The Pew Center on the States issued a study this week that sheds further light on our municipal pension problems, a political crisis with strong Arendtian overones. Where most studies have focused on the enormous problems faced by states, this one focuses on cities:
Cities employing nearly half of U.S. municipal workers saw their pension and retiree health-care funding levels fall from 79% in fiscal year 2007 to 74% in fiscal year 2009, using the latest available data, according to the Pew Center on the States. Pension systems are considered healthy if they are 80% funded.
The growing funding gulf, which the study estimated at more than $217 billion for the 61 cities in the study, raises worries about local finances at a time when states are also struggling to recover from the recession. Property-tax revenue dipped during the housing crisis, straining city finances amid a weak national economy.
The reason to pay attention to the problems in cities is that cities have even less ability to solve their pension shortfalls than states. The smaller the population, the more a city would have to tax each citizen in order to help pay for the pensions of its retired public workers. The result is that either cities get bailed out by states and lose their independence (as is happening in Michigan) or the cities file for bankruptcy (as is happening in California).
Also this week the NY Times ran a story about San Bernadino, one of three California cities to file for bankruptcy as a result of their pension obligations. It is a stark reminder of why we should care about public pensions:
Five months after San Bernardino filed for bankruptcy — the third California city to seek Chapter 9 protections in 2012 — residents here are confronting a transformed and more perilous city. After violent crime had dropped steadily for years, the homicide rate shot up more than 50 percent in 2012 as a shrinking police force struggled to keep order in a city long troubled by street gangs that have migrated from Los Angeles, 60 miles to the west. … “The parks department is shredded, the libraries similarly,” [the mayor] said. “My office is down to nobody. I’ve got literally no one left.”
A similar fate is befalling other California cities that are in bankruptcy:
Stockton, Calif., which filed for bankruptcy in June, has followed a similarly grim path into insolvency, logging more homicides last year than ever before. In Vallejo, Calif., which filed for bankruptcy in 2008, cuts left the police force a third smaller, and the city became a hub for prostitution.
As I have argued, the pension crisis is not arcane policy or economics. It is a crisis of politics and government. It came about because municipal and state governments offered irresponsible contracts to public employees. There is no way these contractually guaranteed pensions can be paid. By refusing to face up to this fact now, we are making the problem worse. The result will be the hollowing out of local government services across the country. Police forces will be decimated. Public libraries and fire stations will close. Parks will fall into disrepair. All in order to pay full pensions to retirees. This of course won’t happen. Cities will refuse to do it, as they have in California and elsewhere. The result will then be bankruptcy, which comes with its own tragedies.
For anyone who cares about government and wants government to succeed, the pension problem must be addressed, for it threatens not only economic disaster, but political cynicism beyond even today's wildest dreams. Across the country, teachers, policemen and firemen, not to mention civil service employees and others, will see their promised pensions shrink precipitously. Not only will this devastate retirement nest eggs for millions of people, it will fray the social contract—pitting young against old and taxpayers against public employees. This is already happening.
What is more, the pension crisis will likely further erode local control over our lives. As municipalities go bankrupt they turn to states. As states go bankrupt, they turn to the federal government. Bailouts come with strings and ever-increasing levels of bureaucracy. For those who understand that our federal system was designed to thwart the establishment of sovereignty by dispersing power through competing levels of governance, the pension crisis has the potential to radically disempower local governments and further the amassing of federal power already long underway.
There may not be pretty or easy solutions, but ignoring or denying the problem is no longer an option. It is time for those who care about government and freedom to engage the pension issue and insist to our legislators that we act to treat pensioners with respect but also preserve the power of local governments to support rich and vibrant political institutions.
From Athens to Madrid, the European crisis has entered yet another of its "decisive" phases —how many decisive phases can one crisis have? Reflecting on Europe has brought to mind Seyla Benhabib's 2004 Tanner Lectures on cosmopolitan universalism, which itself was inspired by Hannah Arendt's comments on international law in the epilogue and postscript to Eichmann in Jerusalem. The sovereign debt crisis in Europe might seem to have little to do with Benhabib's discourse ethics or Arendt's affirmation of the limits of international law, but it does. Let me explain.
The debt crisis in Europe is not an economic crisis. It is a political crisis. The Euro-zone created a common currency without a common political system. This worked great for a while as countries benefitted from integration and stability of the Euro. But now that debt and recession plague Europe, indebted countries like Greece, Ireland, and Portugal are losing control of their politics.
The typical response to over-indebtedness in democratic countries is to devalue one's currency. This causes massive inflation, allowing the debts to be paid. It is painful in the short term and everyone's buying power decreases and the standard of living suffers. But devaluation resets the economy and allows for growth free from the straight-jacket of debt.
