Everyone seems to know the current path of federal fiscal policy is a deathtrap over the long term. What's peculiar is the relative inattention to the balance sheets of state and local governments.

Hidden behind accounting fictions, the politically unspeakable reality is that public employee pension systems are under-funded by more than $2 trillion. Add more than $1 trillion in unfunded health-care benefits for retired public employees, and state governments face protracted structural deficits ranging from challenging to insurmountable.

Unfunded promises are the equivalent of government debt. The burden of promises made by state governments to their employees -- effectively an invisible wealth transfer from future taxpayers to current and prospective public-sector employees -- amounts to about one quarter of U.S. gross domestic product. The strength and durability of the current economic recovery are unknowable; that state and local governments, which employ one in nine workers, will be a drag on that recovery is certain.

Ultimately, mathematically unsustainable trends must reverse. As with New York City in the late 1970s, eventually the federal government may get involved in redefining the services state and local governments provide, the benefits paid to public employees and the burdens on taxpayers. States cannot kick the can down the road ad infinitum.

David Fuller's view The subscriber who forwarded this also said that it was "a timeless piece on the psychology behind the investment decisions at public employee pension funds." I agree.

I would also make another point. Unfunded public sector pension liabilities are a huge and growing problem for all heavily indebted countries, from Greece to many other European states, the UK and USA. These countries have three ways out of this crisis: 1) grow their way out of trouble; 2) slash benefits; 3) inflate.

Path 1) is preferable but difficult and takes a long time under the best conditions. 2) is probably sensible but also divisive. 3) is too often inevitable.