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Blue Model Blues
Here Comes Puerto Rico’s Default
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  • Andrew Allison

    Let’s start with: no federal bailout under any circumstances absent annulment of state constitutional prohibitions on pension reform and institution of the reforms. Once the states get the money, there’s no incentive to change. The first two Greek bailouts and history of failure to institute the promised reforms should be salutary. The nettle which has to be grasped is that existing pensioners as well as prospective ones are going to have to take a hit.

    • f1b0nacc1

      Also, an end to public sector unions of all kinds and for all purposes. Much as I hate to agree with FG on this one, he is right that it is hypocrisy in the extreme to single out some politically popular groups (such as firefighters) and grant them exemptions for the basic reforms that others (such as teachers) have to endure.
      I would add an end to all non-market based contracting (AA giveaways and set-asides, for instance), as well as mandates for hiring and promoting based upon anything other than strict-scrutiny merit. An end to things like Davis-Bacon (a federal rule, but there are plenty of them at the state level as well), and sole-source contracting that doesn’t meet with strict scrutiny as well.
      Finally, real transparency in the management of future pension and retirement funds on the state level, and transparent third-party overview of how these funds are managed. ERISA standards would be a good start here…

      • Andrew Allison

        You don’t want much [grin]. I wouldn’t hold my breath;. the unions own too many politicians for there to be a realistic expectation of killing them off. But the states are going to become desperate for a bailout, and must be made to reform their pensions first.

        • f1b0nacc1

          The states that will need bailouts will indeed be desperate, and thus should be squeezed for every single concession that can be wrung out of their useless corpses. Let a few go broke and demonstrate why this is not a desirable choice to the others (I suspect that Greece has had this salutary effect on several of the PIIGS) and you might see the impossible become possible quite quickly.
          Go big or go home I say!

          • Andrew Allison

            There’s a state that won’t need a bailout????

          • f1b0nacc1

            If the conditions imposed on the first few are onerous enough (and they should be truly painful), the lesson MAY be learned and those still not sucked into the vortex might take the necessary steps on their own.
            Lots of mays and mights there, but it would be a good thing if it could happen. Remember, every state that gets a bailout (conditions or no) weakens the foundations of federalism, and strengths the imperial tendencies of the central government.

          • FarOutlier

            I want a bail out too. Don’t forget me. I’m in line. No cutting.

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    • Proud Skeptic

      Give a mouse a cookie…

      I can’t imagine how giving them money could ever be better than letting them stew in their own juices. No number of concessions would ever compensate for the precedent being set. The “leading Democrat” from NJ is already trying to use federal government bail outs of Wall Street and Detroit as precedents.

      Time to dig in the heels. The money isn’t there. Period.

      BTW – what is a “leading Democrat”, anyway? Is he the guy who shows the least amount of responsibility in his actions?

      • FarOutlier

        A leading Dim is the one that gets the highest percentage of payoffs. Neither Wall Street nor the auto industry should have been bailed out.

  • Anthony

    Yes, Puerto Rico has pension liability problems but as cited we find such across continental United States. Nevertheless, what WRM categorizes as blue model melt down mask real people and institutions (patterns of rules and behaviors) engendering our proverbial “chickens coming home to roost”. I think a more fair categorization would be Fordist Model in play post WWII (synchronized with U.S. dominance both economically and politically). That is, the crisis is not a blue consequence as it developed gradually over the course of several decades under both democratic and republican regimes. The crisis in many ways is the culmination of an era – the baby boom era; to that end, both Democrats and Republicans have played their part – not Blue but Fordist.

    Necessarily, WRM suggests relief for reform; but that presupposes effective principal-agent as well as administratively capable state! Question: how do we get incentives to act self-interestedly out of public sector pension payoffs?

    • Andrew Allison

      PR’s debt problem is far, far more widespread than the endemic (epidemic?) public pension problem. And WRM is unmasking, not masking the impact of the tax, borrow and spend Blue Model.

      The answer to your question, namely abolish public employee unions, is self-evident.

      • Anthony

        Every informed/interested reader knows Puerto Rico’s debt… Whether author is masking/unmasking turns on Fordist interpretation – See WRM’s book for clarity. I’m done.

    • Hominid

      It’s not just pension problems – PR is a massive welfare state.

      • Anthony

        You probably won’t get many rebuttals there.

