How Many Times Must The Taxpayers Pay To Rebuild Sea Bright, New Jersey?

At this writing the Senate still hasn't approved the second-round $50+ billion Hurricane Sandy relief bill, but I'm not holding out much hope that it will go down to defeat, or for that matter be trimmed even a little.  So it's time to further examine the infinite credit card mindset behind these things.

Yesterday the AP had a story raising the legitimate question of whether it's the right thing to rebuild yet again in some of those communities destroyed time and again by ocean storms.  The story was picked up by numerous outlets.  Here is the version at Newsday.  But like almost everything from the press, the story is so totally infected by the infinite credit card mentality and ignorance of history as to be next to useless.

The headline is:  Should worst-flooded areas be left after Sandy?  Here's the response of Dina Long, mayor of Sea Bright, NJ:  

"We're not retreating," said Dina Long, the mayor of Sea Bright, N.J., a chronically flooded spit of sand between the Atlantic Ocean and the Shrewsbury River only slightly wider than the length of a football field in some spots. Three-quarters of its 1,400 residents are still homeless and the entire business district was wiped out; only four shops have managed to reopen. . . .  But as in many other storm-damaged communities, there is a fierce will to survive, to rebuild and to restore.  "Nobody has come to us and said we shouldn't exist," she said. "It is antithetical to the Jersey mindset, and particularly to the Sea Bright mindset. We're known for being strong, for being resilient, for not backing down."

Sounds like the voice of a brave fighter.  Or is she a contemptible moocher?  To me the answer entirely depends on whether the residents of Sea Bright are prepared to rebuild with their own money, or private insurance, or whether their so-called "strength" and "resiliency" is just a function of the hand-outs they can suck off the Federal credit card.  Incredibly, the AP reporter is not curious enough to understand that this is the fundamental question.  It is not asked.  But we know the answer, since the $60 billion Federal hand-out is enough to pay for all legitimate losses from Sandy at least three times.

Well let's take a little look at the history of Sea Bright.  When was the last time it was flooded by some combination of its ocean and river?  That would be 2010.  Here's a story about the 2010 storm and its aftermath:

“Sea Bright families are still recovering from the effects of the snowstorm that hit the area and destroyed local families’ homes back in 2010.  This funding will help fully repair the damage caused; it will also bolster the relevant public infrastructure to prevent future damage from the regular storms and floods that affect area,”  said New Jersey U.S. Senator Bob Menendez. 

The Federal funding in question would be $1.4 million to build and repair bulkheads "to minimize [future] flood damage."  Looks like that money went straight down the rat hole.

And the next previous flood at Sea Bright?  Why, that would be September 2009!  Here is a youtube story with a video of the ocean flowing up onto the streets.

Before that, it seems you have to go all the way back to 1992.  Lou Lumenick of the New York Post lived there at the time, and wrote a recent story for the Post describing his experience in the horrific 1992 destruction.  Oh, but here in a blog post from 2005 called "The Jersey Shore Real Estate Bubble" we have a description of houses for sale "north of $3 million" on the very site of properties destroyed in the 1992 storm.  Those would be the houses just now destroyed and that the taxpayers must pay for.

Next, a policy paper from Rutgers University (for those who don't know, it's the state university of New Jersey) listing other major storms that destroyed Sea Bright, going back into the 19th century:

1962 The Great Ash Wednesday Northeaster

1944 - Great Atlantic Storm

Christmas Storm and Jan. 1914 Storm - caused massive destruction

1890s - storms repeatedly destroyed wooden bulkheads and battered many of the cottages in Sea Bright

And here is NJ Governor Christie calling the House of Representatives "disgusting" for postponing a vote on Federal relief to bail out these people for the umpteenth time.  Really, Governor Christie?  Perhaps I am the only person in the United States who finds it disgusting that the Congress votes $60 billion of Federal taxpayer money to bail out everyone who built anything on the coast that got destroyed.  But it is disgusting, and it's time for a few other people to join me.

Back to the AP story.  They have the idea that the only possible alternative to Federal hand-outs to rebuild again and again is "buyouts" of the affected property owners.

If buyouts did occur, [Prof. Jon Miller of Stevens Institute of Technology] predicted they would happen in areas with lower property values because of the high cost of buying up prime coastal real estate. That could have the unintended consequence of placing the shore off-limits to all but the wealthy, he said.