It is of course possible to achieve the same effect of devaluation within the Euro zone. The Euro zone could issue Euro bonds, which would be inflationary and allow the indebted countries to pay off their Euro-debts with plentiful and cheap Euros. This is the solution that French President Francois Hollande and others are pushing.
The problem in the Euro-zone is that countries without debt problems don't want to devalue the Euro and thus lower their purchasing power. Without the political sense of a common fate, Germans do not want to suffer for the sake of the Greeks. What is more, the Germans have no faith that if they bail the Greeks out now, the Greeks will reform their profligate ways and not come back for another bailout in a few years. The result is the current crisis of austerity. Or so it seems.
Behind the scenes there is another debate that few are paying attention to. Amidst the repeated rejection of Euro bonds by Germany's leaders is the insertion of a caveat. Euro bonds would be possible if they came with treaty reform, say Germans like Joshcka Fisher and economic leaders like European Central Bank President Mario Draghi. In essence, Germany is willing to bail out Europe, but only if the countries in the Euro zone agree to give up a substantial amount of their sovereignty over economic policy. What Germany wants is for decisions about budgets and deficits and tax policy to be set by European bureaucrats not by democratically elected leaders. If the struggling Euro zone countries agree to those conditions, there is a good chance Germany will agree to bail them out with Euro bonds. And Europe will move closer to a United States of Europe, but one dominated by economic bureaucrats rather than a democratic legislature.
The connection between European politics and Hannah Arendt is important. What Germany is demanding is that Europe abandon its decentralized political control over economic matters and cede decision-making to an apolitical centralized European bureaucracy. Behind such a desire is the subordination of politics to economics that Hannah Arendt saw as one of the defining features of the modern age.
In The Origins of Totalitarianism, Arendt argued that the transfer of the economic principle of unlimited growth to politics underlies imperialism. Imperialism has its economic roots in the “realm of business speculation”-specifically the bursting of an investment bubble in the 1870s. As national entrepreneurs sought new markets, they enlisted state support for economic expansion. “Expansion as a permanent and supreme aim of politics is the central idea of imperialism.” The rise of imperialism and the spread of economic thinking in the political sphere means, Arendt argues, that politics becomes subservient to economics.
Arendt fears the confusion of economics and politics and especially the elevation of economics over politics. Since politics demands the imposition of limits and “stabilizing forces that stand in the way of constant transformation and expansion,” she argues that imperialist expansion brought with it a grave and destabilizing threat to the political order. When politics under the sway of economic imperatives is forced to expand on the world stage, political leaders must offer ideologies that give meaning to an ever-larger, undefined, disconnected, and homeless mass, a population that replaces a citizenry. Under the economic imperatives of growth, politics becomes world politics.
It is an open question today whether politics can return to a political activity that sets moral, ethical, and economic limits on human action. The reason is that we are increasingly suspicious of action, which is, by its nature, free, spontaneous, surprising and unpredictable. Whether we are Germans seeking economic stability, Americans demanding that the Federal government limit the states in their right to deliver (or not deliver) education or healthcare, or human rights activists insisting that individual states conform to international cosmopolitan norms of behavior, the liberal and centralizing demand that people behave well according to cosmopolitan standards rubs against Arendt's democratic insistence that politics must leave space for local, bounded, and undisciplined action.
And here we can return to Seyla Benhabib's call in her Tanner lectures for a new cosmopolitan universalism. Benhabib has initiated an important engagement with Arendt and human rights, one that embraces Arendt's formulation of a "right to have rights" but also resists Arendt's efforts to limit the scope of that universal right. We should all be grateful for the clear-sighted way Benhabib raises this crucial question.
Arendt seeks her bearings in reformulating human rights from her experiences of the Jews and other minority peoples during and preceding the holocaust. The true “calamity of the rightless” in the middle of the 20th century, Arendt writes, is “not that they are deprived of life, liberty, and the pursuit of happiness, or of equality before the law and freedom of opinion... but that they no longer belong to any community whatsoever.” Human rights reflect the legalized exclusion of human beings from civilized communities and these human rights are “much more fundamental than freedom and justice, which are the rights of citizens.” The rights of man, in other words, are not revealed by the deprivation of specific rights, but by the plight of those who are expelled from all rights; the truly rightless are those who are so oppressed that they are deprived of legal status so that no one will even oppress them. It is this total deprivation of rights that makes manifest the one truly human right, what Arendt calls the “right to have rights.”
