Tuesday, July 31, 2012

Government Craziness in Illinois and France ... Political Fraud, Too?

Illinois and France have several things in common, it seems. And those things, other than out-of-control government spending and sick economies, include government leaders that don't have a clue about what's happening. Either that or they simply don't want We the People to know what they know but are unwilling or afraid to share with us.

My guess is that they really don't have a clue about the impact their actions are having and will continue to have on their economies and the future financial well being of their citizens.

First up is Illinois. The Governor has called for a special congressional session to deal with and hopefully resolve how to fund the $83 billion unfunded public sector retirement liability of the state. In an obvious sleight of hand maneuver, Congressional officials are complaining about the cost of such a session. I guess they don't want to waste the taxpayers' money. What a crock!

Maybe they're lying about why they don't want a special session this summer.

Let's do the math. If the special session were to cost $8.3 million (my guess is the cost would be much less than that), and if the unfunded problem they would purport to solve is $83 billion (which it is), that means the special session cost relative to the total problem to be solved is infinitesimal, miniscule or whatever other word describes nothingness. $8.3 million x 10 x 10 x 10 x10 = $83 billion.

So why are the legislators balking? Could it be that they have no interest in performing their elected duties? Could it be that they don't want to anger taxpayers -- er-- voters prior to this fall's elections?

That's my guess.

Now let's go to France.

France's President Takes on Peugeot tells the story of the crass and overtly political comments by the French President and his ally in attacking the auto company for trying to run its operations responsibly in light of current and foreseeable economic conditions.

As with Illinois, the French government knows no bounds as to how much OPM it can spend or commit to spend. The problem is it's running out of places to find the money to do so. Again, similar to Illinois and its $83 billion retirement funding obligation, there's no money left in the French till. And lenders certainly aren't lining up to lend them more.

So the President yells at Peugeot's leaders and calls them names. Nice way to handle things, I guess. At least it's the French way.

Here's the story:

"Earlier this month PSA Peugeot Citroën announced it would shutter an assembly line . . . north of Paris. Citing its high labor costs and sharp international competition, the company warned that some 8,000 jobs in France would have to go. Both President François Hollande and Minister of Industrial Renewal Arnaud Montebourg declared the decision to be "unacceptable."

"The State won't let it happen," Mr. Hollande told a French television interviewer after Peugeot's announcement.

The main tactic so far has been to publicly rebuke Peugeot's management as "cheaters," with Hollande officials now accusing the company of concealing or even lying about its labor costs....

Peugeot CEO Philippe Varin has now promised that "there will be no forced layoffs and that we will do what is necessary to reindustrialize the ... site." Workers who voluntarily retire will receive generous buyout packages. Naturally, that's still not good enough for the unions, which have organized strikes to show their contempt....

Mr. Montebourg either doesn't know or doesn't care that Peugeot also hired more than 2,000 people in France last year (10,000 globally) . . . . In the first half of 2011, the company booked a profit of €806 million; in the first half of this year, it lost €819 million. Different times, different strategies—there is nothing abnormal here.

Peugeot's French cuts are part of a broader contraction for the industry across Western Europe, where all the macroeconomic indicators are pointing against manufacturing.

French car-making is no exception. The sector is plagued with some of the highest labor costs in the world—about 50% of which wind up in government coffers, not workers' pockets.

Car sales have nose-dived since the Sarkozy government cut down on the cash-for-clunkers and other "stimulus" goodies it doled after the 2008 crisis. In the first half of this year, new Peugeot sales dropped 21.6% year-on-year.

To fix all this, Messrs. Montebourg and Hollande have come up with the Socialist trifecta of bullying, subsidies and protectionism. That may be the easiest political gamble. But France's failure to adapt its economy to the modern world is real, and the consequences are now painfully obvious. Fixing the problem will take more than "green" spending sprees and blaming Asia.

The government so far has refused to consider basic economic principles and the cost of statism on industry. Until it does, it can't begin to helpfully address France's crisis of competitiveness. The Hollande administration, try as it might, simply cannot replace all private employers in France with senior civil servants, all willing consumers with taxpayer subsidies, and all private investment with state-run banks. . . .

Rather than meddling more in private industry, President Hollande and his administration might do better to . . . consider their own job descriptions. Their role is to provide a fiscal and legal background for companies to thrive—and in these areas, France isn't lacking in work to be done, starting with the tax and labor codes.

French voters elected a new government in May, not new CEOs for their auto companies. If those are the jobs that Messrs. Hollande and Montebourg want, the people to talk to would be auto executives and shareholders—once they're done insulting them, that is."

My Take

Governments can't cope with having no money to spend, but any money they do spend has to first come from the private sector or borrowing.

Auto companies worldwide are struggling; in France, in the U.S. and elsewhere. Many other industries are suffering through this ongoing debt induced economic debacle as well.

Growing government by borrowing uncontrollably has happened. Meanwhile, paying for that growth in government hasn't happened. Debts and commitments for future spending are now enormous.

 So now the fat lady is singing, or at least preparing to sing, but there's no money to pay her.

Any further delay to face the facts by refusing to convene in order to address the fundamental issues of no money in Illinois and recognizing that there's not enough business in France to keep automotive facilities running full tilt won't solve anything. It will only result in "death by delay."

The governments of Illinois and France, like the emperor, have no clothes. At least none of their own.

There's a big fact based economics lesson being taught these days, but politicians don't want to attend the class.

They'll forced to show up someday soon, and it's not going to be a pretty sight when they do.

Thanks. Bob.

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