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The Red Line

No One Should Take Fiscal Accountability Projections Too Seriously. They Lack Key Data.

Connecticut’s Office of Policy and Management (OPM) and its Office of Fiscal Analysis (OFA) both released fiscal accountability reports on November 18th forecasting annual fiscal surpluses through fiscal year 2026.

While these reports are legally mandated to be issued in November, they are exercises in virtual futility at this time of year, especially this year. Why? Because one of the largest sources of revenue and the largest category of expense involve significant unknowns even for the current fiscal year ending June 30, 2023.

Revenue from taxes on investment income is highly variable and unpredictable. Indeed, state law labels it officially as “volatile.”

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Declining Revenue Will Meet Higher State Employee Costs and Flight from High Energy Costs

Ned Lamont won a convincing victory in last week’s election. Congratulations are in order. Citizens should extend him the same honeymoon that his challenger would have enjoyed.

Yet, we must turn our attention to the future and the looming challenges we face.

First, the state is facing a serious decline in revenue.

Second, following on the heels of the costly recent SEBAC 2022 wage deal, state employee unions are going to come looking for improvements to the benefits side of their contract, which expires in 2027.

Labor always wants more, despite that Connecticut state employees already enjoy among the most generous benefits in the nation. Their health care benefits are the most generous in the nation by far. The negotiations are going to be tough and consequential.

Third, Eversource has warned that electric rates are going to increase 40%, which comes on top of the state’s already stratospheric energy costs. Likely, citizens and businesses will flee the state.

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Hopeful Versus Hapless

In most elections, an incumbent governor has an extensive record and a vision for the future. Not so in Connecticut’s gubernatorial contest, despite that Democrat Ned Lamont is campaigning as if he is the fiscal savior of the state. He is claiming to have turned a $4 billion deficit into a $4 billion surplus.

November 4, 2022

That would have happened even if the governor’s office had been vacant.

Lamont had nothing to do with the turnaround, which is temporary in any case.

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Germany Must Rearm, American Business Should Re-shore

Recently, I was seated at a dinner party beside a young lady whose life has spanned the globe. Let’s call her Amy.

Amy is an American who lived overseas for a significant stretch of her childhood, before returning to the U.S. for college. After graduation, she left again to attend graduate school.

Along the way, she met and married a European, who had hopscotched Europe and then traveled to the U.S. in his career pursuits.

Now, Amy and her husband live and work in Berlin.

The couple seem citizens of the world, their lives an idyl of globalism and their horizons limitless in an interconnected and interdependent international system.

Yet, today, we are seeing more of the downside of globalism. Beware any phenomenon embraced so passionately that it becomes an “ism.”

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Sophistry Masquerading as News in Connecticut

The Merriam Webster dictionary defines sophistry or sophism as “an argument apparently correct in form but actually invalid.”

This definition describes perfectly a recent newspaper headline that ran in several Connecticut newspapers in mid-September reading “CT on pace for another multibillion-dollar budget surplus.”

The subtitle got specific: Early projections from Gov. Lamont put state nearly $2.3 billion in the black this fiscal year.”

Certainly, the headline implied the “multibillion-dollar budget surplus” was a marvelous new development.

It wasn’t and isn’t. The surplus was forecast in early May when the official state budget was enacted.

The newspapers knew, or should have known, this.

A genuine news focus would have been the suspect nature of that stale forecast, given the plunge in the stock market upon which the state relies so heavily for income tax revenue.

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The Silent Price You’ll Pay for Our Mounting National Debt

After an unexpectedly hawkish Federal Reserve raised interest rates by 75 basis points for the third consecutive time last week, all eyes were on markets and the economy. Few, however, paid attention to the effect persistent inflation and higher interest rates will have on Uncle Sam.

September 30, 2022

That’s surprising. Gross interest expense on the national debt hit $88 billion in August according to the Monthly Treasury Statement. That’s a stunning annualized rate of $1.06 trillion. Interest on the national debt is exploding and heading toward what economists refer to as a “doom loop”—the vicious cycle in which the government’s borrowing to pay interest generates yet more interest and yet more borrowing.

The August numbers barely reflect the impact of the Fed’s interest-rate hikes between March and July, much less last Wednesday’s increase and the additional 1.25% by year’s end implied by the Fed’s new guidance.

The Fed’s more-hawkish guidance calls for “higher rates for longer,” even if it brings on recession.

Not only are rising interest rates driving up federal interest expense dramatically; inflation is propelling growth in government spending on Social Security benefits, Medicare and other government healthcare programs.

Naturally, if we do slip—or plummet—into a serious recession, federal income tax revenue will erode. Even before recession, the last nine months of declining stock and bond markets virtually assure an almost complete collapse in capital-gains-tax revenue.

The national debt is working like a cancer sapping the nation’s long-term economic vitality.

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The State Labor Deal and the Resulting Retirement Wave

Ned Lamont would have voters believe that he has engineered a “Connecticut Comeback.” On his campaign website, he claims to have turned a $4 billion deficit into a $4 billion surplus.

Lamont has had nothing to do with the temporary improvement in the State’s condition. The transitory improvement is based upon billions and billions of one-time federal assistance that will run out in a matter of months and upon a gusher of individual income tax revenue derived from a stunning decade-long stock market rally that ended nine months ago.

Lamont did have one critical task. He had 100% control over the negotiation of the new state employee wage contract, the SEBAC deal. Over the next decade that deal will cost the state an estimated $6.4 billion.

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Not An Isolated Incident

Recently, an assistant school principal in Greenwich, Connecticut was caught on video avowing that he hires only progressive teachers. He explained that he won’t hire Catholics because they are too rigid, nor older teachers since they are too set in their ways, for him to be able to bend them to his mission of progressive teaching.

In Greenwich, he is probably an outlier. I live in Greenwich, and I have a second grader in the school system. He has had two great teachers and is just starting with a third of apparent great promise. Yet, most of the progressive education mischief occurs in higher grades, so I will reserve judgment.

The reality is that this is not a Greenwich issue. It is a national issue, more precisely a Beltway issue. The national teacher unions headquartered in Washington DC and the Biden Administration are very clearly pushing a left-wing agenda. The unions and Biden are doing everything possible to inject critical race theory (CRT) into the nation’s public schools, despite all their protestations to the contrary.

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Jobs Blues Are Returning to Connecticut

Connecticut’s jobs outlook looks ominous, despite the most recent, very positive report of 6,500 jobs gained in July coupled with a big decline in the unemployment rate from 4.0% to 3.7%.

The job gains are highly likely to reverse very soon. Today, ADP reported that national private sector job growth in August fell to half its level in July, presaging a significantly weaker national number for August to be reported this Friday by the U.S. Bureau of Labor Statistics (BLS)  and a poor August number for Connecticut in the next state-by-state report from BLS in mid-September.

Even before today, there were warning signs nationally and for Connecticut. Connecticut’s workforce shrank by 2,100 in July, the first monthly decline in 2022. Connecticut was not alone. The labor force shrank in twenty-three other states.

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College: Free is Free, Before or After; Yet, Nothing Is Free

Joe Biden, supposedly a moderate, has become Bernie Sanders without much realizing it. Bernie Sanders and progressive Democrats have long advocated free college. Yet, most Americans understand that there is no such thing as free college any more than there is free lunch. Someone always has to pay.

Biden has now proposed cancelling much of the cost of college after the fact.  What’s the difference between up-front free tuition and after-the-fact tuition cancellation, aka loan forgiveness? There is none, if you think about it.

Taxpayers will have to pay.

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