Honesty and Trust

Dishonesty is costly

By Walter E. Williams

Dishonesty, lying and cheating are not treated with the right amount of opprobrium in today’s society. To gain an appreciation for the significance of honesty and trust, consider what our day-to-day lives would be like if we couldn’t trust anyone. When we purchase a bottle of 100 pills from our pharmacist, how many of us bother to count the pills? We pull in to a gasoline station and pay $35 for 10 gallons of gasoline. How do we know for sure whether we in fact received 10 gallons instead of 9 3/4? You pay $7 for a 1-pound package of filet mignon. Do you ever independently verify that you in fact received 1 pound? In each of those cases, and thousands more, we simply trust the seller.

There are thousands of cases in which the seller trusts the buyer. Having worked 40 hours, I trust that George Mason University, my employer, will pay me. People place an order with their stockbroker to purchase 100 shares of AT&T stock, and the stockbroker trusts that he’ll be paid. Companies purchase 5 tons of aluminum with payment due 30 days later.

Examples of honesty and trust abound, but imagine the cost and inconvenience if we couldn’t trust anyone. We would have to lug around measuring instruments to make sure that it was in fact 10 gallons of gas and 1 pound of steak that we purchased. Imagine the hassle of having to count out the number of pills in a bottle. If we couldn’t trust, we’d have to bear the costly burden of writing contracts instead of relying on a buyer’s or a seller’s word. We’d have to bear the monitoring costs to ensure compliance in the simplest  of transactions. It’s safe to say that whatever undermines honesty and trust raises the costs of transactions, reduces the value of exchange and makes us poorer.

Honesty and trust come into play in ways that few of us even contemplate. In my neighborhood, workers for FedEx, UPS and other delivery companies routinely leave packages that contain valuable merchandise on the doorstep if no one answers the door.

The local supermarket leaves plants, fertilizer and other home and garden items outdoors overnight unattended. What’s more, the supermarket displays loads of merchandise at entryways and exits. In neighborhoods where there’s less honesty, deliverymen’s leaving merchandise on doorsteps and stores leaving merchandise outdoors unattended or at entryways and exits would be equivalent to economic suicide.

Why Not Talk to Tehran?

Talk to the man, Mr. President.

By PATRICK J. BUCHANAN

In the fall of 1956, Nikita Khrushchev threatened to rain rockets down on London for the British invasion of Suez and sent his tanks into Budapest to drown the Hungarian Revolution in blood.

He blew up the Paris summit in 1960, banged his shoe at the UN, and warned Americans, “We will bury you!”

He insulted John F. Kennedy in Vienna, built the Berlin Wall, and began secretly to place missiles in Cuba capable of annihilating every city in the Southeast, including Washington.

Those were sobering times and serious enemies.

Yet in the Eisenhower-Kennedy years, living under a nuclear Sword of Damocles unlike any the world had ever known, we Americans were on balance a cool, calm and collected crowd.

How then explain the semi-hysteria and near panic in circles of this city over the possibility President Obama might meet with President Hassan Rouhani and hold negotiations over Iran’s nuclear program?

We hear talk of Hitler in the Rhineland, of a new Munich, of America failing to act as Britain failed to act, until, back to the wall, it had no choice but to fight. The old Churchill quotes are heard once again.

But is the Ayatollah Hitler? Is Rouhani von Ribbentrop? Is Iran the Fourth Reich? Should we be very very afraid?

Iran, we are told, is the most dangerous enemy America faces.

But is this true?

Depending on one’s source, Iran’s economy is 2 to 4 percent of ours. After oil and gas, its big exports appear to be caviar, carpets and pistachio nuts. Inflation is unbridled and Iran’s currency is plummeting.

Here is the New York Times last month:

“Rouhani’s aides describe Iran’s economic situation as the worst in decades. … The signs of woe abound.

“Lacking money, Iran’s national soccer team scrapped a training trip to Portugal. Teachers in Tehran nervously awaited their wages, which were inexplicably delayed by more than a week. Officials warned recently that food and medicine imports have stalled for three weeks because of a lack of foreign currency.”

Should Iran start a war, the sinking of its coastal navy would be a few days’ work for the Fifth Fleet. Its air force of U.S. Phantoms dating to the Shah and few dozen MiGs dating to the early 1990s would provide a turkey shoot for Top Gun applicants.

In 30 days, the United States could destroy its airfields, missile sites and nuclear facilities, and impose an air and naval blockade that would reduce Iran to destitution.

And Iran is not only isolated economically.

How Europe's Economy Is Being Devastated By Global Warming Orthodoxy

That sucking sound of European business going to the US

By Jim Powell

Many Europeans complain about their high energy costs, largely due to their increasing dependence on renewables — the most costly energy sources.  But European political parties as well as a majority of people still want government to promote costly options, especially wind and solar power.

