A View into the Future: Post Script to June-November 2012

Using the previous 4 years experience as guide we may expect:

The national economy will continue to languish with low growth and high unemployment. I do not believe we will enter another recession during the next four years but we will be becalmed. Some states – New Jersey under Christie/Sweeney among them – will continue to apply the brakes on the nations’s economic growth. Neither Obama nor Romney, and certainly not the U.S. Congress, will address the factors in the U.S. tax code which encourage capital export.  Accordingly, regardless of who wins, Wall Street will remain disconnected from Main Street.

Needless to say, the national debt will continue to grow with either one.

Even if president Obama wins in November 2012, we already know his capability for abdicating postulates made while campaigning. We should expect that there will be negative effects on Social Security and Medicare, two social programs which candidate Romney has on his hit list, even if Obama is victorious. Obama will adopt some of Romney’s proposals. Such effects would most likely be cuts in both programs, perhaps somewhat smaller under Obama than those which would be implemented by a hypothetical President Romney.

We should also expect a re-elected President Obama to slightly reduce other social programs that he is now, during the campaign, defending with vigor. Either Obama or Romney will sweeten draconian cuts by phasing them onto the younger generations.

I would also expect that a re-elected President Obama would abandon at least some of his tax positions in support of the lower and middle classes, all for the sake of compromise. Similarly, there will be retreats in issues such as the environment and Wall Street regulatory statutes.

As a rule of thumb, President Obama will cede ground wherever big money is involved. He will hold out better in social issues such as birth control and same sex marriage.

President Romney would be very negative on the social issues mentioned above and similarly or even more accommodating toward big money.

Income gap would grow more under Romney than under Obama although the difference between the two will not be large.

We should expect that either President Obama or Romney will continue making inroads into our civil liberties using terrorism as excuse, even after Al Qaeda is wiped out.

A President Romney would be more likely to get the United States involved in another major foreign war.

With either president, New Jersey should expect very little help from Washington and that is why our own gubernatorial election of 2013 is so important: We will be basically on our own. We can hardly afford irresponsibility, demagoguery, and incompetence any longer.

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The Shrinking New Jersey

Real gross domestic product (GDP) increased in 43 states and the District of Columbia in 2011, according to new statistics released yesterday by the U.S. Bureau of Economic Analysis (BEA). New Jersey moved in the opposite direction.

New Jersey was among the few states which actually experienced a GDP contraction: -0.5% and that explains why government revenue is also down. New Jersey’s unemployment rate was 9.1 percent in April, a full percentage point above the national rate.

New Jersey is now the 47th state out of 50, measuring from best to worst, in economic performance. Only Wyoming, Mississippi, and Alabama are worse off. We are the brakes on the national economic recovery.

http://www.bea.gov/newsreleases/regional/gdp_state/2012/pdf/gsp0612.pdf

Governor Christie will go on pushing his fiscally unsustainable tax cut which will have no economic effect because a single such measure does not stimulate aggregate demand – the missing link in our economy.

But blaming the policies of Governor Christie alone for the economic decline is a gross simplification of the facts. Unfortunately, almost everyone, including the media, prefer simplifications. Candidate A vs Candidate B; or Raise Taxes vs Cut Taxes. That is why single issues become so disproportionally influential in elections: Abortion, Guns, Gay Marriage, etc .

The reality is that in New Jersey, regardless of what candidate we elect, the roots of the problems are in the political system. And attacking the system is not safe. I have already been harassed for what I am doing and this is just the beginning. We are not even in our election year yet.

A candidate fails New Jersey the moment he/she shuns to even attempt to revamp that system. I mean really doing change; not just propaganda and token tinkering.

What is the political system? The two dominant political bureaucracies, Home Rule, political patronage, political money, the tax code, the laws that skew the political contest in favor of the two parasitic parties, and more.

But it is much easier to focus on one face than on a myriad of political and economic reforms.

