Tag Archives: Government

What Are The States Smoking?

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People sometimes convert an anticipated payment stream into cash by issuing bonds. Rocker David Bowie pioneered the practice of floating bonds financed by anticipated royalty streams; he received $55 million in exchange for his discography. Accident victims call J.G. Wentworth, the pseudo-opera singers on TV, to convert settlements into liquidity. Now, there are many good reasons to exchange future payments for cash today – uncertainty of the reliability of the payments, fear of surprise inflation surges, unexpected one time bills. A bad reason is to finance a lavish lifestyle. Floating a bond might fund the expenses for a while, but the money will run out, leaving nothing. Such is the case of states borrowing against their tobacco settlements.

In 1998, a group of Attorneys General from 46 states colluded to extract $206 billion from the tobacco industry, ostensibly to fund tobacco related Medicaid costs. A small portion of the settlement was earmarked for an education campaign to reduce tobacco consumption. None of the money went to these purposes. The State money went to fund general budget items unrelated to health, and the education campaign became an annoying series of TV commercials calling tobacco companies liars and murderers – a topic unrelated to the challenges of quitting smoking.

As governments are wont to do, they incorporated the tobacco money into their budgets, spent the payments and more. One by one, the most of the states found themselves in a budget pinch and balanced their budgets with a one-time tobacco bond sale. Last year Minnesota mortgaged its tobacco payments for $700 million. Two years ago, Illinois plugged its budget gap with a $1.5 billion tobacco bond. One time tricks do not solve long run spending problems, though, and Illinois later raised its income tax by over 60%.

Worse still, many of the state’s tobacco bonds are general obligations of their treasuries, so if the tobacco payments fall short, the states are on the hook. Of course that is exactly what is happening. The settlement payments are based on tobacco consumption, which is declining. Kids who want to look tough and women who prefer cancer to obesity still smoke, but many other people are quitting or not even taking up the habit. In several states, the settlement payments are becoming insufficient to fund the bond payments.

Despite the imprudence, Alabama just floated $93 million in new tobacco bonds. The Wall Street Journal reports that Alabama has avoided some of the risks and excesses of other states’ tobacco bonds, however they have mortgaged their future to prop-up irresponsible spending today. Separately, Jefferson County, Alabama (Birmingham) just filed the US’s largest municipal bankruptcy ever. If high finance catastrophes cannot stop politicians from borrowing to spend recklessly, perhaps nothing can.

Like underfunded pensions, tobacco bonds are an example of states’ sneaky borrowing against future revenue to fund wasteful spending today. In most states, running a state budget deficit is illegal, but the politician’s instinct to spend is too strong, so they find a way to borrow.

So, who needs people to smoke? The states that have borrowed against the smokers’ habit would be ruined if everybody quit. Irresponsible, perverse, and probably immoral, yet irresistible to politicians who are paid to spend like there is no tomorrow. The states need spending controls to solve their budget problems, not tobacco bonds to enable them.

Why Politicians Are Like Copper Thieves

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Washington is a criminal enterprise, which is not news. Politicians regularly dole favors to their donors in the form of grants and loan guarantees (Solyndra), theft of private assets for bailouts (Chrysler), and mandates for the use of worthless commodities (corn ethanol). The corruption is endless and goes back to Byzantium; governments are always corrupt because men are corruptible. Due to its size, however, Washington is the greatest criminal enterprise ever assembled. Still, what manner of thief has Washington become? The worst kind.

Popular culture lionizes certain classes of criminals, such as jewel thieves and bank heist masterminds, while it demonizes dirty crimes like armed robberies. Why the difference? Isn’t a thief a thief? Not entirely, and for good reasons. A jewel thief takes from the rich, who by popular belief can afford a loss. He sneaks into a mansion, barely breaking a single window, removes the jewels, and disappears. Nobody is injured, nothing much is damaged, and the jewels go on to flatter another wealthy owner; at least in the movies. Economically, this theft is highly efficient. Wealth is transferred from one person to another with little collateral impact. It is as if the rich victim just handed a stack of cash to the thief.

Dirty crimes involve a high degree of collateral damage as a part of the transfer of wealth. When an armed robber steals a few hundred dollars from a convenience store, the collateral damage is tremendous. People are often murdered, and customers lose faith in the store’s safety, so they shop elsewhere. The damage caused by dirty and unpopular crimes greatly exceeds the value to the thief; people instinctively say “what a waste” when they hear of these crimes.

A particularly wasteful crime trend is copper thieves. Copper thieves steal from construction sites by cutting down installed copper wires and pipes in order to sell the valuable metal as scrap. In doing so, they destroy the value of the labor that installed the copper as well as the finished value of the wire and pipe. Stealing copper whose scrap value may be a few hundred dollars can cause hundreds of thousands of dollars in collateral damage. Economically, copper thieves are among the worst criminals because they cause so much harm for a relatively small personal gain.

So, is Washington’s culture of corruption more like a jewel thief or a copper thief? Washington causes incalculable collateral damage while directing wealth to its friends. As Peter Schweizer’s Throw Them All Out documented, a few hundred thousand dollars thrown at a politician results in tens of millions in graft in return. From the investor’s (i.e. donor’s) point of view, political gamesmanship is the best investment of all. From the taxpayer’s perspective, Washington corruption is nearly a crime against humanity.