It's like the idea of letting people suffer their own losses, or buy their own insurance, doesn't even occur to them.  It's beyond the pale!  The mindset is:  of course it's obvious that the taxpayers must either bail out or buy out the people who just bought newly built $3 million homes in a community that has been destroyed by the ocean seven times in the last 130 years.   Am I the only person who is willing to say no to this insanity?

It's Good To Have An Infinite Credit Card

The alarming figure of $16 trillion for the debt of the United States has been much in the news.  That's the amount of actual bond debt outstanding, now somewhat exceeding the entire GDP and growing rapidly.  But aren't there also contingent liabilities out there?  For those who don't know that term, that is the amount that the Federal government has guaranteed, or insured, or otherwise put its credit behind, although not yet actually spent.  It's not so easy to come up with any kind of comprehensive numbers, but I'll make a start.  Also, I'll save the big ones (Medicare, Social Security) for last.

The Federal government insures almost all bank deposits through the FDIC.  In May 2012 the Wall Street Journal put the total amount of U.S. bank deposits at $10.26 trillion.  Could we ever have a systemic banking crisis where essentially all of the banks become insolvent at once?  We almost had one just a couple of years ago.  How about the S&L crisis in the 80s, where all the S&Ls became insolvent at once? And can we think of examples from other countries?  How about Japan in the 1990s?  Russia in 1998?  And don't even get started on Latin America!

What's the total of Federal housing guarantees?  According to Forbes a few days ago, the FHA (which has stepped into the breach to guarantee mortgages given the weakness of Fannie and Freddie) is up to $1.08 trillion.  Oh, and almost 10% of that is in default and they look to be needing a bailout soon.  But don't worry, they have an infinite right to just draw on the Treasury, so no need to go to Congress for an appropriation.  Here's an article in the American Thinker that puts the total of guarantees and debt of Fannie and Freddie at $7 trillion.  Supposedly the Treasury is ending its open checkbook to Fannie and Freddie as of December 31, 2012.  Do you believe it?

Do you know that the Federal government guarantees all private pensions?  The agency is called the Pension Benefit Guaranty Corporation, PBGC.  And by the way, what is the possibility that any private pension plan can meet its obligations when the Federal Reserve keeps interest rates at zero and nobody can make a dime on any investment?  So how is the PBGC doing?  Here's the latest from Fox News on November 16:  they just ran a $34 billion deficit for the year ended September 30, up from a mere $26 billion last year.  

If the trend continues, the agency could struggle to pay benefits without an infusion of taxpayer funds.

What a surprise!

How about flood insurance?  If you didn't know it before Sandy, you surely know now, that the Federal government issues essentially all flood insurance to those in the path of hurricanes.  Turns out that after Katrina the flood insurance program didn't have nearly enough money to pay its debts, so the Feds gave them a line of credit of $20 billion.  They then borrowed $18 billion to pay claims, and haven't repaid any meaningful amount.  Now we have Sandy.  Oops!  The cost of that is projected at $6 - 12 billion according to the Chicago Tribune.  So we are about to blow through the $20 billion cap by multiple billions.  Time for another bailout!  My idea is that we'll spend the money building bigger and better on the same barrier islands.  It's not a problem as long as you have the infinite credit card at your back.

Let's get away from these little numbers and back to something noticeable.  Virtually all student loan debt is backed by the government.  How much is that?  According to this from the New York Times, the total of student loan debt passed $1 trillion in 2011.  Likelihood of getting that back?  Remember, these borrowers are the same people who are supposed to pay for the retirement income and medical benefits of the baby boom generation.

Skipping over a few trivialities (crop insurance, terrorism insurance) let's get to some real numbers.  What is the unfunded liability of the Medicare program?   To be fair, Medicare is different from the other programs above in that the Federal government reserves the right to cut it.  But if you think it should be continued at least as is, or that it would be politically "impossible" to cut, then these numbers are highly relevant.  According to this from the Cato Institute, the Medicare trustees themselves put the number for the unfunded liabilities at $38.6 trillion.  Tanner of Cato thinks $90 trillion is more like it:

Let's try to put the ongoing debate over the future of Medicare into a little bit of context. Last year, Americans paid $274 billion in Medicare taxes and premiums. At the same time, the program paid out $564 billion in benefits. That amounts to a shortfall of roughly $290 billion. Looking into the future, even the most optimistic estimate by the program's trustees puts Medicare's future unfunded liabilities at more than $38.6 trillion. More realistic projections suggest the shortfall could easily top $90 trillion.

