Illinois's Pension Reform Goes Down In Flames

On Friday the Supreme Court of Illinois unanimously declared unconstitutional, under the Illinois State Constitution, the 2014 pension reform law by which Illinois's legislature had sought to bring the state's pension costs under control.  The whole exercise represents a major lost opportunity for Illinois, and for the cause of state pension reform generally.  

The decision of the Illinois Supreme Court is here.  The basis of the decision is that the attempted reform, embodied in a statute called Public Act 98-599 (effective 2014), violated Article XIII, Section 5 of the Illinois Constitution that reads:

Membership in any pension or retirement system of the State . . . shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.  

In the face of that provision, the Illinois legislature enacted a statute that reduced the pension annuities that state employees could earn over the course of their careers, without making explicit that pensions already earned as of the date of the statute were protected.  It's not possible to know how the court would have come out if the legislature had explicitly protected all pensions already earned.  Perhaps this court would have come out the same way, particularly given the level of anger and hostility evident in its opinion.  But if the legislature had taken the route of explicitly protecting all pension earned to date, they would have had a powerful, and ultimately correct,  argument that what they were doing did not violate the constitutional provision.  Even if they had lost this case, they would have had a more than good shot of prevailing in the long run.  Now, it's back to the drawing board.

As enacted, this statute appears to reduce both pensions earned before its effective date and also subsequent accruals.  Here is a list from the Supreme Court opinion of some of the changes:

First, it delays, by up to five years, when members under the age of 46 are eligible to begin receiving their retirement annuities. . . .  Second, with certain exceptions and qualifications, it caps the maximum salary that may be considered when calculating the amount of a member’s retirement annuity. . . .  Third, it jettisons the current provisions under which retirees receive flat 3% annual increases to their annuities and replaces them with a system under which annual annuity increases are determined according to a variable formula and are limited. . . .

Without explicit protection of pre-enactment accruals, the state was left in the position of having to argue that it could use its police powers to override pension contracts -- in the face of a specific constitutional provision protecting the pension contracts (not to mention a provision in the federal Constitution barring states from impairing rights under contracts).  Here is the state's brief in the Supreme Court.  I can't say I'm surprised that the Supreme Court did not buy the state's argument, which would essentially mean that the state could ignore the clear constitutional provision by the simple of expedient of declaring some kind of "emergency" whenever it wants to spend the money on something else.  Moreover, the court seems to have been particularly offended by the fact that the statute exempted judge's pensions from the reforms.  Although the legislators may have thought that they would buy the judge's support by the exemption, the judges were smart enough to realize that if they upheld the reforms for everyone else, then the reforms could be extended to judges the next day.

So Illinois is now in the position of having to start over in the face of a hostile and skeptical Supreme Court.  Worst is that the distinction between pensions accrued-to-date and future accruals was never clearly presented in this case.  Not explicitly protecting already-accrued pension benefits was a huge mistake by the Illinois legislature.  That omission took away from the state the potential winning argument and also led to sloppy language in the Supreme Court's opinion that may suggest that the constitutional provision protects future accruals. For example, here is a quote from page 20 of the opinion:

Accordingly, once an individual begins work and becomes a member of a public retirement system, any subsequent changes to the Pension Code that would diminish the benefits conferred by membership in the retirement system cannot be applied to that individual.   

But is it really the case that the Illinois constitutional provision (and comparable provisions in many other states including New York) means that an employee who begins work for as little as one day at age 25 is then entitled to have his pension accruals continue at an undiminished rate for an entire career of 40 years or more, even if those accruals are at a completely unsustainable level for the state and its taxpayers?  The obvious flaw in this logic is that the obligation to pay for pension accruals based on future service does not yet exist, and the state has not committed itself to make such an obligation come into existence.   The constitutional provision protecting pensions does not give an employee a constitutional right to have his job. Therefore, he can be fired, or can quit, before earning additional pension benefits.  So a reduction limited to future accruals does not "diminish or impair" anything to which the employee has an existing contractual right.       

