Tuesday, July 17, 2012

Funding Government to Pay for Public Sector Pensions/Entitlements ... It's All About PRIVATE SECTOR PRODUCTIVITY

We have serious issues with respect to underfunded future promised public sector pension benefits and the funding thereof.

We also have serious issues with respect to future economic growth and unemployment.

PRIVATE SECTOR PRODUCTIVITY IS THE LONG TERM ANSWER to our problems with prosperity, profitability, economic growth and unemployment. Hence, it's the answer to funding public sector retirement benefits as well.

{Stated another way, the missing element to prosperity is productivity. We'll defer an in-depth discussion of productivity for now, but while it's a necessary and vital ingredient of private sector growth, it's largely absent from the public sector. It's as simple as 1-2-3. (1) Productivity creates prosperity. (2) Productivity results from specialization. (3) Specialization is made possible because of big and free trading markets.}

The Incredible Bain Jobs Machine is well worth reading. It says this in part about the importance of productivity to a prosperous economy:

"Did Mitt Romney and Bain Capital help office-supply retailer Staples create 88,000 jobs? 43,000? 252? Actually, Staples probably destroyed 100,000 jobs while creating millions of new ones.

Since 1986, Staples has opened 2,000 stores, eliminating the jobs of distributors and brokers who charged nasty markups for paper and office supplies. But it enabled hundreds of thousands of small (and not so small) businesses to stock themselves cheaply and conveniently and expand their operations.

It's the same story elsewhere. Apple employs just 47,000 people, and Google under 25,000. Like Staples, they have destroyed many old jobs, like making paper maps and pink "While You Were Out" notepads. But by lowering the cost of doing business they've enabled innumerable entrepreneurs to start new businesses and employ hundreds of thousands, even millions, of workers world-wide—all while capital gets redeployed more effectively.

This process happens during every business cycle and always, always creates jobs. Yet is ignored by policy mavens.

It is now four years after the wheels fell off our financial system. The government has tried every gimmick to revive the economy: fiscal stimulus, monetary easing, loan write-downs, foreclosure modifications—all duds. It seems like no one remembers how an economy creates jobs anymore. The right answer, in fact the only answer, for jobs and better living standards, is productivity.

Economists define productivity as output per worker hour. But ramping up the output of trolleys or 8-track tapes won't increase living standards. It is not just technical efficiency that matters, it is also effectiveness—that is, producing what the economy really needs and consumers will pay for.

And so, in a broader sense, productivity is really about doing the right things the right way. Using modern construction equipment, we could build a pyramid on the National Mall in Washington with amazing efficiency, but it would not be effective.

So how does productivity result in more employment? . . . . new technology comes along that allows something never before possible. Cash from an ATM, stock trading from an airplane's aisle seat, ads next to Google search results.

The inventor or entrepreneur who uses the invention benefits from sales and wealth and hires people to produce the good or service. We don't hear about this. Instead we hear about the layoffs of bank tellers, stockbrokers and media salesmen. So productivity becomes the boogeyman for job losses. And many economic cranks would prefer that we just hire back the tellers and toll collectors.

This is a big mistake because new, cheaper technology becomes a platform for others to create or expand businesses that never before made economic sense. Adobe software killed typesetters, but allowed millions cheaply to get into the publishing business. Millions of individuals and micro-size businesses now reach a national, not just local, retail market thanks to eBay. Amazon allows thousands upon thousands of new vendors to thrive and hire. . . . (another way) productivity results in more employment is by attracting capital to satisfy new consumer demands. . . .

The mechanism to decide the most effective use for this capital is profits. The stock market bundles profits and is the divining rod of productivity, allocating capital in cycle after cycle toward the economy's most productive companies and best-compensated jobs. And it does so better than any elite economist or politician picking pork-barrel projects and relabeling them as "investments."

The productive use of capital is not an automatic process, of course. It is all about constant experimentation. And it is never permanent: Railroads were once tremendously productive, so were steamships and even Kodachrome. It takes work, year in and year out—update, test, tweak, kill off. Staples is under fire from Amazon and other productive online retailers. Its stock has halved since its 2010 peak and is almost at a 10-year low. So be it.

With all the iPads and Facebook and cloud-computing growth, why is unemployment still 8.2% and job creation stalled? My theory is that productivity is always happening but swims upstream against those that fight it. Unions, regulations and a bizarre tax code that locks in the status quo. . . .

How can government do the right thing to help productivity and the employment it fosters? Get out of the way."

My Take on Public Sector Pensions and Other Government Spending

Productivity is essential to a prosperous economy and an ever higher standard of living for its citizens. So let's switch gears and talk about public sector pensions and how they're possible.

One ongoing mystery is the failure of many of our fellow Americans to make the connection between a healthy private sector and the ability to fund promised public sector retirement benefits or any other government spending initiatives.

