What Now For Illinois?


Having now passed the largest tax increase in Illinois’ history—one that will pay for barely 1/3 of the state’s current unpaid bills and still does nothing to deal with massive structural shortfalls that are bankrupting the state—the political class will now attempt to return to business as usual. How will this be possible? Our two year budget stalemate has exposed the financial house of cards driving Illinois toward a junk credit rating. The gulf that now exists between the lean and responsive government that our citizens dream about and the reality of our decades-long adventure ride of borrowing and catastrophic debt is impossible to ignore any longer.

Good and honest government is the foundation of a safe and just society, but any government—whether federal, state, or local—must always be rigorously monitored and carefully sized to match the needs and the means of the citizenry in order to avoid being both overly intrusive and ruinously expensive. If it is not—as has been the case for too long in Illinois—two problems will result.

First, we can expect that the growth and maintenance of government will become—to a greater and greater extent with each passing year—the very purpose of government. As more contracts and paychecks become attached to agencies and their programs, vocal, organized, and determined constituencies will always form to defend the need for that spending—and insist that yet more is necessary. Given that bureaucrats quickly learn how to both hide bad news and frustrate any attempt at legitimate outcome measurements, expenditures simply continue unabated year after year without any honest accounting of costs and benefits. Money goes in, money goes out, and citizens rarely have the least idea where, why, and how their tax dollars are being spent—which gladdens the hearts of the political class and their allies busily enriching themselves at the public till.

Second, if government is permitted to heedlessly expand its mandate by assuming more and more of the responsibilities that should be left to parents, the private sector, religious institutions, and civic organizations, personal initiative and responsibility is eroded. No matter how much people with the best of intentions might wish it to be otherwise, government cannot shield us from every problem. Moreover, a fair and just government should never protect its citizens from the consequences of their own irresponsibility because it will simply encourage and enable more of the same. This will both frustrate the responsible and empty their pockets to pay for the increasing foolishness of others. The end result is bureaucratic growth and government policies that do little other than subsidize personal failures and enable social dysfunction.

Does any of this sound familiar? If it does, consider speaking out, demanding accountability, and voting new leadership into state offices. The worst strategy of all will be silence. If we are too beaten down and befuddled to insist on dramatic change, we deserve to reap the whirlwind that lies dead ahead.





America’s “Affordability” Problem

If one were to make a list of the three spending categories that bedevil the average person’s budget, the list would read as follows: healthcare, housing, and education.

Now make a list of the spending categories where federal and state policies have most actively attempted to improve affordability, and three race right to the top: healthcare, housing, and education.

Quite a coincidence, isn’t it?

When I entered college in 1976, the following were true:

• Annual cost of healthcare per person: approximately $690
• Median home value: approximately $44,000
• Average annual cost of a four-year private college:          approximately $10,700
• Average annual cost of a four-year public college: approximately $1,200
• Average annual salary: approximately $9225

It was, therefore, quite possible—if one was careful with money—for the average person to obtain healthcare, find somewhere to live, and obtain an education at a public college or university. Purchasing housing and funding an education did, of course, require some borrowing and some hard choices about where and how to spend, but a comfortable life with reasonable aspirations was available for individuals who were willing to work hard and make sacrifices in pursuit of their goals.

Nothing was easy, nothing was guaranteed, and nothing was free; however, everything was possible for those with initiative and perseverance. Obviously, this is no longer the case. Although local conditions and circumstances vary somewhat, the aspirations of average American are being crushed by the onerous costs of healthcare, housing, and higher education—the expenses associated with these essentials having far surpassed both the CPI and personal incomes. What happened between 1976 and today, and what role did government play in advancing—or impeding—our dreams?

The short answer is that government “helped” you—but not in the manner you expected. Instead of improving affordability by allowing transparency and market-based efficiencies in these three critical areas of the economy, heavy-handed and clumsy government interventions have completely obliterated honest and open markets driven by basic value and sensible pricing. Healthcare, housing, and education are now almost wholly controlled by rules and regulations that are written and interpreted by unelected bureaucrats at the behest of elected officials who are beholden to their campaign contributors. Given how disconnected from economic reality our healthcare, housing, and education markets have become over the past few decades of government interference, any attempt to allow them to operate independent of supervision and—more importantly—the overt and hidden price supports now baked into the system will surely lead to startling price deflation across these three sectors that will rattle the very foundations of our economy, financial systems, and society.

