Private equity investments underperformed broad US stock indexes for the fiscal year that ended June 30, 2020. Importantly for taxpayers and governments, this underperformance of private equity weighed down public pension system asset returns during a particularly difficult year for investments.
These investment results may mark the beginning of the end of superior private equity returns that have characterized early 21st century institutional investing. If private equity returns have now fallen “back to earth,” many public pension systems can expect heightened scrutiny over their allocations to this asset class and the high investment costs that go with it.
Most businesses in Texas had been allowed to operate at 75 percent of capacity since mid-October, when Abbott also allowed bars to reopen. It was implausible that removing the cap would have much of an impact on virus transmission, even in businesses that were frequently hitting the 75 percent limit.
While Abbott said Texans would no longer be legally required to cover their faces in public, he urged them to keep doing so, and many businesses continued to require masks. At the stores I visit in Dallas, there has been no noticeable change in policy or in customer compliance.
Conversely, face mask mandates and occupancy limits did not prevent COVID-19 surges in states such as Michigan, where the seven-day average of newly confirmed infections has risen more than fivefold since March 1; Maine, which has seen a nearly threefold increase; and Minnesota, where that number has more than doubled. Cases also rose during that period, although less dramatically, in other states with relatively strict COVID-19 rules, including Delaware, Maryland, Massachusetts, New Jersey, Pennsylvania, and Washington.
Florida, a state often criticized as lax, also has seen a significant increase in daily new cases: 34 percent since mid-March. But Florida, despite its relatively old population, still has a per capita COVID-19 death rate only a bit higher than California’s, even though the latter state’s restrictions have been much more sweeping and prolonged.
After sifting through news myriad stories about California’s ongoing scandal at the Employment Development Department, however, I’m left wondering: Where is Ed Anger when you need him? I’m “pig-biting mad” about the ongoing unemployment mess, as an angry Anger might write. Yet California’s elected officials and a weary public are treating it like any garden-variety bureaucratic failure.
This is one of the most infuriating scandals ever to plague our state. The department, which is responsible for paying out unemployment insurance claims, has been incapable of paying legitimate claims even as it has paid as much as $31 billion in fraudulent ones, often to inmates. Think about those staggering losses. They would be enough to make a dent in any number of the state’s infrastructure, budgetary, and debt-related problems.
The stories are as unbelievable as the Weekly World News‘ latest Elvis sighting. Here’s a desk-pounder from CBS Los Angeles: “A Fresno girl who just celebrated her first birthday is collecting $167 per week in unemployment benefits after a claim was filed on her behalf stating that she was an unemployed actor.”
Cowen cautioned that many technological advances would doubtlessly improve human welfare but still might not show up in U.S. gross domestic product (GDP) and productivity statistics. For example, the new plug-and-play vaccine platforms may well result in highly effective vaccines for malaria and HIV, and that would be a huge boon for millions of people living in poor countries, but those benefits would be unlikely to show up U.S. GDP per capita statistics. He also pointed out that the recent significant advances in green energy production are occurring chiefly as a way to avoid the possible catastrophe of man-made climate change. Because climate change is a hidden counterfactual, replacing fossil fuels with solar, wind, and batteries would not necessarily lead people to feel as though their standard of living had risen.
Strain countered that the toll that infectious disease takes on the stunting of talents and skills in poor countries would be greatly ameliorated by rolling out cheap effective vaccines now made possible by messenger RNA technology. Over a longer time horizon, the U.S. and the rest of the world would significantly benefit from efflorescence of invention and entrepreneurship arising in regions whose development is held back by prevalent plagues.
It’s time for the Democrats who elect presidents that promise not to jack up taxes on anybody but the rich to come to terms with something: These politicians can’t continue to spend that much money without raising taxes on nearly everyone, and that includes some regressive taxes. I don’t like it, since I’d prefer the size and scope of government to be significantly smaller—but this reality is not optional.
Here’s another reason why Biden was never going to be able to keep his promise: He already announced his intention to increase the corporate income tax from the current 21 percent to 28 percent. The reality here is that the corporations that he says are going to send bigger checks to the Internal Revenue Service (IRS) after the tax hike aren’t the ones who actually shoulder this heavier tax burden.
The numbers here are simply staggering. Consider the fact that in 2019, the last full budget year before the pandemic, the federal government spent a grand total of $4.4 trillion. Combined with the bill that already passed in March, this plan represents nearly $5 trillion in new spending.
Though the specifics of the proposal are in flux, it seems to bear some similarities to the $1.9 trillion American Rescue Plan (ARP) that Biden signed into law earlier this month. That bill was ostensibly a COVID-19 relief measure, but only a small percentage of the money was actually directed toward dealing with the pandemic. The upcoming $3 trillion package will be called an infrastructure bill, but the Times says only about $1 trillion would be directed toward such traditional infrastructure items as roads, bridges, ports, and improvements to the electric grid.
