Tag Archives: Greece

Grants to Puerto Rico haven’t helped much

Greece’s monetary and fiscal issues have overshadowed a similar situation right in America’s own back yard: Puerto Rico. Puerto Rico’s governor recently called the commonwealth’s $72 billion in debt “unpayable” and this has made Puerto Rico’s bondholders more nervous than they already were. Puerto Rico’s bonds were previously downgraded to junk by the credit rating agencies and there is a lot of uncertainty surrounding Puerto Rico’s ability to honor its obligations to both bond holders and its own workers, as the commonwealth’s pension system is drastically underfunded.   A major default would likely impact residents of the mainland U.S., since according to Morningstar most of the debt is owned by U.S. mutual funds, hedge funds, and mainland Americans.

So how did Puerto Rico get into this situation? Like many other places, including Greece and several U.S. cities, the government of Puerto Rico routinely spent more than it collected in revenue and then borrowed to fill the gap as shown in the graph below from Puerto Rico’s Office of Management and Budget. Over a recent 13 year period (2000 – 2012) Puerto Rico ran a deficit each year and accrued $23 billion in debt.

Puerto rico govt spending

Puerto Rico has a lot in common with many struggling cities in the U.S. that followed a similar fiscal path, such as a high unemployment rate of 12.4%, a shrinking labor force, stagnant or declining median household income, population flight, and falling house prices. Only 46.1% of the population 16 and over was in the labor force in 2012 (compared to an average of nearly 64% in the US in 2012) and the population declined by 4.8% from 2010 to 2014. It is difficult to raise enough revenue to fund basic government services when less than half the population is employed and the most able-bodied workers are leaving the country.

Like other U.S. cities and states, Puerto Rico receives intergovernmental grants from the federal government. As I have explained before, these grants reduce the incentives for a local government to get its fiscal house in order and misallocate resources from relatively responsible, growing areas to less responsible, shrinking areas. As an example, since 1975 Puerto Rico has received nearly $2.7 billion in Community Development Block Grants (CDBG). San Juan, the capital of Puerto Rico, has received over $900 million. The graph below shows the total amount of CDBGs awarded to the major cities of Puerto Rico from 1975 – 2014.

Total CDBGs Puerto Rico

As shown in the graph San Juan has received the bulk of the grant dollars. The graph below shows the amount by year for various years between 1980 and 2014 for San Juan and Puerto Rico as a whole plotted on the left vertical axis (bar graphs). On the right vertical axis is the amount of CDBG dollars per capita (line graphs). San Juan is in orange and Puerto Rico is in blue.

CDBGs per capita, yr Puerto Rico

San Juan has consistently received more dollars per capita than the other areas of Puerto Rico. Both total dollars and dollars per capita have been declining since 1980, which is when the CDBG program was near its peak funding level. As part of the 2009 Recovery Act, San Juan received an additional $2.8 million dollars and Puerto Rico as a country received another $5.9 million on top of the $32 million already provided by the program (not shown on the graph).

It’s hard to look at all of this redistribution and not consider whether it did any good. After all, $2.7 billion later Puerto Rico’s economy is struggling and their fiscal situation looks grim. Grant dollars from programs like the CDBG program consistently fail to make a lasting impact on the recipient’s economy. There are structural problems holding Puerto Rico’s economy back, such as the Jones Act, which increases the costs of goods on the island by restricting intra-U.S.-shipping to U.S. ships, and the enforcement of the U.S. minimum wage, which is a significant cost to employers in a place where the median wage is much lower than on the mainland. Intergovernmental grants and transfers do nothing to solve these underlying structural problems. But despite this reality, millions of dollars are spent every year with no lasting benefit.

Taxi protests around the world

Yesterday, in Athens, taxi workers went on strike to protest the country’s recent deregulation of their industry. To comply with IMF recommendations, Greece has increased the number of permits available for taxi drivers.

This policy is not an austerity measure per se, but rather a liberalization of the taxi industry, not requiring a change in government spending or taxation. As taxi drivers protest, other Greeks should be celebrating this measure — it will mean more cabs are available at lower prices.

Here in Washington, DC, taxi drivers are also up in arms. Two drivers associations are suing Mayor Vincent Gray and the DC Taxi Commission because of the 2008 switch from fares based on zones to meters. Some drivers say their pay has dropped by 30 percent as a result. They are correct that the meter rate is determined arbitrarily, but most likely the current rate is higher than the market rate would be. As in Athens, the  number of cabs allowed to operate in DC is artificially capped. Jim Epstein writes at Hit & Run:

Since 2010, the D.C. Taxi Commission hasn’t been issuing licenses to new cabbies. There’s no official waiting list, but a representative from the commission told me she receives calls “all day, every day” from potential applicants. In other words, want-to-be cab drivers are clamoring to get into the industry at the going rate.

