Downsizing Blog

Postal Union Wants More

The finances of the U.S. Postal Service are deeply in the red. The agency faces a permanently reduced demand for its services and its labor accounts for almost 80 percent of its costs. Thus it is not a good time for postal employees to get an increase in wages and benefits, right?

According to one postal union, the USPS’s deteriorating condition isn’t relevant. The American Postal Workers Union, which represents more than 200,000 employees, has recently entered collective bargaining negotiations for a new contract. In an interview with Government Executive, APWU President William Burrus calls a pay increase for his members an “entitlement”: 

“More -- more control over activities at work, more money, better benefits -- we want more,” said Burrus. “We will try to fashion our proposals to reflect the entitlement to more.” 
An arbitrator will most likely determine whether APWU workers get their raises. Oddly, according to federal law an arbitrator can’t take the USPS’s financial condition into account when weighing a decision. This is like instructing the captain of a ship that’s struck an iceberg to ignore the gaping hole in the boat when deciding whether or not to abandon it.     
 
USPS management has asked Congress to change the law, which Burrus preposterously calls “antidemocratic”: 
Burrus said he resents the idea that an arbitrator should be required to take into account the Postal Service's financial situation. He called the idea antidemocratic and said it interferes with free collective bargaining. 
Having watched the unionized workforces at GM and Chrysler receive preferential treatment from the federal government, there’s little incentive for Burrus and the postal unions to not ask for more. The postal unions are likely betting that in a worst case financial scenario for the USPS, policymakers will tap taxpayers for a bailout. Unfortunately, if recent history is a guide, they’re probably correct.

 

Posted by Tad DeHaven on September 7th, 2010

HUD Getting Defensive

The administration underestimated the magnitude of the economic imbalances that spawned the recession, and overestimated the government’s ability to quickly right the ship. Despite the Obama administration’s massive economic interventions, unemployment remains high and the economy is still sluggish. The administration has been defending itself by claiming that its actions prevented a worse recession or even a depression.

Now the administration is making the same claim with regard to the housing market. 

As I discussed last week, federal policymakers are apt to respond to crises with quick-fix measures instead of considering what policies would best serve long-term growth. The result is wasteful programs like the homebuyer tax credit, which only succeeded in introducing more distortions into the economy.
 
The homebuyer tax credit temporarily induced people to purchase homes. Now that the credit has expired, sales of new and existing home have fallen. Taxpayers are out billions of dollars, and the necessary correction in the housing market was merely delayed. Not only has there been no long-term benefit, people who were induced to purchase homes now risk being stuck with underwater mortgages if housing prices decline further.
 
HUD Secretary Shawn Donovan was recently asked by CNN to justify the administration’s policies in the wake of renewed weakness in the housing market. Donovan responded with the company line that “this housing market would be a lot worse had we not brought down interest rates to record lows, provided a home-buyer tax credit, [and] helped millions of families stay in their homes.”
 
Maybe this statement is true, and maybe it isn’t: it’s impossible to know. However, the answer is less important than the answer to the following question: Are the administration’s housing policies good for the long-term health of the housing market and broader economy?
 
Considering that the administration’s housing policies have largely been an extension of the policies that contributed to the housing bubble and bust, the answer is no. In fact, the government’s role in the housing market has expanded. The federal government now backs more than 90 percent of new mortgages, which means that the U.S. housing loan market has been partly nationalized.
 
In the CNN interview conducted by Ed Henry, Donovan was questioned about previously “rosy” statements he made about the housing market.
 
HENRY: Let's stay on housing for a moment, though. You are saying it could have been a lot worse without some of the president's initiatives, but over the last year, you have been pretty rosy about your scenario in the housing scenarios.
 
I want to go through some of your statements. In December of last year, you said, "We believe we may finally be seeing the light at the ends of the tunnel." You said in May, "The truth is that our housing market like our economy has begun to turn the corner." You also said at the beginning of this very month, "There's no question that the state of today's housing market is in significantly better shape than anyone predicted a year ago." Mr. Secretary, do you still stand behind those rosy statements?
 