As I have said many times: It is not so much what Governor Christie has done. It is what he has not done. His sin is for the most part in omission.

If elected governor, my administration will be made up of technocrats. The mission will be to put New Jersey on a path of economic growth and social balance. Nothing will be untouchable.

In a presidential election year, a gubernatorial candidate for the year after is a lone wolf. However if we look at the two presidential candidates, Obama and Romney, there are differences in positions but when we come to the actual actions, they do not look as distinct. Obama appears as the lesser of two evils. Telling of our political drought is the fact that many people vote for one candidate just to keep the other one out of office.

New Jersey shall have a more diverse menu in November 2013.

Banning Fracking: New Jersey Should Follow Vermont

At a time when the economy of New Jersey seems to be heading south, it is very important that we do not succumb to the temptation of dismantling environmental protections in a futile attempt to reverse the tide of economic bad news. Trampling on our own natural habitat is not good economic policy.

While the conservative (?) government of Canada is revising (see diluting) all environmental laws to favor the oil and gas industries in Canada, the State of Vermont has given us an example of what is essentially the right course of action: Sustainable growth.

Vermont first state to ban fracking – CNN.com.

I can not imagine a government that calls itself conservative (Ottawa) failing to conserve the pristine quality of the Canadian land. I presume conservative means different things to different people.

Hydraulic fracturing – I have written about this before – is the threat of our time against underground water sources. Water – potable water that is – will be among the priciest commodities in one or two decades. We already buy huge amounts of bottled water because we do not trust our tap water.

If elected governor of New Jersey in 2013, I will not rest until hydraulic fracturing and offshore drilling are banned from New Jersey.

Europe Must Burn the Bridges and Create the Eurobond. US, UK Must Stop Myopic Opposition to Financial Transaction Tax

There is popular support for further European integration, as the Irish vote shows. Furthermore, that may be the only opportunity for the survival of the common currency in the form we know it today. Nonetheless the ECB must be given the authority, if it does not have it already, to devalue the euro and make the economies of the common currency more competitive.

Above all, they all must act fast. There must be a calculated decisiveness in their actions. Actually I tend to think that the two steps – eurobond and devaluation – must be taken together.

Irish Vote Yes in Fiscal Pact Referendum – SPIEGEL ONLINE.

The main stumbling block toward the eurobond is of course Germany although several other countries bordering the Baltic and North Seas are also opposed to the idea for obvious reasons: The eurobond would make borrowing to them more costly than with the national notes is today. But that is what unity is all about. Germany and the others can more than recoup their loses by keeping the huge common, duty free market to their products. The latter will most likely change very rapidly if the euro disappears in which case we may see intra-Europe commerce plummet.

This is actually the great opportunity for Germany to redress the wrongs of two world wars. Yes, Germany has paid huge reparations in the past but this would be a voluntary act, saving the continent’s economy, perhaps the world economy. It would be a reversal of roles: Germany saving the world economy that we screwed up; the opposite from 1939-45.

The exit of Greece from the eurozone is almost inevitable now, due to the country’s political atmosphere. The question now is whether damage control by the ECB, IMF, will be effective enough in dealing with the separation.

ECB chief calls euro ‘unsustainable,’ slams Spanish bank response – The Washington Post.

ECB President Mario Draghi said on Thursday that he believed the euro zone’s current structure  is unsustainable, and added that the region’s governments must surrender far more budget and regulatory power to a central authority if the currency union is to be saved.

As he spoke, the Irish did their part.

The eurozone crisis is affecting the U.S. tremendously but the greatest contribution we could offer to help, instead of sermonizing, is to cease the opposition to the financial transaction tax (FTT) – intended to diminish wild speculation in the financial markets. We triggered this global crisis and it is it the least we could do. But we do not support the (continental) European proposal because of Wall Street’s influence in Washington. I do believe the republican candidate Romney is also clueless in this regard and will cave in to the same forces. We, with the UK, stand alone on the rock of idiocy.