This is killing European economies.  Electricity costs in Europe are more than double the cost of electricity in the U.S.  High electricity costs make it difficult for businesses to operate if they need a lot of electricity.  Their cost of electricity is high, and they might not be able to pass it on to consumers when consumers are free to patronize businesses operating where electricity costs are much lower.  Many businesses under pressure are likely move to a lower-cost location, and jobs will go with them.  Antonio Tajani, European Commissioner for Industry and Entrepreneurship, warned: “We face a systemic industrial massacre.”

The Germans probably have done more than anyone else to promote high-cost wind and solar power.  Other types of renewable energy, like hydropower and geothermal power, usually are limited to a small number of suitable sites. The Germans want to have renewables account for 80 percent of their electricity.  Their experience illustrates consequences of such a policy.

The most obvious consequence is lots of subsidies and taxes.  The German government has arranged for renewable energy producers to sell the power grid their electricity at more than 6 times the wholesale electricity market rate.  Nature reported that in 2012 renewable energy producers “cashed in an estimated €20 billion for electricity worth a mere €3 billion.”  Counting the costs of electricity from all sources, the Institute for Energy Research reported that “Germans pay 34 cents a kilowatt hour compared to an average of 12 cents in the United States).”

Big gap between low U.S. energy costs and high European energy costs

Americans, of course, benefit from the fracking revolution, despite President Obama’s efforts to discourage it.  Fracking is responsible for natural gas prices that are one-third to one-quarter of what Europeans pay for Russian gas.  As we know, fracking has boosted oil production in America, too.  Since 2005, U.S. electricity rates have remained substantially the same, while European electricity rates have jumped about 40 percent.  The expansion of pipelines from Canada, along existing permitted routes, will make it possible to tap larger continental reserves, even if Obama continues to block or severely restrict the Keystone pipeline.  Cheap, reliable American energy helps cover sins like the world’s highest corporate income taxes.   By contrast, in Europe mere talk about fracking can be enough to set off riots.

The Boston Consulting Group affirmed that electricity is one of the biggest factors that determine manufacturing costs.  The cost of U.S. natural gas has come down by half since 2005, and more and more utilities are switching to natural gas, so the outlook is for U.S. electricity rates to remain steady or decline further, whereas European electricity costs seem likely to go higher as more wind turbines and solar panels are installed.

Because crude oil costs less in the U.S. than in Europe, feedstocks are cheaper for companies manufacturing plastics, pharmaceuticals, industrial chemicals and other products.  Neither wind nor solar power produce feedstocks.  IHS, an international market research firm, projects that by 2020 U.S. chemical production will double, but European chemical production could fall by about a third.

The Association of German Chambers of Industry and Commerce (DIHK) reported that its surveys indicated many German business executives would rather move operations to the US than remain handicapped by high European electricity costs as they try to remain competitive in world markets.  DIHK Chief Executive Martin Wansleben acknowledged that “The U.S. has become much more attractive to companies than Europe.”

It’s no wonder more European companies are opening or expanding facilities in the U.S., and more U.S. multi-nationals are shifting overseas operations back home:

·                     Airbus is building an aircraft assembly plant in Mobile, Alabama.  It will produce A320 jets for the American market.  Der Spiegel noted that Airbus “could save on manufacturing costs compared to its plants in Hamburg, Germany, and Toulouse, France.”

·                     Siemens, a German multi-national engineering and electronics company, is making turbines for fossil fuel power plants in Charlotte, North Carolina.

·                     BASF, the German chemical company, has opened a $33 million facility expansion in Research Triangle Park, North Carolina.

·                     Michelin, the French tire producer, is developing a $750 million facility in Greenville, South Carolina.

·                     BMZ GmbH, a German company, opened its U.S. facility in Virginia Beach, Virginia for research, development, assembly and distribution of lithium ion rechargeable batteries.

Some Plain Talk About Rights

Disaster: Import an underclass, then give it with the free meal ticket the right to vote.

By George Handlery 

The right to vote is a key feature of the democratic order. This is so self-evident that one fears to state it. Now, a reason emerges to commit in favor of the sensible application of the principle. The reason is as stunning as it is threatening. This practice is now under attack by the multiculturalists and the Left. 

The right to vote is the ability to decide a group’s future. True, this right is not limited to balloting. The concept assumes that a choice is offered. When the writer was young, the police came to herd voters to the local “Council House”. There one was to vote for Our Beloved Party. Thus, the right to vote deteriorated into an obligation to legitimize oppression. There was no right to abstain or to vote “wrong”, that is for the “Class Enemy”, and against the Soviet “Camp of Peace”.

As mentioned, an attack upon the system of voting, as defined by tradition and common sense, is emerging. Those that think their region will be immune to this threat will be disappointed.

In Western Europe an idea spreads that will not stop at the water’s edge. It is to extend to aliens the right to vote on the local level. This goes beyond voting in private associations. For instance, the writer has been a member of a Swiss village gun club and voted on matters of its governance. Newly, Green – Red projects wish to give the vote to foreigners in local government. This is not a voluntary association but a component of a system that peaks as a sovereign state. 

