Wednesday, September 29, 2010

The Markets New Role

Anatole Kaletsky, in an Op-ed for the NYT, predicts the decline of "free-market thinking in international economic management," as well as the rise of greater state intervention in domestic economic management. In a passage highly reminiscent of Daniel Yergin's Commanding Heights, Kaletsky discusses the state prerogative for economic management:

"If market forces cannot do something as simple as financing home mortgages, can markets be trusted to restore and maintain full employment, reduce global imbalances or prevent the destruction of the environment and prepare for a future without fossil fuels?"

His answer to this question is nuanced - "yes and no" - an justifiably so. This article better articulates the options for economic development facing countries today than any that I have recently read. This passage summarizes the balance that must be struck between free markets and government management:

"Yes, because markets are the best mechanism for allocating scarce resources. No, because market investors are often short-sighted, fail to reflect widely held social objectives and sometimes make catastrophic mistakes. There are times, therefore, when governments must deliberately shape market incentives to achieve objectives that are determined by politics and not by the markets themselves, including financial stability, environmental protection, energy independence and poverty relief"

Kaletsky then explains the mechanism for effecting these policies without subsuming the power and benefits of the market, "This doesn’t necessarily mean that governments get bigger. The new model of capitalism evolving in Asia and parts of Europe generally requires government to be smaller, but more effective."

I couldn't have said it better myself. The Fair Market Movement is all about finding market based solutions to social, public and economic problems, without weighing the government with increased responsibility for outcomes. Kaletsky may be giving other countries more credit than is due in terms of the size of their shift from the "Washington Consensus" economic model, but he is spot on in describing America as embodying some of the worst Fair Market principles.

Thursday, September 16, 2010

Pension Reform - Half-Baked Proposal

In an Op-ed at, Richard Riordan and Alexander Rubalcava propose a "Race to the Top" initiative aimed at State and Municipal Pension fund reforms.

The proposal makes sense - have the federal government offer a way to reduce interest payments and guarantee the funds in exchange for much needed reforms aimed at increasing transparency and solvency. Their point that the federal government is already going to be holding the bag on the $1T+ in unfunded liabilities of all the TBTF pensions, so we might as well compel the funds to act more in our interests, is eminently true, and largely unappreciated in the public discourse.

The only issue I take is that they position their proposals to shore up government pensions as a solution to the situation of underfunding. The problem as I see it is that there are pensions at all. The truth is, a pension is by definition underfunded. Pensions have always been a device used by spineless managers and politicans to defer current operating costs by converting them into future liabilities - someone else's problem. Why would someone employ a pension (defined benefit plans) if they didn't intend to underfund it? It would be much less risky for workers to accept the pension contributions (defined contribution plans) and establish themselves an independent investment vehicle, but that would mean employers would have to pay every worker all the money they earned for that time period. Instead former managers, government and private, vastly preferred writing I.O.U.s with an accounting cost of capital of zero (I believe this to be the case, but am not a pension accounting expert).

GM kicked this can down the road for decades, and we all know how that story ended. The State and Muni pensions are next, though they are likely to get funded 100 cents on the dollar. While the taxpayer, local, state and federal, may not be able to dodge this bullet, I think any serious reform proposal for pensions must prevent the politicians and public unions from reloading the gun to our heads.

Private companies already eschew the pension , with most companies trying to wind them down and offering 401K type plans instead. If pension reform is going to be a "race to the top", I certainly hope the finish line is considered pension abolition. I realize it may take years, but we should at least be heading in that direction.