Regarding the FTT, the UK (that is the conservative government) is just being the little selfish twerp that it has been since taking office. UK’s GDP is much more dependent on The City than their continental neighbors are on their respective financial markets. And PM Cameron’s policies reflect that fact.

Our economic sluggishness today is in part caused by Europe’s crisis and Europe’s crisis is caused, in part, by our political surrender to the influence of money. Everybody will lose unless we have the courage to change.

Actuarial Analysis of N.J. Public Pensions Are Unrealistic

Financial markets are in turmoil. Most world economies are barely growing. Interests rates can not go lower. Real estate is comatose. Public pension funds everywhere are awakening to the fact that their actuarial profiles are way too optimistic and do not reflect the real world. However, the corrections also fall short. To quote the comments of NYC Mayor Bloomberg published in the NYT on Memorial Day: “The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent.” New Jersey currently expects 8.25% in its investment returns. It is absurd. But it allows the state government to contribute less, passing the shortfall to future administrations.

With the rosy actuarial projections the Christie administration claims, the funds are some $44 billion short. But here, back on Planet Earth, if we plug in realistic numbers, say 6.0% return, the deficit of the pension systems blows up to over $100 billion – I am being cautious here.

The problem is that government, in New Jersey particularly, can not afford to be realistic, as we saw very well with the projection of growth made by Governor Christie when he launched the “New Jersey Comeback” in January 2012. The economic and fiscal doctrines of the Christie administration resemble voodoo. But they are dictated by politics.

There are seven public pension funds in New Jersey: They cover some 800,000 employees and retirees. Many of these have dependents so we may be talking about as many as 25% of the N.J. population which could be directly affected by pension problems. Then we must add all the businesses which derive income from these people. Even if we leave aside all legal obligations, this is a New Jersey issue.

The seven plans are: Public Employees Retirement System (PERS); Teachers Pension and Annuity Fund (TPAF); Police and Firemen Retirement System (PFRS); State Police Retirement System (SPRS); Judicial Retirement System (JRS); Consolidated Police and Firemen Pension Fund (CPFPF); and Prison Officers Pension Fund (POPF).

The main plans are the first two: PERS and TPAF.

http://mercatus.org/sites/default/files/publication/WP1031-%20NJ%20Pensions.pdf

Most if not all the N.J. funds were healthy (PERS and TPAF where actually over-funded in the early 1990’s) when Governor Florio, facing $1 billion shortfall in his budget, changed the plans assets from book value to full market value and increased the assumed rate of investment return from 7% to a whopping 8.75%. A higher nominal return led to lower governmental contributions to the systems. But experience shows that financial markets are too fluid and uncertain. The numbers above were a stretch.

Then came Governor Whitman in 1993. She changed the actuarial valuation method from Entry Age Normal (EAN) to Projected Unit Credit (PUC) which, although acceptable, is like a balloon mortgage: PUC lowers the liabilities at first but then they explode in later years(1).

Whitman, among other damaging measures, also issued Pension Obligation Bonds for a total of $2.7 billion, through the New Jersey Economic Development Authority, NJEDA. She also included the bond returns in the total valuation of the Pension Systems. The bonds returns were the only government contribution to the funds.  But the bonds were offered at a rate of  7.5% and the actuarial expected return of the Pensions was 8.75% at the time. She also allowed  local government to take pension holidays: That is to say: not contributing. Nonetheless, property taxes still skyrocketed during Whitman and the following administrations. Of course those NJEDA bonds will come due at maturity one day if they have not done so already.

The following Governors – Di Francesco, McGreevey, Codey, and to a lesser degree, Corzine – were also reckless and overall disastrous for the N.J. Pensions Systems. What Christie has now done with the Pensions and Benefits Reform Law is to essentially refinance the liability accrued and pass it onto the workers.

