Robert Johnson

Roosevelt Institute Senior Fellow and Director of the Project on Global Finance

Recent Posts by Robert Johnson

  • The Political Underbelly of the Pensions Crisis: What Broke the System, and How Do We Fix It?

    Feb 25, 2014Robert Johnson

    Roosevelt Institute Senior Fellow Robert Johnson will join Roosevelt Institute Senior Fellow and Chief Economist Joseph Stiglitz, Roosevelt Institute Senior Fellow Thomas Ferguson, former Lieutenant Governor of New York Richard Ravitch, and others today in New York City to explore the underbelly of the public pensions crisis. The following is adapted from Johnson's forthcoming paper on this topic.

    Roosevelt Institute Senior Fellow Robert Johnson will join Roosevelt Institute Senior Fellow and Chief Economist Joseph Stiglitz, Roosevelt Institute Senior Fellow Thomas Ferguson, former Lieutenant Governor of New York Richard Ravitch, and others today in New York City to explore the underbelly of the public pensions crisis. The following is adapted from Johnson's forthcoming paper on this topic.

    Since the beginning of the Great Recession, policymakers and reporters have spoken of a growing crisis in public pensions. Many state and local governments are struggling to meet their obligations to retirees, and the easiest explanation is that government workers are overpaid and their pensions are unaffordable. But the evidence suggests that the pensions crisis is both less pervasive and more complex than that. Beyond the economic crisis, which put enormous pressure on state and municipal budgets, a range of factors including poor decision-making and the influence of big money interests has led to the underfunding of some state and city public pensions. With a clearer understanding of the problem, we can begin to take steps to solve it and keep our promises to public workers.

    Contrary to public perception, pension underfunding is not a widespread issue. There is wide variation in pension performance across states, and underfunding is concentrated in particular states (for example, Illinois and Kentucky) and cities (Chicago and Providence). Where underfunding does occur, it seems to stem largely from the internal problems of those governments, which existed well before the recent economic crisis put additional pressure on their budgets.

    There is also little basis for the conclusion that state and local employees are significantly overcompensated. On the contrary, pay is comparable at lower skill levels, and private-sector employees are significantly better paid at higher skill levels. According to Alicia Munnell, Director of the Center for Retirement Research, “Pension and retiree health benefits for state and local workers roughly offset the wage penalty, so that total compensation in the two sectors is roughly comparable.” There are surely examples of extreme individual pension obligations that warrant scrutiny, but they do not appear to contribute significantly to the total level of underfunding reported by analysts.  

    The evidence suggests that pension underfunding is at times associated with choosing an unreasonably high discount rate. The discount rate is the expected rate of return on invested pension funds. A lower discount rate means governments must provision more now in order to meet future liabilities. Politicians tend to prefer a higher discount rate, which reflects a better “expected” yield on assets in the pension fund, since it allows them to justify provisioning less for pensions now. Unfortunately, a higher yield also means more investment risk. If the pension fund loses money, the pension liability does not go away; instead, taxpayers are forced to make up the difference or the government defaults on its obligations. This approach may help to mask the true cost of providing public services, but it is the public financial equivalent of the Hail Mary pass in football: you score a touchdown or you lose.

    This may explain why governments are increasingly attracted to investment alternatives that have a record of substantial returns and are not closely correlated with the stock indices. Alternative asset investments (primarily hedge funds, venture capital funds, and private equity) averaged just below a combined 5 percent share of U.S. public pension funds’ portfolios between 1984 and 1994, but they averaged nearly a 20 percent share from 2008 to 2011. These more volatile assets may provide substantial benefit, but in times of stress, it is unclear if “reaching for yield” is a prudent strategy or simply reflects desperation. It also raises ethical concerns due to a lack of transparency and the potential for “pay to play” schemes, in which placement agents offer financial incentives, such as campaign contributions, to the people responsible for making decisions about pension fund allocations. This appears to be a system prone to abuse, and significant reforms must be enacted to realign the incentives of pension officials with the incentives of taxpayers and pensioners. This could include immunizing some pension investment boards with financial compensation, requiring disclosure of all outside income, and prohibiting individuals and firms that manage assets for a particular government from making campaign contributions to local representatives.