In both cities politicians have earned favor with cab drivers by restricting their number to keep rates high. But liberalizing taxi policies will benefit all city residents — especially potential new cab drivers — except those who have historically been sheltered from competition.

Austerity measures lead to unrest in Greece

In anticipation of €26 billion ($37.4 billion) in spending cuts and tax increases to reduce Greece’s deficit over the next five years, unions called for strikes. Affected services included public transportation, schools, hospitals, and media. In addition student demonstrations in Athens turned violent as protesters hurled bottles and firecrackers at police.

The austerity measures are in return for last year’s €110 billion EU/IMF debt bailout. A good portion of the proposed cuts will be to public sector salaries, defense and health care spending.

Was the bailout enough to keep Greece afloat? According to the Wall Street Journal’s scorecard they could have used about €151 billion, which means they should borrow about €40 billion more to plug last year’s hole. The tab has grown in the interim and markets are demanding 15 percent to lend to Greece. S&P rates Greek bonds “in deep junk territory.”

Charles Forelle at Brussels Blog offers four possible solutions: 1) Modify the current measures by extending the time horizon to pay back the bailout, “plow ahead with privatization”, and restructure the terms of the bailout loans 2) Give Greece more bailout money, 3) Delay paying creditors in exchange for new bonds that are paid off later, and 4) Tell lenders to take a “haircut” today.

Each of these comes with its own set of  repercussions: political, economic and fiscal.  The choice will depend on which fallout Greece’s government want to face. Markets have already reacted to yesterday’s strikes in Athens (and S&P’s warning to Portugal’s banks). A round of  euro selling was touched off by investors concerned that Greece is likely to default again.

CAP Act: Baby Steps Towards Fiscal Responsibility – Tentative and Toothless

This afternoon Senators Bob Corker (R-Tenn.) and Claire McCaskill (D-Mo) will introduce legislation to “force Congress to dramatically cut spending over 10 years”. From the Senator’s website:

At a time when many families have been forced to tighten their pocketbooks, Congress must also learn to do the same. This bill isn’t just about cutting back this year or next year; it’s about instilling permanent discipline to keep spending at a responsible level,” McCaskill said.

The Commitment to American Prosperity Act, the “CAP Act,” would:

(1) Put in place a 10-year glide path to cap all spending – discretionary and mandatory – to a declining percentage of the country’s gross domestic product, eventually bringing spending down from the current level, 24.7 percent of GDP, to the 40-year historical level of 20.6 percent, and

(2) If Congress fails to meet the annual cap, authorize the Office of Management and Budget to make evenly distributed, simultaneous cuts throughout the federal budget to bring spending down to the pre-determined level. Only a two-thirds vote in both houses of Congress could override the binding cap …

I’m very pessimistic about this, for many reasons. Procedurally, the Act only institutes a new budgetary point of order, which can be overridden with super-majority votes in both houses. That is, the Act doesn’t compel anyone to act fiscally responsibly unless they’re inclined to do so. If we had such restrained legislators, a cap wouldn’t be necessary to begin with. Currently the House can override budgetary points of order with a simple majority vote, so this is an improvement, but not one I expect to have serious results.

The technical aspects of the Cap Act are similarly merit-less. First, the baselines are all skewed; why should we accept 20.6% of GDP spending as the new ‘normal’? Historically, Federal receipts average right around 18% of GDP, so locking in 20% would still put us on a trajectory towards systemic deficits. Given that we’re starting from a baseline where Federal debt rapidly approaches 100% of GDP, this isn’t a responsible plan to reign in spending. Similarly, the “lookback GDP” guidelines will count 2009, 2010, and 2011 spending, which has already exploded far beyond what is fiscally sustainable, or historically precedented. The “glide path” isn’t a serious measure of fiscal sustainability; it places us, in just five years, at the same debt-to-gdp ratio that trigged an economic meltdown in Greece last year. So the bill doesn’t set reasonable baselines, it doesn’t do anything to address the deficit, and if Matt’s work with similar TELs in the states holds, high-income economies like ours tend to use spending caps as excuses to grow spending beyond the levels they otherwise would.

There are some technical merits, but they’re merely cosmetic. Bringing Social Security back ‘on-budget’ is a good start, but this bill still leaves massive loopholes for ’emergency spending’, which the New York Times called a new way of political life six years ago. That trend hasn’t changed one iota since; if anything it’s gotten worse. A unified Democratic Congress couldn’t pass any budget last year. It’s one of the few constitutional powers actually entrusted to the Congress, and they failed. Which leads to my separation-of-powers concerns with this legislation. It’s unclear from a first reading, but where is the authority for Congress to entrust sequestration power with OMB, an executive branch agency?