Where does Illinois go from here?  The Supreme Court's opinion does not actually direct the legislature what to do, and only enjoins implementation of the statute previously enacted.  But the court seems to think that the legislature will now only have one option, which is to fully fund the pensions under existing accrual rules, raising taxes to the extent necessary to do so.  I see several other options:

1. The legislature can do what it should have done in the first place, and enact a new statute explicitly protecting prior pension accruals while reducing future accruals.  Without doubt the same cast of characters will challenge such a new statute.  But the new statute will make the court focus this time on the distinction between past and future accruals and either allow the future reduction or take the extreme and ridiculous position that one day of work for the State of Illinois brings with it a lifetime entitlement to a given pension scheme.
2. The state could start systematically getting rid of (laying off) senior employees with unsustainable pension accruals and replacing them with new employees with much reduced pension promises (or perhaps, defined contribution plans).  Will the Illinois Supreme Court then hold that employees have a constitutional right to their jobs, even if the constitution has no such provision and the senior employees with unreduceable pension accrual obligations cost double or more the cost of replacements?
3. Or then there's the option that seems to be the choice of New Jersey: just stop putting money into the pension plans and see what happens.  The Supreme Court can declare a statute unconstitutional, as it has done here, without too much stress; but it is quite another thing for a court to order a legislature to appropriate money.  It is likely (but not certain) that the court will pull back before taking that step.  According to the Supreme Court opinion, the state pension plans at issue are currently about 41% funded.  And that's with the stock market at record levels!    With no additional contributions, one good stock market crash could have these pension plans bouncing checks within as little as ten years.  Bring it on!

Or Illinois can do what the court wants and raise taxes greatly to try to rescue these badly underfunded plans.  That course would risk putting Illinois into accelerating economic decline relative to its neighboring states.  And Illinois is already the economic laggard in its Midwestern neighborhood.  I say, try one of # 1, 2 or 3.

Progressive Economic Ignorance In New York

Keeping up with the economic ignorance of New York's "progressive" politicians is often a game of "can you top this?"  Every time you think it just can't get any stupider, it does.

For example, consider rent regulation.  In the aftermath of World War II New York City instituted a system of rent control on the price of all apartments in buildings more than minimal size, exempting new construction; and then in the early 1970s they applied a different system of rent regulation ("rent stabilization") to all the subsequently-constructed apartments, and to apartments that had previously exited the control system.  And thus when I moved to New York in the mid-70s we had the bizarre situation of a universally-recognized desperate shortage of housing and simultaneously almost no new construction in the private market.  Who could have foreseen that?  In the mid-1990s (with a Republican Mayor, Governor, and State Senate) we got modifications to the rent regulation laws that made it possible for owners to decontrol most apartments on vacancy.  This has led to a very, very gradual process by which the rent regulations have been phasing out.  And surprise! -- Lots of market construction is back.

So of course you can guess what is happening in the world of the "progressive" politicians.  Today Mayor de Blasio issued a press release calling for the elimination of essentially all provisions of the rent laws, most notably vacancy decontrol, that enable owners to remove apartments from the system.  Capital New York has the story.  Here's an excerpt from the Mayor's press release:

"This is a vital priority for New York City. Our working families and our neighborhoods are depending on stronger rent laws. Rent is the number one expense for New Yorkers. Unless we change the status quo, tens of thousands of hardworking families will be pushed out of their homes," de Blasio said in his release. "This has to be a city for everyone. It cannot just be a city of luxury apartments out of everyday New Yorkers’ reach."

So Bill, if this is such a great idea, why not just decree that all rents shall henceforth be zero?

And I'll bet you're thinking that that one cannot be topped.  But that just proves that you don't follow the news closely.  If you did, you would have seen that the New York City Council -- with the support of de Blasio of course -- a few days ago passed a resolution opposing the so-called "fast track" authority that President Obama is seeking from Congress to negotiate free trade deals with Asian countries.  Crain's New York Business has this story.  Why would New York City want to meddle in that one?  Here's the take of Crain's:

Labor unions and progressives like the mayor see only the local losses, as workers in foreign countries make the products that once were made in the U.S. -- eliminating millions of jobs here.

But here's the bizarre thing.  Manufacturing jobs started leaving New York long ago, and today they're almost all gone.  When I moved to New York in the 70s there were over a million manufacturing jobs in the City.  The number today is only about 75,000, and those are specialized things like "craft" breweries in Brooklyn.  It's hard even to try to understand how a new trade agreement with, say, the Philippines, is going to affect those jobs one way or the other.

But meanwhile, what is the main business of New York today?  It's what all those hundreds of thousands of office workers in Manhattan do.  A good summary is that they are engaged in the internationalization of the world economy.  Another way of putting it is that they work on choosing the best investments for money, which means allocating capital to the place where it can be most efficiently deployed, in a process where international boundaries are increasingly irrelevant.  This "investment business" broadly defined is much more than just what goes under the banner of "Wall Street," and includes substantially everything that the major banks, financial firms, private equity firms, hedge funds, asset managers, law firms, accounting firms, financial consultants, and lots of others, do.  And substantially all the rest of the New York economy -- from real estate to insurance to entertainment to travel and on and on -- lives off the fruits of the investment business that drives the whole enterprise.

