-issued debt has performed in the past, does anyone doubt that California, or many other municipalities, are in fiscal straights right now?
Last and not least, politicians have no business telling rating agencies how to handle different types of investments. We’ve been down this road before with Fannie Mae and Freddie Mac. During drafting of GSE reform bills in the past, politicians put constant pressure on the rating agencies to maintain Fannie and Freddie’s AAA status.
The gaming over muni ratings illustrates all the more why we need to end the rating agencies govt created monopoly. As long as govt has imposed a system protecting the rating agencies from market pressures, those agencies will bend to the will of politicians in order to protect that status. As Fannie and Freddie have demonstrated, it ends up being the taxpayers and the investors who ultimately pay for this political meddling.
Weekend Links
- Jack of all trades and master of none: What happens when the government gets so big that it fails to fulfill its most important role.
- The hard truth about end-of-life care in America.
- If current trends continue, the U.S. government will soon spend a greater portion of GDP on Medicare and Medicaid than Canada now spends on its entire single-payer government-run system. Here’s a way to fix that.
- How about a little honesty from time to time in the tobacco policy debate?
- More drug-related chaos along the Mexican border.
- Go North Young Man! Will Wilkinson becomes “forever Canadian.”
So Much for Making Money on the Bailout
The federal government is unlikely to recoup all of the billions of dollars that it has invested in General Motors and Chrysler, according to a new congressional oversight report assessing the automakers’ rescue.
The report said that a $5.4 billion portion of the $10.5 billion owed by Chrysler is “highly unlikely” to be repaid, while full recovery of the $50 billion sunk into GM would require the company’s stock to reach unprecedented heights.
“Although taxpayers may recover some portion of their investment in Chrysler and GM, it is unlikely they will recover the entire amount,” according to the report, which is scheduled to be released Wednesday.
Well, it’s only money. And with the taxpayers facing more than $100 trillion worth of unfunded liabilities, what’s a few more wasted dollars?!
Sticking Around Afghanistan Forever?
I’ll confess one of the arguments that I’ve never understood is the claim that the U.S. “abandoned” Afghanistan after aiding the Mujahadeen in the latter’s battle against the Soviet Union. Yet Secretary of Defense Robert Gates apparently is the latest proponent of this view.
Defense Secretary Robert M. Gates said in an interview broadcast this week that the United States would not repeat the mistake of abandoning Afghanistan, vowing that “both Afghanistan and Pakistan can count on us for the long term.”
Just what does he believe we should have done? Obviously, the Afghans didn’t want us to try to govern them. Any attempt to impose a regime on them through Kabul would have met the same resistance that defeated the Soviets. Backing a favored warlord or two would have just involved America in the ensuing conflict.
Nor would carpet-bombing Afghanistan with dollar bills starting in 1989 after the Soviets withdrew have led to enlightened, liberal Western governance and social transformation. Humanitarian aid sounds good, but as we’ve (re)discovered recently, building schools doesn’t get you far if there’s little or no security and kids are afraid to attend. And a half century of foreign experience has demonstrated that recipients almost always take the money and do what they want — principally maintaining power by rewarding friends and punishing enemies. The likelihood of the U.S doing any better in tribal Afghanistan as its varied peoples shifted from resisting outsiders to fighting each other is a fantasy.
The best thing the U.S. government could do for the long-term is get out of the way. Washington has eliminated al-Qaeda as an effective transnational terrorist force. The U.S. should leave nation-building to others, namely the Afghans and Pakistanis. Only Afghanistan and Pakistan can confront the overwhelming challenges facing both nations.
Federal Pay: Response to the Critics
My post yesterday on federal worker pay generated a large and aggressive response from federal workers, both in my inbox and on websites such as Fedsmith.com. (See also Federal Times and Govexec). Here are four points raised in criticism:
First, people accuse me of producing distorted data somehow. Actually, it’s essentially just raw Bureau of Economic Analysis data, but the data is usually overlooked by the media because I don’t think the BEA puts out a press release on it. Anyway, the average wage data is from BEA Table 6.6D. The average compensation data is simply total compensation (Table 6.2D) divided by the number of workers (Table 6.5D).