In thinking about Arendt's enigmatic formula, Benhabib has worried that Arendt simply does not offer a full and philosophical elucidation of the right to have rights. The "right to have rights" partakes of a "philosophical perplexity"; to invoke the "right to have rights" is to give certain rights "a binding power over and beyond the moral obligation that they impose on moral agents." The rights in the "right to have rights" are not mere "oughts," but are universal, cosmopolitan norms. Or at least that is what Benhabib wants to argue, with and against Arendt.
If Arendt remained suspicious of international norms that would be applied in international courts, Benhabib argues that the last 50 years have witnessed an "evolution of global civil society that is characterized by a transition from international to cosmopolitan norms of justice." She embraces the term "cosmopolitanism," which she argues has rightly become one of the key words of our time. What cosmopolitanism means, for Benhabib, is the "carrying of universalistic norms" of a common truth that is inter-subjective rather than metaphysical. In short, Benhabib argues that cosmopolitan norms are emerging in our times that give basic human rights to individuals and can even bind state actors.
Benhabib’s interpretation of the "right to have rights" is appealing, especially in the face of, for example, the ongoing inhumane treatment of Shiites in Syria. Yet, as Benhabib herself recognizes, her reading complicates Arendt’s hard-minded characterization of the right to have rights as “a right to belong to some kind of community.” Arendt means the right “to live in a framework where one is judged by one’s actions and opinions.” In doing so, Arendt excludes the traditional civil rights of life and liberty that Benhabib wants to read into Arendt’s formula. Arendt is careful to distinguish human rights to the rights to be treated humanely that Benhabib seeks to encode in a newly emerging cosmopolitan institutionalization of human rights. For reasons at the core of Arendt’s thinking, Arendt clearly limits the right to have rights and thus human rights to only two rights, the right to act and the right to speak.
The only truly human rights, for Arendt, are the rights to act and speak in public. The roots for this Arendtian claim are only fully developed five years later with the publication of The Human Condition. Acting and speaking, she argues, are essential attributes of being human. The human right to speak has, since Aristotle defined man as a being with the capacity to speak and think, been seen to be a “general characteristic of the human condition which no tyrant could take away.” Similarly, the human right to act in public has been at the essence of human being since Aristotle defined man as a political animal who lives, by definition, in a community with others. It is these rights to speak and act—to be effectual and meaningful in a public world—that, when taken away, threaten the humanity of persons.
Benhabib has good reasons to want to expand the cosmopolitan basis of Arendt's "right to have rights." It is important to see, however, that the desire to strengthen a cosmopolitan foundation for human rights places stability and security above action in much the same as the present German desire to subordinate Greeks and Spaniards to a pan-European regime of responsible citizenship. Both are motivated by a desire for security, stability, and standards. And both elevate the institutional application of cosmopolitan universal norms (economic norms in Europe, human rights norms internationally) over the messiness of local political action.
At a time of economic crisis and humanitarian crises, the great uncertainty of our world will militate toward ever more centralization and thus ever less space for action. Benhabib is certainly alive to these tensions and has answers to many of them. You can read her account here. It is your weekend read.
Ina Drew has resigned. Why wasn't she fired?
Drew is the executive at JPMorgan being asked to fall on her sword for the $2 Billion+ loss in hedging trades. Jamie Dimon, who for four years has taken credit for running a tight ship in which he was responsible for steering JPMorgan through the financial crisis, will of course soldier on, beaten but not broken.
Aside from allowing her the dignity of not being fired, the resignation also, I have to imagine, preserves what must be a very generous severance package. All present reports refuse to disclose Drew's severance package. She was paid $15.5 million last year and almost $16 million in 2010. What justification is there for now allowing her to resign and potentially keep a severance?
The answer seems to be that Drew, like all the executives on Wall Street, deserves their stratospheric compensation. This of course was Dimon's point in his announcement of her resignation. He writes:
Ina Drew has been a great partner over her many years with our firm. Despite our recent losses in the CIO, Ina’s vast contributions to our company should not be overshadowed by these events.
In other words, Drew is brilliant and has been valuable. She should not be blamed for losing $2 Billion. She still deserves what is reported to be a severance package of over $14 Million in equity rewards, according to the Wall Street Journal.
The canard of the best and the brightest is one we hear over and over. The basic fallacy here is the belief that these executives are so smart and so valuable that they can't be angered or let go.
The fact that these blow-ups keep happening has done little to quell the applause for the bankers. All the incentives are for the executives to take on risk. What happens when they lose? They resign. I am sure Ina Drew is smart and capable and no doubt she will be back at a hedge fund or a new firm as soon as she wants.