The power conferred by this right depends on the entity’s system. Centralized France represents a pole and Switzerland illustrates the other extreme. There principled “decentralization” is the fitting term as, in official parlance, “sovereign” means “people” and not the executive. Accordingly, government is built from the bottom to the top. The central government, whose authority flows from “below”, is the executive of local organs.  

In some systems, local government is significant, especially if the parameters of daily life are drawn locally. Thus, local institutions are more than a cog in an aggregate. Whoever controls local government is not in charge of a minor agency but empowered to regulate a key gear. 

Those that propose that the right to vote in local matters be exercised without citizenship imply that the power conferred is insignificant. This empowerment in local politics insinuates that the integration of non-citizens is facilitated through their inclusion in decision-making. This contradicts a traditional approach, which is (a) controlled immigration, (b) residency, (c) integration. Naturalization admits to membership in a community. It is to follow integration - the internalization of the community’s values. 

Germany Elects Mama – The Real Winner is Socialism

Mrs. Merkel's CDU/CSU Trounces Rivals 

Political scientists in Germany call it the 'Mutti factor' – as German news magazine Der Spiegel writes:

 “Germans like their quiet. Should a couple raise their voices such that they can be heard in the courtyard of a city apartment building, it is a sure bet that before long, the phrase "Ruhe da!" ("Quiet!") will come ringing out of an open window. Even in big metropolises like Berlin, most flat seekers yearn for silence and tranquility, far removed from the chaotic noise emanating from the busy streets.

Angela Merkel, more than any other politician on the campaign trail this year, has understood her flock's desire for calm.

[…]

The chancellor has even gone so far as to directly appeal to the electorate's longing for quiet. As Reuters correspondent Alexandra Hudson noted in a recent article, the election manifesto for Merkel's party includes the assertion: "One in two Germans feels troubled by noise" and suggests that her party would seek to improve the situation.

[…] a chancellor who prefers to wait before making decisions and a leader who is sometimes difficult to pin down. It has also helped propel her popularity to dizzying heights. Her followers have taken to affectionately calling her "Angie." The German press has dubbed her "Mutti," the word children in Germany use to address their mothers.”

 (emphasis added)

 Angela Merkel delivered the biggest victory for her party since Helmuth Kohl's post-reunification heyday, and only barely missed attaining an absolute majority of parliamentary seats (although her party only gathered 42% of the vote, up a respectable 8.2% from the last election according to initial estimates, parties that fail to take the 5% hurdle won't get any seats). 

And herein lies the problem. You may be wondering why we are claiming that 'socialism was the real winner', given that a nominally conservative party clearly won the election. We explain the reason below.  

Sole Voice in Favor of Free Market Capitalism Gone

It would be an exaggeration to equate the FDP with classical liberalism, but as far as German politics goes, it is the party that comes closest to its ideals. It definitely was the sole advocate of free market capitalism in the German political landscape. While it has always been a small party, it was a famed 'kingmaker' through most of the post WW 2 era, managing to influence both social democratic and nominally conservative governments by entering into coalitions with them.

Global Warming and the chilling of Politics

The aim of the IPCC is to freeze political debate

By Tim Black

This Friday, the Intergovernmental Panel on Climate Change (IPCC) is set to publish the first instalment of its three-part, 2,000-page draught-excluder, the memorably titled Fifth Assessment. This, like its predecessor, which was published at the height of climate-change mania in 2007, will tell us ‘unequivocally’ that climate change is happening, that the situation is perilous, and that there is a sliding scale of bad scenarios awaiting us in the warmed-up future.

As such, the prophecies leaked from the draft version sound a comfortably familiar note of terror, like the ever-resurrected bad guy in a tired horror-movie franchise. We’ll be told that the glaciers are melting quicker than thought, that sea levels could rise by three feet and that temperatures could rise up to 4.8 degrees Celsius this century. And, on the back of The Science, the old alarmist lags have once again been demanding that we do something. In the words of Lord Stern, author of the environmentally friendly The Stern Review in 2006, we need to decide what ‘kind of world we want to present to our children and grandchildren’. That is, one scorched by our present greed or saved by our cutting back.

That’s the point of the IPCC’s infrequent assessments. They constitute the Word of a very secular God, the expert, the scientist. They tell us what we ought to do. No questioning. No debate. And therefore, no politics.

But there’s one big fat sceptical fly stuck in the IPCC’s ointment. And that’s the small matter of a distinct absence of global warming over the past 15 years, despite the IPCC’s models insisting otherwise. In December 2012, for instance, the UK Met Office released a forecast suggesting that not only have global temperatures not risen for over a decade but that they are unlikely to rise significantly in the period up to 2017. Likewise, earlier this year, even someone as committed to climate-change alarmism as James Hansen, the recently retired head of NASA’s climate-change research arm, admitted that the ‘five-year-mean global temperature has been flat for the last decade’.

