Randomly Noted

To those fretting about the very real budget problems of U.S. cities and states, their difficulty in fulfilling  financial promises they made and the implications of all that for the market in tax-free bonds, here’s a number that might offer a measure of reassurance. 72. Or, if you like, 77.

These numbers represent the percentages, respectively, of the number of polled New Yorkers who support the tough budget proposal of the state’s new Democratic governor, Andrew Cuomo, and the percentage who have a favorable view of him. (The source is the Siena Research Institute.)

That’s New York, the fabled liberal state. Across the river in New Jersey, the controversial Republican governor, Chris Christie, is lighting into government worker benefit and retirement plans that threaten the state’s fiscal future.

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Call it the authoritarian advantage.

The notion gets tossed around all the time in macroeconomic discussions. In difficult economic times, non-democratic countries have an advantage. They can make fast decisions by fiat, steering their economies as they see fit. In democracies, of course, things are messier and slower.

Of course, no one here is advocating dictatorship, economic or otherwise. The freer the economy and the citizen the better. But it is worth noting in these troubling times, America is following an expected pattern in which so-called economic and business elites believe in certain paths to economic improvement and growing numbers of voting citizens think otherwise.

Call it a populist backlash.

Example one is the bank bailout. Lots of people now call TARP (Troubled Asset Relief Program) some variant on the best program that also managed to be the most hated. Many people understand that letting the financial system collapse in 2008-09 would have meant greater disaster for everyone, but having voted for bank bailouts is now no badge of honor for politicians seeking re-election.

Trade is another one. It wasn’t long ago there was a pretty broad coalition in the U.S. that believed the freer the trade, the better. The U.S. would benefit because from agriculture to banking services to manufacturing equipment, we had some useful things to sell the world.

Sure, many unions and other advocates of manufacturing workers, whose jobs could easily be shipped abroad, stood long opposed to freer trade, but they now have lots of company. It’s understandable that when jobs get scarce people want to build walls around the jobs that remain, but such policies, especially if widely adopted by nations, will hurt everyone.

The U.S. Federal Reserve is expected to embark on another round of quantitative easing to help spur the stuck-in-the-mud economy. The essential increased printing of money to buy Treasury securities will hurt the value of the dollar, but the Fed believes a stronger level of inflation and even higher inflation expectations are needed to get people and businesses spending again, eventually increasing employment and keeping the scary deflation monster at bay.

But the notion of higher inflation, especially engineered by a central bank, likely won’t sit well with many people. In a recent issue of The New Yorker magazine, James Surowiecki cited a 1996 study by the well-known Yale economist, Robert Shiller, that showed “sizable majorities” of people globally are dead set against inflation, even in a trade-off for higher employment.

That might well be a reasonable stance, because once ignited inflation and its expectations are tough to tame. Also, the Treasury bond buying plans bythe Fed might simply not work. At least Fed officials don’t have to worry about getting re-elected.

People in Congress do, and that’s why it’s a pretty sure bet there won’t be another big round of fiscal stimulus coming, absent an economic disaster. Too much worry about the giant federal deficits already created.

Even though, abstractly at least, the case could be made the Fed’s efforts would have a better chance of success if there was a stimulative assist from fiscal policy, leaving the essential and extraordinarily diffiicult deficit reduction issue for another day.

Underfunded pension commitments to public employees is a central, long-term issue for local governments and for the U.S. municipal bond market.

According to a new academic study, even substantial revisions to those pension plans likely will leave taxpayers with a big bill to fill the hole, a $1.5 trillion-sized hole.

Dramatic policy changes such as eliminating pensions’ cost-of-living adjustments and kicking retirement ages up to levels in line with the Social Security regime still leaves a $1.5 trillion hole, said Joshua D. Rauh, co-author of the study and associate professor at Northwestern University’s Kellogg School of Management.

And such changes can hardly be assumed. “While these ‘drastic’ actions may be less politically viable than more incremental policy measures, even these do not come anywhere close to solving the problems associated with states’ legacy pension liabilities,” says the  study by Rauh and Robert Novy-Marx of the University of Rochester.

Their findings were presented Thursday at a meeting of the National Bureau of Economic Research. 

Without changes, they estimate the unfunded liability stands at $3 trillion.

Throw another worrisome fact into the public pension mix. Most states figure they are going to earn a return on their existing assets of about 8% to help fund future payouts. At least in the current investment environment, that’s quite an assumption.

None of the gloom should stop states from enacting sane reforms for pension schemes. A nascent movement is under way. This column has previously noted a significant ‘agency’ problem exists with public employee retirement benefits. Temporary state political leadership has little incentive to tackle these nasty issues or to be tough in union negotiations, unless  they see tangible short-term political advantage.

As more voters understand the pension liability predicament many states are in, that political will may make itself known.

At a minimum, retirement age and other standards should better mirror private industry.

“The debate over the solution is over transfers,” the study’s authors write. “The current situation is one in which beneficiaries view their benefits as secure promises and taxpayers do not perceive that they will be held accountable for guaranteeing those promises.”

Ultimately, Rauh and Novy-Marx figure taxpayers will have to come up with the money to fill the bulk of the gap that remains regardless of the level of reform that takes place. “If unfunded liabilities continue to grow, the bailouts could be even larger.”

