Mish's Global Economic Trend Analysis |
| Eight Choices for "Generation Wait"; Percentage of Young Adults Moving Hits 50-Year Low Posted: 15 Nov 2013 02:16 PM PST When you do not have a job (or have a low paying job), and are stuck with education costs that you cannot possibly pay back, what do you do? Eight Unfortunate Choices
Generation Wait Please consider 'Generation Wait': Share of young adults who move hits 50-year low U.S. mobility for young adults has fallen to the lowest level in more than 50 years as cash-strapped 20-somethings shun home-buying and refrain from major moves in a weak job market.More Young Adults Stay Put Yahoo!Finance has an interesting chart that shows More Young Adults Stay Put.  Structural Issue Unlike what Bernanke thinks, this is a structural problem. And I have been talking about it for years. Here are a few examples.
Here is a chart courtesy of Tim Wallace from the last link above.  In 1990 close to 60 percent of those 16-19 were working. Now it's under 30%. In the 20-24 age group the percentage fell from 75% in 1988 to under 65% now. Why? Structural Demographics Poor This is what I said in my May 2008 post Demographics of Jobless Claims. Structural demographic effects imply that prospects in the full-time labor market will be poor for those over age 50-55 and workers under age 30. Teen and college-age employment could suffer a great deal from (1) a dramatic slowdown in discretionary spending and (2) part-time Boomer reentrants into the low-paying service sector; workers who will be competing with younger workers.And here we are. Any Mish readers surprised? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Posted: 15 Nov 2013 11:28 AM PST Numerous cities have filed for bankruptcy in recent years, and many more cities are on the brink. The reason is untenable union wages, and more importantly untenable pension promises. Sampling of Bankruptcy News
What Went Wrong? Those are not isolated incidents. I have written about Oakland, Houston, Baltimore, Harrisburg, and numerous other cities. Unions are behind the demise of every one of those cities. Union coercion (public and private), vote buying, and inept city management in settling wage and pension disputes ruined every one of the above cities. Dozens more cities are on deck. Detroit was obviously bankrupt ten years ago, and would be far better off had it declared bankruptcy ten years ago, but just did so in July of 2013. Promises, Promises Unions keep promoting their head in the sand belief that pensions and wage contracts are sacrosanct. Well they aren't. Take a look at actual events.
In an exchange with an attorney representing Detroit's two pension funds, U.S. Bankruptcy Judge Steven Rhodes said U.S. Bankruptcy Code would not afford special protection to pensions because, "It gives a priority to one unsecured creditor or one group of unsecured creditors, over all the others." Read that ruling over and over again until it sinks in. There is only one inescapable conclusion: Public Union Pensions are NOT Sacrosanct, regardless of what state constitutions stipulate. Taxpayers can all be thankful that US bankruptcy laws overrule ridiculous state guarantees. Vallejo Case Study Vallejo, California is an interesting case study. The bankruptcy judge let the city cut pensions. It didn't. And now (just as I predicted in 2010), Vallejo is headed for bankruptcy again. The lesson for cities is simple, slash pensions when you have the chance (or you will be back in bankruptcy court again). What Constitutes Fair? A friend of mine pinged me with these thoughts regarding the Chicago pension mess. The City of Chicago did a dumb thing 20 years ago, but is it really fair to take away a pension from someone who worked 20 years for less money than he could have made in the private sector to get the pension? This is a tricky issue. In the private sector employers default all the time, but the PBGC guarantees a high percentage of benefits. PBGC does not guarantee municipalities.My response follows... Template for Fairness
It certainly is not fair to ask taxpayers to pick up the tab, given the threats, coercion, vote buying, and backroom deals under which politicians rewarded their friends and themselves jobs with ridiculous pensions. Fairness Test Needed In bankruptcy court, some judge (as happened in Rhode Island and will happen in Detroit), is going to slash benefits by 50%, perhaps even more. There will be no fairness test. Pension reductions will happen, and they will be across the board. Yet, some high-roller pensioners will collect over $150k per year in benefits (even with the reduction), while others with a $25,000 pension will see it cut to $12,000. That's fair to the taxpayer, but arguably not fair to those on the bottom rung. And that is the likely result in absence of a negotiated settlement. Negotiated Settlements The fairest possible thing to do is sit down at the table and negotiate a settlement. I suggest, those with the least pension benefits get the smallest cuts, and those with the most benefits get the biggest cuts. Indeed, if unions were smart, the majority could come to negotiated terms with a starting point along the lines of
Such a negotiated settlement would be the fairest thing for everyone, pensioners and taxpayers alike. However, my starting point may not be possible. When pension plans are exceptionally low-funded, even those on the bottom rung may need to take some hit. The next fairest thing is bankruptcy. And although bankruptcy is fair to the taxpayer (assuming no tax hikes), bankruptcy is not likely to be very fair to those on the bottom rung. Pension Obligation Realities As part of the negotiation process, the city and the unions must agree on how underfunded the plan really is. One of the factors that determines funding levels is assumed rates-of-return. The 8% rate-of-return assumption that many plans now have is ridiculously optimistic. Thus extreme caution is warranted so cities do not end up back in bankruptcy. This necessitates several additional restrictions on the bankruptcy negotiation process.
Five Immediate Action Items
Will Unions See the Light? If unions don't negotiate pensions, bankruptcy will result, and unions will then have only themselves to blame. Hopefully, a few across-the-board pension cuts exceeding 50% or more, especially in Detroit, will get unions to see the light. The Light My plan offers a fair template for city officials, taxpayers, and unions. If unions disagree, they can take their losing case to bankruptcy court with likely results as depicted above: multiple bankruptcy filings and across the board cuts applied indiscriminately. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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