The California State Teachers’ Retirement System (CalSTRS) recently reported a 26 percent increase in early teacher retirements in the second half of 2020 relative to the previous year. CalSTRS officials suggest that the COVID-19-driven spike in retirements will not affect the pension plan’s long-term solvency. But even if that holds true, CalSTRS is currently only 66 percent funded and has $100 billion in unfunded benefits. The costs associated with paying off this pension debt are skyrocketing and siphoning hundreds of millions of dollars from classrooms each year.
Like many states, California has made decades of legally ironclad promises to teachers regarding retirement benefits that, for a variety of reasons, have become massively underfunded. The most notable factors contributing to growing debt are underperforming investments, inaccurate actuarial assumptions, and politicians’ longstanding preference to spend money on sexier things than retirement plans. When a public pension plan accrues debt, states and school districts need to start paying down that debt in addition to covering the normal operating costs associated with pensions. While California’s ledger would indicate it has been making pension debt payments, CalSTRS funding has only gotten worse over the last decade.
In some cases, state and local governments show net OPEB liabilities, which is the total amount of benefits already promised to retirees, as large or larger than their net pension liabilities. Although the total future cost of retiree health care benefits is smaller than pension benefits, which are intended to replace income, most governments have at least partially prefunded their pension benefits while setting aside little or no money to cover their future OPEB costs. This is often attributable to the strong legal protections granted to public pensions but that largely do not extend to OPEB benefit promises made to workers in most places. Nonetheless, by failing to set aside funds for retiree health benefits as employees accrue them, government employers are burdening future taxpayers with growing debt. The size of the problem is also raising doubts among prospective retirees about whether the benefits promised to them will really be there when they retire.
In this post, I consider two potential strategies for using the temporary increase in governments’ fiscal capacity to address unfunded other post-employment benefit liabilities: (1) prefunding and reforming defined retiree healthcare benefits, and (2) switching employees to defined contribution retiree health care benefits.
Last week Austria, Norway, Denmark, and Iceland all suspended the administration of the Oxford-AstraZeneca COVID-19 vaccine, citing reports of blood clots occurring in a few folks who had been inoculated with it. Ireland, France, Germany, Italy, Spain, Thailand, and the Netherlands have now joined them.
“There is no causal effect established or anything like that yet,” Irish Prime Minister Micheal Martin told CNBC, “but as a precautionary move in line with the precautionary principle and in an abundance of caution, our clinical advice was to pause the program whilst the EMA does a review of this.”
The precautionary principle is an ideological construct that eschews risk-benefit evaluations and essentially requires that all new technologies be somehow proved entirely risk-free before they can be used.
Indeed, an analysis from the National Taxpayers Union’s Andrew Lautz has found that when accounting for states’ rainy day funds and steady revenues, only about $6 to $16 billion (not the proposed $195 billion) would be needed to make those governments whole.
Lautz also argues it’s inappropriate to divvy up money to states based only on their number of unemployed residents, given that the jobless are already receiving targeted benefits and that those benefits are themselves helping to prop up states’ tax revenues.
“Individuals who want a job and don’t have one are certainly struggling right now, but the [$900 billion] December bill and the proposed COVID-19 relief package support them with a $300 or $400 per week boost to their regular unemployment benefits,” writes Lautz. “The $600-per-week benefit from the CARES Act helped prevent major state revenue dropoffs in part because it allowed unemployed people to continue spending at rates similar to before they lost their jobs.”
According to estimates from the Centers for Disease Control and Prevention, the infection fatality rate for Americans who are 70 or older is something like 5.4 percent, compared to 0.5 percent for 50-to-69-year-olds, 0.02 percent for 20-to-49-year-olds, and 0.003 percent for people younger than 20. In other words, the risk for the oldest age group is 11 times the risk for the next oldest, 270 times the risk for 20-to-49-year-olds, and 1,800 times the risk for the youngest cohort.
Yet Los Angeles Times reporters Soumya Karlamanga and Rong-Gong Lin II, citing University of Florida epidemiologist Cindy Prins, write that “Florida’s older population might have, perhaps counterintuitively, prevented the virus from spreading as quickly as it did in California.” How so? “Young adults who socialize and mingle, either at work or in social settings, tend to spread the virus the most while older people are more cautious and stay home.”
Florida, of course, is a mecca for college students on spring break, whose socializing and mingling provided ammunition for critics of DeSantis’ alleged recklessness. And despite the relative timidity of elderly Americans, they account for more than four-fifths of COVID-19 deaths in the United States. Nursing homes alone account for more than a quarter of the total death toll.
Since the federal government is giving states money that they don’t need, there are two things state lawmakers can do: Use the federal money to grow government spending or pass that extra cash along to taxpayers by lowering their tax burdens.
However, the Senate inserted language in the American Rescue Plan expressly telling states that they “shall not use the funds provided…to either directly or indirectly offset a reduction in the net tax revenue,” or do anything that “reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.”
That same section of the bill also bans states from depositing the federal bailout into their public pension funds. That’s probably a good idea, but it’s pretty ironic considering that the American Rescue Plan also contains a completely indefensible bailout of some private-sector pension funds run by labor unions.