Good union, bad union.

A lot of discussion has been centered around excessive union demands that end up bankrupting various governments. Some have even declared all unions as evil. I think there can be a line drawn; some unions can be a useful tool of social equilibrium, while others may have no economic or social justification at all. I think private unions can be necessary to ensure that the profits are more fairly shared between the owners and the labour, but for this system to work, some conditions have to be met. Below I list those conditions and show how they often do not apply to public unions.

• Contract negotiation must happen with the employer. This ensures that unions will not be able to extort more than their labour is worth. At some point true business owner would prefer shutting his business down as an alternative to operating at a loss. Public unions, however, negotiate their contracts with other public workers in the government, while the true "business" owner - the taxpayer - is left out of the picture. This often allows public unions to negotiate conditions that could never be sustained in a profitable business.
• Business interests must be somewhat aligned with labour interests. The alignment does not have to be absolute. But if small private business goes bankrupt, workers normally suffer too. For public unions this is generally not so - public money comes in no matter what.
• Business must not be a monopoly. This is self-explanatory, I hope. The unwelcome effects of monopolies are well known in the Economic science. Healthy dose of competition ensures that labour  stays aware of its true market price. Public unions are often operated within a monopoly service, such as school system, and the costs are frequently hidden from both the taxpayers and the users of these services. The results, again, are a distortion of the market and salaries that would never be obtained in a competitive business.

 These three points are my case against many public unions, but not necessarily against private ones.

Why TARP #2 will still look like theft.

As Fed has become powerless (and all but irrelevant) in the recent months, the powers that be have been trying fiscal measures. The original TARP has now been recognized by most as a failure, mostly because the money pretty much went to line up the pockets of the bankers at virtually no upside for the taxpayer. See for example how Merrill Pay Was Down Only Slightly in 2008 From 2007 Levels. At the same time, most people don't realize how close the whole financial system was to a complete breakdown (as in, no ATMs, no credit cards working) in the October of 2008. It is quite likely that TARP has prevented that event. So even though the plan resembled theft much more than a rescue mission it did do some good.

Now we have Obama's proposed 825$ billion stimulus that is being debated in Congress; and on paper it looks better, since money seems to be intended to go to various 'productive' projects like education, infrastructure maintenance, etc.

I already wrote in the previous post about my distrust for any centrally planned initiatives, and about the dangers of fiscal recklessness, but for the moment I want to leave these aside and present you with a little piece from Bloomberg about how government projects actually work in practice: Hidden Bonuses Enrich U.S. Government Contractors. Here comes the choice cut:

...the government spent $368.4 billion on all contracts in 2008, and Republican Oklahoma Senator Tom Coburn estimates that about $100 billion of that was wasted.

US government actually managed to dwarf the numbers that caused recent outrage about Wall Street bonuses: 16$ billion in bonuses, compared to unknown trillions of taxpayer money spent on maintaining the financial system alive.

That is why I don't believe Obama's TARP will be more ethical than Paulson's. Money is still going to line up the pockets of the bureaucrats, just slightly different ones.

There is a way to effectively spend money for economy stabilization, but it is not what the corrupt politicians in Washington are doing. We could have much more bang for the buck spending this money where it really helps, but I probably should write a separate post about it.

Particle Physicist elected to Congress.

Maybe they do elect smart people sometimes! New congressman from Illinois is a former Particle Physicist Bill Foster who worked at Fermilab for a few years. Although I do not know Bill Foster personally, I have myself contributed many years of work to Fermilab. Fermilab recently ran into serious funding trouble so having a Congressman on its side will hopefully help.

More about Social Security Trust Fund.

My previous post about SS fund being whole was a little misleading. It was interpreted by some people as meaning that "there is no problem, nobody panic". But the correct interpretation should be slightly different. What the analysis done by Bruce Webb shows is that the trust fund has enough assets in it right now to remain whole indefinitely if those assets remain at their expected values. The catch here is that fund's assets are mostly invested in US government bonds rather than in cash. In other words, US government borrowed money from the Social Security Trust Fund. The Fund therefore has direct exposure to US debts, and therein lies the problem. While US government debt is still (officially) AAA-rated, some economists have argued that US has amassed such a huge debt burden that it cannot possibly repay it in a normal way, so some kind of default has to happen. Since outright default of the government (like in Russia or Argentina) is unlikely, debt will be dealt with in a combination of other ways. Some of it will be devalued through inflation and dollar devaluation, some may be paid off through tax increases, and some through budget cuts. None of these three ways alone will be sufficient to deal with the debt. For example, if US lets inflation climb too high, it will devalue some debt that is sitting in things like non-inflation-indexed 10 and 30 years bonds but it will only make harder to pay other debts, such as the ones in short-term bonds that are getting rolled over and on which the interest rates would climb very high. Tax increases are very unpopular and extreme (read impossible) hikes would be needed to fix the budgets. Therefore the most likely course of action by the government would be to slash the spending, and some of the biggest items in the budget are Social Security and Medicare. Essentially, government may have to cut pensions to pay off the debts.

And this is the real threat to Social Security, not the lack of assets in the Trust Fund. The source of the problem is in the unbalanced federal budgets, not the Social Security structure. The reason we hear so much talk in the media about Social Security being broke is twofold. First, politicians want people to start getting used to the idea that Social Security is not guaranteed and will be scaled down. It is much easier to negotiate pension payments down if you can make people believe that they should expect no pension at all. The second reason is that government tries to divert people's attention from the real problem. If people understood that the root of the problem is in unbalanced budgets, not in Social Security itself, they would demand that budgets are cut by reducing things like military spending, and politicians don't want to hear that. It seems safer to convince people that their pensions are slashed because the Social Security system was broken rather than tell them that it's because the money was spent fighting a set of unpopular wars.

So no, Social Security is not broken. The government spending habits are.

Social Security may not be broke.

I am sure you have all heard the story before: Social Security is so unprepared to deal with its future liabilities that it is completely broke for all practical purposes. Well, one person decided to sit down and actually do the numbers on his own, and documented the calculations in his blog. His conclusion? Social Security is not broke. The blog makes for a fun read for the number crunchers among us.