Tuesday, May 15, 2012

Government Solvency Compared to Private Sector Solvency ... Upside Down Media Coverage

Let's try a little truth telling about a few more of our nation's many long term structural financial issues which will require solutions, sooner or later, and hopefully sooner.

Since neither the political class nor the media wants to go "there," we will. We're not running for office or pumping up our TV ratings to sell more advertising time. Thus, we'll simply tell the truth as we see it.

In so doing, we'll compare the contrasting financial approaches adopted by California and New Jersey politicians, and we'll also highlight the media coverage of two prominent private sector companies--JP Morgan and Bain Capital.

(1) Last week JP Morgan reported that it had recently lost $2 billion of shareholder money on trading operations. At the same time, the bank's management reported that the company still expects to earn the initially projected profit of ~$18 billion in 2012.

That kind of performance is indicative of solid management. And evidence of a well run company that makes mistakes, acknowledges them publicly, accepts responsibility therefor, learns therefrom, takes remedial action and then quickly moves forward. That's what best-in-class operations do, and that's what JP Morgan management did.

Yet the sound bite hungry media pundits and Dodd-Frank political backers are all over the bank's management for reporting this bank discovered and self disclosed relatively small loss, even though no taxpayer funds are involved and the firm's loss is small or perhaps even no potatoes to the bank's shareholders.

(2) Meanwhile, the media and politicians remain largely silent about proposed remedial actions to address the somewhere between $100 trillion and $200 trillion in unfunded government liabilities for promised retiree pension and health care benefits at the local, state and federal level, Social Security, Medicare and Medicaid included. Future taxpayers will get the bill, of course, thanks to our "kind and caring" government leaders. That would be a great headline story on the evening news, but it ain't gonna happen. Ever wonder why?

(3) In a similar vein to the JP Morgan tempest in a teapot incident, Bain Capital and presidential hopeful Mitt Romney are being assailed by the Obama campaign for closing an unprofitable steel plant resulting in the layoff of several hundred workers in Kansas City years ago. Yet Bain has won a few games along the way, as it has hired tens of thousands of workers elsewhere in the past several years. Some winners and some losers, too. Mostly winners or Bain would be broke by now, just like its former Kansas City steel operation ended up.

But Bain's not broke.  Not even close. The company continues to make profits each year for its shareholders, and it pays its taxes on time, too. Thus, "mean old" private sector company Bain, unlike our "kind and caring" big and getting bigger government, pays taxes to enable the politicians to keep open politically popular but money draining government funded post offices, taxpayer funded losing "investments" in companies like Solyndra and other similar largesse. Isn't spending OPM wonderful?

(4) So in contrast to the Bain Kansas City steel company's loss making operation, the U.S. Postal Service isn't closing. And it won't be anytime soon, if ever. And despite the technological impact of email and such on the postal service's viabililty, the U.S. Postal Service will not soon be laying off tens of thousands of workers either. It's losing the taxpayers about $10 billion annually instead. That's kind and caring government in action. Take that, fellow taxpayers.

Let's move on to the states.

(5) Unless taxpayers come to the rescue, California will have a budget shortfall (projected loss) of $16 billion this year compared to the approximately $9.2 billion loss it guesstimated just this past  January.

Of course, more California taxpayers may choose to  relocate elsewhere if their taxes are continually being raised, but so what, say many of the California politicians?  I guess state officials, including Governor Brown, believe the money will come from U.S. taxpayers through federal funding if all else fails.  We the People need to wise up to all this state to federal to state and back gamesmanship and soon. It's may well be our money they're spending, even if we don't live in California.

The $16 billion California shortfall is several times greater than the $2 billion one JP Morgan just acknowledged. And JP Morgan will remain very profitable compared to to the $16 billion sinkhole in California. JP Morgan can cover its losses itself and if not, its shareholders will.  But not the taxpayers. Unlike California.

Thus, JP Morgan will pay taxes on its profits, and California will endeavor to raise taxes on its taxpayers to cover its losses. Think you'll see as much on the evening news about California as you've seen on JP Morgan? Neither do I.

(6) Here are three related questions: (1) Who has the real forecasting and financial problem for taxpayers, JP Morgan or California? (2) Why aren't we talking about the fiscal solvency of our states instead of spending valuable time assailing JP Morgan and Bain Capital? (3) Aren't election years fun?

Speaking of fun, let's compare California politics to New Jersey politics.