    • odys

      The problem with your whole post is that the social policies were put in place before the Baby Boomers could even vote. The oldest Boomers were able to vote in the 1968 election for Nixon. Most policies were in place years earlier.

      Another problem is that for some reason you say this is a bipartisan problem but only traditionally-Democrat run governments are having this problem.

      • Anthony

        1) you infer a supposition that’s inherent to result – post WWII governance; 2) using your own time-frame, cited pension decisions were inclusive of Dem and Rep state and local governing policy enactments. Thanks.

      • Hominid

        It’s the so-called ‘greatest generation’ that put the socialist policies in place – they worshipped the Dem socialist FDR.

  • Blackbeard

    Relief for reform? Sounds good but isn’t that what they tried in Greece? And how well did that work? The promised reforms will never come.

    • Andrew Allison

      That’s why the reforms must come before the bailout, if any.

  • klgmac

    President Obama cut his political chops in Chicago Illinois. Both are functionally bankrupt. His Progressive policies will yield the same result on the national scene.

  • VictorErimita

    None of these sensible ideas will happen. No Democrat politician will ever willingly budge one single iota from full support of his/her chief sponsors in the publc sector. No Democrat voter will ever admit a single flaw in blue model. Instead, the familiar shrieks of racism, the perfidy of the one percent, especially the Koch brothers, and Republucan “greed” will ensue. These people must be bankrupted, and enough of the voting public must awaken from its low information stupor to realize they are going down with the sinking blue ship to vote against people who will prolong and compound the devastation. But, of course, they would rather agonize about a dead lion.

    • MoreFreedom2

      Mead’s best idea to to force government pensions to be handled like they force private firms, where obligations are paid for as they are created, rather than making promises they expect future taxpayers to fulfill. Thus, Democrat politicians who create benefits for government union workers, will have to raise taxes when they create those benefits, which will affect their ability to stay in office. Of course, the federal government getting its fiscal house in order means that future promises that aren’t paid for and are unfunded (to the tune of around $200 trillion) means that a whole batch of politicians will lose office when they reform Social Security and Medicare (obligations of which are not part of the official debt). So it seems unlikely that it will happen until things get much worse.

      Forcing former government workers to take a haircut on their pensions will certainly given current government employees an incentive to ensure their government is efficiently run, and to expose fraudulent and wasteful behavior. And it will give them an incentive to not elect politicians that make them promises that won’t be kept. IMHO, they are the ones most responsible, and who should be forced to pay for the overspending.

      As far as forcing reforms on bankrupt governments such as Puerto Rico (where one of every 4 workers works for the government), I don’t trust our current set of politicians to insist on the right reforms. Puerto Rico can pay its debts: it can force all landowners to pay part of the value of their property to the government. Of course, that will cause property prices to fall, and force many people to sell their land, homes and businesses and downsize, and result in most of the current set of politicians to lose office. It can also reform via many means: reduce the bloated workforce, reduce its welfare spending (currently over 30% of the budget), sell it’s many money losing government owned corporations (https://en.wikipedia.org/wiki/List_of_government-owned_corporations_of_Puerto_Rico), and sell most of its assets and property.

      No one will be lending Puerto Rico any money any time soon, which is one reform that will happen without political intervention, and a reform that will make a difference.

      • VictorErimita

        Well said.

  • Misanthrope

    The problem with a solution “in between” is that leftists will never abide by it. Once taxpayer coin is in hand, they will use every means to avoid complying with the terms of what they have agreed to.

    • odys

      True. The left will fight to attach as few stings as possible and then fight and fight to remove whatever strings remained.

    • FarOutlier

      Exactly like Greece. They agreed to reforms, took the money, cooked the books and came back for more.

  • charlesrwilliams

    The Congress should exempt PR from the Jones Act and the minimum wage. I would be happy to see PR given independence.

    • Hominid

      PR should have been granted independence long ago. The majority of people of PR are not Americanists and most are resentful of the USA. We let Cuba & the Philippines go shortly after seizing them. We kept PR for strategic military needs in the Caribbean – they benefitted enormously in return. Now that their marxist agitators were able to kick our military bases out (we no longer need them anyway), it’s time to end this perverse relationship between PR & the US.

      • odys

        Yes, why independence is not forced on Puerto Rico along with forced repatriation of its citizens, is beyond me. Those bad attitude people made that mess, let them live in it.