Faced with this ocean of red ink, the Obama and Romney campaigns are busy claiming that the other guy wants to cut Medicare. They, on the other hand, would never think for a moment about cutting anyone's Medicare benefits. Hello. Can anyone out there do math?

And yet one more:  Social Security's unfunded liability, according to this from Bloomberg News in July 2012, is $20.5 trillion.

Medicaid?  They don't even put out a number for that one, at least that I can find.  It may be the biggest of all!

The bottom line:  you either believe that it's possible for a big borrower with the infinite credit card to take on all the downside risk of life for everybody, or you don't.  I just predict, when this ends it's not going to be pretty.

Ponzi Schemes

Are social security, Medicare, and Medicaid Ponzi schemes?  (And how about Obamacare?)

It depends on how you define the term "Ponzi scheme."  Defenders of the entitlement programs say they are not Ponzi schemes because Ponzi schemes are  illegal whereas the entitlements are not; and because in Ponzi schemes the investors are deceived about the true nature of the investment, whereas with the entitlements it is all laid out right there in the statute books.

I'll concede both of those points, but those points are not really important.  The important aspect of the Ponzi scheme is its mathematics.  The key characteristic is that the liabilities of the scheme increase at a geometric rate that is faster than any possible ability to attract new money into the system.  In that sense, Medicare and Medicaid are clearly Ponzi schemes.  Social security has Ponzi scheme aspects, although not beyond cure by fixes that are at least theoretically possible.  For Obamacare it's too early to tell, but the odds that it will prove quickly to be a Ponzi scheme are exceedingly high.

Medicare spending in 1990 was $107 billion according to this article.  By 2011 it reached about $563 billion per a chart here.  That's a compound annual growth rate of over 8%.  The economy is growing at around 2%.  In a good year it grows at around 4%.  In a spectacular year it grows at around 7%, and we may never see one of those again.  Medicare grows at 8%, compounded, year after year after year. 

Here's a not-too-hard math exercise:  if Medicare is currently about 4% of the economy, and grows at 8% per year, and the economy grows at 3% per year, how many years until Medicare is larger than the entire economy?  The answer is shorter than you might think:  around 70 years.  At that point everyone works all the time, but we have no food, no housing, no clothes, no vacations, and not even any medical care except for old people.  Everyone works just to provide the medical care for the old people.

That scenario won't happen because Medicare as currently structured will fall apart, just like the  Madoff scheme fell apart, well before we get there.  But how soon:  10 years, 20,or 30?  Nobody knows.  But it will happen because there is no way around the math.  And by "Medicare falls apart" I mean the Federal government falls apart, unless they have somehow separated themselves from paying for Medicare in the meantime.

You ask, why can't we just slow it down, say to the rate of inflation or slower?  Good luck with that.  The reason is that the incentives are perverse and every one of the millions of people working in the healthcare system has the incentive to try to get as much money out of Medicare as possible.  With Medicare, every provider tries to raise his price every year by inflation or more, but that is only one of several factors at work.  A second factor is that people live longer, so there are more and more beneficiaries.  And then there are the new treatments.  If you come up with a new treatment, you don't charge just last year's price plus 3% because there was no last year's price.  You can set a new price at whatever you think you can get away with.  The government has no ability to push back because you will be able to show that somebody died when they refused to pay.  That's how we end up with new cancer treatments costing $100,000 for a course of treatment.

But you ask, with every good sold in the private economy, the producer has the same incentive to get as much money as possible out of the consumer.  So why don't sales of every consumer good turn into a Ponzi scheme?  The answer is that private individuals can't afford the price.  If Apple tries to price the new iPad at $100,000 the way a pharmaceutical company prices a new drug, it will sell about six of them and lose money.  That's why you see new electronic products coming out at high prices ($10,000 for a flat screen TV) that then drop quickly over time.  The rich buy in the first round and the increasingly less rich in subsequent rounds at lower prices.  In Medicare, every course of treatment is sold to the richest buyer of all, the one with the infinite credit card who can't say no when someone is dying.

I can confidently predict that until Medicare is reformed in a way that it must meet a budget and people cannot just get whatever treatment they want, then it is a Ponzi scheme (in the mathematical sense) and it will collapse.