In the draft version of the report, the IPCC does acknowledge that the ‘the rate of warming over the past 15 years is smaller than the trend since 1951’. In fact, the IPCC now admits that the rate of warming between 1998 and 2012 was about half the average rate since 1951. And as it stands, no one is quite certain why this is, with everything from the oceans’ ability to absorb heat to the solar cycle being blamed.

It Has Begun in Italy

Monte Paschi "Bails In" Bondholders, Halts $650 Million In Coupon Payments

by Tyler Durden

Recall that three weeks ago we warned that "Monti Paschi Faces Bail-In As Capital Needs Point To Nationalization" although we left open the question of "who will get the haircut including senior bondholders and depositors.... given the small size of sub-debt in the capital structures." Today, as many expected on the day following the German elections, the dominos are finally starting to wobble, and as we predicted, Monte Paschi, Italy's oldest and according to many, most insolvent bank, quietly commenced a bondholder "bail in" after it said that it suspended interest payments on three hybrid notes following demands by European authorities that bondholders contribute to the restructuring of the bailed out Italian lender. Remember what Diesel-BOOM said about Cyprus - that it is a template? He wasn't joking.

As Bloomberg reports, Monte Paschi "said in a statement that it won’t pay interest on about 481 million euros ($650 million) of outstanding hybrid notes issued through MPS Capital Trust II and Antonveneta Capital Trusts I and II." Why these notes? Because hybrid bondholders have zero protections and zero recourse. "Under the terms of the undated notes, the Siena, Italy-based lender is allowed to suspend interest without defaulting and doesn’t have to make up the missed coupons when payments resume." Then again hybrids, to quote the Dutchman, are just the template for the balance of the bank's balance sheet.

Why is this happening now? Simple: the Merkel reelection is in the bag, and the EURUSD is too high (recall Adidas' laments from last week). Furthermore, if the ECB proceeds with another LTRO as many believe it will, it will force the EURUSD even higher, surging from even more unwanted liquidity. So what to do? Why stage a small, contained crisis of course. Such as a bail in by a major Italian bank. The good news for now is that depositors are untouched. Unfortunately, with depositor cash on the wrong end of the (un)secured liability continuum it is only a matter of time before those with uninsured deposits share some of the Cypriot pain. After all, in the brave New Normal insolvent world, "it is only fair."

To wit:

“In the new world we’re in, bondholders pick up the tab when they can be forced to,” said John Raymond, an analyst at CreditSights Inc. in London. “State aid rules impose losses where possible.”

European Union Competition Commissioner Joaquin Almunia told reporters on Sept. 7 the bank should receive final approval for its restructuring plan within two months. The lender, which received a 4.1 billion-euro bailout, submitted a revised plan that more than doubles the amount of new capital it intends to raise to 2.5 billion euros as it seeks to repay the aid.

Almunia recommended that “cash outflows from the beneficiary to hybrid capital holders and subordinated debt holders be prevented to the maximum extent possible,” in a letter sent to Italian Finance Minister Fabrizio Saccomanni dated July 16 and seen by Bloomberg News.

More importantly, this is just the start:

Monte Paschi’s 108 million euros of undated, non-cumulative trust preferred stock issued through Antonveneta Capital Trust II fell 5 cents on the euro to 41 cents, according to Bloomberg bond prices. That’s the lowest price since April 23, data compiled by Bloomberg show. 

While the bank is halting payments on the bonds that make up its Tier 1 capital, the most-junior layer of debt capital instruments, it also has the equivalent of about 2.6 billion euros of more-senior Upper Tier 2 debt in three issues in euros and pounds. 

While Monte Paschi is making payments on these notes, it isn’t clear that it will be able to go on doing so, said Raymond.

Expect an update from the bank on Wednesday when it will hold a conference call. 

Failure has been outlawed

By Eliminating Failure, the Government Robs Us Of Success

By Harry Binswanger,

Where does the Left get its power? From one source at root: a wrong standard of morality, of good and evil. Self-sacrifice is said to be the good, self-interest the evil. The Left blames every social and economic disaster on “selfish greed.” What caused the financial meltdown, according to the Left? The selfish greed of Wall Street bankers. Why was Obamacare passed? Because people are in need, and the greedy must serve the needy.

Those on the Right should be pointing out that “selfish greed” is a smear-term: it blackens ambitiousness and the desire to produce wealth, which are virtues, by associating them with mindless gluttony. But Rightists don’t expose the smear because they share the anti-self-morality, or at least fear to challenge it.

So far, most public defenders of capitalism have lacked the courage to say, in the words of John Galt in Atlas Shrugged, “your life belongs to you and the good is to live it.”

But, as a small step in the right direction, pro-capitalists are beginning to answer the absurd leftist claim that greed caused the financial crisis. They are pointing out this obvious fact: “greed”–as the desire to get rich–is a constant. It did not suddenly come into being, or flower, in the period leading up to the financial meltdown.

For instance, a Wall Street Journal editorial (April 25, 2013) observed that “the crisis had several causes other than the greed that is found at all times on Wall Street and every other street.”

