City Journal Autumn 2014

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Josh Barro
Land of Delinquents « Back to Story

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great article
Great article, but I think too soft on the corrupt and incompetent people running Illinois who got us into this mess. The legislative leaders have made themselves $ multi
millionaires by abusing their political clout in their hopelessly corrupt home county of Cook. Bankruptcy is truly the only answer to send a message to the crooks and to those other governments who think they can do as the see fit and leave the wreckage for future generations.
I moved to ga. I pay more in income tax even after the last il increase. But sales tax, fees, standard of living are better. To he'll with il, and if you think Rahm can bail you out Chicago, ha. The mayor needs to buy the votes, and the guv needs Chicago. Run with your lives.

I do have a condo for sale. Willing to take a loss just to get the he'll out for good
Rahmbo has a tough reputation and has good political and financial instincts, but his reputation is a cover for his atrocious performance in operational matters. Rahm was a central player in the failed Hillarycare effort, and was on the Freddie Mac Board of Directors during the Democrats' campaign contribution scandals and during the $10 billion accounting fraud. Obama sealed the Fan and Fred documents to protect someone, probably Rahm. Then as White House Chief of Staff, Rahm was at the very center of everything that has gone wrong in the Obama Administration: Obamacare, energy, card check, whatever. The very last place you want an operational screw-up is in an executive position like Mayor of Chicago. Rahm seems to stay around just long enough to create a mess and then bails before anyone figures out that the mess is his fault. Good luck, Chicago.
Hey - I am really delighted to discover this. Good job!
Greece? (See N.J. circa 2009 and Detroit). As productive businesses and people flee the state over the next 5 years, this behavior will certainly be counterproductive and unsustainable.
Barro -

"It’s hard to miss the parallel with President George W. Bush’s economic policy, which combined tax-cutting with huge expansions of spending and generated massive deficits."

This statement is patently inaccurate, but you are in good company. Glenn Beck says the same thing, and he is wrong, too; perhaps the this is the only belief that you share with Glenn Beck. To understand why this statement is wrong, you need only a basic knowledge of the Constitution, an area in which you seem to be a little shaky. The Constitution spells out how the congress and the executive pass laws and policies, including budgets that authorize expenditures.

The simplest, most straightforward illustration of this is LBJ's and the Democrats' passage of the War on Poverty in 1965 that cost $6.6 trillion over a thirty year period, an average of $220 billion per year, though the actual costs varied and tended to grow as the population grew. That means that a substantial chunk of money went to the War on Poverty during the administrations of Johnson, Nixon, Ford, Carter, Reagan, Bush I, and the first four years under Clinton. That $6.6 trillion was wasted on fraudulent and utterly ineffective measures, and was to the discredit of the Democrats in 1965 who passed the law; it had nothing to do with any subsequent president, though President Reagan tried mightily to reform the War on Poverty, as in the 1986 SOTU address, only to have the reform efforts blocked by Senate Democrats.

Reagan critics always point out that the national debt rose under Reagan, as if Reagan caused the national debt to rise. Reagan did not do that, LBJ did that. The Democrats in 1965 passed the expensive, wasteful War on Poverty law, LBJ signed the law, and the responsibility for that law was solely to the Democrats account until the law was cancelled in 1995. LBJ's War on Poverty took billions of dollars from investment capital that should have created jobs, and diverted it to the corrupt, ineffective War on Poverty. The absence of investment capital caused the economy to go stagnant for seventeen years from 1965 to 1982 (look at the DOW graph). It was Reagan that created the growth and jobs starting in 1983, in spite of the multi-billion dollar War on Poverty dragging like an anchor behind the ship of state.