*   *   *

The explosive growth of the cost of healthcare is obviously affected by the simple fact that the average American is older than 40 years ago—therefore, requiring more healthcare. However, it is also a fact that Americans pay far more for exactly the same procedures, medications, and services than any other developed nation in the world; an aging population does not, therefore, tell the whole story. We should instead look at the manner in which governmental policies have disastrously skewed the health insurance market by promoting fee-for-service reimbursement (which perpetuates endless medical “churn” to drive up provider incomes), poor internal controls to identify fraud, and virtually non-existent efforts to control costs—producing an almost perfect mechanism for driving up healthcare costs for everyone.

Moreover, the politicization of healthcare through government interventions—Obamacare being the most recent and visible example—causes what should be a free market to be captured by special interests and lobbyists whose sole concern is making certain that the gravy train keeps rolling so that profits can endlessly rise. This fatally flawed public marketplace, of course, affects the private healthcare sector in turn because all the rules and regulations written by state and federal legislators affect both—and focus almost exclusively on expanding access with almost no concern for costs.

As a result, whether it comes out of our own pockets or is “free” healthcare paid through taxes and government borrowing, every aspect of American healthcare costs more and more—yet our health outcomes compared to the rest of the world lag further and further behind because the system is driven by a quest for profits rather than outcomes. A system that benefits itself by paying for a heart transplant instead of a health club membership is not serving the public’s interest, and the glacial movement towards reimbursement models that incentivize patient outcomes and pay a flat annual amount per patient rather than allowing every separate service to be endlessly billed through a fee-for-service model are wonderful, but their growth is held in check by the political capture of the healthcare market by powerful corporations and interest groups that buy the legislative process with their campaign contributions.

Not surprisingly, decades of “reforms” have seemed to do little to help the actual patient—but they always line the pockets of the pharmaceutical industry, big hospital conglomerates, specialty care providers, and durable medical equipment manufacturers. Today healthcare costs absorb 18% of our nation’s entire Gross Domestic Product and cost over $10,000 per person, which is twice the average for other developed countries.

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The catastrophe of government efforts to improve housing “affordability” would require an entire bookshelf to detail, but we can easily see the broad outlines of the problems that have been created in three areas.

Public housing—the signature effort of government to help provide homes for the poor—has obviously contributed to urban blight, crime, and a host of social pathologies while trapping generations of Americans in conditions that are little better than prisons. This all has, of course, been facilitated by a political process that rewards insiders and campaign contributors with lucrative contracts, politicians who are happy to cut ribbons yet are be nowhere to found when roofs leak and furnaces malfunction due to shoddy construction and maintenance, and the sheer magnitude of government incompetence—quite a toxic brew.

In addition, government lending programs have for decades encouraged the more affluent to flee their poor neighbors by creating swathes of new housing stock that lock out the unfortunate and actively discourage any attempt to create mixed-income neighborhoods. The result of decades of these programs and incentives has been the creation of suburban and urban mono-cultural monstrosities that allow developers to turn a nice profit yet contribute to cruel segregation driven by income levels that serve to only more thoroughly isolate the most vulnerable families based on their credit scores. The endless sprawl that results also drives the building of expensive and expansive infrastructure to support this insanity—legacy costs we pay for through escalating property and state taxes that many can ill afford on top of their mortgages.

Finally, the ruthless suppression of mortgage rates to improve “affordability” has encouraged ruinous speculation through “house flipping” that has enriched a few but further ratcheted up prices and inflated a series of housing bubbles that have resulted in real estate crashes that always seem to lead to taxpayer bailouts of lenders stuck with a fistful of non-performing mortgages. Government policies that turn basic shelter into a crazed casino of greed serve some well but cause widespread damage to the social fabric of our nation. Today the median price of a home in the United States has hit $345,000—which places an unconscionable strain on families struggling just to get by.

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Education is, sadly, perhaps the most pungent example of the harm government efforts to “help” can cause. Briefly, the federal government decided decades ago that the best way to help students to afford education was to facilitate their transformation into debt slaves. Between the mid-1970’s and today, the aggregate subsidized loan limit for the Stafford Student Loan program jumped from $10,000 to $65,000, thus allowing colleges and universities to dramatically and unconcernedly raise tuition, room, and board prices because students could, after all, simply borrow more to cover the increased costs.