Finally, there are massive political concerns with the legislation. It seems poised as a cover for fiscally irresponsible co-sponsors like McCaskill and John McCain (who both supported TARP and the GM Bailout; McCaskill also voted for Obamacare while McCain has his own big government medical plan to push) to claim the mantle of fiscal responsibility. We’ve already seen that movie, and it was terrible the first time.

In sum, I don’t see any reason the bill would restrain spending to a responsible or sustainable level. The bill has some good ideas, but they’re wandering in a wilderness of bad ones. The impulse is good, the execution is terrible.

Note: Sorry a rough draft went up on the RSS feed earlier, WordPress is a cruel mistress sometimes.

Will We Learn From Greece?

A few weeks ago Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, warned, “Greece is a lesson for us…. We shouldn’t be so arrogant to think that that couldn’t happen to us.” Mr. Hoenig was talking about our “very, very significant deficit” at the federal level.

Mr. Hoenig is right to worry about the Federal Government’s financial footing, but as a growing number of commentators have argued, the comparison between Greece and the U.S. states may be more apt than that between Greece and the U.S. Federal Government.

Like Greece, nearly every state in the union faces a major budget gap. The National Governors Association and the National Association of State Budget Officers estimate that these gaps total $127.4 billion for the remainder of 2010, 2011 and 2012. Like Greece, these gaps manifested themselves during the recession but their underlying cause is unsustainable levels of government spending. Like Greece, the states have made unrealistic promises to their public employees in the form of unfunded pensions and health benefits. Like Greece, these promises loom as the single largest threat to fiscal solvency in the coming years. And like Greece, the states have a limited number of ways to deal with the situation: they may not declare bankruptcy and they may not inflate their way out of the mess.

In both situations, however, the governments can appeal to the next level of government for aid. In the US, the states received some $135 billion from the Federal Government in the stimulus package passed last spring. And in Europe, the EU has promised to bail out Greece to the tune of $146 billion. These actions send the signal that the US and the EU apparently think that some governments are too big to fail. They also establish a strong incentive for US state and EU member nations to live beyond their means.

The Economist recently noted another similarity between Greece and the US states: as in Greece, many leaders at the state government level are reluctant to make the tough choices necessary to deal with the problem.

This last comparison, however, may prove false. That is because the Greeks may finally be on the verge of addressing their problem. This week, the ruling Socialist Party, PASOK, unveiled their reform proposals and on Friday, the government agreed to the bill. According to Reuters, “The reform cuts benefits, curbs widespread early retirement, increases the number of contribution years from 35-37 to 40 and raises women’s retirement age from 60 to match men on 65.”

My colleague Eileen Norcross has just written a paper with AEI’s Andrew Biggs which reveals the scope of the pension problem in the state of New Jersey. They found that the pension system there is underfunded by as much as $170 billion. Note that this one state’s pension problem dwarfs the $127.4 billion sum total of all state budget gaps over the next two and a half years.

Worse, these unfunded liabilities will come due soon. A series of studies by Joshua Rauh (Northwestern) and Robert Novy-Marx (University of Chicago) find that seven states will run out of pension money by 2020. And when they do, the costs will be enormous. When Illinois’s pension system goes broke in 2018, for example, the state’s pensions costs will be nearly half the size of the entire 2008 state budget.

If Mr. Hoenig is right and Greece is a lesson, let’s hope that policy makers in the US learn it before the pension crisis hits.

Do Keyensians Understand Politicians?

Alan Blinder has a thought-provoking article on Greece in the Wall Street Journal (with more Greek metaphors than Jason had Argonauts). His central claim is that governments should take their cues from St. Augustine, who asked God to make him chaste, but not yet. Because of the recession, the argument goes, we ought to run deficits as the “oracle” Keynes counseled.

But once things turn around, we should concentrate on balancing the books. The general strategy is: Run deficits in times of famine and surpluses in times of feast. This type of argument is quite popular now and was repeated ad infinitum at a gathering of left-of-center thinkers I attended last summer. It has also become a common argument for those who advocate tax increases rather than spending cuts to deal with state budget crunches.

Even if we conceded the Keynesian point that deficit spending is what the doctor ordered, and there are many who are not prepared to do so, what shall we make of the Keynesians’ view of politics? From my perspective, politicians simply don’t behave as the Keynesian model predicts. In the 74 years since Keynes wrote his General Theory, the U.S. has been in a recession just 17 percent of the time. Still, during those years, the Federal Government ran deficits 84 percent of the time. As Buchanan and Wagner argued several decades ago in Democracy in Deficit:

Keynesian economics has turned the politicians loose; it has destroyed the effective constraint on politicians’ ordinary appetites. Armed with the Keynesian message, politicians can spend and spend without the apparent necessity to tax.

