Punchinello’s Chronicles

February 23, 2010

Balancing Delusional Budgets

Illinois, like an increasing number of states, is facing a catastrophic financial crisis. We’re about $12-billion in the hole, and unless something gets done about it, we’ll have to default. That means announcing we’re not gonna pay our debts. And that means we won’t pay off on bonds, loans, or pensions.

What’s a budget, anyway? Isn’t it simply the balance between money coming in and money being spent? Yes. Okay, it gets a bit more complicated when you try to have a surplus, maybe if you’re making a profit. But even that’s not too hard to understand. Families make budgets, you and I make budgets, and we understand the primary rule of modern life: Live within your means!

Making a budget begins with examining how much money comes into your system. How does that money arrive?  Is it by the day, hour, week, month, year? Whatever the time period, that’s the money you have to work with.

The second step involves an examination of what you’re spending money to buy. What are your repeating expenses, like rent (or mortgage), phone, electricity and so forth. The third step looks at money you spend that isn’t always exactly the same, but that varies. Things like food for the week, gas for the car, dry-cleaning and so forth.

After the basic expenses, you take a look at stuff you buy that isn’t a regular type of purchase. So you might buy a TV every once in awhile, or maybe some new clothes. You look at your life, your past, your habits, and you look at about how long something lasts before needing to be replaced or maintained.

It’s not that hard. All of us have to do the same thing. But when you become An Economist (sound of heavenly music), suddenly everything is “different.” Suddenly you get to throw out every single practical financial principle in existence. You get to pretend that “macro” economics, involving societies and governments, is totally and completely different from “real” economics.

The very first thing anyone who starts a business learns is that you calculate your expenses on a “per unit” basis. Let’s say we sell roses, and we want to figure out how much we should sell them for. We figure out our weekly expenses for rent, utilities, fees and taxes, and how much it costs to buy next week’s roses.

The we look at how many roses we sell in a given week. We divide our total weekly expenses by how many roses we sell, and that’s the “break even” price for each rose. We have to sell our target number of roses at that price in order to make enough money to pay for the week, with zero left over.

Now suppose we’re a town, and we need to hire a police officer. The salary is a fixed cost, but the employee (the officer) doesn’t sell anything or create anything. Instead, the police officer maintains the peaceful and stable environment so that the rest of us can have a business and home. To pay for that salary, all of us chip in a few dollars in taxes.

The town examines the total amount of tax money for the year, and it should match the cost of the police officer’s salary. (For the example, we’re just taxing the town for 1 police officer, and everything else will run itself.)

Let’s say it costs $100/year for our police officer. So we tax the 100 people in our town 1 dollar a year. Each year, we get $100 in taxes and we pay $100 to cover the salary for the officer. We have a balanced budget.

But now let’s introduce a union contract. That contract says that if the officer sustains an injury, the town will cover all medical costs. The contract also says that if the officer retires, the town will pay for that retirement until he dies of natural causes, no matter how long after he or she stops working.

Where does the money come from?

We know that for each year the public employee works, town taxes will cover the cost in salary. What about the unknown, variable costs of hospital charges for injuries? How do we know what will be those costs? In most years, there won’t be any (we hope), so we have to set aside “projected” medical costs.

A typical hospital stay for an injured police officer costs, say, $200. We understand that, and we want to protect our police officer so we don’t mind an additional tax. All 100 people in town add another 50-cents per year to cover projected medical costs. That brings in $150/year, and we put the extra money in a bank. Just in case we need to cover the hospital costs, if our officer gets shot.

What happens to that $50?

In today’s world, the people in charge of the town decide to spend the money. They “borrow” against that fifty bucks for something else.

Now suppose the union contract tells us that, by LAW, the town must pay our police officer $10/year for the rest of his or her life when the officer retires from the job. By LAW, the officer has the option of retiring after working, say, 20 years on the job.