Indeed. But something does change, psychologically, in the boom preceding a crash. The change is not an increased desire for wealth. Nor is it that people become fixated on the short range. What changes is people’s assessment of risk. People do not become more greedy, they become over-optimistic. Seeing stocks and real-estate go up and up, they imagine that this is the new normal and that a decline in prices is not in the cards.

By the same token, during the panic and bust phase, people become overly pessimistic. They imagine that there is no bottom, that investments are all super-risky, and that doom is at hand.

As the boom is not an excess of greed, so the bust is not a greed-deficit.

Beneath the psychological swings lies the root cause: the boom-bust cycle is due to government manipulation of the money supply, as the Austrian school of economists have demonstrated. The Fed’s injection of ever-more money into system is what creates the ever-rising prices and thus the over-optimism.

Another government policy fuels the over-optimism: failure has been (almost) outlawed. In a free economy, there are always some firms that are failing. In a regulated economy, the government props up failing firms, thereby creating the moral hazard that adds to the over-optimism.

“Too big to fail” is supplemented by “too small to fail” and “too medium to fail.” Myriad government interventions act to protect businesses, large and small, from failure.

Zombie Apocalypse in a ‘DC’ Comic

Perfect plans usually fail in practice

By Paul Cantor

All my life I have been watching the U.S. federal government steadily increase its power, but I never expected to see it expand into the comic book business. Imagine my surprise, then, when I found a comic book — excuse me, a “graphic novella” — on the official web site of the Centers for Disease Control and Prevention, a minor masterpiece of the horror genre entitled Preparedness 101: Zombie Pandemic. Evidently the political principle “never let a good crisis go to waste” extends even to fictional crises. Perhaps inspired by its appearance in the last two episodes of the first season of AMC’s popular television show The Walking Dead, the C.D.C. decided to make its own contribution to the growing body of apocalyptic zombie narratives, and to score some propaganda points for itself in the process. Unsurprisingly, on its own web site the C.D.C. manages to do what it — or any other government institution — conspicuously fails to do in The Walking Dead, namely to come up with a quick solution to the plague and work to cure it.

The fact that the C.D.C., a unit of the U.S. Department of Health and Human Services, chose to jump on the current zombie bandwagon in American pop culture tells us something: More is at stake in these apocalyptic, “end-of-the-world-as-we-know-it” narratives than their simple shock value. For all their ghoulishness and gore, these zombie narratives raise some fundamental issues, above all the question of the relation of government to social order. Is central planning by government experts the solution to human problems (as the C.D.C.’s comic suggests), or does government intervention in human affairs generally make matters worse (as we will see The Walking Dead implies)?

The proliferation of zombie narratives represents a more general trend toward crisis scenarios in our culture, which strangely turn out to be a measure of people’s attitudes toward the state. The collapse of communism in the late 1980s left central planning discredited. Its proponents have thus been forced to find new ways of arguing for their socialist schemes, for example, disguising them under the banner of environmentalism. Would-be central planners may concede that in the normal course of events, free markets do a better job of allocating scarce economic resources, but, they argue, crises or disasters may occur on such a scale — national or even global — that only central planning by nation-states or international organizations can adequately deal with them. One might call this new phenomenon “socialism with an apocalyptic face.”

Films and television shows over the past two decades have featured stories of comets or asteroids headed for Earth, of catastrophic global warming (or cooling), of invading space aliens, of volcanic eruptions and earthquakes on a planetary scale, or viral plagues of pandemic proportions, and so on.[1] Zombie narratives are only one subset of this genre of global or cosmic catastrophe narrative. Many of these stories portray ordinary people as helpless in the face of disaster. They panic or freeze or despair or in other ways make matters worse for themselves. Ordinary people are shown having to rely on elites to save them, often a combination of scientific experts and military special forces, sponsored and directed by national governments or international organizations such as the U.N.[2] That is the way these apocalyptic narratives in pop culture have contributed to a kind of recuperation of socialist thinking. Individual human beings, dwarfed and overwhelmed by a global or cosmic catastrophe, are forced to turn to government to save them.

Into the Transformational Future

Rich City, Poor City

BY JOHN MAULDIN

"The future is already here," intoned William Gibson, one of my favorite cyberpunk science fiction authors, "it's just not very evenly distributed." Paraphrasing Gibson, the pension crisis is already here; it's just not very evenly distributed. For the past two weeks we've been exploring the problems of state pension funds. This week we will conclude our look at pension plans for the nonce with a 30,000-foot overview of the states and then take a deeper dive into one city: mine. This will give you at least one version of how to do your own homework about your own hometown. But fair warning, depending on your locale, you may need medical help or significant quantities of an adult beverage after you finish your research. Then again you may be pleasantly surprised and congratulate yourself on choosing a particularly adept hometown. And be on notice that, no matter what your personal conclusion and how well-grounded your analysis is, there will be people who live in your neighborhood who think you are utterly full of, well, let's just say "nonsensical matter" and leave it at that. This is a family letter.