        They campaigned to stop the navy practicing shelling and the navy did. Then they were amazed the navy shuttered the base and tossed them out of work. They actually thought they should get paid for no reason.

        • Hominid

          Repatriation?!? The PRs are again fleeing the island in droves headed to the US as their ‘economy’ is collapsing. Also, since 1917 and at present, PRs are US citizens with Constitutional rights.

  • http://overcoming-lust.com JVanderSpek

    The Feds must come in and apply the same actuarial discipline that the private sector chafes under for all local and state run pensions. No exceptions. To meet this very reasonable standard, the feds should begin by lending money as needed to keep the pension funds compliant. Where will the money come from to pay back these loans? From those who benefit—the beneficiaries. Since the feds have unlimited ability to tax income in any way they want, they should establish an excise tax on benefits derived from these bailed out pension systems to fund the bailout.

    Problem solved—a self-funded bailout.

  • Hominid

    You can deny Darwin’s reality, but you can’t escape it.

  • Armand Rodriguez

    Once again we find that what is horrible and destructive for our country is good for the Democratic party.

  • Mriordon

    You left something out of one segment, “Some (mostly Republicans) won’t want to give a single dime to the improvident fools and crooks who created this mess. Others (mostly Democrats) will insist on no-fault bailouts…” It should have read “Some (mostly Republicans) won’t want to give a single dime to the improvident fools and crooks(all Democrats) who created this mess…”

  • brianreilly

    What the well-meaning author describes is the formal end of the representative republic, by suicide. Seems to me that our Founders warned us about this. Regardless of the good intentions, there is a terrible storm coming, and it is not at all clear what will be left when it passes.

  • bscook111

    But given the role that federal tax exemptions play in the municipal bond market, there is something to be said for making eligibility to issue tax-exempt bonds conditional.

    Let’s see if the marketplace will establish conditions. How about any new regulation being confined to fostering transparency and simplicity vis a vis the prospectus. Heavy penalties for lying, for the CPAs, Bankers, and Principals. Jail time, and not in the country club.

  • ata777

    Admirable suggestions that will go absolutely nowhere.

    • odys

      Actually, as the author noted, federalizing local budgets would be the liberals’ dream. No, federalize the employee benefits instead.

  • odys

    Whay wait! Today, the federal government should state that only defined contribution pensions are in existence for government employees at all levels across the nation. Still need to resolve the older pension issue, but stop digging.

  • Turbo

    The meltdown will be the reform. That’s the only plausible reality.

  • odys

    Imagine if the federal government had not gone rogue and stayed rogue. Imagine if Social Security and Medicare were state run and state created without any involvement of the feds.

    Likely 5 states’ Social Security and Medicare would be bankrupt by now, and we can guess which 5 states. The rest of us would be fine and not need to worry about our old age. Change the constitution to forbid the regulating of interstate commerce by the feds. instead form a council of state Secretaries of States to negotiate and ratify free trade treaties between the states. And there can be no free trade in a good with foreign nations unless that good is freely traded between the states.

  • DisgustedwithElitism

    Ultimately, the position that will be taken by the elites of both the major political parties is bailout now, reform later. Based on our experience of the last several decades, reform will not happen.

    We are at, or past, the tipping point. The only questions are remaining are these: 1) Can we save ourselves? (Is it even financially possible?) and 2) Do we have the political will to do what will be necessary?

    Parenthetically, I fear the answer to both questions is “No.”

  • jaytrain

    The ‘ good news ‘is that , given their triple tax exempt status , most of the bonds are owned by individuals, either directly or through mutual funds , in high tax states . So were there any leadership in the conservative movement ,they would be loudly railing against bailing out 1%er fat cats in NY , NJ ,CT and Cal. The only other holders are speculators , not investors , betting on a federal bailout : these vermin need to be burned bad , a 50% haircut sounds right .

  • fuchsia1

    … all proposed solutions for public sector pension insolvency are based on there being a vast pool of surplus wealth … that just needs to be carefully spread around to quiet things down. Is Greece ever going to reform? Chicago? The time to avert this train wreck was about 30 years ago. Cities and states are going to start issuing scrip … which will only be honored in government run stores. Landlords will be foreclosed … and banks will go belly up … and housing will no longer be maintained. Welcome to Dystopia!

  • Harry_Voyager

    I’m sorry, calling budget cuts a “hair cut” is probably the stupidest saying I’ve heard in a long time. It’s right up their with “blood and treasure.” It’s silly, talking like modern wars are about gold doubloons from Pirates of the Caribbean.