Second, people argue that reporting overall averages for wages and compensation is somehow illegitimate. People email me comments like “my federal salary is only $50,000, yet you claim that federal workers make $79,000.” All I can say to folks like this is that there must be a federal worker out there making $108,000 who balances you off.
Third, people argue that a better analysis would be to compare similar jobs in the private and public sectors, rather than looking at overall averages. I agree that that would be very useful. Unfortunately, the BEA data is not broken down that way. At the same time, the BEA data provides the most comprehensive accounting for the value of employee benefits of any data source. Benefits are a very important part of federal compensation, and so that’s why I look to the BEA data.
Fourth, many people argue that the federal government has an elite workforce with many highly educated people. Certainly, that’s an important factor to consider. However, that is the reason why I focused on the pay trend over the last eight years. The federal worker compensation advantage rose from 66 percent in 2000 to 100 percent in 2008. Has the composition of the federal workforce really changed that much in just eight years to justify such a big relative gain? I doubt it.
A final consideration is to look at a “market test” of the adequacy of compensation in the public sector–the quit rate. The voluntary quit rate in the federal government is just one-third or less the quit rate in the private sector (Table 16 near the bottom here).
That is strongly suggestive of ”golden handcuffs” in federal employment. While many federal workers probably grumble about their jobs (as many private sector workers do), they know that the overall package of wages, benefits, and extreme job security (Table 18 here) is very hard to match in the competitive private market, and so they stay put.
Bringing the States Back In
It’s an annoying, hackneyed trope of foreign policy types to say “if you want to understand X, you have to understand Y.” That said, let me engage in a little bit of it.
What’s going on in Afghanistan, we’re supposed to believe, is about terrorism, failed states, economic development, counterinsurgency, counterterrorism, human rights, and some other stuff. And to an extent, it is about each of those things. But to my mind, if you want to get a handle on what’s driving events over there, and on its historical status as a plaything of regional and extraregional powers, you ought to read this article in today’s Wall Street Journal.
The themes that permeate the article are familiar: States as the primary actors in international politics, their uncertainty about other states’ intentions, the fundamental zero-sumness of security competition…somebody should cook up a theory or two on this stuff.
Eventually–although in fairness, God only knows when–we’re going to leave Afghanistan. When that happens, India and Pakistan are still going to live in the neighborhood. They’d each prefer to have lots of influence in Afghanistan, and to preclude the other from having too much. Accordingly, they’re both trying to set up structures and relationships that would, in the ideal scenario, let them control Afghanistan. In a less-than-ideal scenario, they’d like enough influence to undermine the other’s control of the country. Until you grasp that nettle, you’re really just fumbling around in the dark.
Find a solution for that in your COIN manual.
Afghanistan Now Is Truly Barack Obama’s War
Afghanistan is voting for president. Unfortunately, the outcome, even if a fair result, is unlikely to matter much. The war will continue.
In 2008 President Barack Obama was seen as the anti-war candidate. In fact, his reputation reflected his prescient opposition to the Iraq war, but he said little to suggest that he was out of sync with Washington’s interventionist consensus.
We see his status quo foreign policies with his support for continued NATO expansion as well as maintaining American garrisons around the globe, including in South Korea and Japan. But his escalation in Afghanistan most obviously demonstrates that he is a man of the interventionist left.
He is now making it clear that Afghanistan is his war. Reports Reuters:
President Barack Obama will seek to shore up U.S. public support for the war in Afghanistan on Monday just days before an Afghan presidential election widely seen as a major test of his revamped strategy.
Obama will address a military veterans group in Phoenix at a time when U.S. combat deaths are rising amid a troop buildup against a resurgent Taliban, and polls show a softening of public backing for the eight-year-old war.
Hoping to reassure Americans, Obama is expected to sketch out why he believes the Afghanistan policy he unveiled earlier this year is working and why the United States must remain committed to stabilizing the war-ravaged country.