Public sector workers want the monthly amount of their retirement benefits "guaranteed" and therefore prefer the promise of "safe" pensions over 401(k) plans. We also want other "guaranteed" government provided goodies such as Medicare, Social Security, better schools, lower interest rates on student loans, increased nursing home subsidies and countless other "freebies."

Now let's take a crack at explaining in plain common sense English why this is nonsensical.

In simple terms, it's all about private sector profits---the source of all government revenues, whether directly or indirectly. That's what funds all retirement benefits, private and public sector alike, and pensions and 401(k)s as well.  Until we come to a broad understanding of that simple truism, we'll wander around aimlessly arguing about things that really don't matter one single bit.

Risk and reward and America's standard of living all come together in the private sector. Period.

Pensions are paid because companies and individuals are prosperous. If we promise pensions but either don't or can't set aside enough money to pay them when due, they're not safe at all. They're simply unfulfilled, and perhaps unfulfillable, empty promises.

Future not pretty for pensions says this about Illinois' situation as well as the U.S. generally:

"Last week President Obama signed into law a measure that gives U.S. companies something of a pass on having to sock away money for employee pensions. Hesitant though one is to predict the future, if you want to see what this move portends, it may not be so far-fetched to behold present-day Illinois state government, which has the notorious distinction of having the largest unfunded pension liability in America and a system on the verge of collapse.
These pension payments improve no company’s bottom line. Human nature being what it is, if punting is an option, well, that’s a formidable temptation. Just ask legislature after legislature and governor after governor in this state. Illinois’ nightmare didn’t happen overnight. Many were of the opinion over the last three decades plus in Springfield that the day of reckoning would never arrive ....
Let’s just say that this law is unlikely to compel any company to keep up with those payments. As it is, the Associated Press reports that four in every five pension plans insured by Uncle Sam’s Pension Benefit Guaranty Corp. are underfunded, though for the most part they’re in far better shape than Illinois government is.
No one discounts the financial pressures that the recession placed on employers. If we’re on the subject of human nature, well, over the years some folks got greedy where fighting for ever-higher retirement benefits was concerned (though for the most part they could not hold a candle to the public sector). Yesterday’s obligations are now coming at the expense of today’s services and job security, and in an environment where unemployment already is uncomfortably high. Even those who are not so keen on this idea dared not criticize, for fear struggling companies would eliminate or slash pension benefits for workers instead. It would seem unwise to count on that money being there for your ... ahem ...

“golden” years.
There’s just no balance in American life anymore. Leverage seems almost inevitably to be abused by those who have it, and the pendulum never stops in the middle. Is there any dispute over who has it now?
Americans should begin preparing for the day when pensions as we know them no longer exist. The momentum in that direction already has a full head of steam.

The AP again reports that fewer than 15 percent of private sector workers participate in defined benefit plans, down from 38 percent in 1979. Many companies have moved to defined contribution, or 401(k) plans where employees take the investment risk. Some employers don’t even provide 401(k) matches.
As a result, national leaders need to begin thinking about the social implications of people not leaving jobs, at least voluntarily, as they get older because they can’t afford to. As it is there’s not enough room for young people, even those with college diplomas, coming into the nation’s work force, with the economy simply not expanding fast enough to accommodate them. Everything is cyclical, and that situation could get better. It could also get much worse. As always, beware the Law of Unintended Consequences."

Connecting the Dots

Tax Increases are the result of increased government spending. So when government promises benefits for which it doesn't raise taxes at the time, future taxpayers will see tax increases. It's really that simple.

And when taxes increase, people have less money to spend or save as they so choose. Output is always and only 100%, so when government takes more from its citizens to spend on government, including trasfer payments, the percentage of output under the direction and control of the citizenry is reduced. And that's true even if taxes aren't raised at the time of the spending.

So what does this private sector free market based productivity issue have to do with public sector pension funding, including the assumptions about investments in pension funds? Just about everything.

In simple terms, government spending is a tax on private sector output. Future government spending is a deferred tax on future output. That includes public sector pensions, as well as Social Security, Medicare and Medicaid payments, too. The money to fund government of necessity comes from the private sector's profitability, including payroll and supplier purchases, and the private sector generates profits through productivity increases.

There's lots of chatter about tax increases and government stimulus this campaign season. All we really have to focus on is the deficit. As long as we incur $1 trillion deficits, we'll be adding more than $1 trillion to the tax bill down the road. And as long as we make promises about future payments and don't fund those promises at the outset, we'll be adding future taxes on top of the already in excess of $1 trillion increment in the "official" deficit number.

Whether we spend money we don't have or promise to spend money down the road and don't fund it at the time, it's all the same. And whether we slow the economy or not, the taxes can't cover what the overall economy's output won't support.

FINALLY .......

(1) Economic output comes from the private sector. That's 100% true.

(2) Government spending and government taxation subtracts from that 100%.

(3) So do future government commitments such as promised pension benefits subtract from that 100%.

(4) So do deficits which have to be paid for someday---by someone--- subtract from the 100%.

(5) And that "someone" will be future generations of Americans.

Thanks. Bob.

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