However, just in case students want to go all in on that Art History degree and graduate school, students can now blithely sign away their futures with additional unsubsidized loans up to a total of roughly $138,000 in borrowing. In addition, let’s not forget those lovely Parent PLUS loans that help college and universities to destroy the golden years of mom and dad by allowing them to accrue their own crippling debts to help pay for the salaries of an army of Assistant Deans and the whirlpool tubs in the new Student Center. It seems little wonder that college enrollments are dropping nationwide. All this “affordable” education is destroying the financial futures of generations of Americans by impoverishing both the young and the old—a disaster that has led to a terrifying total of over $1.4 trillion of student loan debt.

*  *  *

In short, decades of government efforts to make healthcare, housing, and education more affordable have been a costly and damaging constellation of failures that have enriched a few and emptied the pockets of everybody else. Given the inherent unsustainably of these markets absent increasingly intrusive and expensive government programs, one can easily foresee a point in the future when they can no longer be propped up.

There is an old saying: Only when the tide goes out do you discover who’s been swimming naked. As government debt and voter frustration grow, the chances that we will be forced to reckon with long-hidden price realities in healthcare, housing, and education looms ever larger. This will be an unpleasant and unwelcome wake up call for many who were led to believe in values that were artificially created and expensively maintained, but it is likely to soon become an unavoidable reality.









Looking Beyond A Broken State


If you live, work, or own a business in Illinois, the results of decades of political malfeasance are easy to spot: services cut, schools struggling, credit ratings downgraded, essential services curtailed, infrastructure in disrepair, public safety and health spending shortchanged, taxes and fees raised, and governmental reforms endlessly postponed. This is, understandably, a source of incredible frustration for citizens who daily deal with the many problems caused by the irresponsible practices of state government.

Unfortunately, the solutions that are now being proposed in Springfield boil down to more of the same: Give us your money. Apparently the idea that abandoning business as usual—when business as usual has nearly put the state out of business—is beyond consideration. Illinois has instead become the poster child for what happens when elected leaders decide that finding new and expensive ways to fund governmental failure is itself the whole point of governing.

These are the end times for giveaways and graft in the Land of Lincoln. The financial catastrophe that now confronts Illinois is wide, deep, and beyond repair—as the Governor and State Legislators are well aware; it is now simply a question of who will be blamed when the system crashes. A monstrous current accounts deficit, grotesquely underfunded state pension systems that offer retirees no security, and decades of excessive and corrupt overspending are now pushing Illinois right to the brink.

There is only one solution that will solve Illinois’ calamitous financial shortfall: bankruptcy. Although federal law currently prohibits states from entering bankruptcy, the recent “bankruptcy” of Puerto Rico demonstrates that laws can be tweaked to allow for state debts and obligations to be discharged. Although any Illinois insolvency would likely come with a more politically palatable appellation (“Fiscal Reconciliation”, anyone?), there is no other way forward. Delay of the inevitable may continue a little longer, but basic addition and subtraction will win out eventually.

Will this be painful? Yes. Will it prompt endless finger pointing and blame shifting? Absolutely. Will schools, state retirees, the elderly, children, state employees, the disabled, contractors, and taxpayers bear the brunt of the consequences while those with money and influence avoid the worst? Count on it. Fiscal meltdown, as much as we might wish it to be otherwise, is a process that is never fair and rarely reasonable. It is instead a dirty, raw, and frightening process that drives wedges between people and institutions while all are desperately scrambling for a seat on the last leaky lifeboat before the ship of state goes down.

Citizens of Illinois are in for a rough ride for years to come, and it is likely that even more residents will join the many already abandoning the state. However, those who remain will have an opportunity to participate in the historic rebuilding of a state government and its institutions. If people are strong, if they are responsible, and if they are humane, Illinois can once again be a wonderful place to live and work.


We’re Turning Japanese


I’m turning Japanese
I think I’m turning Japanese
I really think so….   

–The Vapors (1980)

It is generally acknowledged that when national debt surpasses 100% of Gross Domestic Product (GDP) any nation, except under the most exceptional of circumstances, will likely be on a very slippery slope to major economic problems. The official U.S. government debt has now ticked over this threshold (let us not speak at this time of our unfunded federal, state, and municipal obligations), and the major financial take-away of the Obama presidency—and likely its most lasting legacy—has been has been a stupendous rise in this federal debt load, which nearly doubled during his “take what you want” administration that paid not the least attention to the basic laws of addition and subtraction.

