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The Red Line

Federal Reserve Has Accelerated and Escalated

The Federal Reserve Bank’s monetary policies of increasing interest rates and “quantitative tightening”—reducing its $8.9 trillion balance sheet—will increase the volume and cost of government borrowing at all levels. It will slam the federal budget and state budgets as well, especially states in chronically weak fiscal condition such as Connecticut, despite its recent improvement.

The impact will be felt even without a recession, but if the economy does contract, the federal government will have limited capacity to employ fiscal stimulus to spur a recovery or to provide aid to struggling states.

The Fed has increased short-term rates by 2.25% following its 0.75% rate increases yesterday and in June and smaller increases in March and May. According to the Fed’s own official guidance, it will increase rates further in 2022 to reach an all-in increase of at least 3% by year end.

As this additional 3% works its way into the refinancing of maturing Treasurys and Connecticut State bonds, federal and state interest costs will soar.

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Ned Lamont’s “Debt Diet” and CT Democrats’ Debt Delusions

What happened to Connecticut Governor Lamont’s “debt diet”... if there ever was one?

Lamont is running for reelection claiming credit for fiscal restraint.

Yet, since Ned Lamont took office, Connecticut’s long-term borrowing has increased from about $25 billion to $27 billion. Moreover, after issuing $1.2 billion of new bonds already this year (see below), the state is officially scheduled to issue another $1.3 billion of new bonds this fall. In addition, Lamont and crew have committed to issue $175 million of Community Investment Fund bonds as well.

What kind of diet is that?

Lamont’s claim of engineering a fiscal turnaround of the state couldn’t be further from the truth. That is not necessarily to say that he has mismanaged affairs, but rather to say that he has had virtually nothing to do with the factors which have improved the state’s standing…  improvement which will only be temporary.

Three factors have been at play. The federal government has showered the state with Covid assistance money; the roaring bull market in stocks and bonds through December 2021 has produced a gusher of tax revenue from the state’s large population of wealthy investors; and, finally, automatic fiscal restraints adopted in 2017 before Lamont took office have limited spending.

Lamont was simply lucky at being there as governor as the three trends coincided.

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Rising Interest Rates Will Crush the Federal Budget

The Federal Reserve’s policies of increasing interest rates and quantitative tightening—reducing its $8.9 trillion balance sheet—will increase the volume and cost of federal government borrowing, slamming the federal budget and exposing the consequences of decades of deficit spending.

The impact will be felt even without a recession, but if the economy does contract, the government will have limited capacity to spur a recovery with fiscal stimulus.

Since February 2020, publicly held U.S. Treasury debt has exploded, growing from about $17 trillion to $24 trillion. Almost half of the increase has wound up at the Fed, whose Treasury holdings have ballooned from $2.5 trillion in February 2020 to $5.8 trillion.

Quantitative tightening is a big initiative. In May the Fed announced plans to reduce its Treasury holdings by $330 billion by the end of the year, and by $720 billion annually thereafter until its balance sheet shrinks to a yet-to-be-determined size. The Fed can reduce its balance sheet, but that doesn’t mean the federal government can reduce its balance of outstanding debt.

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The Build Back Boondoggle and the Magnificent Seven

What if Connecticut’s All-Democrat Congressional delegation (pictured above) had had their way a year ago? The Magnificent Seven all supported President Biden’s Build Back Better proposal, a constellation of new federal spending initiatives that would have cost anywhere from $2 trillion to $6 trillion.

At the time, the national debt had already skyrocketed by almost $7 trillion largely to fund spending over the course of the shutdown and the pandemic.

Imagine inflation today if that massive boondoggle had been enacted.

If ever there were a reason to “nationalize” an election and for voters to “throw out the bums” for misdeeds in Washington, promoting such wildly irresponsible national spending should be the textbook example.

Voters in Connecticut should throw out Senator Blumenthal and Representatives Joe Courtney, Rosa DeLauro, Johanna Hayes, Jim Himes and John Larson for fiscal and financial malpractice.

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Democracy Dies Without Disagreement

It is a sad day in America when we cannot agree to disagree. It is sadder when failure in that regard is overtaken by an effort to smear those with whom we disagree.