    The pure juvenilism of it irritates me to no end.

    Ok, rant is done. Back to your regularly scheduled political discussion. Unless the Democrats get a three house majority in the next election, I do not see Federal bailouts happening, nor am I convinced that they would even be a good idea. Generally speaking most issues are best understood, and therefor best handled by the people who are undergoing them, and in the situations where they do not understand why they are in the hole, it is exceedingly difficult to convince them to manage their finances any differently.

    Bailouts for that have a long history of simply prolonging the recession and making things overall worse in the long run. Just take a look at our current “recovery”.

  • moderate Guy

    Time to deal with the blue states the way Germany dealt with Greece. Like Greece, the blue states are lying their way into their continuous membership in US financial and economic union, inflate their alleged economic performance, underreport fiscal problems and shroud the corruption of shady deals.
    Any fiscal help to blue states or cities should come with “greek” conditions.

  • FarOutlier

    While I do applaud the author for discussing these matters I have to be realistic and I must disagree. There will be no sane solutions from the Blue Boys. In fact they will actually argue for more spending to stimulate the economy to raise taxes to pay off the problem. Really, that is what those nut cases will come up with. Outside of that they will simply wait until it all collapses as in Puerto Rico. I’ve even heard that both the conservatives and the liberals are to blame for PR’s problems. PR is toast. IL is toast.The reason the NJ pol called for a $1T bailout is because NJ has absolutely no way to pay for its pensions. It cannot even raise taxes enough to begin to pay for their pensions since the taxes are all ready driving people out. The Blue Boys will attempt to punish those that had common sense and did not get into their problems. I can hear it now how the Blue Boy states support those with common sense so it is only fair to screw KS, AL, MS, TX and other same places to save the highly overpaid and over pensioned NJ, IL, NY, RI public employees.
    No, it will just have to collapse.

  • valwayne

    Puerto Rico isn’t a democrat controlled State, although it looks like democrats have been running it. We need to help it sort out its debts. However, not a Penny for the States and Cities that have been run into the ground by the corrupt alliance of democrats and public employee unions that has corruptly taxed and spent those cities and states, like Chicago and California, into collapse. All they have to do is raise taxes and the voters stupid enough to vote for democrats deserve to pay until their eyes bleed. Obama is doing the same thing to the entire nation right now. Puert Rico is the future Obama and the democrats have in store for all of us. Socialist idiots like Obama and the democrats have been destroying economies for the past 200 years.

  • ggm281

    No bailouts. It is taxpayers bailing out the hedge funds. Change the law, and let them default. Hedge funds invested ASSUMING that the US taxpayers would eventually be on the hook. They got high rates of return because the debt was high risk. They’ve gotten their return, now let them write of their losses!

  • Floyd R Turbot

    Margaret Thatcher’s dictum proves to be correct. Again.

  • Jerome Ogden

    Dr. Mead is recommending that the federal government play the same role with Puerto Rico that the IMF is trying to play with Greece, i.e., the enforcer of tough love in return for debt relief.
    Good luck with that. The federal government itself needs the tough love more than Puerto Rico.

  • petegross

    Very good article and many very good comments I agree with so I won’t repeat those points.

    But any REAL fix to the pension problems at all levels of government will be painful and how that pain is distributed will be critical to the viability of any plan. While no plan can be absolutey fair to everyone involved ( pensioneers, taxpayers, lenders,etc ) it must be seen as being reasonably fair or it hasn’t a chance. As someone else pointed out in their comment, there can be no exemptions. That means all categories of workers, all spending programs to include all social welfare, all pet projects, etc.

    This will be interesting, to say the least.

  • wammnebu

    As much sense as the moderate approach makes, there is no way it would happen like that. What would actually happen is that the central planners would make a scapegoat out of the deal, claiming that the “Austerity Straitjacket” is what is destroying puerto rico, not their policies. When they cut programs as they are required by the deal, they will cut the ones the people need most (ie fire, police, schools) rather than administrative bloat or pensions in order to garner support for their “pain.” Unions will strike and shut sectors down, and then use this self inflicted pain to squash the nascent libertarian movement in puerto rico and gather supporters for generous (and less conditional) bailouts. And all of this in the end will prolong a puerto rico crisis to a decades long puerto rico catastrophe.