    Even when there is no direct corruption, big money can have a powerful influence over pension funding decisions. It becomes very difficult for the political process to defend the common interest when ambitious politicians are under pressure from concentrated interests. Policymakers may be reluctant to adequately provision for pensions if doing so requires them to raise tax rates on high-income individuals, cut corporate subsidies, or otherwise drive away capital. Just look at the case of Detroit, where restructuring pension obligations is on the table at the same time the state is approving money to build a new hockey arena. This is not antiseptic technocracy at work; this is politics.

    Relief could come from reforms in the political systems to lessen big money's influence and empower small donors. To accomplish this, states could establish systems of public campaign financing. Maine, Arizona, and Connecticut already have such systems, as does New York City, and New York State is on the cusp. Though the mechanics differ, all of these systems would change incentives to make candidates responsive to average people, not just big donors. As a result, policy is more likely to be oriented to the public interest.

    The pensions crisis has far-reaching implications for the future of the U.S. economy: the state and local government sector is about 14 percent of the American workforce. Failure to uphold the promises we’ve made to current workers and retirees would create a brain drain in the public sector, drive down private-sector wages, exacerbate inequality, and lead to more economic volatility. The good news appears to be that there are a large number of pension plans that are solvent thanks to prudent management. The real problem rests with the governments of a few states that have historically failed to provision adequately for their pension obligations and are increasingly turning to riskier investment assets. These problems can be solved, but it will require substantial reform and swift and collective action.

    Robert Johnson is a Senior Fellow at the Roosevelt Institute.

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  • Obama's Speech as a Thermometer for Our Sick Democracy

    Sep 7, 2011Robert Johnson

    Can our society reward politicians for doing the right thing to stop a crisis?

    Can our society reward politicians for doing the right thing to stop a crisis?

    President Obama's speech on Thursday comes at a very difficult time. He pivoted toward deficit reduction in 2010 and alienated his base with validating "fist bumps" for Eric Cantor and golf outings with John Boehner while the latter pair were doing their debt ceiling game of chicken. Now he is either 1) expected to restore his base's enthusiasm with a vigorous vision of economic recovery or 2) pander to the Chamber of Commerce with supply side gimmicks that will have little impact on employment but create mini windfalls for donors. Romantics and cynics are equally inclined to project onto the event.

    As observers, I sense we would be better to watch this speech and ask the question, "What can we infer about the structural deformations of our democracy when a smart man like Obama is saying [whatever he says] when heading toward an election campaign?"

    We are in effect taking the temperature on the sickness of our democracy. We have two currencies of power in America: votes and dollars. The episode of TARP, a month before the 2008 presidential election, gave us evidence that dollars are the more powerful currency even at election time. We will learn where Obama thinks the balance lies from this speech.

    When demand is stagnant and 16 percent of the population does not have full-time work, we are in an obvious and profound crisis. The vigor with which both parties embrace deficit reduction contrasts violently with the helpless timidity with which they address the challenge of jobs.

    The fact is, we do not have a society that is stable and functional when our politics is insensitive to a crisis of this magnitude. As Jared Bernstein said last week on his blog:

    ...Have we, as a nation, lost the ability to self-correct?

    Any system, whether it's biological, political, or economic, must be able to diagnose and fix its problems if it is to survive. I don't mean to be gloomy or dramatic, but I'm wondering if our political/economic system is up to that task.

    Are we up to the challenge as a society? The question is not whether Obama is up to the task but whether our society, as it is structured in a post-Citizens United world, is capable of responding to the needs of large segments of our population. Can Obama pursue healthy policies and believe he can be re-elected for doing so? If not, we have real work to do in reforming our politics. I suspect that it is the case or we would already see the White House and Congress on a constructive path toward demanding stimulus and employment relief.

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    So what do I want to hear from Obama?