Today we are rapidly approaching $20 trillion dollars in federal debt (never mind what we have promised and have no hope of ever delivering in the form of future entitlement spending), and dramas over raising the federal debt ceiling to accommodate our continued profligacy have become a regular feature of D.C. politics, so we can expect that discussions about just how deep a hole we are now in are going to dominate our national dialogue as we slowly become painfully aware that the rules of the game have changed. Politics will no longer be “the art of the possible”, a notion that has driven roughly a half century of American governmental thought. We will instead soon be discussing politics as the art of managing a jarring contraction of the progressive fever dream of never-ending benefits magically paid for by ever-increasing taxes on the “rich”, which often translates into ruthlessly extracting money from the paychecks of anyone who has a relatively decent job.

Japan has long been the acknowledged international leader in accumulating government debt. At the present time, their total government debt totals roughly 250% of their GDP, which is a frightening total that many brilliant individuals explain away as not that much of a problem for a variety of ridiculous reasons that make sense only to credentialed economists and central bankers. We are, by comparison, supposed to feel pretty good that our “official” debt is far below that of Japan—which is a perhaps a telling sign of how delusional and disingenuous our political leaders have become when it comes to speaking to us about our economic futures.

Imagine, if you will, what will happen when we can no longer borrow to pay our nation’s bills—and the fear of precisely this happening is why the national debt limit will always be raised despite the harrumphing and hollering by all involved. Were the national debt limit not raised this summer—and every summer, spring, winter, and fall to come—the collision of available funds and daily financial obligations would be catastrophic and prompt a fairly ugly political choice: stark reductions in government programs and benefits versus instantaneous insolvency and a collapse of the market for U.S. Treasury bonds. No elected official will ever allow that to happen because the peasants would revolt—and hold them accountable. Unless the Congress and Senate can find a way to meet on another planet, there would no place to hide from angry taxpayers, businesses, and bondholders. Therefore, for both political and practical reasons, we’re going to borrow and borrow—or print and print—money until our financial system collapses.

There is, to be sure, another option available: Implement an immediate plan to dramatically shrink the scope and size of the federal government and its many, many programs and obligations to match available tax revenue while also beginning to pay down our debts. However, the problem with this is obvious to all. The uproar—driven by partisan politics and an equally partisan national media—about “heartless” cuts to programs that would harm our “most vulnerable” citizens (you all know the script, folks!) is always deafening when the least suggestion is made to better reconcile tax revenues and government outlays.

Of course, no one in Washington or the Washington media bubble is ever able to explain the supposed compassion behind strapping generations of Americans to terrifying levels of debt—according to the National Debt Clock, every citizen is now on the hook for over $61,000 exclusive of state and municipal debt obligations—but that is the unfortunate nature of these discussions. We can’t talk about what really needs to be resolved because politics is also the art of avoiding difficult choices for as long as humanly possible.

Oh, by the way, if you take into account the total U.S. Debt, which includes state, local, and household debt among other factors, every citizen now owes over $212,000 dollars—and that is exclusive of student, automobile, credit card, and mortgages debts, which tack over $56,000 dollars on to the debt for each citizen.

Sushi, anyone?

Democrats In A Debt Trap

The electoral fortunes of the Democratic Party are now at a low ebb, and leaders of the party are seeking a path that will allow them to begin winning back the governorships and state legislatures they have lost to the Republican “Red Wave” in recent elections. On the federal level, the loss of all three branches of government—the election of Donald Trump to the Presidency being the most galling loss of all to many—has led to a great deal of soul-searching that has yet to produce a solid strategy for success beyond continuing to paint the Republicans now firmly in power as heartless plutocrats out to enslave America.

Only time will tell whether simply bad-mouthing Republicans will ultimately turn into a winning electoral strategy (Hint: It didn’t work for Hillary Clinton). However, I wonder if there is a much bigger electoral problem facing Democrats that is not being sufficiently discussed: trends in the American labor market over the past half century—particularly those regarding union membership—that could ultimately serve to lock Democrats out of power for many years to come.

The support of the Democratic Party for the American labor movement during the glory years of the Roosevelt presidency, the industrial boom due to rearmament around World War II, and our manufacturing hegemony in the period immediately after the war while the rest of the world’s factories still lay in ruins likely hit its high point in 1954, when roughly 35% of all American workers were unionized. Our heavily unionized private sector employees in key America industries such an automobile and truck manufacturing, steel, coal, and transportation helped create national wealth on a scale never before seen in world history, and many Americans enjoyed a lifestyle as a result that was previously unimaginable.

