Cookie Jars

When I was a little kid, there was a cookie jar in my house, and Mom who baked excellent cookies.? I was a scrawny runt, and at that time a picky eater.? But when I got home from school I could have a snack, so long as it was not within an hour of dinner.? I remember a bowl of potato chips, and some cookies.? Maybe slicing up a banana with a little sugar and milk.? Or, sliced carrots with Italian dressing. Mmmmmm….

Anyway, we all know what we like.? Politicians know what they like as well.? They want to promise a lot, and not tax much.? That has problems, because over the long run, budgets must be balanced, unless you want to live in Fantasyland.

Maybe Disney needs to take lessons from the governments of the US, because they live in Fantasyland now.? Ask yourself this: what governmental entity of any size has their budget balanced on an accrual basis?

  • Are retiree benefits fully funded? (pension & healthcare)
  • Are the rainy day funds funded?
  • Are the “trust funds” funded, and not raided?

The list goes on.? Often local, state, and federal governments raid the value of assets meant to fund future expenditures in order to fund current spending needs.? Most famously, the trust funds for Social Security and Medicare hold non-marketable debts of the US Government.? There is nothing behind Social Security aside from the taxation power of the US Government.? Same for the military and old DB [Defined Benefit] plans for US Government employees.

The money has been spent, and the payment of future benefits relies only on future taxation.? But lest you blame the Federal Government overmuch, the states and municipalities aren’t much better.

I’m relatively certain that most states and municipalities have to balance their budgets on a cash basis, not an accrual basis.? Another way of saying this is if there is a dollar left in the till, on a cash basis, the budget is balanced, no matter what future promises remain to be paid, with no assets to back up the promises.

We would never let insurance companies or banks be run in such a manner, but we let governments slide because of their taxation authority.? When the time comes to raise taxes, how well will that be received?? When the time comes to reduce benefits, even those being paid? now, how will that be received?

I don’t see how this works out.? I believe in pre-funding future obligations.? Practically, our governments believe in raiding cookie jars until there are no more cookies left, and maybe, some anti-cookies.

Government finance will be rough for the next 30+ years.? It could have been a lot easier if governments had decide to pre-fund, and not raid the assets.

 

8 thoughts on “Cookie Jars

  1. The only one I can think of: The US Postal Service.

    In fact, the need to pre-fund their pension plan is the very thing that’s causing most of their current difficulties.

    1. That’s not the problem. That’s what the politicians *think* is the problem because they don’t want rates to go up, or services to decline much, so they raid a “cookie jar.” Win, lose or draw, if USPS goes out of business, the workers deserve their benefits.

      The real problems for the USPS are:

      1. Not raising rates, especially on bulk mail
      2. Sweet deals cut w/Fedex & UPS on package delivery
      3. The Internet destroying many reasons for mail — the internet changes everything.
      4. Not charging differential rates for areas of the country that are expensive to service.

      But no, it’s not the prefunding of benefits… perhaps the granting of overly large pension benefits is a problem, but not the prefunding.

      Oh, and I wrote about this more than 2 years ago:

      http://alephblog.com/2010/10/13/what-if-we-replaced-the-us-postal-service-two-years-from-now/

  2. I have a problem with this argument because its in fact impossible for governments such as the US government to save. They are simply too big.

    They can not save in bonds or currencies like a normal person because it would have a macro economic effect. As the creator of currency it makes no sense for them to save dollars. Save dollars at that scale would be the same as destroyer money and hence deflationary.

    Now they could save in equities and make investments. But at the scale we are talking about 10’s of trillions of dollars it too would have a macro effect and I wouldn’t trusts the government to make good investments at that scale.

    So the only way the government really saves is by creating a long-term growing economy. The power to tax is a lot like equity if the economy is growing then the power of tax is becoming more profitable.

    Small countries can save by creating sovereign wealth funds. A large country like the US doesn’t have that option as savings has very real macro effects at that scale that distorts the act of saving.

    1. Yes, if we tried to do it all now, there would be macro effects, especially now in a liquidity trap because of bad policy encouraging malinvestment.

      Actuarial methods for funding should have been tighter, not looser, for funding from the beginning, with a prohibition on self-lending to the government/states/etc. And large programs like Social Security, Medicare, etc., should never have been created — creating them unfunded has led to a crisis of major proportions. Even then, the politicians dither and even raid cookie jars that are underfunded.

      All over the world, we are getting the government we deserve, with few if any places able to pay for the massive entitlement programs foolishly created. 10 years out the crisis will be hot, because we promised too much and did not adequately prefund.

      1. I still have no idea how we would ‘prefund’ entitlement spending.

        What assets are you proposing the government to purchase?

        Corporate bonds, Equities, foreign bonds, foreign equities.

        I guess we could do that but I still see it as difficult and strange for the US government to directly hold these kind of things.

        We also had a savings gut throughout the 2000’s. We had China saving a ton of dollars. If everyone is saving then what are they buying?

  3. Canada implemented full accrual accounting last decade. I really have not researched it that much, but I do remember that the net deficit went down when it was implemented as it also recognized the non-financial assets like government buildings. Perhaps the same would apply to the US? I’m sure the US government has many similar assets.

    1. The US still owns some government buildings, but most new ones are leased through Credit Tenant Leases, because the government can’t afford the cash outlay, even though borrow/build would be smarter. Back when I was doing these deals, I was getting 1.5-2.0% over Treasuries, with the building as security. Lease payments are not subject to appropriations. Building owner has a leveraged play on inflation.

      The real value in the US is that the Government owns over 50% of the land. Don’t know who would buy it all, though… especially in Alaska…

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