    1. Corporate profits are at their highest level since the Korean War. Corporations need no more incentives to hire. Just more confidence in demand growth.

    2. All this long-term deficit reduction we are planning to do is to buy space for a profound short-term stimulus over the next three years or so, until the unemployment rate is below six percent.

    3. Stimulus should be focused on projects that will have lasting productivity benefits for the nation for years to come. Education investment, science spending, and infrastructure modernization all help.

    4. We have to look seriously at how we subsidize foreign direct investment and change the tax code to support domestic investment. Subsidies for outsourcing and offshoring have to be terminated.

    5. Single payer health insurance and negotiated drug prices are not only the essence of good budget policy in the long term, they are good policies for jobs and competitiveness because no other society has such ridiculously high prices, and employer-based health costs deter hiring.

    6. Public financing of elections, and requiring our networks to donate public service time for elections, would be the best way to reduce pork and realign our incentives and would be great for budget policy and social balance in the long term.

    If several of those six themes are addressed, I will be encouraged. If I see Obama make a stand and work diligently to make them into policy and openly take issue with officials in either party for opposing them, I will be inspired. It has been a long time since I have been inspired by the actions of the President of the United States.

    Rob Johnson is a Senior Fellow and the Director of the Project on Global Finance at the Roosevelt Institute.

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  • A Symptom of Desperation? Querying QE3

    Aug 18, 2011Robert Johnson

    Why quantitative easing is more symptom than cure.

    Why quantitative easing is more symptom than cure.

    When an economy is in a slump and the fear of debt overhang and default surrounds us, there is a tendency to tighten our belts. But these actions only serve to deepen the slump. Economists suggest that to offset private caution, we should resort to public sector stimulus. Hopefully, such stimulus is directed toward building things that boost our future productivity, like science and research, infrastructure repairs and upgrades, and education. In the short term, the economic activity created by these investments allows people to work out from under debt overhangs and leads to more private sector jobs. Investing in these things will also make it easier in the future to pay off the debt incurred in the slump.

    When coherent and rational approaches have left the building, as they have in the current U.S. ideological conflict over the role of government, what else can still be done?

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    Expansionary monetary policy, aka "quantitative easing," is one thing, but its effectiveness is questionable. Advocates of QE believe creating the expectation of rising inflation is helpful. But in a slump, it is not clear how the Fed is connected to the inflation. The old adage "you cannot push on a string" is perhaps apt since monetary stimulus leads to a pile up of excess reserves at the banks rather than fresh lending.

    Those who look at the impact of QE cite a narrowing of the spread between short-term and long-term interest rates. Others point to a compression of the spread between corporate bond rates and government bond rates that can, at the margin, get corporate investment moving --but right now the corporate sector appears to have a lot of cash in the vaults, so this channel may not produce much.

    QE can also impact perceptions of the dollar's foreign exchange value. An announced QE program may lead to a decline in the dollar vis a vis foreign currencies and thereby stimulate activity in the export- and import-competing sectors.

    So overall, QE is not likely to hurt much. It is mainly a symptom of desperation and reflects the dysfunction in Congress and the White House that has stopped us from using much more effective tools to spur the economy forward.

    Rob Johnson is a Senior Fellow and the Director of the Project on Global Finance at the Roosevelt Institute.

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  • Thoughts on Dodd-Frank Birthday: Everything is Broken

    Jul 21, 2011Robert Johnson

    The weakness of Dodd-Frank illustrates a crisis in governance that is sapping the vitality of the country.

    The weakness of Dodd-Frank illustrates a crisis in governance that is sapping the vitality of the country.

    Legislation is incremental. It is a reflection of compromise. Yet rarely in the history of the United States post WWII has legislation been so revealing. Revealing because, in relation to the velocity of circumstances that revealed the inadequacy of our regulatory framework, and in relation to the damage that was done to lives and living standards across America and around the world, this legislation did very little to rebalance the relationship between finance and larger society.