The political risks for him are enormous. Anything bad that happens in Iraq can be blamed on George W. Bush. But any failure in America’s nation-building mission in Afghanistan — and failure is the most likely outcome in any nation-building in Afghanistan — will be seen as his responsibility.
And American and other coalition military personnel, as well as the Afghan people, will pay the price.
Co-ops: A ‘Public Option’ By Another Name
Politico reports that the so-called “public option” provision could be dropped from the highly controversial health care bill currently being debated throughout the country:
President Barack Obama and his top aides are signaling that they’re prepared to drop a government insurance option from a final health-reform deal if that’s what’s needed to strike a compromise on Obama’s top legislative priority…. Obama and his aides continue to emphasize having some competitor to private insurers, perhaps nonprofit insurance cooperatives, but they are using stronger language to downplay the importance that it be a government plan.
As I have said before, establishing health insurance co-operatives is a poor alternative to the public option plan. Opponents of a government takeover of the health care system should not be fooled.
Government-run health care is government-run health care no matter what you call it.
The health care “co-op” approach now embraced by the Obama administration will still give the federal government control over one-sixth of the U.S. economy, with a government-appointed board, taxpayer funding, and with bureaucrats setting premiums, benefits, and operating rules.
Plus, it won’t be a true co-op, like rural electrical co-ops or your local health-food store — owned and controlled by its workers and the people who use its services. Under the government plan, the members wouldn’t choose its officers — the president would.
The real issue has never been the “public option” on its own. The issue is whether the government will take over the U.S. health care system, controlling many of our most important, personal, and private decisions. Even without a public option, the bills in Congress would make Americans pay higher taxes and higher premiums, while government bureaucrats determine what insurance benefits they must have and, ultimately, what care they can receive.
Obamacare was a bad idea with an explicit “public option.” It is still a bad idea without one.
The UN Can’t Even Promote Health
When people ask if the United Nations can serve any useful role, I find myself mumbling that maybe it can do some good on issues with cross-border impact, such as aiding refugees and improving health care. However, I always add, the record has not been good even there.
Now even the UN is admitting that it is hard to demonstrate that it has done any good on health care despite spending billions of dollars collected largely from American and other Western taxpayers.
In the last two decades, the world has spent more than $20 billion trying to save people from death and disease in poor countries.
UPDATE: The AP has made a correction to their original story that reported the UN had spent $20 billion on health care programs. They meant to say nearly $200 billion:
LONDON (AP) — In the last two decades, the world has spent more than $196 billion trying to save people from death and disease in poor countries.
But just what the world’s gotten for its money isn’t clear, according to two studies published Friday in the medical journal Lancet.
Millions of people are now protected against diseases like yellow fever, sleeping under anti-malaria bed nets and taking AIDS drugs. Much beyond that, it’s tough to gauge the effectiveness of pricey programs led by the United Nations and its partners, and in some cases, big spending may even be counterproductive, the studies say.
I’m thinking of changing my answer the next time I’m asked if the UN has any positive roles to a simple and emphatic “no.”
The Government Is Not the Economy
Rep. Zoe Lofgren (D-CA) is very upset that the Obama administration has rejected the California state government’s request for a bailout. She tells the Washington Post:
This matters for the U.S., not just for California. I can’t speak for the president, but when you’ve got the 8th biggest economy in the world sitting as one of your 50 states, it’s hard to see how the country recovers if that state does not.
First, presumably Lofgren knows that the federal government is projecting a deficit of $1.8 trillion for the current fiscal year — so where is this emergency aid for California to come from?
But perhaps even more importantly, Lofgren seems to confuse the state of California with the State of California. That is, she confuses the people and the businesses of California with the state government. There’s no clear and direct relationship between the two. The state government is currently running a large deficit and is warning of a “fiscal meltdown.” Of course, as it continued to issue claims of fiscal meltdown and painful cuts over the past many years, California has continued to spend. The state has nearly tripled spending since 1990 (doubled in per capita terms). It went on a spending binge during the dotcom boom and never adjusted to the lower revenues after the bust. During the Schwarzenegger years the state has increased spending twice as fast as inflation and population growth. What were they thinking?
