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California is the 5th fastest growing state economy. This is despite already being the largest state economy by far. That is simply remarkable and to call such

by dnomad 8y ago

California is the 5th fastest growing state economy. This is despite already being the largest state economy by far. That is simply remarkable and to call such a state of affairs "verge of bankruptcy" is just stupid. Further the noise around pension obligations is mostly meaningless alarmism from people who don't know any better. If California is on the verge of bankruptcy why is California's bond rating at AA-? Why is New York's bond rating is AA+? Why are investors all over the world, particularly sovereign wealth funds, in fact standing in line to loan money to these high-tax, high-growth US states? Ex-real estate and ex-China, these economies are in fact the engines of growth for pretty much the Western hemisphere. We'll see how long it lasts though. The thesis here is that when you combine the nonsense alarmism around debt and the cherished American belief that governments can do no right you get a recipe for enormous underinvestment and malinvestment. And Americans are so disconnected from reality that they probably will vote for any idiot who starts crying about "fiscal responsibility" and cuts public investment in these economies.

tptacek 8y ago
Those bond ratings are a measure of short-term solvency (if it heads off another unproductive exchange: the ratings agencies work with a very different of "long term" than GMU does). California does reasonably well (11th nationally) on that axis. We're talking about long-term structural solvency. I don't understand what California's bond rating has to do with the impact of its unfunded pension obligations.
- komali2 8y ago
  If we really are talking long term structural solvency, I think it's bad faith to start arguing any given state is "objectively worse" than any others - obviously we don't know, because we can't even predict the recessions that keep happening every ten years. (we being the majority of the population and law makers - obviously some people are screaming their heads off about it, fruitlessly)
  - tptacek 8y ago
    I didn't start arguing that. The Mercatus Center at GMU did. Mercatus has an ideological bias (and not one I share), but they're serious people with real reputations. It's also a little weird to suggest that the fiscal outlooks of different states aren't comparable. Some states have pension obligations that consume an outsized fraction of their projected income, and others don't. What's complicated about that?
- dnomad 8y ago
  The idea that bond investors only care about "short-term solvency" and therefore ignore unfunded pension obligations doesn't make any sense at all. I don't even... Also this idea that California, the 5th largest economy in the world, is ranked "11th nationally" in terms of debt ratings doesn't make any sense. Nobody actually compares an economy like California (GDP 2.5T) with Arizona (GDP 2.5B). There's so much wrong here -- from the pure ideological nonsense that California is "on the verge of bankruptcy" to the idea that bond investors only think 6-10 years into the future -- that it's really not worth continuing this conversation. (It's also quite clear that the legion of downvoters, hard pressed to actually defend their ideological nonsense, can always just suppress the facts. So much for free speech uber alles.)
  - tptacek 8y ago
    That's literally what a bond rating measures: whether a particular bond is likely to be repaid. A short-term bond is generally anything that comes to maturity before one year, and long-term is anything else.
    - dnomad 8y ago
      > short-term bond is generally anything that comes to maturity before one year, and long-term is anything else. Yeah that's now how any of this works. First, average muni bonds duration is 10+ years. Short-term debt is inherently safer than long-term debt but all investors will look far beyond a particular bond. Especially when dealing with sovereign entities who can't go bankrupt they are much more concerned about the risk of default (on anything, not just bonds). That's actually what the credit ratings measures -- a comprehensive evaluation of ability to service all debts. They are not at all bond-specific. Logically, if investors really did believe these states were doomed then they would also be forced to conclude that the states themselves know they are doomed (all information is public) and at any moment the states will take measures before they are destroyed to prevent their own destruction. These measures will inevitably be some form of default. So if you're lending money to an entity who everybody knows will default at some point in the future it would be naive to think any one particular debt instrument is safe. Defaults, by their very nature, are very unpredictable. That's why investors will demand a real risk premium even for extremely short-term debt (30 days) from borrowers with low credit ratings. This isn't economic theory btw, this is economic fact, supported by two centuries of market data. Suffice to say, Cali and NY bonds are actually set to out perform so the market does not believe that either state is going to default in the next 10 years or even the next 30 years.

by dnomad 8y ago

tptacek 8y ago

Those bond ratings are a measure of short-term solvency (if it heads off another unproductive exchange: the ratings agencies work with a very different of "long term" than GMU does). California does reasonably well (11th nationally) on that axis. We're talking about long-term structural solvency. I don't understand what California's bond rating has to do with the impact of its unfunded pension obligations.

komali2 8y ago
If we really are talking long term structural solvency, I think it's bad faith to start arguing any given state is "objectively worse" than any others - obviously we don't know, because we can't even predict the recessions that keep happening every ten years. (we being the majority of the population and law makers - obviously some people are screaming their heads off about it, fruitlessly)
- tptacek 8y ago
  I didn't start arguing that. The Mercatus Center at GMU did. Mercatus has an ideological bias (and not one I share), but they're serious people with real reputations. It's also a little weird to suggest that the fiscal outlooks of different states aren't comparable. Some states have pension obligations that consume an outsized fraction of their projected income, and others don't. What's complicated about that?
dnomad 8y ago
The idea that bond investors only care about "short-term solvency" and therefore ignore unfunded pension obligations doesn't make any sense at all. I don't even... Also this idea that California, the 5th largest economy in the world, is ranked "11th nationally" in terms of debt ratings doesn't make any sense. Nobody actually compares an economy like California (GDP 2.5T) with Arizona (GDP 2.5B). There's so much wrong here -- from the pure ideological nonsense that California is "on the verge of bankruptcy" to the idea that bond investors only think 6-10 years into the future -- that it's really not worth continuing this conversation. (It's also quite clear that the legion of downvoters, hard pressed to actually defend their ideological nonsense, can always just suppress the facts. So much for free speech uber alles.)
- tptacek 8y ago
  That's literally what a bond rating measures: whether a particular bond is likely to be repaid. A short-term bond is generally anything that comes to maturity before one year, and long-term is anything else.
  - dnomad 8y ago
    > short-term bond is generally anything that comes to maturity before one year, and long-term is anything else. Yeah that's now how any of this works. First, average muni bonds duration is 10+ years. Short-term debt is inherently safer than long-term debt but all investors will look far beyond a particular bond. Especially when dealing with sovereign entities who can't go bankrupt they are much more concerned about the risk of default (on anything, not just bonds). That's actually what the credit ratings measures -- a comprehensive evaluation of ability to service all debts. They are not at all bond-specific. Logically, if investors really did believe these states were doomed then they would also be forced to conclude that the states themselves know they are doomed (all information is public) and at any moment the states will take measures before they are destroyed to prevent their own destruction. These measures will inevitably be some form of default. So if you're lending money to an entity who everybody knows will default at some point in the future it would be naive to think any one particular debt instrument is safe. Defaults, by their very nature, are very unpredictable. That's why investors will demand a real risk premium even for extremely short-term debt (30 days) from borrowers with low credit ratings. This isn't economic theory btw, this is economic fact, supported by two centuries of market data. Suffice to say, Cali and NY bonds are actually set to out perform so the market does not believe that either state is going to default in the next 10 years or even the next 30 years.