The NYT ran yet another piece highlighting the "crisis" in public pensions. This time the story is that pensions are in worse shape in New York City than they were in 1975 when the city faced bankruptcy. The way it gets this conclusion is by showing that pension payments and liabilities are larger, even after adjusting for inflation, than they were in the mid-1970s.

While this is true, it ignores the fact that New York's gross domestic product is close to three times as large today as it was in the mid-1970s. This means that the $5 billion contribution to pensions that the article shows was made in the mid-1970s (in 2017 dollars) was a considerably larger burden on the city's economy at the time than the projected payment of $10 billion in 2020. 

The article points out that the unfunded liability of the city's pensions, as conventionally measured, is $65 billion. While this sounds ominous, the discounted value of the city's GDP over the next three decades will be more than $20 trillion, making the liability equal to roughly 0.3 percent of projected GDP. That is far from trivial, but also not an unbearable burden if the city's economy remains healthy.

There is one very important point in this article. It notes a big expansion of pensions in 2000 at the peak of the stock bubble. Many other public pension funds also raised their commitments as a result of this bubble, with the expectation that markets would give their historic rates of return even though price-to-earnings ratios were at unprecedented highs.

Other governments stopped contributing to their pensions during this period with the idea that the market would contribute for them. This led to a situation where they suddenly were forced to ramp up contributions sharply when the bubble burst and threw the economy into recession in 2001. Some, like Chicago under Mayor Richard Daley, found this shift too difficult to manage and simply allowed the unfunded liability to grow.

In short, the stock bubble created serious problems for public pension funds. It also created problems for tens of millions of workers planning for retirement. This is worth noting because the conventional view among economists of the stock bubble is that it was just a lot of good fun with no major economic consequences. 

This is close to mind-boggling. Many of the same economists who see the growing and bursting of a huge bubble as no big deal think all hell would break loose if the inflation rate were 3.0 percent instead of the 2.0 percent rate currently targeted by the Fed. There may be a world where this inconsistency makes sense, but it's not the one we live in.