Consider corn ethanol. Because each State is equal in the Senate, a swath of low population states that grow corn wield extreme power over Congress’s appropriations. These corn states have forced politicians to mandate ever more corn ethanol in gasoline because it drives up prices and demand for corn. Congress has outlawed the importation of Brazilian sugar and ethanol because it is too competitive. If the goal were to reduce CO2 emissions, Brazilian sugar and ethanol would be the choice, but the goal is to benefit comparatively rich plain state farmers. The result is world hyperinflation in food prices. Corn prices rose from under $2.50 per bushel to $6 thanks to Washington mandates. Since cattle feed on corn, steak prices are rising at 10 times the rate of general inflation. Worldwide prices of substitute staples like rice also rose, causing a food crisis where most people spend most of their income on food. Just like copper thieves, Washington politicians, largely Republican in this case, do not care how many people they hurt to get a few thousand campaign dollars.

On the Democrat side, consider Pres. Obama’s harassment of Chrysler bondholders. In order to bail out his UAW base, Obama stole from the bondholders whose rights were senior to those of the labor union. Obama called on the bondholders to “sacrifice” to benefit the greater good, but his version of the greater good was the UAW, which represents a tiny wealthy sliver of the US’s workforce. The greater cost for Obama’s theft is hidden in the revelation that politics trumps property rights. The Chrysler bondholders were prepared to sue the Government, but they were convinced by Obama’s operatives that they would be beaten down long before prevailing in court. Until this moment, an investor felt he knew his rights, but now any investment can be taken without cause or compensation if the President so wishes. In order to transfer a few million dollars to his cronies, Obama permanently damaged an $8 trillion engine for capital formation and economic growth.

If only Washington acted as the gentlemanly jewel thief, simply giving its stolen cash to its friends. Instead, Washington is like the copper thief, callous to the incidental damage its thievery causes. The next time someone exposes the latest episode of Washington corruption, remember to scale-up the reported graft to include the collateral damage.

Worker Participation Is The Writing On The Wall

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We’ve been a little bit lazy, I think, over the last couple of decades. – Pres. Obama

Pres. Obama was talking about his government’s laziness in attracting foreign investment (hint Mr. President: less government efforts actually attract investment, not more), but he may as well have been talking about the US in general since he took office. Of course Americans are far from lazy, they just respond to market signals like taxes and regulations, and the percent of adults who now work or wish to work portends doomsday.


Worker Participation Rate (%) By Year (1976-present)
Source: Bureau of Labor Statistics

Worker participation is the percent of adults (16 and over) who are either working or are seeking work. As the chart shows, workforce participation drops off during recessions because some people give up on seeking work and either retire or join a shadow unmeasured economy. Significant drops in participation can be seen during the 1980-82 recession, the 1990 recession, and the 2001 recession, but they all pale to the collapse of worker participation over the past three years. In all the years measuring this metric, there has never been such a dramatic collapse in the percent of people who contribute to the measured economy.

The difference between an adult who works and who does not is the story of the US’s recent troubles. Workers pay taxes and consume fewer public resources like Food Stamps, Medicaid, Section 8, and Unemployment Insurance. Workers support the retired through Social Security and Medicare taxes. The arc of worker participation over the past 35 years mirrors the rise and fall of US prosperity and global standing.

The dramatic rise throughout the ’60s and ’70s reflects women joining the workforce, and followed the Regan revolution of unprecedented prosperity, basically paying for an ever growing government budget and runaway entitlement programs. However, worker participation fell off a cliff almost immediately after Obama took office. Possibly a coincidence, but his brutal FDR-like rhetorical assault on private enterprise, his hyper-regulatory legislation, and his partisan pro-union policies sent a message to employers to stop hiring.

This is not to say that people outside of the workforce do not contribute. For example, a dual income family that once used daycare or a nanny for their children might decide that the mother’s after-tax income would barely cover the cost of these services. When the mother decides to leave the workforce, she takes the worthwhile job of daycare or the nanny, but now all of these parties are not reporting income and paying taxes. By burdening businesses with regulation, taxes, and now the mandate to provide health care, many people find a way to get by outside of the workforce system.

The baby-boom generation that brought the US such fiscal gems as Medicare is retiring, creating a powerful drain on worker participation. The boomers are about a quarter of the US’s population, and without their employment, the US simply cannot pay its bills. Either boomers need to work longer or the US needs qualified immigrants in huge numbers over the next decade; without a workforce to support the retirement of the boomers, the US cannot survive as is.

The US’s worker participation rate is falling to that of socialized Europe. What the world generally sees as European laziness may actually be a rational response to socialism that discourages workforce participation. The US federal debt is likewise approaching that of Europe’s failed economies such as Greece and Italy. US debt is as much caused by overspending as it is anemic economic growth, much like Europe. Rather than a warning that anti-capitalism and over regulation lead to ruin, Europe’s example is a role model for Washington and the Obama administration. If the US’s economy ever rights itself, look to worker participation as the key measure of the turnaround.