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.

Stopping the Fleecing of N.J. Pensions by Political Hacks

I know a former politician who after being a part time elected official for a number of years and perhaps having a menial public job somewhere, landed a very lucrative position in an independent public authority, plausibly to make a living but also to qualify for a juicy pension. The position was security chief and all he did was to convert the place in an Auschwitz-look-alike, and spend $ tens of thousands chasing the Canadian geese out of the grounds – a never ending crusade for the geese were incredibly persistent and multiplied… like geese do.

He also declared war against feral cats and red foxes. Two of the persecuted feral cats applied for political asylum at my house when they were babies and live happily here. This guy knew about security as much as I know about deep sea diving. That is zero.

I was engaged in an interesting debate with a friend of mine after my last article on pension returns and probably the only thing we agreed on was that the problem is pervasive: People with political connections (she disputed that her friend had any) hold menial or part time positions, or political office for a number of years, with low wages, and then as they reach the 20th or so year in the pension system, they talk to their political godfather or godmother or ally or political boss and voila – from one day to the next they become managers of things that they often have no idea how they work but which secure them juicy pensions after a few years on the public dole.

There are thousands of those cases. Christie himself has appointed a few, even at the Port Authority of NY and NJ.  Another instance is, I believe, the chief of the Delaware River Port Authority who is a former assemblyman or senator of NJ. But they are present at every level of government.  This type of thing is as Newjersian as apple pie is American.

Up to now, in my program, the line of defense against these abuses has passed not through the pension system but through civil service law. That is: I would very strongly advocate for a reform of CS Law so that almost every position in the public sector has to be open to the general public through conspicuous advertisement, examinations and/or professional vetting. Thus neither the governor nor anybody else could just pick someone and give him/her a public job, or worse, invent un unnecessary job to favor a political supporter, relative, etc.

The only exceptions would be at cabinet level, executive secretaries, etc. That is my concept of civil service reform.

But after the discussion with my friend I thought that there could also be a safety mechanism in the pensions themselves. That is: When there is a sudden and very large (we have to define very large) increase in wages, during the last ten (or so) years of public employment, then the retirement pension becomes a fraction (also to be defined) of the total employee contribution to the pension during the entire public career and not calculated on the last 5 years base-salary.

I am still turning  this idea around in my mind so it is by no means a finished product. But it would be an additional hoop pension abusers would have to jump through.

Obviously, all those in the N.J. Pension System today, such as the officials of the N.J. League of Municipalities, League of Counties, some legal and consulting firms associated with county governments, etc., who are not public employees, should be expelled from the New Jersey Pension System.

From left to right: Albert and Jimmy days after receiving refugee status at home

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

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.

Nearly 25% of N.J. Residents Lived in Poverty in 2010

This report is more realistic than the federal standard for measuring poverty – which I believe is outright ridiculous no matter where you live in the U.S. – N.J. defines being poor as making less than $36,620 for a family of three — twice the federal poverty rate. New Jersey has a higher cost of living than most other states particularly because our exorbitant property taxes, which also reflect on rental costs.

Nearly a quarter of N.J. residents lived in poverty in 2010, study shows | NJ.com.

There are a number of factors which have contributed to this imbalance in one of the richest states in the nation. But all the factors, fundamentally, find their roots in the complicity of the two dominant political parties in holding wages stagnant and fleecing the public. In other words: A lot of people, even those not comprised in the low 25%, are making too little money and paying too much to the political octopus that rules New Jersey.

Note that the 2000 or so government entities of New Jersey devour more than 10% of the state GDP of about $650 billion. And we do not even have defense expending!

This reality has had two major consequences after two decades or so:

1. A lot of people borrowed beyond their means to maintain the illusion of prosperity.

2. Disposable income plummeted and with it went aggregate demand, thus pushing the economy into an endless period of anemic performance.

Since government – and all its local subdivisions –  also borrowed left and right, New Jersey has entered a period when the high degree of leverage has the effect of quasi paralyzing both the public and private sectors. There are budgetary problems and people are taxed out. Even if millionaires are taxed, as the democrats call for, that additional revenue would amount to considerably less than $1 billion.

The millionaire surtax has become more like a political football to keep the masses distracted and pretend that there is a major difference between the two dominant political parties. It is theatre.

The democrat-proposed increase in the minimum wage – possibly to blunt my message because I am the first who has mentioned minimum wage in the last decade – would be the first in I-don’t-know-how-many-years and it is clearly insufficient to have any economic impact.

Both parties have proposed tax reductions: Christie his ubiquitous income tax across-the-board cut, which of course favors his political base, and the democrats their property tax cut. Both plans are better than nothing; the democrat plan slightly better. But the grand problem is that the state is not in a sound enough fiscal position to – responsibly – adopt either plan.

If a tax cut – any of them – is implemented, it will amount to a tax deferment rather than a tax cut. When such tax becomes due, 10, 20 years from now, it will also come with accrued interest so we will end paying more for this meaningless relief today.

While both political parties endeavor in buttering up the voters in back-to-back election years, I am presenting  – in this website – my program of reforms, which I believe are the minimum essential to save New Jersey.

Citizens of New Jersey beware: Our problems are complex. Any politician that presents a simple solution to a complex problem is eminently dishonest.

The New Jersey Comeback? Gone With The Wind

Fiscal common sense and sound economic policy have both taken back seats to political demagoguery. The tax cuts – whichever shape they adopt – are a mortgage on the future on New Jersey. Our difficulties are complex and require complex solutions: That means deep structural reforms in both our tax code and in the government itself.

The governor placed a public relations bet and lost. The fact is that objective economic conditions do not follow propaganda. Bombastic announcements do not belong in the realm of economics and fiscal responsibility. New Jersey is trailing the entire Northeast of the nation – with the exception of Rhode island – in almost all economic indicators and notably more so in unemployment. I have the hope that the fiscal fortunes of New Jersey may improve during the Summer with the income and sales tax receipts from the glorious Jersey Shore.

Nonetheless, the economic forecast pushed by the governor is his pony shows also known as town-hall meetings was of 7.3% economic growth for New Jersey this coming fiscal year.

That surpasses the expected economic growth of China! In what planet is the governor living in? I am sure that Christie may have no difficulty fooling some of his most gullible and sheepish supporters, but that does not mean that the wacky figures will become a reality. In view of the world economy sluggishness, there is not even hope that New Jersey could be dragged ahead into prosperity by other economies.

We have to be really smart and reform-bold to move ahead of the pack all on our own.That is what my economic program is all about: Breaking the mold; away with both Keynes and Friedman. We will borrow bits and pieces from all and put it together in a program tailored for New Jersey 2014.

Friedman, in particular, did probably more harm to the United States than the entire North Vietnamese army in a 9 year war.