In the bigger picture, unless New Jersey experiences significant economic growth, the government will not be able to keep pace with the increasing contributions set by the Pension and Benefits Reform Law of 2011. But in the economic growth area, Christie has failed. Therefore, to achieve that growth, we must have a change not only of government but of the structure of government in New Jersey.

We must also bring the actuarial analysis of the New Jersey Pension System(s) to normalcy. The actuaries should be independent, shielded from political influence.

(1) State and Local Pension Fund Management, Jun Peng, CRC Press, pp 154, 155

Egyptian Presidential Election Today, French, Greek Legislative Elections in June – All Critical

The Egyptian candidates, 13 in all, range from islamists to former ministers of the Mubarak regime. The outcome of this election, the first free election in Egyptian history, may have profound consequences in the Middle East. Unfortunately, women have been marginalized in this historic event. Not a single presidential candidate is female. Egyptian women were very active during the revolution which led to the election.

The French will go to the polls to elect a new National Assembly and its composition will be paramount in determining whether President Hollande will be able to carry out his program or instead adopt a more centrist approach.

With the arrival of Hollande, huge differences have surfaced between Germany and France in how to deal with the crisis. Hollande’s call for the creation of the euro-bond has been rejected by Germany, The Netherlands, and Finland.

With the euro bond, the borrowing cost for these 3 nations would increase while others, debt strapped nations, would find borrowing cheaper. The euro bond would homogenize their credit ratings.

All continental members of the EU want to impose a tax on financial transactions which would benefit fiscally in two ways: By generating revenue and by reducing speculation. Only the U.S and Britain oppose the move. But by opposing this tax, and the reduction of speculation, both the U.S. and Britain may be shooting themselves in the foot. If the EU breaks apart, they will feel the pain too. Britain is part of the EU but not of the eurozone.

The Greeks are forming a new government in June and the composition of this government may be the key on whether Greece stays in the euro zone. Further international fiscal support for Greece hinges on whether the new Greek government swallows the bitter pill of austerity reforms. French President Hollande however favors reducing the size of the pill and instituting growth measures simultaneously.

If Greece leaves the euro zone, all bets are off. There is really no precedent in this area so the consequences are difficult to predict. Greece leaving the common currency zone may trigger a contagion effect in both Italy and Spain.

I do not understand why the ECB does not devaluate the euro more to make European-made products more competitive. I believe decisive action in that area should be taken rapidly but it is not happening and the exchange rate is being left to the currency markets where the euro has lost some ground but not enough to really make a difference.

What we all can count on is that all these events will affect us profoundly here in the U.S. The only thing certain is uncertainty.

Moody’s Assigns Negative to New Jersey; Questions “Comeback”

The rating agency forecast that New Jersey is falling behind the nation and revenue will remain below expectations. Since government revenue is almost a direct function of GDP, the forecast indicates that New Jersey’s economic growth will lag behind the rest of the country for the next 14 months. Job creation is also determined by economic growth.

This is an implicit indictment of the economic policies – or lack of – of the Christie administration and his democrat accomplices in the N.J. Legislature.

Add Moody’s to those questioning Christie’s ‘Jersey Comeback’ : page all – NorthJersey.com.

Governor Christie launched a propaganda blitz with his “New Jersey Comeback” at the start of the year, perhaps aiming more to a national audience than to New Jersey itself. However, it has backfired in the face of the numbers. In fact, New Jersey is a drag on the national economy.

The evidence is symptomatic of a monumental philosophical failure.

At the roots of our difficulties is the reluctance of both dominant parties to engage in the drastic structural reforms needed. An overhaul of the tax code, increasing the minimum wage, elimination of the layer of county governments, and a constitutional amendment abolishing certain aspects of home rule are at the core of those reforms. Already in the third year of his administration, the governor is short in time to begin implementing the changes needed, even if he wanted to.

In the end, the future of New Jersey will be in the hands of the voters in November 2013: You will be deciding your own future and your children’s.