Friday, October 1, 2010

Governments' Bad Investments

By Iain Murray

The Wall Street Journal reports that municipalities all over the nation are teetering on the verge of bankruptcy ("Local Debts Defy Easy Solution," September 23). This may be the final proof that the ongoing financial crisis is not a crisis of free markets, as populist politicians and media have characterized it. The municipal debt crisis is a political crisis, one created by politicians making bad decisions with taxpayer money in order to funnel it to their cronies and supporters. 

Why are municipalities in so bad a position? For the most part, because of deals cut with public employee unions. One of the prime benefits a labor union brings to its members is a fat pension plan that, in theory, is generously funded by the citizens of the municipality the union members work for. 

For union-friendly politicians, this was a sweet deal. They could reward their labor supporters with generous benefits, while passing the buck of raising taxes to pay for those benefits on to their successors years into the future. Now those bills are coming due. As the Journal says, state and local pension plans "have promised over $3 trillion in retirement benefits," while their pensions assets "are at least $1 trillion shy of that." California's pension shortfall is larger than the GDP of Saudi Arabia, oil riches and all.

Governments' Bad Investments

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