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Home Publications Blogs Beat the Press Incompetent Economists, Not Pensions, Push Property Taxes Higher

Incompetent Economists, Not Pensions, Push Property Taxes Higher

Friday, 24 December 2010 08:10

The Wall Street Journal told readers today that "pensions push property taxes higher," in a headline of a news article. The article notes that large pension shortfalls, together with a loss of other tax revenue, are causing many local and county governments to raise property taxes.

Of course the reason that pensions face large shortfalls is that economists like Alan Greenspan and Ben Bernanke were not able to see the $8 trillion housing bubble, the collapse of which wrecked the economy. These pension funds also suffered because they listened to highly paid investment advisers who had no idea what they were doing. It is worth noting that almost all of these highly paid investment advisers still hold their high paying jobs.

Comments (7)Add Comment
Reasons for the Rise in Local Property Taxes
written by Ron Alley, December 24, 2010 7:34
Here in Minnesota the rise in local property taxes has been the product of changes in revenue sharing between the state and local government entities. The state has cut back on revenue sharing with cities and counties, reduced state contributions and bonding for local projects and property taxes and "user fees" have been increased to supplant the lost revenue. There have been cutbacks in services -- including police and fire protection. Those are the real reasons for the increases here in Minnesota. The mainstream media coverage on the issue has been spotty.

Accounting changes now require local government entities to disclose pension funding shortfalls. However, the degree of compliance is uncertain.

Yesterdays NYT article on the "pension crisis" in Pritchard, Alabama is an interesting piece.

Pension shortfalls
written by KYC, December 25, 2010 7:13
Here's a quick thought experiment: suppose the overnight Fed funds rate has been steady between 4% and 5% for the last 10 years because there have been no financial crises. Then long term treasuries would be yielding 6% to 7%, which would make pension fund assumptions of 8% easily achievable.
So... one way to fix pension shortfalls is to raise interest rates! It is the failure of regulation (not lack of regulation but lack of enforcement) that created the crises. The Fed reacted by lowering interest rates for over a decade. Lower rates have prevented the clearing out of bad assets, thus yields have remained low. Pension funds face shortfalls because they can't attain the 8% assumed rates of return.
"Not able to see"
written by lambert strether, December 25, 2010 8:58
Your hypothesis is that Greenspan, et al., are incompetent.

Have you given consideration to the possibility that they're malevolent?
It's not so easy
written by scrooge, December 25, 2010 9:04
Certainly pension actuaries and advisors played a large role with dubious assumptions and self serving advice, but the core problem has always been one of promising more than could ever be delivered over the long haul.

When the economy grows at something around 3% per year on average (including bubbles), expecting 8% from stocks requires an infinite series of greater fools to continue paying more for the same dollar of earnings. Hmmm, what could go wrong with that plan?
written by Nordpol Weinachtsmann, December 25, 2010 8:28

noting that almost all of these highly paid investment advisers still hold their high paying jobs.

Also worth noting was failure of state and county governments to raise property taxes when the market could have easily borne the hike in 2005. Why they didn't? They were afraid to pop the bubble. Nobody hiked taxes or loan interest rates because everyone was sitting on the edge of chair afraid to make a wave, afraid to make a wave that would sink the ship. It now is time to pay for the hangover. Property prices are a 27 year cycle. Run a Fourier Transform! The glide path is not short.

They were all guilty of bubble-prop-up.
written by pete, December 28, 2010 10:17
Sigh, Krugman asked for and got the bubble in 2002 to cure the early century recession...while Shiller and Dean were warning against it....Bubble cured it, then it inevitably burst....Ergo, there would have been no growth without the bubble, right....so Greenspan and money neither created, nor destroyed an economy...its all a veil. Activist monetary policy is simply an added risk to our already risky economy. Take the unemployment goal away from the fed, and leave us with just the normal risks of business.

written by kharris, December 31, 2010 8:39
Another reason for the shortfall, and thus the need to raise revenue to cover the shortfall, is that a shortfall was built into pendions. Legislators, not wishing to actually pay for the obligations that they and the municipalities within their states had undertaken, allows pension managers to use ridiculous estimates of investment returns in calculating pension performance. Pensions were going to cause fiscal problems, even without the latest recession. The recession just meant that the problem has come home to roost sooner and in a bigger way.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.