Illinois Teetering on The Edge of Insolvency

"Illinois Enters a State of Insolvency," from Crain's Chicago Business:

...The sharp rise in pension payments is the biggest factor pushing Illinois toward what a legislative task force last November called "a 'tipping point' beyond which it will be impossible to reverse the fiscal slide into bankruptcy." The little-noticed report on the state's pension problems warned that "the radical cost-cutting and huge tax increases necessary to pay all the deferred costs from the past would become so large that many businesses and individuals would be driven out of Illinois, thereby magnifying the vicious cycle of contracting state services, increasing taxes, and loss of the state's tax base."

...While the Illinois Constitution protects vested pension benefits, that promise, like all the state's obligations, is only as good as its ability to pay. The Civic Federation warned lawmakers last fall that "there is mounting evidence that a judge could find the state is already insolvent. If the state is found to be insolvent under the classical cash-flow definition of insolvency, which is 'the inability to pay debts as they come due,' it is not only the pension rights of non-vested employees that will be in jeopardy. All the obligations of the state, whether vested or not, will be competing for funding with the other essential responsibilities of state government. Even vested pension rights are jeopardized when a government is insolvent."

The Question on Everybody's Mind

If there is no new stimulus plan in 2010, which looks to be the case going into 2010, a rough ride  may be coming again at the end of 2010 or early 2011.  That is, assuming Krugman's assumptions are correct about what will happen when the 2009 stimulus loses effect (which, is occuring now).  Since he hasn't been wrong about the trajectory of the economy in, oh, about the past 15 years, I would say the concern is definitely worth considering.  The fundamental question going into 2010 is: did the 2009 stimulus have teeth?  Will the economy take off on its own in 2010 when the stimulus spending slows down?  If it did and the economy does, then Krugman is wrong and we're in the clear for a while.  If not, then without further stimulus we're looking at a dip back into recession.

Krugman:

One thing that often becomes clear when we talk about prospects for next year — which worry me — is that there’s a lot of confusion over the timing of stimulus impacts. Even well-informed people will say things like “we’ve only spent a quarter of the money, so let’s wait and see what happens.” Menzie Chinn tried to get at this confusion recently; here’s my take.

Let me work with a stylized numerical example. It doesn’t quite match the real stimulus — there’s no distinction between spending and tax cuts, and it tails off much faster than the real thing. But I think it’s close enough to make the point. Here’s the table:

In the table, “Rate” is the total stimulus spending within each quarter. “Change” is the change in stimulus spending from the previous quarter. And “Cumulative is the total spending to date.

Now think about three questions you might ask. The first is, how much higher is GDP this quarter than it would be without the stimulus? This should depend on “Rate” — on the quantity of goods and services the government is buying right now.

The second question is, how much faster is GDP growth this quarter than it would be without the stimulus? This should depend on “Change” — on the extent to which the government is buying more stuff than it did last quarter.

Finally, you can ask, how much of the stimulus money has been spent? For that you want to look at “Cumulative”, and compare it with the final total for that column.

Now the point is that “Rate”, in real life, follows an inverted U. The peak effect on the level of GDP comes at the top of the curve, but the peak effect on growth comes earlier, before the curve flattens out. In the table above, spending peaks in the second quarter of 2010, but the peak impact on growth is in the third quarter of 2009, i.e., it’s behind us. That’s true even though by the end of 2009 less than a third of the money has been spent.

And when the spending begins to tail off, the effect on growth turns negative.

What does this really look like? Menzie gives us the chart from Deutsche Bank, which is similar to other estimates, e.g. from Goldman Sachs:

You can see why I and many others are worried about the second half of next year.

China's Potemkin Cities

Depressing Ways To Look At A Growing Economy

Paul Krugman, in The Jobs Deficit, writes:

It was truly amazing the way last week’s employment report was hailed by many people as a sign that our troubles are over. Here we are, having suffered huge job losses, and needing to make up the lost ground — and a report showing that we’re still losing jobs, but not as fast, is grounds for celebration?

Anyway, I thought it might be useful to create a sort of benchmark for the level of job growth that would really count as good news. I start from the fact that we’ve lost about 8 million jobs since the recession began — that’s the official number plus the preliminary estimate of the coming benchmark revision. I then take EPI’s estimate that we need to add 127,000 jobs a month. EPI points out that when you put these numbers together, they say that to return to pre-crisis unemployment within two years we’d have to add 580,000 jobs a month. That’s not going to happen.

But let’s set a more modest goal: return to more or less full employment in 5 years –which means seven lean years of depressed employment. To keep up with population growth over those 7 years, the United States would have had to add 84 times 127,000 or 10.668 million jobs. (If that sounds high, bear in mind that we added more than 20 million jobs over the 8 Clinton years). Add in the need to make up lost ground, and we’re at around 18 million jobs over the next five years — or 300,000 a month.

So that’s a useful benchmark. Even if we add 300,000 jobs a month, we’re looking at a prolonged period of suffering — a huge cost from the Great Recession. So that’s kind of a minimal definition of success. Anything less than that, and it’s bad news. It sort of puts that wonderful report that we only lost 11,000 jobs in perspective, doesn’t it?

Sparse Posting

Posting has pretty much come to a standstill and will continue to be sparse until the semester is over.

Here are two related pieces to keep you thinking:

What is Good for Goldman Sachs is Good for America: The Origins of the Present Crisis

In The Eye of the Storm

I also recommend this: The Economics of Global Turbulence