    As sad as it is, much like a substance addicted patriarch, giving them money is just enabling. All you can do is care for the kids and family they are hurting, and be there for the head of household when he finally runs out of excuses.

    That’s the major problem with self destructive leftism, it doesn’t actually end when they run out of money, it ends when they run out of boogeymen and excuses so that they start turning on each other (if war is unavailible). Leftism isn’t just the domain of idiots, there are sensible people trapped in it like a confidence scheme. The people who are only looking for free stuff are probably going to leave for bluer pastures (new york), and the people who love their island are going to stay and fight for it. They have already caught on to being duped (Brazil has begun to as well), why subsidize the con-men when they are on their way out? The country needs to do nothing to let the people of Chicago and LA know that they’re leaders are not failure ensured. Its a big country, there is no particular industry that could not be picked up by other states should one go under. We are not Europe, where migration to another part of the union requires an additional language/culture barrier. There are plenty of English/Spanish speaking parts of the US with stable economies for Puerto Ricans to move to, and the american people can help puerto ricans out on a personal basis (ie give to communities, not to the commonwealth).

  • kalendjay

    An employee where I worked said that there are no jobs in PR, so she works in the US. But her mother stays in a government subsidized home where effective rent for her is $100/mo. She pays her mother’s rent! And that supposedly is a realization of the libertarian trope that we should rely less on social security, more on personal savings and support between and among family members.

    PR has plenty of beaches and a potential as a port transfer hub that is underutilized, but which would integrate the Panama Canal with dozens of small Atlantic Seaboard and Gulf Coast ports. There was once a robust sugar industry there, all gone. So PR’s problems are more systemic and deeper than DC admits. In fact they are the problems created by DC, not local ones.

  • petegross

    One more thought. As this issue progresses and the pain of solutions or attempted fixes become better known and felt there is the strong possibility of a lot of social unrest. We saw some in Greece ( although it was not too bad …. Yet ). We will see alot more here as those who think they are getting the ” shaft ” will not take it quietly.

    Also, as states AND counties AND cities raise taxes, cut services and benefits we will see those who can, moving to ” better ” states/ counties/cities. Also businesses will move destroying the tax base and creating a downward spiral. Of course we have already seen the beginning of this in places like Detroit but these places are just the beginning.

  • Section 9

    California raised taxes and kicked the can down the road. The bell will toll, however.

  • wheezer

    WRM is one of the blogosphere’s best. This article no exception.

  • Guest

    No federal bailout. Blue jurisdictions must experience figurative death. Current blue citizens must be swept up in the figurative death of their jurisdictions in order to set an example for the future. No compromise and no mercy.

  • Dan045

    Any election promise that amounts to “future politicians will find the money” is worthless.

  • Bang-a-gong

    FORWARD to the Detroitification of America!

  • Moonlight Hangzhou

    The Metl down continues because there is no accountability…. Wait and watch as it comes home. Soon the workers are going to say, “Why am I working?”

  • life form

    I agree with the article except the last part. What does he mean by “blue model meltdown”? Generally, aren’t the red states net recipients of federal largesse, and blue states net donors? Puerto Rico is not a typical example.
    from business insider: “Red States are Welfare Queens”
    http://www.businessinsider.com.au/red-states-are-welfare-queens-2011-8?op=1

  • life form

    I thing the article is good, but what does he mean by “blue model”? Aren’t red states generally federal recipients, and blue states generally net federal donors?
    From business insider: “Red States are Welfare Queens”
    http://www.businessinsider.com.au/red-states-are-welfare-queens-2011-8?op=1
    Puerto Rico is not a typical example, is it?

    • Fred

      Aren’t red states generally federal recipients, and blue states generally net federal donors?

      Yes, largely because, due to our climate and relative sparseness of population, military bases tend to be located in the South and West. Perhaps you think it not worthwhile to pay us Neanderthal rednecks to protect your worthless Yankee ass?

      • life form

        Really? That’s how you reply to a neutral, civil question? PS I’m from the peach state, and did my service in the USN. Tool.

  • MikePM

    Greece, Puerto Rico, and the $18 trillion national debt are the reasons why I believe Scott Walker, despite his flaws, will ultimately end up being the next president.

    When even deep-blue Wisconsin recognizes the basic failures of the blue model and the need to get an out-of-control public sector under control, it tells you how deeply the reality of the fiscal situation has penetrated into the psyche of the average American.

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