Required reading

By Buttonwood

SOMETIMES a website can catch the zeitgeist, as condoflip.com did during the housing boom and the implode-o-meter did during the bust. One of the big issues in the next few years is bound to be pensions, particuarly those in the public sector. So I was intrigued to come across the pension tsunami website which does a good job (albeit with a right-wing slant) of collating news stories about the issue. It also has a Californian tinge but then California always seems a few years ahead of everyone else.

Read it and weep at some of the largesse that has been showered on public sector employees at the tapayers' expense, including the 9,111 Californina retirees who take home more than $100,000 a year in pensions. One lucky devil even gets more than $500,000, after a career in charge of Vernon, a city with fewer than 100 inhabitants. Because public sector pension funds are so much in deficit (one estimate is $1 trillion, another is $2.5 trillion) and because state budgets are so constrained, politicians are facing the choice of maintaining pensions or maintaining local services. In LA, one official has estimated that a third of the budget will be devoted to pension costs by 2015.

Public sector pension funds have just followed the pattern of private sector schemes. Step one, promise employees better pension benefits in lieu of higher pay. Step two, allow older employees to retire early as a "cost-saving" measure. Both employ the economics of the never-never. Pension funds are classic Ponzi schemes in which the benefits of retirees depend on the income generated by new employees. (This is true even of funded schemes, since they invest either in equities, a claim on the profits generated by future workers, or government bonds, a claim on their taxes.) They were thus bound to be in trouble once the demographic pattern shifted, and the next generation was no bigger than the last.

This is already a hot political issue as my US colleague notes in this post; as in Britain, attacks on public sector pensions are generally launched by the taxpayers' party (Republicans. Conservatives) and resisted by the public sector workers' party (Democrats, Labour). It will also be a legal issue. In Colorado, retirees are suing over plans to reduce the scope of their inflation protection.

Another area that is going to be a huge political issue is unemployment. One of the biggest puzzles for US public policy is why joblessness rate is so high, and is falling so slowly. Two huge problems are the high rate of unemployment among young men and the long periods that some are spending out of the workforce. Edmund Phelps had a column on this issue in the New York Times last Friday. He argues that there are structural reasons for an increase in the joblessness rate, such as a lack of long-term investment. The piece is also the subject of an expert dissection by Gavyn Davies in his FT blog.

August could yet be a turbulent month in the markets. The Fed's statement on Tuesday, combined with some slightly weaker Chinese data, is causing some remarkable moves in bond markets. Had you proposed three years ago, that the two-year Treasury would yield less than 0.5%, you would have been dismissed as a lunatic. The 10-year yield is at 2.7% while the Geman 10-year bund is yielding less than 2.5%. Note also today's trade figures which show American exports declining in June; every country might have an export-led strategy but, by definition, not everyone can make it work.

When you have finished reading up on those issues, which financial books should you take to the beach? For those who still have an appetite for books on the credit crunch. Too Big to Fail by Andrew Ross Sorkin captures the main characters and the bewildering pace of events; Roger Lowenstein's The End of Wall Street is more analytical. Then one can run through the big themes this blog has tried to cover; the example of Japan is well analysed by The Holy Grail of Economics (Richard Koo); post-Bretton Woods bubbles by Richard Duncan in The Dollar Crisis, and the rise of emerging markets in Losing Control by Stephen King. And if you haven't read them yet, financial theory is dissected by Justin Fox in The Myth of the Rational Market, the 1930s by Liaquat Ahamed in Lords of Finance and sovereign debt crises in This Time is Different by Carmen Reinhart and Kenneth Rogoff.

As for me, after a disappointing rental experience in Falmouth on the Cape last year, I am off to the west coast to work my way from San Francisco to Seattle. But the 11-hour flight will at least give me a chance to study The Spirit Level, the book on inequality by Richard Wilson and Kate Pickett that I have been meaning to read for some time. Back at the end of the month.