For the Record: Nouriel Roubini is Wrong

Nouriel Roubini is the man of the hour because he's the only economist* who's been predicting something like what we're seeing happening at the moment. He's also predicting that it's going to get a lot worse.

OK, perhaps not the only one, but certainly the most-quoted. It's not hard to see why. His talks and interviews are full of catnip for reporters like, "People who have been totally blinded and wrong accusing me of getting the timing wrong, it’s just a joke... It’s a bit pathetic, frankly." Economics is called "the dismal science" in part because most economists are inclined to say things like, "Sometimes the rigour of his analysis seems to be missing."

To be fair to Roubini, the current crisis ought to reflect just as, if not much more poorly on his many other professional colleagues who spent the past decade-and-change explaining why the current system was in fact doing just fine, k thx bye, or building complex macroeconomic models so divorced from reality as to be masturbatory exercises equivalent to the English department's worst Foucault-inspired dreck, dressed up in mathematical drag. Arnold Kling says that the macro profession needs to be pruned with a hatchet rather than a scalpel, and I agree.

That being said, I think Roubini is wrong about this thing leading to a general crack-up.

Yes on Question One

It is not just the people who took out "liar loans" and ran up five figures of credit card debt who have been living beyond their means. Question 1 is the best chance Massachusetts voters have to send a message to a legislature that seems structurally beyond repair.

The MBTA spends upwards of $250,000,000 per year servicing some $8 billion of debt, even as it continues to build and subsidize highly unprofitable lines. And it is hardly alone.

Here and elsewhere, state workers are guaranteed retirement benefits that would not disappoint the CEO of AIG or Lehman Brothers. Like private pensions, state employees contribute to plans which are invested in the hopes of generating sufficient returns to pay out the necessary benefits. Unlike private pensions, state employees often have a legal guarantee that the difference will be paid out from the state's general fund. These plans are understandably popular with employees, including the elected and appointed officials who set the rules. They are also chronically underfunded--a secondary concern given their right to claw money out of the general fund.

A view of the world to come can be seen in General Motors, which for decades provided a similar standard of guarantee to its employees. Today, GM spends an estimated $15,000 annually per current employee providing benefits to retired ones. It is more instructive to think of GM as a human services agency than a manufacturer of automobiles. They are being forced to delay the introduction of a new line of smaller cars in order to conserve cash--a choice between suicide today and metastatic cancer tomorrow.

In similar fashion, we may not be far off from the day that taxpayers are spending more to pay retired cops and teachers than we are paying ones currently employed. The recent dive in the markets does little to improve the situation, and accounting controls for many state pension funds make Enron look good by comparison.

Naturally, the most vocal opponents of Question 1 are the public-sector unions, and they have spent lavishly to oppose it, claiming it poses an existential threat to critical services in the Commonwealth. In fact the greatest long-term structural threats are runaway spending and guarantees of gold-plated, tax-backed benefits.

Question 1 could be called an extreme approach. Certainly, cutting off all income tax payments at the same time as the state was likely to get hit by significantly lower tax receipts across the board could lead to some difficult choices. But given the General Court's extreme disregard for the will of the voters, a "Yes" vote on Question 1 is the best opportunity voters have in this election to send a message. While Sal DiMasi has made clear that he would do everything in his power to quash a successful initiative, it would still provide a resounding wakeup call. Spending must be contained and ultimately reduced, lest today's profligate ways lead to an even-worse unraveling in the years to come.