The New York City Council and Mayor de Blasio would gladly hobble this gigantic economic engine in some kind of quixotic effort to "save" the pitiful remaining 75,000 manufacturing jobs.  Really, do they have any idea at all what they are doing?  Oh, I should mention that the support for the anti-fast track resolution in the City Council was unanimous.

UPDATE, May 6, 2015:   Indeed, they most assuredly have no idea whatsoever what they are doing.  Today Mayor de Blasio has announced new funds in his upcoming budget to provide services to manufacturing businesses, including training "to give workers the skills that industrial employers seek."  From Crain's New York Business today:

"Thriving industrial and manufacturing businesses that provide quality jobs for New Yorkers are vital to combating inequality and diversifying our economy," said Mayor Bill de Blasio in a statement provided to Crain's. "Businesses from furniture-makers in Sunset Park, to metal finishers in Crown Heights, to film studios in Greenpoint employ thousands of New Yorkers of all backgrounds in good-paying jobs. We're investing in the crucial services and the skilled talent our industrial and manufacturing businesses need to grow."

Newsflash to Mayor and City Council:  Manufacturing is not coming back as a significant part of the New York City economy in this lifetime.  Granted, the on-budget part of what the Mayor proposes is a de minimus amount of money (about $1.5 million).  But it's also accompanied by more of the usual crony capitalist accoutrements, like land use restrictions to keep vast swaths of land in industrial use even though there are hardly any industrial users left.  And anyway, pure waste is pure waste.  If they can't tell this is pure waste, how can you have confidence in anything they do? 

Can The Government Fix Poverty? Part III

From the department of "Can they really be this stupid?" today comes exactly what you have known was coming since the rioting in Baltimore began:  a lead, front page article in the New York Times promoting the next gigantic government spending program that they promise is really, really, really going to fix the poverty this time.  The headline is "Change of Address Offers A Pathway Out of Poverty."  

Needless to say, there is no mention or recognition in this article of the current $1 trillion +/- of annual government anti-poverty spending in this country, all of which has brought us Baltimore, not to mention Detroit, Cleveland, St. Louis, Buffalo, Camden, Newark, Bridgeport, Hartford, Memphis, and fifty or so more of same scattered around the country.  But this time it's going to be different!  Here's the "new" idea: The poverty is caused by people being trapped in bad neighborhoods.  If "we" just give "them" the help they need to move to better neighborhoods, suddenly their lives will shift upwards and all will be well.  How do we know that?  The Times breathlessly reports that "a large new study" is just out from Harvard professors Raj Chetty and Nathaniel Hendren.  Here are the results:

Based on the earnings records of millions of families that moved with children, it finds that poor children who grow up in some cities and towns have sharply better odds of escaping poverty than similar poor children elsewhere.  

Wow!  It's based on "earnings records of millions of families"!  It's done by professors from Harvard!  It shows "sharply better odds" of escaping poverty!  Surely it must be right!

The Times goes out and asks a few questions to Chetty, and he immediately gives away the mindset at work:

“The data shows we can do something about upward mobility,” said Mr. Chetty. . . .  "Every extra year of childhood spent in a better neighborhood seems to matter.”

Who's the "we" there, Raj?  Undoubtedly it's the sinister alliance of government bureaucrats and Harvard professors who got us here in the first place.  It's the official "we" who know so much better than "they" do how to run "their" lives.  But don't worry, Professor Chetty "has presented the findings to members of the Obama administration, as well as to Hillary Rodham Clinton and Jeb Bush, both of whom have signaled that mobility will be central themes of their 2016 presidential campaigns."  Do you think that any one of those three has the critical thinking ability to ask an intelligent question about this?  Don't count on it.  Meanwhile, over at the Department of Housing and Urban Development this must sound like a fabulous new gravy train of additional funding.  Here's the reaction of the current Secretary:

In an interview Friday, Julián Castro, the secretary of Housing and Urban Development, said he was excited by the new data. Mr. Castro said his department had been planning to reallocate funding, so that some people moving to more expensive neighborhoods would receive larger vouchers. Currently, the value of vouchers tends to be constant across a metropolitan area.