    In essence, it was revealed that in this era of money politics people are basically defenseless against the concentrated power (even more concentrated after 2008!!) of the financial sector. As Senator Durbin exclaimed in a 2009 radio program, "[Banks] frankly own the place". The clarity of that thought was revealed by the contrast between the magnitude of the crisis and the harm that it has done, and the lack of meaningful reform in Dodd Frank. Real balanced legislation would have gone much further to curtail embedded leverage and complexity of instruments. Real legislation would have contained a mortgage modification dimension like the Home Owners Loan Corporation. We do not have those things because they would have threatened reported profits, bonus pools and campaign contributions. This is not just a problem of government, as distinct from the private sector, it is a problem of the governance of the concentrated powerful interests who spent years shaping legislation and regulatory enforcement to unshackle themselves until they imparted great harm to the rest of society and handed it a bill for the cleanup.

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    This is not a problem of governance that is confined to the financial services industry. It was also in evidence in the healthcare legislation where insurance and pharmaceutical interests had their way. It is true in the realm of national security where analysts lament that our force structure is still oriented toward a threat paradigm from the cold war and that we cannot respond because of the providers of pork. This is not a problem of the Democratic party. No, the Republican party was feeding at the same fundraising trough throughout the Dodd-Frank deliberations. This is a problem of governance that is harming a broad range of what has been the quality of life and vitality of the United States of America. If Dodd Frank's weakness makes that one point clear by unmasking this ugly process, then it has the potential to be of value. On the other hand, its weak result, which diminished trust in government, may serve to feed the anti-government sentiments. In that case, it could mark a foundational episode in the deterioration of America.

    Rob Johnson is a Senior Fellow and the Director of the Project on Global Finance at the Roosevelt Institute.

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  • From New Deal to Raw Deal: The Real Economics of Cutting Social Security

    Jul 7, 2011Tom FergusonRobert Johnson

    social-security-200Contrary to the mainstream media and D.C. drumbeat, Social Security has little to do with the federal deficit. So why is there talk of cutting it?

    social-security-200Contrary to the mainstream media and D.C. drumbeat, Social Security has little to do with the federal deficit. So why is there talk of cutting it?

    This morning the Washington Post reported that the White House is offering to cut Social Security as part of a broader budget deal with the Republicans. At last we have the answer to the question everyone has been asking about the Democrats: How far can they go?

    The financial collapse of 2008 has taught us to be skeptical of economic forecasts that simply spin trends out into an indefinite future. Most central bankers, economists, and business leaders failed not only to foresee, but even to imagine, the colossal dimensions of that catastrophe.

    Now, however, the very people who said that there was no way for regulators to recognize financial bubbles in advance predict budget gloom and doom. Scary charts of the time path of U.S. debt to GDP ratios -- many originating from the Peterson Foundation -- fill the media, along with specious arguments about how budgets affect national income.

    The strangest of these debates involve Social Security. The "arguments" here sort mostly into two groups: One rails on about how "runaway entitlements" are leading to a deficit explosion. The other advises that Social Security can be "saved" in the long run by timely changes, typically involving a mix of taxes and benefit cuts, including, notably, yet another rise in the age of eligibility for the program.

    Neither point of view makes much sense. The simple fact is that the deficit did not swell tidally until the financial crisis hit. While George W. Bush's tax cuts destroyed the Clinton budget surpluses, enough tax revenues trickled in to keep the deficit from blowing out until the economic equivalent of Hurricane Katrina hit in the fall of 2008. It was the one-two punch of the bank bailouts and the Great Recession that led to today's giant gap between general revenues and expenditures.

    But even now there is no near term threat to Social Security's solvency. In 1983, Congress enacted into law recommendations of the Greenspan Commission to raise Social Security taxes to cover the retirement bulge coming from baby boomers. Since then, the program has piled up enormous surpluses. These have been invested in government bonds, thus helping to finance the rest of the government.

