Two Views on the Economy

by: Matthew Rafat

Two interesting views on the economy and whether the recession is over:

1. Schwab's Liz Ann Sonders says it might be over.

2. Dennis Gartman says it's over.

Now read this and this:

For years, governments have been promising generous medical benefits to millions of schoolteachers, firefighters and other employees when they retire, yet experts say that virtually none of these governments have kept track of the mounting price tag...

Actuaries say that about 5.5 million retired public employees have health benefits of some kind - and accountants joke that there are not enough actuaries in the country to do all the calculations necessary to estimate how much all these retirees have been promised...Today, only one in 20 companies still offers retiree benefits, according to Don Rueckert Jr., an Aon actuary.

Rosy economic projections belie the public sector's debt bomb. At some point, taxes must be raised to cover public sector pensions and lifetime medical benefits. Once taxes increase, non-government workers will have less disposable income. The less disposable income, the less people can spend. The less spending, the lower our economic growth--as long as our economy is driven by consumer spending.

The only solution to the death/debt spiral is to cut spending, which includes cutting public sector benefits. Does this mean that teachers and other government workers must get paid less? No. What it means is that government benefits must be brought in line with a regular American's benefits. Instead of a pension, police officers, teachers, lawyers, judges, and other government workers should get a 401k or 403b plan. Instead of guaranteed lifetime medical benefits, government workers should get the same medical plan everyone else gets--employer-subsidized health care while employed, COBRA if terminated, and then Medicare when the time comes.

Economists who praise the so-called economy recovery are not taking into account long-term debt liabilities. We need to cut spending, and all we've done so far is use accounting tricks to hide the massive debt we're giving to our children and grandchildren. That's not just irresponsible--that's immoral.

Kudos to the NY Times' Milt Freudenheim and Mary Williams Walsh for being ahead of the curve. Their article on GASB 45 was published in December 2005.