Our officer started work for the town when he or she was 25 years old. 20 years later, the officer is 45 years old. At that point, a typical life expectancy suggests the officer will live to be 85 years old. That means the union contract provides $10/year for the next 40 years ($400).

Where do we come up with the $400?

The town decides that’s fair, so we add yet another 25-cents per year in taxes. And so it goes, with each new tax being specifically and exactly tied to each particular expense.

Except…what if we, the people in town, didn’t have any say in the matter? What if we never agreed that the union contract should provide for all that retirement? And what if the union contract suddenly raises the salary to $150/year? We don’t negotiate those contracts, but we have to pay the taxes.

And suppose we have no say at all in where all that additional money is stored? In fact, what if that extra money, designated for future pension and medical costs isn’t even stored at all? What if that money gets spent on something like food for the poor people in town?

Suppose our town bosses decide to simply give away $1/week to anyone who doesn’t have enough money to buy food? They take that give-away money from the extra money being set aside for our police officer’s medical emergencies and retirement pension. That means the bank account doesn’t have the money.

For the past many decades, politicians have been paying out money for new programs that they make up out of thin air. Each program helps them get elected. There’s free money for rent, food, medicine, utilities, health and happiness. There’s free money for houses, loans, cars and clothes. There’s free money for this or that, all designed to get the politician elected.

Every single one of those free-money programs is being paid for by money that’s supposed to be set aside for union contract benefits that are written into LAW! Those obligations have to be paid!

What’s the answer? To get rid of the police officer!

So now we’re paying $20/year in taxes, but we no longer will have a peaceful, stable environment for our homes, families and businesses. That’s like saying we should get rid of the roses because we can’t afford to buy them each week!

Let’s get rid of more and more of our “fixed costs.” We’ll get rid of our houses because they cost too much in mortgages. We’ll get rid of our apartment because it costs too much in rent. Then we’ll stop driving cars because it costs too much for gas. We’ll turn off the electricity, heat, cable and water because it costs too much each month.

Before you know it, we’ll have perfect union contracts! We’ll pay an entire population of retired union workers who aren’t working. We’ll pay for all those union workers whenever they need to see a doctor, get medicine or have an operation. We’ll cover all their costs for rent, utilities and food, all from their retirement pension.

We’ll cover all these costs while you and I are living in a cardboard box, somewhere under a bridge. You and I won’t be working, we won’t have a business, and we won’t be making any products. We won’t be selling any roses, and nobody will be making cardboard boxes. There won’t be any money coming in from selling a damn thing.

When you think about it, there won’t be any hospitals and there won’t be any doctors or nurses. There won’t be any grocery stores, and nobody will be producing any shows for the TV. There won’t be anyone working in the electrical generation plants, nobody running the water pumps, and there won’t be anyone pumping gas. Nobody will be making cars because they’re all employees! Union employees!

Since we got rid of all our fixed costs because they cost too much, all that will be left will be the legal contract obligations. There only will be politicians, retired union workers, and someone running the money-printing machines. Everyone else will be dead from exposure and starvation.

When all of use are making $0/year, taxes will be $400 per person, per year.

In fact, since none of us has any money, it won’t be a problem at all to raise our taxes to $1,000,000 per person, per year. Why not? What we’ll do is simply pretend to pay our taxes! Yeah, that’s it! While we’re eating dandelion soup, huddled under some branches out in the cold, we can pretend we’re paying our taxes!

Illinois is going to go broke. There’s no question at all. There won’t be any money to pay all those pension obligations, nor will there be any money to cover the required contract benefits. That’s because NONE of those benefits were ever calculated as a “per unit” cost. And that’s because no government, ever, anywhere, in the entire history of human existence has EVER created a single unit of anything!

The clear and obvious answer coming from our politicians, who don’t work, don’t build anything, don’t run a business, and don’t create a damn thing is what? It’s to get rid of everything that earns any money! No matter what, there’s no way we should begin to get rid of union contract obligations!

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