With this basic understanding of economic and governmental principles, it is easy to understand why your quote at the top of this post is ridiculous. The DOW tripled from 1996 to 1995, a nearly unprecedented rise. The only similar circumstance in the last century was the Roaring Twenties that preceded the Great Depression; the Depression lasted twelve solid years and was only ended by the start of WWII, not the optimum scenario to end an economic downturn. The Dot.com Bubble was much like the Roaring Twenties writ large, reflecting the much larger economy that we now have. The Dot.com Bubble crashed one solid year before Clinton left office and the NASDAQ was down $2.5 trillion before Clinton was gone. All economic downturns have leading financial indicators (falling markets, reduction of government revenues, falling GDP) and trailing indicators (unemployment, primarily, with job training and unemployment benefits required). The timing was such that the leading indicators were not prominent until Clinton was gone, but the trailing indicators were soon obvious soon after Bush took office. Naturally, the Democrats blamed the effects of the Dot.com Bubble on Bush but the whole rise and the pop of the Dot.com Bubble fell fully within the Clinton administration.

When Bush took office the Bubble crash was in full swing and the overt loss of jobs showed up quickly. So what was Bush supposed to do, ignore the disaster that Clinton had created? Bush promptly took corrective actions, lowering taxes to restore investment capital, growth and jobs, while buying job training programs and paying unemployment benefits. Yes, that was expensive but it worked to perfection. Unemployment was held to 6.3%, growth resumed, and the DOW and GDP hit new record highs. So, if Bush caused "huge expansions of spending and generated massive deficits," how is it that the deficit fell steadily from 2003 to 2007, GDP and the DOW hit new record highs. and growth and employment both hit record highs. Graphs of employment, GDP, and the DOW show record performance of the economy after Bush had cleaned up Clinton's Dot.com Bubble mess.

Unfortunately, the Democrats' Unaffordable Housing Project destroyed Bush's excellent recovery, and we were back to LBJ and the War on Poverty but with more villains. Carter passed the Community Reinvestment Act that required lenders to create mortgages for qualified borrowers, Clinton declared that all borrowers were qualified regardless, and Democrats on the Senate Banking Committee created the Fan and Fred campaign donations scandal and the $10 billion accounting fraud. You cannot find a single record of any Republican lawmaker contributing to the Housing Bubble or to the various frauds and scandals.

So, your statement, "It’s hard to miss the parallel with President George W. Bush’s economic policy, which combined tax-cutting with huge expansions of spending and generated massive deficits," is false, misleading, and absurd. You really want to correct this deficiency if you wish to be taken seriously as a commentator. Otherwise you are delinquent.
Amending the constitution is impossible in Illinois. It was set up by the politicians to require a convention, and by scare tactics the last proposal was quashed. Politicians like the way the state runs, it puts too much money in their pockets and their friends, and if the rest of us get screwed, then that's OK as long as we vote properly.
Most of what is wrong (seemingly everywhere you look) with budgets and spending is at its root LYING. Politicians lying to voters (I am shocked! Shocked!), voters lying to one another, and in general lying to ourselves. One kind of umbrella lie is that Illinois cannot get into this kind of trouble because its Constitution requires a balanced budget. Pretty clearly, this is a lie. So my modest proposal is to repeal that particular amendment. Who could possibly object? It clearly does not do what its name implies. All it does is take up space in the Archives and give politicans cover for more lies. Its repeal would prompt a much needed conversation, and would be a very small step to start to cleanse the Augean stables.
It seems that Illinois is approaching the end-game, when lenders begin turning their backs on the state. I have heard that the $3.7 bil in (taxable) pension bonds sold this past February went primarily to European investors, who thought that Illinois looked better than Greece, assumed Obama would bail out his home state, confused it with a sovereign government--or some combination of the three.

Your number for the unfunded pension liability reflects the official reporting, which is based on unattainable and unrealistic discount rates for the five components of the state pension plan. Apply a 15 year Treasury rate, and the number just about doubles.

Finally, I think you'll find that most states ramped up pensions and salaries after the dot.com market run-up around 2000. Look at the 8-10 year history in state CAFRS; the cost of general government for states across the county increased 3-4x the rate of inflation, without any significant change in the number of state employees per capita.