The precipitous decline of many formerly dominant U.S. industries is well-known to all, and today a scant 6.5% of private sector workers are members of unions, which would seem to signal the death of the American labor movement—but this is not the case. Although total union membership has certainly declined, and now only 11% of all workers are unionized, labor unions have become a dominant player in one part of our job market—public sector (read: government) employees, where roughly 35% of workers are now unionized.

During the decades following World War II—and most particularly during the decades following the “Great Society” progressive politics of the 1960’s—government employment as a percentage of the workforce exploded, and today roughly 1 in 5 American non-military workers is drawing a municipal, state, or federal paycheck. At the local government level union membership among workers hovers between 40-45% because of the inclusion of heavily unionized police, firefighters, and public school teachers in the totals. This is a transformation that has changed both the American labor movement and its relationship to our citizens.

In a galaxy a long, long time ago—and now far, far away—unions largely represented the downtrodden industrial proletariat battling the evil capitalists for a fair share of the wealth, in the form of profits, their labor was creating. However, the demands of workers were always constrained by the profits that were available to share; unions certainly did not want to kill the goose that laid the golden egg. This near-magical balance was, of course, destroyed by foolish free trade agreements that allowed companies to simply relocate their operations to countries where labor was much, much cheaper. However, I hope—and I know I am not the only one who feels this way—that a rejection of the illusory benefits of globalization will bring much needed manufacturing jobs back to America and reinvigorate our private sector unions.

However, when it comes to public sector unions, there is no balance between worker demands and available revenues/profits that constrains negotiations; taxes are simply raised or costs deferred to pay for contract agreements, and any dollars and cents reality is largely absent from the equation. Those long gone battles between industrial workers and greedy capitalists that still inform our collective understanding of labor-management relations are misleading models for today’s labor market; the negotiations between public sector unions and craven politicians who often lack all business sense are one-sided affairs that have become, to be blunt, a fiscal disaster for the taxpayers of our country.

Unconstrained by the realities of profit and loss, public sector workers now typically enjoy salaries, job protections, and benefits (particularly as regards healthcare and retirement) that the average private sector worker no longer even dreams of possessing. We now often encounter the rather perverse situation of relatively less affluent private sector employees being taxed to pay for the comfortable lifestyles of those who work for government, and these pressures are reaching the boiling point as the costs of public pensions and retiree healthcare agreements—that were negotiated decades ago with absolutely no thought as to how they eventually would be funded—are now blowing gaping holes in local, state, and federal budgets. Estimates of the cumulative shortfalls in public sector retirement plans, which are still built around defined benefit models that have largely disappeared from the private sector, range between $3-5 trillion. This is going to get real ugly real soon, and taxpayers—unsurprisingly—will be caught in the middle.

All of this leaves the Democratic Party in one heck of a bad spot. Given that many millions of dollars of union contributions to the Democratic Party and Democratic politicians are major sources of funds to support political and electoral operations, Democrats cannot back away from their traditional support for these unions and their demands their contracts be honored in full. However, given that this will essentially boil down to requesting steep, escalating tax increases to cover the costs of fiscally unsound pension and healthcare plans for decades to come, Democrats are going to find themselves in the very unpopular position of squeezing money—and lots of it—out of the struggling many to pay for the comfy lifestyles of the few. Citizens will certainly push back hard—as has already happened where bailouts have been sought after municipal public sector plans have failed—and their demands that retiree benefits be reduced to levels that can be sustained with the tax dollars now available will certainly grow louder and angrier.

The bottom line is that, in the difficult years ahead, the Democratic Party will be in a perfect position to make a lot of enemies. Members of public sector unions will feel betrayed by the Democratic politicians they have so lavishly supported with political contributions, and taxpayers will be likewise angered about being asked to foot the bill for financially irresponsible employee contracts. Republicans, who have historically advocated for small government and (at least in words) for fiscal restraint will simply sit back and watch these battles while positioning themselves as the protectors of working class taxpayers—unlike those danged crazy Democrats who just want to raise everyone’s taxes and spend, spend, spend.

Unless the Democratic Party can find a way to convince their allies in public sector unions to voluntarily reduce their salaries and benefits in order to forestall a fiscal supernova, it is going to be a very rough go at the ballot box for their candidates, which will push them even further into the political wilderness and leave our nation with de facto one-party rule. This would be a real shame because a vibrant two-party system provides tremendous benefits to our nation and its people, but I wonder whether this fiscal trap is one the Democratic Party has any hope of escaping unscathed.