The bigger issue, however, is that there is still the feeling around that these executives deserve to be making tens of millions of dollars every year. Recall that back in 2009 after the best and brightest brought the country's best (i.e. biggest) banks to their knees at the federal taxpayers' dole, Ken Feinberg was appointed to oversee bonuses and compensation at those banks. He has told how the big banks decided that every single one of their executives had performed above average and deserved extravagant bonuses. In an article about Feinberg from 2009, Steven Brill writes:
To take a near-comic example, the firms did not present a single executive as meriting a pay grade below the 50th percentile of their supposed peer group.... In fact, all 136 of the executives (the 25 top earners for each of the seven companies, less 39 who left during the year) were depicted as well above average, typically in the 75th percentile or higher. And the peer groups they were supposed to be in were often inflated; for example, someone running a unit might be portrayed as a chief executive because, the argument went, he ran a really big unit.
Citigroup and Bank of America, Brill writes, "concluded that everyone in their executive suites was above average when compared with peers at other giant banks that didn’t need a bailout." The banks then proposed that their average executives deserved bonuses of between $10-$21 million. After months of negotiating and cajoling, Feinberg talked them down, so that in the end, the average banker received a year-end bonus of $6.5 million at Bank of America and $6.2 million at Citigroup.
Those paltry $6 million bonuses were in a year that the banks went bankrupt and had to be bailed out. No wonder the best and the brightest like Drew deserve $14 and $16 million when times are good. Of course, the incentives to take risks are still there. If your risks work out, you make a fortune. When your risky trades go bad, you resign and take your winnings and your severance.
These bankers have nothing at risk and everything to gain by taking risks. Four years after the financial crisis, it seems that little if anything has changed.
How big is the pension crisis in the United States? As I wrote last week, The Pew Charitable Trust has issued a report that there is a whopping $1 trillion dollar gap between the pensions promised to state public employees and the money that has been set aside to pay those pensions. But I also said that many people think that gap is actually much bigger.
The states' calculations assume a rosy 8% or even 10% return on their investments. The Pew report shows that even with those unrealistic assumptions, there will be a $1 trillion gap, since the states are underfunding their pension funds even based on optimistic returns.
Recently, Gillian Tett of the Financial Times talked to a few academics about the question and learned why the gap is actually $3-5 trillion dollars, and not simply $1 trillion. The basic problem is that low interest rates (now around 2%) mean that the investment on pension funds is not returning close to the hoped for amount. As Tett reports:
Thus academics, such as Joshua Rauh of Northwestern University, think that if a more realistic rate of return were used, this would reveal that state pension funds are now underfunded to the tune of $3tn-$4tn. Other observers are even gloomier. “This $4tn figure is a lower bound,” argues Robert Merton, economics professor at MIT. “Liabilities as reported by state and local governments seem to creep steadily up with each report due to ‘actuarial losses’ or overly generous assumptions about mortality and worker behaviour. In recent years, these have added growth of about 4-5 per cent per year to total liabilities.” And, of course, the longer that US interest rates – and bond yields – remain ultra low, the worse this underfunding gap becomes.
Tett's essay makes for a sobering read. As she rightly points out, this problem cannot be ducked forever. Remember, the 2009 bailout that President Obama pushed through was $900 billion, slightly under $1 trillion. We are talking about a shortfall in state budgets of $3-5 trillion in coming years. This is enormous and the effect on state governments and public services will be disastrous. But the very worst effect will be on all of those public employees who have been counting on contractually guaranteed pensions who will, I fear, learn what workers in Rhode Island and Alabama recently learned: such contractual guarantees don't mean much.
What does it mean to have a fact-based politics? This is a question that Hannah Arendt struggled with. First in her writings on totalitarianism, she saw that at the core of totalitarian regimes was the need to keep alive a coherent fantasy that motivated the mass movements supporting the regimes. When inconvenient facts appeared, they simply had to be eradicated.
Later, writing during the Vietnam war and in response to her book Eichmann in Jerusalem, Arendt argued that lies came to serve not totalitarian movements, but well-meaning idealists and technocrats who convinced not only others but even themselves that their lies were in the service of a winnable and noble cause.
Today we face the unraveling of a huge fiction. While the United States is still a wealthy country, we are not as wealthy as we have pretended to be over the last 15 years. But instead of addressing this self-deception, we are continuing to demand higher pensions and better medical care without actually asking who is going to pay for such services. It is a nice slogan to say that pensions and healthcare are human rights. But the current way we are achieving such human rights is by lying to ourselves, and, most pointedly, to the public employees who will see their promised pensions and healthcare evaporate during their retirement.
It would be nice if one of the Presidential candidates in either party would actually discuss the crisis in state pensions. But that would require courage and leadership, not to mention a willingness to have an honest conversation about the fact that this country continues to live beyond its means and promise benefits it cannot afford.