Thankfully, at the state level, the politicians are not turned fully loose. This is because every state but Vermont has a balanced budget requirement. If, however, the new norm is for states to turn to the Federal Government for bailouts during a downturn, these balanced budget requirements will become increasinly meaningless. It is my guess that, like their federal counterparts, state politicians will fail to behave as the Keynesian model predicts.

A Greek Tragedy in U.S. Municipal Debt

In recent days, as the debt crisis in Greece and throughout the Euro zone has been splashed across world headlines, smoldering problems in public finance are coming to the fore of public attention.  In Europe and the United States, federal, city, and state governments have habitually bowed to the requests of their employees and public labor unions, offering salaries and benefit packages that they lack the tax dollars to support.

In the public sector environment of generous pay and benefits, some New York state policymakers are pursuing the difficult option of freezing state and local employees’ pay at current levels.

The Buffalo News reports:

In emergency legislation to keep the government running without a 2010 final budget in place, Paterson has not paid the 4 percent raises for state workers in the executive branch that were to have kicked in April 1. The extra pay is being delayed.

The governor also is threatening to start a once-a-week furlough program next week for about 100,000 state workers. The furlough plan would be put, under Paterson’s current thinking, in next week’s “extender” legislation to provide emergency funding for things like state worker paychecks, some road construction and unemployment and Medicaid payments. The bill requires a straight up-or-down vote — meaning if the Legislature rejected the bill because of the furlough, the government would run out of money and have to shut down.

The Empire Center, a conservative New York think tank, determined that canceling state workers’ raises for this year, as well as limiting municipal worker raises, would be legal if the state Legislature declares a fiscal emergency.

This dramatic action would help New York close its budget gap for the year, but larger municipal finance challenges, such as unfunded pension obligations, will continue to plague workers until state policymakers are willing to stand up to union demands that states cannot afford to meet.

Is California’s Debt a Greek Tragedy?

James Surowiekci writing at The New Yorker considers whether there is good reason to think California’s fiscal plight puts it on course for a Greek-style collapse. Greece is not the only EU nation in trouble. Add in Portugal, Ireland, Italy and Spain to the massive debt club (a.k.a the PIIGS), with debt levels at 60% of GDP in 2008-2009. By contrast the most fiscally troubled states of California, New York, New Jersey and Illinois had debt-to-GDP ratios of 15% during the same period.

Surowiecki suggests this may be reason to breathe a little easier. The biggest debtor nations in the EU owe three times as much relative to GDP as do their high-debt counterparts in the US. Plus, the states can count on a federal bailout.

Yet, neither of these thoughts are entirely comforting.

First, states have underestimated their pension obligations by threefold. Official reports estimate New Jersey’s unfunded pension obligations at $45 billion. Using more reasonable discount rates to estimate New Jersey’s pension obligation reveals an unfunded liability of $137.9 billion, or 261% of total state debt. That’s before adding in Other Post-Retirement Benefits (OPEB) and health care for public sector workers.

Secondly, a half century of  intergovernmental infusions from D.C. in the form of transfers,Medicaid, and stabilization money hasn’t kept the states afloat. Quite the contrary the erosion of fiscal federalism has meant a loss of states’ control over spending and policy.

The FY 2009 stimulus has been as effective as a shot of morphine. States have now spent their education money to expand spending and avoid cuts. Fast forward to FY 2010. Revenues haven’t recovered. Pension obligations loom larger and those “saved and created” jobs are now in search of funds.

Factor in the growth in Social Security, Medicare, health care spending, and annual deficits projected to average $1 trillion over the next  decade and America 2030 looks alot worse than Greece 2010.

Can the Greek Crisis Happen Here?

Greek-ProtestChris Papagianis of E21 asks the question: Can the Greek crisis happen in the United States? Papagianis suggests that the problem lies not on the federal level, but at the state level:

Obviously, states – like the Eurozone members – don’t have their own individual currencies to devalue during a budget crisis. It’s also not simply whether California, Nevada, or Arizona’s deficit and gross debt compare with those of Greece, but how financial markets would deal with a state default and to what extent the political culture in these state capitols can be counted on to avert such an outcome.


However the Greek situation is resolved, it is a reminder that financial panics are not just about specific debt-to-income ratios, but investor sentiment and the financial system’s ability to absorb a default. As more investors become aware of their exposure to the unthinkable, they take actions to hedge that risk. This leads to greater awareness of the risks, an erosion of confidence among counterparties, and the potential for the kind of “run on the bank” that ultimately did in Bear Stearns and Lehman Brothers.

Whole thing here. Niall Ferguson wrote about this prospect earlier this week in the Financial Times. Here’s an easy backgrounder on the Greek crisis.