The UAW says it will try to claw back benefits it gave up when the U.S. auto industry nearly went under. Great. Just when there’s a glimmer of hope that at least two of the U.S. auto makers – Ford and GM – will survive (I’m still not sure about Chrysler), here comes the United Auto Workers with their old-thinking. The global auto industry is in such flux, the post-crisis UAW needs to be a partner, not a problem. Nissan-Renault CEO Carlos Ghosn, visiting our newsroom this week, spoke of the multi-billion-dollar bet his firm is placing on the advent of electric vehicles. I can’t tell you if electric cars will take off in a big way or experience a slow climb in popularity. What I do know is there will be more electric cars on the road in coming years, just as there are increasing numbers of hybrids. It’s also clear that the established auto makers face mounting competition from upstart rivals, including a surging Hyundai and a pack of Chinese up-and-comers. Let’s hope the latest UAW rhetoric is simply a cheap effort to excite the rank and file rather than a sign the leadership has learned little from the American industry’s near-death experience.

It was a classic clash of corporate profitability/responding to Wall Street versus the small-town impact corporate decisions can have. In the end, both the company and the community made concessions and while painful, not as bad as it could have been.

Harley Davidson has been hit as hard as many companies this recession, especially companies that make discretionary purchase products – like motorcycles. It has seen profits fall the last couple quarters by more than 80%.  Revenues have fallen off the table.

To save money, the company proposed closing a huge production facility in York, Pa., and possibly moving to a more efficient and lower cost facility in another state far enough away that none of the current workers would be likely be able to apply for jobs. The York plant has 42 buildings on it, making manufacturing cumbersome. Work rules and job classifications complicated the cost structure as well.

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The jobs summit in Washington, DC., gathering people to meet with President Barack Obama in the nation’s capital to fret about the significant joblessness plaguing the U.S. economy won’t produce much.

Maybe a good idea or two will emerge, but, really, the choices if you want to do something about the significant unemployment problem are basically two. They occupy either ends of the economic ideological divide.

Choice one: you stay the course. The economy is starting to improve, albeit slowly. Jobs will follow some day. Perhaps you tweak the tax code to encourage hiring.

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If anyone should feel aggrieved by the latest twist in the General Motors-Opel-Germany spat it’s the labor unions. Only a month or so ago, they were the darlings of Germany’s political establishment. Scrambling to prevail in September federal elections, politicians from Chancellor Angela Merkel on down were labor’s best friends.

Their spiel generally went like this: Opel should be sold to the bidder who would protect the maximum number of jobs; Germany taxpayer money would be forthcoming; and only one purchaser had the workers’ interest at heart – the Magna+Sberbank combination linking a Russian bank with a Canadian-Austrian auto parts maker. Also integral to the pols’ mantra: Another potential buyer, private equity firm RHJ International, would pillage Opel’s German factories in the manner of those “vulture” funds so despised by the German chattering classes.

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The U.S. government supports a strong dollar, but it has policies in place that undermine the value of the currency.

China does not have a free-floating currency, a fact that just few years ago irked the U.S. Congress to constant fulminating and near to the point of unilateral, punitive action.

Today, the U.S. Treasury secretary praises China for “playing a major role in continuing to contribute to recovery.” Secretary Timothy Geithner doesn’t answer questions about the value of China’s currency.

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For years, the nation’s largest public pension fund has been a major force in national investment trends and in corporate governance.

The California Public Employees’ Retirement System (whose acronym, CalPERS, boasts a strange capitalization pattern) stakes out the moral high ground for shareholder rights. It’s also an investor that made the decision to go well beyond simple stocks and bonds.

But, as well documented in a Los Angeles Times article today by Tom Petruno and Stuart Pfeifer, CalPERS’ reputation has taken a hit. A couple of quotes from the article give you the flavor:

“Slammed by huge investment losses in last year’s meltdown of financial markets, the nation’s largest public retirement plan faces questions about its long-term ability to make good on the benefits it owes more than 1.6 million workers, retirees and their families.”

And there’s this recent news:

“CalPERS also has been tainted by its involvement with so-called placement agents, middlemen who lobby pension funds on the behalf of big money managers.”

By the way, if you want a career with a lot of income when you are done, consider the California Highway Patrol. An officer with 30 years of service can retire at age 50 at 90% of base pay for life. No typo, that is 90%.

With Ford the sole (relatively) healthy U.S. auto maker, this week’s newsflow is very instructive: The big events include the likely sale of its Volvo unit to China’s Geely, and Ford’s efforts to get UAW locals to approve measures that would reduce its labor costs. Both news events are key to Ford’s survival. Bidding a final adieu to Volvo, should the Geely deal stick, would conclude an odd period in Ford’s history. Ford bought Volvo in 1999 for $6.4 billion;  as WSJ colleague Norihiko Shirouzu writes, after racking up Volvo-related losses Ford finally decided last year to ditchi t. Ford never should have bought another brand – it needed to improve its own vehicles, which it has finally done. The UAW situation speaks to Ford’s disadvantage relative to rivals Chrysler and General Motors; the latter are in worse financial shape but enjoy lower labor costs thanks to deep UAW concessions made in the heat of the crisis that sent the firms into Chapter 11 bankruptcy protection. As I and others have written, Ford is at a competitive disadvantage by virtue of being the only one of the Detroit 3 to have skirted the need for a federal bailout and bankruptcy protection. It would behoove the UAW locals to get with the program and let Ford function at cost levels that are within hailing distance of Chrysler and GM’s.