Pension plans continue to blame poor market performance for their continuing dire straits of massive underfunding. Irrespective of all time market highs, their actuarial assumption of 8% has been impossible to achieve and continues to be way out of reach.
Municipalities around the country are entering the summer season with expectations of violence not seen in several decades. Yet many are cutting back on police and fireman, for lack of money, just at the moment they seem to need them the most.
Finally, the repairing of roads and bridges, popularly known as infrastructure, continues to be postponed by the “City Fathers” as the illusory cash seems to be somewhere in the distant future.
So what is actually going on? Why are not only most major cities but also most every municipality across the land running out of money? Is it really poor markets, misguided budgeting or lack thereof, lower interest rates, grandiose promises or just total incompetence? A case could be made for all the above. However what is most significant is the philosophy that all the “Town Fathers” cling to when laying out their budget and anticipated revenues for the year and years ahead.
John Maynard Keynes believed that all economic analysis was grounded in models. Contrary to the popular financial statement that “the past is no guarantee of the future,” he believed just the opposite. Certain conditions and actions, when repeated Keynes believed, would ULTIMATELY and ALWAYS achieve the required result.
Federal Reserve officials and their leaders from Greenspan to Yellen have worshipped at the shrine of Keynes for decades. One such example is the printing of money. The model’s premise is that the more you print the more consumers will spend. The trick is finding the right amount to print. Buried in the model is the Keynesian belief that demand and supply can be created and controlled by the government through a printing press. Also embodied is the belief that once modeled nothing should be changed. The idea is to continue doing the action over and over until the desired result is achieved. (ULTIMATELY and ALWAYS)
For decades municipalities have made their tax receipt predictions on a very simple model. Based on that model the budgets for all the social services, from police to fireman, all infrastructure spending and all promised pension contributions could be easily determined and planned.
Examining the bullet points of the model perhaps we can determine where the Keynes approach has gone awry:
1) Each year Senior citizens will die or move thus making the existing taxable home vacant for sale.
2) High school and college graduates will remain to live and work in the community.
3) College graduates will immediately marry and shortly thereafter start to raise a family.
4) The senior citizen homes will be absorbed by the graduates and additional housing will be needed to accommodate their growing families.
5) Local manufacturing and service industries will continue to add employees as job security is unquestioned.
6) Rising tax revenues from property to sales will continue to grow as the Millenials become a more integral part of the community.
This is the model that every village, town, and city across the United States has based their tax receipts upon for decades.
I could talk about the lack of marriages, lack of children, lack of jobs or even the lack of job stability as being the major flaw in the model. However all we need to know is that Keynes never anticipated a generation like the Millennials or he may have had second thoughts about modeling.
The word Millennials, unfortunately for the “Town Fathers” says it all and answers the question, what happened to all those receipts?