    The 2011 Report of the Trustees of the Social Security Trust Fund projects that the Trust Fund and interest earnings from it will suffice to cover all benefit payments until 2036. Even then, the Fund would not be empty -- the Report projects that tax revenues will still cover approximately 75% of promised benefits until 2085. Talk of the bankruptcy of Social Security is hot air.

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    2036 is a long way off. The argument in 2011 is about whether there is any reason to do anything at all right now. The case pressed by self-proclaimed "rescuers" of Social Security such as Peter Orszag, the former head of the Obama administration's Office of Management and Budget who has since accepted a position at Citigroup, is unpersuasive.

    The first yellow flag is Orszag's frank acknowledgment that Social Security features barely at all in any putative budget short fall: "Social Security is not the key fiscal problem facing the nation. Payments to its beneficiaries amount to 5 percent of the economy now; by 2050, they're projected to rise to about 6 percent."  A rise of 1% in four decades! Former Senator Alan K. Simpson, co-chair of the President's deficit commission, claimed that his group's deficit report "harpooned all the whales in the ocean, and some of the minnows." Lost in the blaze of publicity about the Commission is the crucial fact that Social Security is plainly one of the minnows.

    But the whole discussion is even fishier. If any shortfall ever materializes, it could easily be made up by transfers from general tax revenues, though that would breach the long maintained fiction that Social Security is a contributory system on the model of most private insurance. (It is actually a pay as you go system, where current taxes pay benefits to current beneficiaries, with the final guarantee of the whole system's soundness being, in the last analysis, the success of the economy as a whole.) But if fears about 2036 are unbearable, plenty of ways exist that would fix the program without threatening anyone's life support system.

    Between 2002 and 2007, for example, the richest 1% of Americans garnered 62% of all income gains, while the bottom 90% of the population saw their incomes grow by 4%. At the same time, thanks to the Bush tax cuts, the rich were also paying proportionately fewer taxes. Considering that ordinary Americans fronted most of the money for the bank bailouts and have endured most of the recession's "collateral damage," it seems only simple justice that if the program needs fixing, the best way to do it would be to raise the ceilings on earnings subject to the Social Security tax, which is currently only $106,800. That would put the burden on people who cannot plausibly claim to be suffering.

    But if, for example, productivity runs even slightly higher than in the forecasts, there may be no shortfall of any kind. Considering that the projected shortfall is still a quarter century away, there is no good reason to tinker with a program that, as the Washington Post editorialized in 2005, provides the majority of income "for nearly two-thirds of the elderly...[and] the only source of income for one-fifth of all elderly people, for 25 percent of non-married elderly women, and for 38 percent of elderly African Americans and Hispanics."

    But Orszag and others who agree that the program makes at most a minor dent in the budget, nevertheless argue for "fixing" it now. Their reason is remarkable: As Orszag frankly confesses, "even though Social Security is not a major contributor to our long-term deficits, reforming it could help the federal government establish much-needed credibility on solving out-year fiscal problems." Cut benefits, in other words, simply to prove to financial markets that the government can do it. As Paul Krugman observes, this position is tantamount to claiming that we should cut Social Security now, because we might have to do it in the future. Polls show strong public opposition to cuts in Social Security. Considering the havoc that the financial crisis wreaked on the home values and pensions of ordinary Americans, proposals that Democrats should roll over and join Republicans and the Peterson Foundation in cutting Social Security is outlandish. As profits for the banks the American people rescued soar, it marks a new low in the Democratic Party's long retreat from the New Deal's glittering promise that ordinary Americans, too, deserved to share in prosperity.

    This essay is adapted from Thomas Ferguson and Robert Johnson's "A World Upside Down: Deficit Fantasies in the Great Recession," just appearing in the new issue of the International Journal of Political Economy (Vol. 40, No. 1, pp. 3-47). That essay is a revised and expanded version of their Working Paper for the Roosevelt Institute.

    Thomas Ferguson is Professor of Political Science at the University of Massachusetts, Boston and Senior Fellow at the Roosevelt Institute.

    Rob Johnson is a Senior Fellow and the Director of the Project on Global Finance at the Roosevelt Institute.

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