I am constantly asked where the future jobs will be, and I think hard about the answer to that very personal question (it's crucial to those of us who have young kids). Will we see Gibson’s dystopian world or Ian Banks' world of abundance? The answer is, of course, that secular growth in employment will come from the new, transformational technologies that are already being created all around us, truly new industries that will change everything and create opportunities for work that we can't even imagine yet, in the same way the automobile or telecommunications or the McCormick reaper both took some jobs away and created even greater opportunities. The transition is the thing, though. It will be filled with opportunities for some and forced change for others, while we wait for the future to become more evenly distributed. In the next few weeks, you are going to get a letter from me that will tell you about the newest addition to Mauldin Economics, the Transformational Technologies Alert, written by my longtime friend Pat Cox, who is no stranger to readers of this letter. Pat and I have long wanted to work together, exploring the future and especially biotech. He is the best, and you will want to join us from the very beginning. We invite you to charge ahead into the future with us, exploring opportunities that will begin to change your own life right now. And now back to pensions…

Through the courtesy of one of your fellow readers I've been given a treasure trove of data on 702 city pension plans. I won't say that I got lost in the data, but the search and rescue teams sent to find me had to go back for extra supplies. There were some very dark alleys that it took a while to find my way back out of. Not to mention some twists and turns that were totally surprising.

So first I need to say a big thank you to Gregg L. Bienstock and Justin Coombs of Lumesis for giving me access to their data. Gregg is a cofounder of Lumesis, and their signature software is called (appropriately enough, given the oceans of data they plumb) DIVER. They've compiled data on 54,000 issuers of municipal and state bonds from over 100 sources. They sent me an Excel file on the major pension plans of every state and the pension plans of cities with populations over 100,000. And Justin was kind enough to create multiple spreadsheets and graphs upon request and patiently explain their data. The bulk of the data in this letter is from http://www.lumesis.com. The opinions are my own and should not be attributed to Lumesis. From time to time we will also look at another fascinating study from the Pew Charitable Trusts on pensions and retiree healthcare in 61 cities.

As we have seen the last two weeks (here and here), the assumptions that states make about their future investment returns are fairly unrealistic and generally nothing like what they've achieved for the last 10 years. This makes their balance sheets look far better than they really are, and for some states the discrepancy is pretty stark. Witness Illinois, where unfunded pension liabilities run north of $280 billion, give or take. That is more than $20,000 for every man, woman, and child in the state. And the bill keeps rising every month as the state plows ever deeper in debt to its own future.

California’s Promethean Past

How a visionary entrepreneur watered and powered Los Angeles

Henry Huntington’s Big Creek Hydroelectric Project
presented incredible logistical, financial, and technological challenges

by Victor Davis Hanson

These days, the few major infrastructure projects that California undertakes routinely run behind schedule and over budget. Seventeen years after the establishment of the California High-Speed Rail Authority, not a foot of track has been laid, thanks to lawsuits over eminent domain, environmental concerns, and labor practices. The official price tag of the proposed rail system reads $68.4 billion, but most observers, remembering the San Francisco–Oakland Bay Bridge’s massive cost overruns, expect the bill to top $100 billion. It’s essentially the same story with the state’s effort to restore the Sacramento–San Joaquin Delta. After decades of bickering and delays, Governor Jerry Brown is pushing a $24.5 billion plan to flood the delta (in order to preserve some 50 threatened or endangered species) and to build tunnels underneath it to ensure that Central Valley farmers and homeowners continue getting northern California water. The plan would require at least a decade to complete under the best of circumstances; opposition from environmentalists, farmers, local residents, and taxpayer groups would almost certainly delay things further.

Envision a California infrastructure project that put tens of thousands of people to work and finished ahead of schedule while using private financing. Suppose that it made a profit without government guarantees or taxpayer liabilities. Imagine, moreover, that this project did little harm to the environment while producing massive quantities of renewable energy. Almost all the project’s machinery would be hidden underground or housed in elegant classical buildings. It would radically reengineer nature, yes, but the most obvious evidence of change would be scenic alpine lakes where dry canyons had previously stood. And instead of facing endless lawsuits from aggrieved parties, the project would enjoy nearly unanimous support.

More than 100 years ago, California entrepreneur Henry Huntington accomplished all that with his Big Creek Hydroelectric Project on the San Joaquin River, high in the central Sierra Nevada Mountains. Today, the project’s six man-made reservoirs, 27 dams, and nine powerhouses generate 1,000 megawatts of clean hydroelectric power for about 11 million southern Californians; provide late-summer irrigation to more than 1 million acres of farmland; and prevent the San Joaquin River from flooding northeast Fresno in the spring. In symphonic fashion, through dams, reservoirs, penstocks, and tunnels, the river’s descent is regulated, stored, divided, and recombined. To the casual observer, the process is imperceptible.