But a bailout for the government won’t necessarily help the recovery of the state’s economy. In fact, by increasing taxes and/or borrowing, it would likely weaken the national economy. And by encouraging continued irresponsible spending by the state government, it would just be an enabler of destructive policies that suck money out of the productive sector of California’s economy. We all want the California economy to recover. But that’s not the same thing as giving more money to the California government.
Iraq’s Refugee Crisis
George W. Bush’s misguided attack on Iraq has had catastrophic consequences for the Iraqi people. Although the removal of Saddam Hussein was a blessing, the bloody chaos that resulted was not. Estimates of the number of dead in the ensuing strife starts at about 100,000 and rises rapidly. The number of injured is far greater.
Moreover, roughly four million people, about one-sixth of the population, have been driven from their homes. The most vulnerable tended to be Iraq’s Christian community and Iraqis who aided U.S. personnel — acting as translators, for instance. Yet the Bush administration resisted allowing any of these desperate people to come to America, since to resettle refugees would be to acknowledge that administration policy had failed to result in the promised paradise in Babylon.
This horrid neglect continues. Reports Hanna Ingber Win:
Of the millions displaced, the United States will resettle about 17,000 new Iraqis this coming fiscal year. While that is a relatively small number of arrivals compared to the number displaced, about a third of them will end up in El Cajon and Greater San Diego. More than 5,000 new Iraqis will arrive in San Diego County during the fiscal year ending September 30, 2009, according to Catholic Charities in the San Diego Diocese. Getting jobs, homes and visas to reunite the families of the new arrivals — many of whom put their lives and their families’ lives at risk by helping the U.S. military — is a monumental task.
As the Iraq War played out, the Bush administration seemed to do everything in its power to ignore the refugee crisis. Former President Bush, reluctant to admit to a failed war policy, never mentioned the plight of the refugees and for years refused to allow Iraqis fleeing the war zone to resettle in the U.S. Only after significant political pressure from members of Congress and advocacy groups did the administration’s policy begin to change, and refugees began gaining access to the United States.
As a presidential candidate, Barack Obama pledged to address the humanitarian crisis caused by the war. He vowed to increase the amount of aid given to countries like Syria and Jordan, which harbor most of the displaced people, as well as expedite the process of resettling refugees here.
“The Bush administration made every effort they could to try to minimize the issue [of Iraqi refugees] in the debate on the war,” Amelia Templeton, a refugee-policy analyst with Human Rights First, says not long after the presidential election. The Obama administration, on the other hand, she says, has made the issue an explicit policy priority. “Obama has said this is a major problem, that we are responsible for this problem and we will try to change this.”
Whether the Obama administration will live up to its rhetoric is still to be seen.
Immigration is an emotional issue at any time. But there is no excuse for not accepting more persecuted peoples who are fleeing violence sparked by U.S. military action and attacks sparked by their aid for U.S. military forces. If America refuses to act as a haven for these people, then yet another light will have gone out in what was once a shining city on a hill for the world.
An Overdue Reckoning in the Auto Sector
Bloomberg reports:
General Motors Corp., facing a probable bankruptcy filing by June 1, is telling 1,100 “underperforming” U.S. dealers they will be terminated as the automaker starts shrinking its retail network.
Most of the closings will occur by October 2010, and none are happening now, Detroit-based GM said today. The targeted outlets will have until the end of the month to appeal the decisions, GM said, without specifying the stores on the list.
The shutdowns are the biggest U.S. automaker’s first step toward paring domestic dealers to a range of 3,600 to 4,000 from 5,969 by the end of 2010.
To be sure, it is a very sad day for thousands of workers and businesses around the country. But we’re in the midst of a deep recession, which may be nowhere deeper than in the auto sector. Demand for cars and light trucks has absolutely tanked, which means the economy has an excess supply of inventory, productive capacity, and retail capacity.
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