May 27, 2022

This week saw such a sadder day, with the release, and widespread media magnification, of a report by a far-left group attacking by name hundreds of Republican officeholders nationwide charging them literally with guilt by association.

May 25, 2022

The headline in one Connecticut media outlet sounded the alarm: “Report finds 16 Connecticut legislators have joined ‘far-right’ Facebook groups.” Similar headlines appeared across the country.

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Falling Markets Will Crush Government Budgets

Investors are painfully aware of the plunge in stock and bond markets so far in 2022. Are federal and state officials aware of the damage plunging markets will soon do to public budgets and finances? Tax revenue from capital gains is about to fall off a cliff.

May 17, 2022

The Monthly Treasury Statement for April indicates that capital-gains tax revenue reached record levels in 2021. The markets are telling us capital gains will shrink dramatically in 2022.

If what the statement and the markets are signaling is correct, the reversal of fortune for federal tax revenue could be as much as $250 billion. In states like New York and Connecticut and others which are heavily reliant on individual income taxes, the reversal could be devastating.

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Bolster CT Economy, Repay $400 Million in Federal Loans

The Connecticut General Assembly session has now concluded with the adoption of a revised budget for the biennium of fiscal years 2022 and 2023.

April 29, 2022

Happily, Democrats conceded to half of the GOP’s recently proposed $1.2 billion tax cut plan.

Yet, Governor Lamont rejected a major element of the GOP plan: a proposal to use off-budget American Rescue Plan (ARP) money to repay hundreds of millions of still-outstanding federal loans received by Connecticut over the last two years to fund unemployment insurance benefits.

April 29, 2022

Apparently, that proposal has been squashed, with Lamont agreeing to repay only $40 million.

Why is a loan repayment proposal part of a tax-cut plan? Because otherwise these loans must be repaid with hefty tax increases on employers in the state.

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Lamont’s Labor Union Deal Creates a Much Bigger and Costlier Retirement Wave

Gov. Lamont’s tentative agreement with Connecticut state labor unions (the “State Employees Bargaining Alliance Coalition,” or SEBAC) compounds distortions in the natural process of renewal in the state workforce introduced by his predecessor. To prevent a retirement wave over the next three months, Lamont is offering huge wage raises and bonuses to induce employees to stay on the job.

Ironically, in battling a retirement surge created by his predecessor’s meddling, Lamont’s own meddling would create a much bigger and costlier wave in less than two and a half years.

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CT State Employees 5th Highest Paid in U.S. – Raises and Bonuses on Top of That?

Connecticut Governor Lamont has proposed to award state employees significant wage increases and bonuses over three years. But before moving ahead, policymakers should consider whether public employee pay increases are warranted.

A recent study authored by one of us finds that the average Connecticut state employee already receives total pay and benefits roughly one-third higher than is received by comparable private sector workers in Connecticut. This 33% premium is the fifth highest compensation premium out of the 50 U.S. states. Lamont’s proposal would likely widen that gap.

According to state employee union documents, Lamont is proposing to award all unionized state employees three annual base salary increases of 2.5% and, for about two-thirds of employees, annual “step increases” of 2.0%. The wage and step increases are retroactive to July 1, 2021. On top of these increases, every employee will receive bonuses of $2,500 this coming May and $1,000 in July. The bonuses are pensionable.

The new study of compensation for state government employees, authored by Andrew Biggs, examines wages and benefits of state government employees in the 50 states, in each state comparing their compensation to that of private sector workers with similar levels of education, experience and other characteristics.

The use of the same methodology in all 50 states establishes a level playing field and produces genuine comparative results among the states. Moreover, comparing state and private workers in the same state eliminates the need for any cost-of-living adjustments.

State employees may not seem overpaid. But salaries are only part of the story.

The study also finds that fringe benefits are dramatically higher in state government than in the private sector. State employees in Connecticut accrue pension benefits that are roughly six times more generous than the employer contribution to 401(k) plans which predominate in the private sector.

Connecticut’s retiree health program for state employees is by far the most generous in the country. According to state accounting disclosures, the future benefits accruing to current Connecticut state employees are worth an extra $16,000 for each year of work. Retiree health coverage is nearly extinct for private sector workers.

Overall, total fringe benefits for Connecticut state government employees are over three times higher than for similar private sector workers, which more than makes up for slightly lower salaries in state government.

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