So how could any moral person be against this?  Well, there's this from the opening paragraphs of the article:

In the wake of the Los Angeles riots more than 20 years ago, Congress created an anti-poverty experiment called Moving to Opportunity. It gave vouchers to help poor families move to better neighborhoods and awarded them on a random basis, so researchers could study the effects.  The results were deeply disappointing. Parents who received the vouchers did not seem to earn more in later years than otherwise similar adults, and children did not seem to do better in school. The program’s apparent failure has haunted social scientists and policy makers, making poverty seem all the more intractable.

In other words, the ideas of giving out housing vouchers to be used in "good" neighborhoods, or building "affordable housing" in "good" neighborhoods, are not "new" ideas for curing poverty at all. They are things that have already been tried and demonstrated to be total failures.  But don't the Chetty/Hendren data show that these things are going to work next time?  Absolutely not.  The Chetty/Hendren data are derived from people who moved from one place to another as part of their own striving to better their own lives.   Moving to Opportunity was the opposite -- a handout program.  These things are about as different as night and day.

The Times, Chetty, Hendren, et al., are just incapable of understanding that the results that people are able to achieve through their own efforts and striving cannot be duplicated with government handouts.  Striving gets you upwardly mobile suburbs and gentrifying urban neighborhoods.  Handouts get you Baltimore.  No amount of experience, no number of failed programs, will ever enable them to understand this. 

And really, forget about Move to Opportunity -- can't the Times look under its own nose?  Manhattan is the wealthiest county in the country.  It has a far higher density of high-paying jobs than any place else.  So if you were going to move poor people somewhere to enable them to better their lives, Manhattan would be far and away the best place, right?  Well, we've built over 50,000 units of public housing in Manhattan, housing about 150,000 people -- about 10% of the population of the island.  And the result?  The poverty rate in NYCHA projects is 51.3%, according to data they sent me last week.

Can The Government Fix Poverty? -- Part II

In yesterday's article I pointed out that due to its high levels of poverty the city of Baltimore gets far more than its pro rata share of government programs and handouts supposedly to fix the poverty, and we can see the disastrous results.  Given the obvious failure of the trillions of dollars of spending to date, I asked: Could it really be that anyone here thinks that the next round of "programs" and handouts is going to work?

Today the New York Times chimes in on the subject with an editorial, two op-eds, and five letters to the editor.  Most of it is just a liberal guilt-fest, but it's still worth examining the mind-set of the people who caused this horror.  Most illustrative is the op-ed by Michael Eric Dyson.  Here's an excerpt:

Without a brick tossed or a building burning, we are hardly confronting the hopelessness of the future for these young people. The unemployment rate in the community where Mr. Gray lived is over 50 percent; the high school student absence rate hovers at 49.3 percent; and life expectancy tops out at 68.8 years, according to analysis by prison reform nonprofits. These statistics are a small glimpse of the radical inequality that blankets poor black Baltimore. It’s no wonder that black Baltimore erupted in social fury.

OK, the high school student absence rate hovers at 49.3%.  How did it get there?  Baltimore of course follows the Democrat model of government-monopoly unionized public schools.  According to figures compiled by the Baltimore Sun in 2013, Baltimore in 2011 ranked second among the nation's 100 largest school districts in per student spending.  (Number one being New York City of course!)  So what's the answer?  Well, we know the answer of the Baltimore Teachers Union:  Still more government money for the schools!  Here's a link describing their big rally in March to lobby the legislature for more money.

Life expectancy tops out at 68.8 years?  I thought we had free government medical care, otherwise known as Medicaid, for all the poor and near-poor.  That's well over $400 billion of annual government spending in this country, almost $8 billion in Maryland.  We just doubled down on Medicaid with a massive expansion under Obamacare.  Are you now saying that it doesn't work?

And then there's what Mr. Dyson calls the "unemployment rate," which is not what the Labor Department calls the unemployment rate, but rather a rate of idleness among people completely detached from the world of jobs.  Well, the government gave the people welfare, and food stamps, and public housing, and free medical care, and now we find that a lot of the young men just don't work any more.  Didn't anybody stop for a minute to think that this might happen?

New York Times and Mr. Dyson, it's time to take ownership of this.  All of your "solutions" have been adopted at enormous cost, and they have just made the problem worse.  Do you really still think that more of same can possibly work?

Here's the fundamental problem:  All of your guilt always leads to advocacy that "we" must help "them" with some kind of program or handout.  Inherent in that thought is that "they" are not capable of taking care of themselves -- the bigotry of low expectations.  Well, I can say with 100% certainty that more programs and more handouts will cost still more money and still will lead to more idleness and more hopelessness.