Big Creek is a classic story of American (and Californian) ingenuity and drive, as well as a reminder of a time when political leaders agreed that the needs of humanity trumped the needs of, say, fish. Unfortunately, the project’s bounty has helped create a complacency that not only disallows successor developments but threatens the original purpose of Big Creek itself.

By 1900, Los Angeles was expanding to new suburbs both inland and along the coast. Also growing was its demand for electricity to fuel everything from modern commuter trolleys to such novel household appliances as heaters and washing machines. Without plentiful and affordable electricity, Los Angeles couldn’t grow—a fact not lost on the city’s premier residential developer, Henry Huntington. Henry was the nephew of Collis Huntington, an industrialist who had consolidated the Southern Pacific Railroad Corporation, and he inherited much of his money from his childless uncle. (He even left his wife and four children and married Collis’s widow.)

In the early twentieth century, the best way for Henry Huntington to generate the electricity he wanted was to use the force of water falling through massive turbines—a method that would soon provide almost half of early industrial America’s electrical power. By 1900, a nationwide scramble was under way to dam rivers and install turbines. (Today, the Chinese are doing the same thing, building a vast array of new dams to produce thousands of megawatts of clean hydroelectric power.) Yet southern California had few rivers with strong enough flows to generate electricity economically. The Sacramento and American River systems to the north were already mostly claimed for hydroelectric power and flood control. Nearer to Los Angeles were the smaller Kern, Kaweah, and Kings Rivers, but they would be hard to dam, and they lacked the volume of the San Joaquin River watershed to the north, the largest in California.

Merkel Wins Easy Re-Election

Absolute Majority Within Reach

by Spiegel

Chancellor Angela Merkel's conservatives won a clear election victory on Sunday, granting her a third term. Results show that she may have won enough votes for an absolute majority, though she has given no indication as to how she will proceed.

Angela Merkel's conservatives won a resounding victory in Sunday's general election, sharply increasing their share of the vote by some eight points to around 42 percent and putting her on track for a third term.

That result, which would be the strongest result for the conservatives since 1990, could be enough to give Merkel an absolute majority on her own. Public broadcaster ARD predicted that her conservatives could have a slim absolute majority of four seats in parliament. But the final outcome is still unclear.

But she may have to form an alliance with the rival center-left Social Democrats. Her junior coalition partner, the pro-business Free Democratic Party, saw its support slump so dramatically that it may not make the five percent threshold needed for parliamentary representation.

"We will do everything to ensure that the next four years will be successful ones for Germany," a beaming Merkel told ecstatic supporters. "We will now wait for the election outcome, it's too early to say how we will proceed. We will discuss all this tomorrow in our leadership meetings. But we can already celebrate today because we did great."

Her SPD rival, Peer Steinbrück, told supporters: "The ball is in Frau Merkel's court, she has to find herself a majority."

An alliance with the SPD, a so-called "grand coalition" of the two biggest parties, would be a repeat of the right-left alliance with which she governed in her first term from 2005 until 2009.

Merkel's conservative Christian Democratic Union party and its Bavarian sister party, the Christian Social Union, were at 42.1 percent, up sharply from 33.8 percent in 2009, an ARD network TV projection based on actual results showed after polling stations closed at 6 p.m. CET.

A TV projection by ZDF showed a similar result with the conservatives at 42.3 percent.

"This is the FDP's bitterest defeat in decades," said Christian Lindner, a senior member of the party leadership.

Record Low for FDP

ARD had the FDP at 4.7 percent, while ZDF had them at 4.5 percent, a disastrous result for the party, a traditional kingmaker in German politics, which has been in parliament continually since 1949.

The SPD was at around 25.8 percent, according to ARD, up slightly from 23.0 percent in 2009. The Greens were at 8.1, compared with 10.7 percent in 2009.

In a significant development, the anti-euro Alternative for Germany (AfD) party, which was formed in February and calls for an "orderly dismantling of the euro zone," came close to five percent. The ARD had them at 4.9 percent and the ZDF at 4.8 percent.

European Partners Favor 'Grand Coalition'

Many of Germany's European partners regard a third term for Merkel with the SPD as her coalition partner as the best possible outcome. It ensures continuity at the helm of Europe's most powerful economy and it will likely force Merkel to put a bigger focus on stimulating economic growth and curbing unemployment in the crisis-ravaged euro zone.

A grand coalition would also, thanks to its overwhelming majority in parliament, strengthen Merkel's hand in managing the euro crisis because it would lessen the threat posed by backbench rebellions against future European rescue measures.

With the SPD in her coalition, she would no longer face a hostile Bundesrat, Germany's upper legislative chamber, and she may even be able to muster two-thirds majorities needed to change the German constitution if future changes to Europe's institutions should warrant that.

Her hands will, however, remain tied by rulings of the Federal Constitutional Court, which will rule next month on the European Central Bank's bond-buying policy, which put a lid on the crisis when it was announced last year. 

Is Italy Set To Become Europe's Japan?