The pension problem is endemic to states red and blue, and is significantly understated. This means, by the way, that bond ratings are, shall we say, suspect. Illinois will just be among the first to run of time to play Kick the Can.
Amid shrinking profits, corporations will race out of Illinois to seek friendlier tax conditions. Tax revenues for Illinois will decrease, even with these tax hikes,
So Rahm Emmanuel is opening up government to competition with the private sector in order to drive down costs; rather than carving up the private sector into winners and losers by fiat in order to shore up government's zone of control. And he sides with Illinois' taxpayers over Illinois' unions on the issue of unfunded pension liabilities.

What a shame he couldn't discover these principles of practical governance in time to pass them on to his former boss at Pennsylvania Avenue.
Revenue will "unexpectedly" fall short due to creative,employable folks moving out of the state,see NY.Projections real collections fell short along with an outflow of high income folks.
You guys really contort yourselves. So Blago now followed the economic policies of Bush? Other than a war against Capitalism just what war was Illinois waging? BTW as bad as each of those Bush budgets (billions less than "DearLeader" Obama)were. The proposed Democrat alternative budgets were in each & every year Bush was president: SUBSTANTIALLY LARGER!

DEM-LIB COLLECTIVISM IS WHAT BROUGHT RUINATION ON THE STATE OF ILLINOIS...
Im moving this saturday from IL to FL. I earn about 1M a year and there is absolutely no reason to pay $50000 a year to these fools. 10.7% sales tax, every thing twice as expensive. People who make enough to move, DO!
Time to put the Democrats in jail for what they are doing is stealing for family and friends at the expense of the tax payers.

Is obvious, we need to wake up and open our eyes. All of us in this state talk about the corruption but we do not do anything. Is all around us from the cities, counties and state governmemt. From the exhibition center to retirement plans we can afford but do it anyway to support corrupt unions.

So we do something or move away. We need to change our politics in this state.

"The better course of action is to start paying all its bills—by figuring out what it can’t afford to do and then levying sufficient taxes to pay for the rest. A simple prescription..."

A simple prescription for a simple mind. The issue is the power of the unions, unmentioned here, and the stupidity of installing pension rights in the constitution in the first place. Sad to say, but until the Illinois constitution is re-written to protect ALL the people, not just politically powerful unions, there will be no balance of any sort, especially fiscal balance. Illinois needs a Scott Walker, but the odds of that happening are zero. So Barro's simple-minded prescription comes to this: Illinois will ride the union's domination of state politics to higher taxes, declining population, a ruined economy, and finally become the USA's version of Greece.
While all of your ideas are good, you haven't focused on the biggest cost, health care. Health care is failing because of economics. Illinois and the country have not focused on setting goals to cut the cost of health care. If Illinois and the country focused on: an ounce of prevention versus a pound of cure; reducing demand for services, reducing waste (billing and litigation); increasing the number of health cared providers and; increasing competition, then Illinois would be focused on cutting the cost of health care. By focusing on specific goals, Illinois can cut the cost of health care, it's biggest cost. Indianna and Safeway have been able to reduce their costs, so I don't see why Illinois couldn't do the same.
Just like in CA and NY, the White taxpayers are fleeing IL in droves, leaving the parasites behind. IL is doomed.
It is only furthering misunderstanding to think that tax increases are going to raise revenue, especially by a simple mathematical projection. Not only will it raise less revenue than projected as business and employment are reduced by this additional burden, but that gap will grow in future years as people and business continue to leave the state, prompting the state to raise taxes again, of course.
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I wouldn't hold my breath on Rahmbo. It's be nice if he could do some reforms like Indianapolis. However the labor unions would rather the city go bankrupt then to compete for the jobs it thinks it owns. And I am sure he wants a second term, and if the unions hate what he has done, well,,,,,,good luck with that.

The liberals in the state have their heads so deep in the sand on this debt crisis. Yes, it's a crisis. You would never know it, as they think they can still spend their way to prosperity.

The state will have to go bankrupt.

Hate to have to say that but that's the reality. Its too bad for someone I know who is owed nearly $1,000,000 from the state (he has the IOU's). I doubt he will get his money. I would refuse business with the state of Illinois unless they paid upfront. Yes, they are deadbeats.