So is it possible to turn this around?  Absolutely.  There's exactly one way.  Real businesses must be attracted to Baltimore to provide real jobs.  This cannot be done by handouts to business and crony capitalism.  It must be done be creating a bona fide good investment climate.  That means crime under control, lower taxes and lower government spending, and fostering a belief among members of the business community that the government will not turn on you after you commit your investors' money.  In New York, with 20 years of Republican and Independent mayors from 1994 to 2013, we made huge strides in re-establishing a good investment climate, and the economy roared back.  Baltimore can do it too.  But it's the exact opposite of the approach they have taken to date.  Oh, and riots sure aren't going to help. 

Do You Think The Government Can Fix Poverty? Look At Baltimore

I have written many times (for example here and here) about the spectacular failure of the government's efforts to fix the problem of human poverty by the favored devices of "programs" and handouts.   But it isn't often that the nation's attention gets riveted onto quite such a graphic display of the disaster of our anti-poverty efforts as we have had in the past couple of days from Baltimore.

Baltimore is in that group that I have often referred to as the "basket case cities" -- the not small group of U.S. cities that have thrown wads of cash and hordes of bureaucrats at the poverty problem, only to see poverty worsen while the population of the city declines precipitously and the place basically circles the drain.  The poster children for this phenomenon are Detroit and Cleveland, but they are really just the start.  Chicago and Philadelphia also qualify, even though they both put on good shows in their downtowns.  Another trait that the basket case cities share is voting 80% + for Democrats in their elections.  Could it really be that anyone here thinks that the next round of "programs" and handouts is going to work?

Baltimore easily meets all the criteria to qualify as a "basket case."  By the official decennial census, the population peaked in 1950 at 949,708, and has been in decline ever since.  In 2010 it hit 620,961, down about 35% from the peak.  Maryland is one of the wealthiest states, but Baltimore is one of the poorest cities in the country.  The official Census Bureau "poverty rate" for Baltimore is 23.8%, about 9% above the rate for the rest of the country and 14% above the rate for Maryland as a whole.  Median household income is $41,385, compared to $51,900 for the U.S. as a whole and $73,538 for Maryland (all 2013 data).  The murder rate in Baltimore is 37.4 per 100,000; by comparison, New York's is around 4 per 100,000.  This is not a small difference.  And how do they vote?  To take just one example, in the 2012 presidential election, Obama got over 200,000 votes in the City of Baltimore to Romney's 25,000.

As befits its status as a relatively poor city, Baltimore has long "benefited" -- if you want to use that term -- from more than its pro rata share of the government programs and handouts supposedly designed to cure poverty.  Comparative statistics aren't easily available for every program, but consider just a few.  In the U.S., following the explosion during Obama's presidency, there are now about 46 million recipients of food stamps/SNAP; that's about 14% of the population.  In Baltimore the percentage on food stamps was 24% when Obama first came to office, and then it really took off.  Today it's more like 35%.  Or consider public housing.  According to HUD's website here, well less than 1% of U.S. families live in public housing.  In Baltimore, it's more like 4.5%.

Yet the government's own income statistics show that with all the programs and handouts, Baltimore remains poor and is not catching up.  And there's another statistic that I think is even more revealing.  Take the number of jobs in the country here, and divide by the population, and you get an employment-to-population ratio.  For the U.S. as a whole, depending on which measure of employment you use, you get something in the range of 44 - 47%.  For Baltimore, the Maryland Department of Labor says that the December 2014 unemployment rate was 8.2% -- it doesn't sound so bad.  But divide the number employed in Baltimore (251,889) by the 2014 population (622,793) and you get barely 40%.  That means there's a good 5% of the population -- more like 6.5% of the working age population -- that is working in other places in the country but is not working in Baltimore.  These people don't show up in the labor force or in the official unemployment rate.

This is tens of thousands of people.  Who are they?  A very good hypothesis is that large numbers of them have been appearing on our television screens the last couple of days.  Without doubt, there is a good deal of idleness in many of their lives.  Others likely work at what might be called "non-traditional" activities, without getting counted by the government as employed.  They have been relieved of the necessity of steady, regular work by the supposed kindness of the government programs.  This is a prescription for exactly the result we have been seeing.

