State Budget Woes

While much focus is on the federal budget, most state budgets are ,if it is possible, in worse condition. This is a great article on the budget gimmicks employed by states to mask over the depth of the problems. I have been following the author, Steven Malanga , for awhile and he is sound in his understanding of state finances. 2011 truly looks like one where we will witness states as "laboratories of democracy" with differing approaches to solving a common dilemma.

Rent Seeking

This term may not be familiar to many but this is a serious and potentially destructive force at work in our economy. This article on the new White House economic advisor describes the activity. In essence, for a couple decades or more we have had a revolving door between government and big banks. Far from being benign, it creates a moral hazard. It extracts money (rents) from the economy via out sized payments to former/future government officials without any corresponding increase in productivity/wealth creation. It amounts to exploitation of the political system for income (rents) . The term rent seeking traces back to Adam Smith as he described components of income : wages; profits; and rents. This is something of a shadow economic system that no one really talks about.

Thomas Sowell on Housing Crisis

Professor Sowell describes with clarity why the continuing government interventions into housing likely make the problem worse. We continually hear about the large number of homeowners "underwater" on their mortgages (current value is less than the mortgage). Unless someone needs to sell the current value is not relevant. Much like a 30 year old saying they have "lost money" in their 401-k (value less than cumulative contributions). Unless they plan to retire next week the current value matters little. Mortgage rates may rise and prices fall further still before the housing crisis ends.

Retiring Boomers

I saw this article today on the large swath of baby boomers who will turn 65 starting next month. The absolute number (10,ooo per day) is huge and the implications for the economy equally so. Everyone by now knows the story- the boomers spent too much, saved too little and made sometimes horrific life mistakes (jobs,divorce,investments,real estate ,etc.). The article ends by saying 40% of these "retirees" plan to work until they drop. I suspect the real percentage is close to double that figure.

44% Per Year

I saw an interview a couple days ago with Virginia Governor Bob McDonnell regarding his plan to require state employees to contribute 5% (they currently contribute nothing) of their salaries towards pension costs. The most interesting part was what the annual investment returns would need to be in order for the Virginia pension system to be fully funded . The answer: 44% per year!! The S&P 500 has never achieved a 44% return in any year (37% a couple times is the closest). Obviously, you can't get there from investment returns alone. We sometimes see individuals make this same mistake, thinking that if only they could obtain a bit more return all would be fine. Usually, the math simply doesn't work.

2011 Issues

I don't like lists of predictions but this one struck me as rational and reasonable. This guy writes mainly on residential real estate issues so that is the primary focus. Down the list some are issues about state budgets and muni defaults which I suspect may be the issue for 2011. Stay tuned.

Stimulus - the Federal/State distinction

Everyone has heard both sides argue about the efficacy of the stimulus . A couple of Stanford economists have an interesting article today in WSJ that traces the interaction between the states and the federal government on this topic. They make the case that the net is about zero.