(7) Jerry Brown vs. Chris Christie  is definitely worth reading:

"In his January 2011 inaugural address, California Gov. Jerry Brown declared it a "time to honestly assess our financial condition and make the tough choices." Plainly the choices weren't tough enough: Mr. Brown has just announced that he faces a state budget deficit of $16 billion—nearly twice the $9.2 billion he predicted in January. In Sacramento Monday, he coupled a new round of spending cuts with a call for some hefty new tax hikes.

In his own inaugural address back in January 2010, New Jersey Gov. Chris Christie also spoke of making tough choices for the people of his state. For his first full budget, Mr. Christie faced a deficit of $10.7 billion—one-third of projected revenues. Not only did Mr. Christie close that deficit without raising taxes, he is now plumping for a 10% across-the-board tax cut. . . .
When the Obama administration's Transportation Department called on California to cough up billions for a high-speed bullet train or lose federal dollars, Mr. Brown went along. In sharp contrast, when the feds delivered a similar ultimatum to Mr. Christie over a proposed commuter rail tunnel between New York and New Jersey, he nixed the project, saying his state just couldn't afford it.

On the "millionaire's" tax, Mr. Brown says that California desperately needs to approve one if the state is to recover. The one on California's November ballot kicks in at income of $250,000 and would raise the top rate to 13.3% from 10.3% on incomes above $1 million. Again in sharp contrast, when New Jersey Democrats attempted to embarrass Mr. Christie by sending a millionaire's tax to his desk, he called their bluff and promptly vetoed it.

On public-employee unions, Mr. Brown can talk a good game—at Monday's press conference, he announced a 5% pay cut for state workers, and he has proposed pension reform. Yet for all his pull with unions (the last time he was governor, he gave California's public-sector unions collective-bargaining rights), Gov. Brown, a Democrat, has not been able to accomplish what Republican Gov. Christie has: persuade a Democratic legislature to require government workers to kick in more for their health care and pensions.

Now, no one will confuse New Jersey with free-market Hong Kong. Still, because the challenges facing the Golden and Garden States are so similar, the different paths taken by their respective governors are all the more striking. And these two men are by no means alone.

Our states today are conducting a profound and contentious rethink about the right level of taxes, spending and government. Most obvious is the battle for Wisconsin. There Republican Gov. Scott Walker finds himself pitted against public-sector unions that successfully forced a recall election for June 5 after the legislature adopted the governor's package of labor reforms last spring.
Amid the turmoil—Democratic legislators fled the state to prevent a vote, while union-backed protesters occupied the Capitol—Mr. Walker looked weakened. Now he has taken the lead in polls.

More than that, voters have taken the lesson: A recent Marquette University Law School poll showed only 12% of Wisconsin voters listing "restoring collective bargaining rights for public employees" as their priority.

Indeed, the American Midwest today is home to some of the biggest experiments in government. Republicans now hold both the governorships and the legislatures in Michigan, Indiana and Ohio, and in Wisconsin they control all but the Senate. In each they are pushing for smaller, more accountable government. The outlier is Illinois, where Democratic Gov. Pat Quinn and his Democratic legislature pushed through a tax increase on their heavily indebted state.

Now ask yourself this. Can anyone look at Illinois and say to himself: I have seen the future and it works?

Indiana's Mitch Daniels, a Republican, is probably the only governor who can truly claim to have turned around a failing state. That may change if we get eight years of Mr. Christie in New Jersey. Louisiana's Bobby Jindal, also a Republican, may be another challenger for the title, having just succeeded in pushing through arguably the most far-reaching reform of any state public-school system in America.

Hard economic times bring their own lessons. Though few have been spared the ravages of the last recession and the sluggish recovery, those in states where taxes are light, government lives within its means, and the climate is friendly to investment have learned the value of the arrangement they have. They are not likely to give it up.

Meanwhile, leaders in some struggling states have taken notice. They know the road to fiscal hell is paved with progressive intentions. The question regarding the sensible ones is whether they have the will and wherewithal to impose the reforms they know their states need on the interest groups whose political and economic clout is so closely tied with the public purse.

Mr. Brown's remarks Monday suggest the answer to this question is no."

Summing Up

We the People need to get the media pundits and our public servants (local, state and national) to focus on doing the right things.

Only thereafter will we be able to do those right things right. 

And those right things are largely about our "kind and caring" governments' structural financial issues, including spending, deficits and unfunded debt obligations at the city, state and national levels.

These huge problems won't go away until we make them go away.

Ignoring reality won't make them disappear.

Private sector growth and public sector shrinkage, including absolutely essential entitlement and tax reforms, are the only reality based solutions to our big and growing structural financial fiasco.

We can't forever spend more than we make. Not possible.

Enough said.

Thanks. Bob.