The fundamental assumption behind the government programs and handouts is that the recipient population is just not up to the job of taking care of itself like the rest of us.  The correct term for this is liberal racism.  The young men have been put in the insulting and demeaning position where their wives/girlfriends and children don't need them for support and they are "free" to hang out, take or deal drugs, or hustle on the street.  Should we be surprised that they are aimless and angry?  I too would be in their position.  Now, why they vote with 90 or so percent majorities for more of the same, that I can't explain.  But it is very, very hard not to take the handout. 

UPDATE, July 25, 2018:  A reader wrote in to inform me that my links to the Census data for Baltimore did not work any more because the Census Bureau had moved the data to a new site.  So I have update the links above.  However, unfortunately, the data have also changed, and no longer match the numbers in the post, although the changes are not material to the points made.  I have left in the post the data that were provided by Census at the date of the post. 

How Worried Should You Be About A Greek Default?

My answer:  not at all.  In fact, the opposite:  we should all be praying for a Greek default.

The Greek default business has been mostly off the front pages of the U.S. papers for a while, but that doesn't mean that it has gone away.  Greece has some big debt payments coming due as early as June, and many think they won't have enough money to pay without some infusion of cash from EU colleagues or some "restructuring."  ("Restructuring" means that the creditors agree to take less than they are owed and not call it a default.)  And thus endless "negotiations" take place over some kind of "deal" to avoid default.

The benefits to everyone else of Greek default are obvious.  Greece's politicians have made ridiculous spending promises to their voters, counting on other people's money to fulfill the promises.  They way overpay their government workers, demand pitifully low productivity, give out lavish pensions and benefits, don't enforce their taxes -- and pay for it all with borrowing.  When they default the borrowing spigot turns off, at least for a while.  They literally can't pay their bills at the level they are running, and they will have a modicum of financial discipline forced upon them.

Of course there would be losers.  But the only obvious losers are the holders of the defaulted debt.  The people who have lent money to Greece in any recent time frame are not people that anyone should feel sorry for.  Greece's financial irresponsibility has been obvious for many, many years.  Lenders to Greece have gotten premium interest rates for most of human memory.  Why does anyone else owe them a bailout?  Other than lenders to Greece, the potential losers from a Greek default are not obvious at all, and would only emerge if there is some kind of systemic financial crisis that follows the default.

And yet these endless negotiations continue, with the seemingly universal assumption that there will be a bailout or restructuring of some kind if only the recalcitrant Greeks agree to sufficient "conditions."  What I don't understand is, why is anyone even talking to them?

The only answer I can find boils down to -- fear of the unknown.  As one of many examples, consider Rick Moran today at American Thinker:

Thankfully, American banks have very little direct exposure to a Greek default.  But the wild uncertainty of what would happen to the rest of Europe in the case of a Grexit is extremely worrisome to American financial institutions. . . .  But no one in Europe is sure if these measures [taken by European pooh-bahs so far] are enough.  That's because managing expecations following a Grexit cannot possibly take into account the panic factor.  And as swiftly as crisis can move in these days of instantaneous news reporting and speed-of-light transfer of funds, it is more than a distant possibility that panic could overwhelm the system and start a domino effect of collapsing banks in every corner of Europe.

In an afternoon, the international banking system could collapse.

Really?  Of course, I can't predict what will happen with certainty, but frankly this is ridiculous.

And why is this the unknown?  Sovereign defaults happen all the time.  Argentina, with about 4 times the population and two plus times the GDP of Greece, defaults regularly -- most recently last year, and the time before that in 2001.  Venezuela, well over double Greece in population and close to double in GDP, is about to default, and nobody seems to think that that poses any great threat to the world financial system.  Russia, ten times or so the size of Greece in population and GDP, defaulted in 1998.  And I could go on and on.

Well, Greece is part of the Euro.  Does that make a difference?  Only in the sense that nobody knows.  Here is Charles Wyplosz writing today at the Credit Writedowns site:

What makes the coming event interesting is that it will be the first time that a default occurs within a monetary union.

I would dispute that.  Eight U.S. states defaulted on their debt in the 1840s.  Doesn't the U.S. qualify as a monetary union?  Nobody bailed those states out and they didn't exit the dollar.  Is the world different today?  Sure.  But do any of the differences constitute a reason to panic?

I have a very simple proposition:  If the EU can be buffaloed into bailing out Greece by use of threat of "global financial collapse" or something like that, then there is no end to it.  Sooner or later we either have to pour the entire world GDP down the infinite maw of Greece, or toughen up and let the default happen.  The financial institutions need to learn now how to harden the financial system to deal with defaults, or else the Portugals and Italys of the world will follow Greece's example and hit up everyone else for a bailout.  Best to do the default sooner rather than later.