Leaders have no incentive to pursue reform, because voters consistently failed to demand it

by Federico Fubini

Since the global economic crisis began in 2008, Italy’s GDP has declined by about 8%, nearly a million workers have lost their jobs, and real wages have come under increasing pressure. In southern Italy today, a young person – especially a woman – on a permanent work contract, being paid on time and in full, is a statistical oddity. And yet, an uneasy coalition government seems unlikely to address the concerns that drove voters to reject the entrenched ruling elite in the last election. The most striking aspect of Italy’s recent turmoil is what has not happened: citizens have not poured into the streets demanding reform.

Indeed, throughout the crisis, Italian society has remained uncharacteristically stable. The subdued nature of the few public protests that have occurred contrasts sharply with uprisings in Europe’s other struggling economies – such as Greece, Spain, Portugal, and Ireland – not to mention those that have roiled the Arab world in recent years. Even Sweden faced riots this year, as did the United Kingdom in 2011.

The absence of such outbursts of popular anger in Italy can be explained partly by the savings cushion built by previous generations. But there are also deeper social and political forces at play – forces that threaten to push Italy, like Japan after its asset-price bubble burst in 1990, toward silent decline.

Japan’s experience – characterized by more than 20 years of economic stagnation – offers important lessons for crisis-stricken democratic countries with aging populations. During Japan’s “lost decades,” successive Japanese governments allowed public debt to skyrocket and refused to confront the economy’s deep-rooted problems, allowing sclerosis to take hold.

In fact, Japan’s leaders had little incentive to pursue bold reform, because voters consistently failed to demand it. This quiescence was at least partly rooted in demographics. Japanese society is one of the world’s oldest, with roughly 40% of the population older than 54 and a median age of 45.8.

Next stop, banana republic

A banana republic doesn’t happen overnight

By mark steyn

“This is the United States of America,” declared President Obama to the burghers of Liberty, Missouri, on Friday. “We’re not some banana republic.”

He was talking about the Annual Raising of the Debt Ceiling, which glorious American tradition seems to come round earlier every year. “This is not a deadbeat nation,” President Obama continued. “We don’t run out on our tab.” True. But we don’t pay it off, either. We just keep running it up, ever higher. And every time the bartender says, “Mebbe you’ve had enough, pal,” we protest, “Jush another couple trillion for the road. Set ’em up, Joe.” And he gives you that look that kinda says he wishes you’d run out on your tab back when it was $23.68.

President Barack Obama speaks to workers at the Ford Kansas City Stamping Plant on Sept. 20, in Liberty, Missouri. Obama spoke at the plant after the Republican-controlled U.S. House passed a stop-gap funding measure, but also defunding the presidents health care legislation, which may lead to a government shutdown.

Still, Obama is right. We’re not a banana republic, if only because the debt of banana republics is denominated in a currency other than their own – i.e., the U.S. dollar. When you’re the guys who print the global currency, you can run up debts undreamt of by your average generalissimo. As Obama explained in another of his recent speeches, “Raising the debt ceiling, which has been done over a hundred times, does not increase our debt.” I won’t even pretend to know what he and his speechwriters meant by that one, but the fact that raising the debt ceiling “has been done over a hundred times” does suggest that spending more than it takes in is now a permanent feature of American government. And no one has plans to do anything about it. Which is certainly banana republic-esque.

Is all this spending necessary? Every day, the foot-of-page-37 news stories reveal government programs it would never occur to your dime-store caudillo to blow money on. On Thursday, it was the Food and Drug Administration blowing just shy of $200 grand to find out whether its Twitter and Facebook presence is “well-received.” A fifth of a million dollars isn’t even a rounding error in most departmental budgets, so nobody cares. But the FDA is one of those sclerotic American institutions that has near to entirely seized up. In October 1920, it occurred to an Ontario doctor, Frederick Banting, that insulin might be isolated and purified and used to treat diabetes; by January 1923, Eli Lilly & Co. was selling insulin to American pharmacies: A little over two years from concept to market. Now, the FDA adds at least a half-decade to the process, and your chances of making it through are far slimmer: As recently as the late Nineties, they were approving 157 new drugs per half-decade. Today it’s less than half that.

But they’ve got $182,000 to splash around on finding out whether people really like them on Facebook, or they’re just saying that. So they’ve given the dough to a company run by Dan Beckmann, a former “new media aide” to President Obama. That has the whiff of the banana republic about it, too.

The National Parks Service, which I had carelessly assumed was the service responsible for running national parks, has been making videos on Muslim women’s rights: “Islam gave women a whole bunch of rights that Western women acquired later in the 19th and 20th centuries, and we’ve had these rights since the seventh century,” explains a lady from AnNur Islamic School in Schenectady, N.Y., at the National Park Service website, nps.gov. Fascinating stuff, no doubt. But what’s it to do with national parks? Maybe the rangers could pay Dan Beckmann a quarter-million bucks to look into whether the National Parks’ Islamic outreach is using social media as effectively as it might.