DONOVAN: Look, Ed, here is what happened. For 30 months before the president came into office, housing prices fell every single month. They have stabilized as a result of our policies up to now. American homeowners added a trillion dollars in equity over the last year. So I think there is no question that our policies have made a real difference. The real issue is today, and as I said before the July numbers were worse than we expected, worse than the general market expected and we are concerned. That's why we are taking additional steps to move forward.
 
HENRY: But in May, you said we are beginning to turn the corner. Can you still say that? Are we still turning the corner when these numbers are so awful?
 
DONOVAN: Ed, compared to where we were -- and I am talking about where we have been for the last 18 months, the housing market, no question was significantly better. The issue now and what we are focused on is the future. 
Unfortunately, when Donovan says the administration is focused on the future, he means more government housing programs.
 
Instead of allowing the laws of supply and demand to reestablish order, the administration has fallen victim to the fatal conceit that it can successfully “plan” the housing market. Even though prior attempts to plan the housing market created an economic mess, Donovan apparently believes that this time it will be different.
 
It won’t be.

 

Posted by Tad DeHaven on August 31st, 2010

Federal Flood Insurance Folly

The National Flood Insurance Program was created in 1968 to allow flood-prone communities to purchase insurance protection from the government. Overseen by the Federal Emergency Management Agency, the program was supposed to alleviate the need for emergency federal aid. Instead, communities still receive emergency aid in addition to insurance payments.

The Government Accountability Office recently testified to Congress on the NFIP’s shaky condition. The following are key problems cited by the GAO:
  • The NFIP is “by design, not actuarially sound.”
  • The NFIP has borrowed almost $20 billion from the U.S. Treasury and “is unlikely ever to be able to repay the entire amount.”
  • Unlike private insurance companies, the NFIP is not structured to build capital surpluses, doesn’t purchase reinsurance to cover catastrophic losses, cannot accept or reject applicants in order to manage risk, and is legally constrained in its ability to raise rates as needed.
  • Twenty-five percent of participants pay subsidized premium rates, which don’t reflect the full risk of flooding. Even “full-risk” premium rates may not reflect the actual risk of flooding.
  • The NFIP must continue to insure properties that have suffered repeated losses. These “repetitive loss properties” represent only 1 percent of flood insurance policies but account for 25 to 30 percent of claims.
  • FEMA doesn’t do a good job of managing the program. For instance, “FEMA continues to lack an effective system to manage flood insurance policy and claims data, despite having invested roughly 7 years and $40 million in a new system whose development has been halted because it did not meet user needs and was not ready to replace the legacy system.”
USA Today recently reviewed FEMA records and found almost 20,000 homes and commercial buildings that have collected insurance payments in excess of what the properties are worth. For example, one Mississippi home has flooded 34 times since 1978. Valued at $69,900, the property has received $663,000 in insurance payments.
 
This is no way to run an insurance system. But that’s what you get when spend-happy politicians try to operate a business. The USA Today notes:
The program's financial problems reflect a broader government reluctance to restrain benefits. FEMA leaders and some lawmakers have tried to end the premium discounts and the multiple insurance payments, “but there's always been a few in Congress that have had enough political muscle to hold that back,” former FEMA assistant administrator David Maurstad said.

When I worked in the U.S. Senate, the topic of the NFIP came up during a meeting of “conservative” Republican Senators. Alabama Senator Jeff Sessions, whose state is a major beneficiary of the program, admitted that it was ridiculous that beachfront properties were repeatedly rebuilt using insurance payments. However, Sessions said he had to continue to support the program because “those are my voters.” 
 
People who choose to live on flood-prone land should purchase insurance from a private company, which would charge premiums based on the actual risk. If an insurance company will not provide flood coverage to particular properties under any circumstance, that’s a good market signal that it’s not safe for anyone to live there. The federal government should get out of the property insurance business.

 

Posted by Tad DeHaven on August 30th, 2010