The Price of Government Employees

“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy." — Henry Hazlitt

One of the world's more pressing problems is sovereign debt. From Japan to Greece to America, the debts run up by governments are forcing painful choices.

But some think we needn't make hard choices. They think things can go on as before and that government can take on even more debt and start up even more public programs. Some are unwilling to make any sacrifices; they don't want to give up anything.

In America as in Europe, those most averse to change are government employees. The evidence for this has been seen recently in states trying to get control of their deficits. Wisconsin is the prime example, where protesting government employees, teachers, students, unionists, layabouts and a few anarchists occupied the state Capitol for weeks.

The big issue for state employees in Wisconsin was the loss of collective bargaining. Wisconsin needed to scale back collective bargaining so that it can control runaway benefit costs and so that bad employees can be fired without incurring huge legal bills. States wanting to cut their deficits must address spending; they can't just raise taxes, as residents and businesses will simply move on to other states.

To see what the states are up against, watch the video of filmmaker Michael Moore on March 5 in Madison, where he delivered a speech (transcript) to thousands of protesters, inflaming their passions and class resentments, telling them that America is "awash" in cash — "It's just that it's not in your hands."

The cost of personnel is one of the biggest expenses for a state (or for any enterprise). If a state can't control what it pays for employees, it's unlikely to get control of its budget. In his April 1 article "We've Become a Nation of Takers, Not Makers" for The Wall Street Journal, Stephen Moore relates that the annual cost of employees to state and local governments is $1 trillion, almost half their budgets. Here's more Moore:

“If you want to understand better why so many states — from New York to Wisconsin to California — are teetering on the brink of bankruptcy, consider this depressing statistic: Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.

The mushrooming number of government employees isn't the only problem, however; government employees have higher average compensation than private sector workers. Some contend that this is false. But a recent study from The Heritage Foundation by Jason Richwine and Andrew Biggs confirms it. And on April 4 in a related article at NRO, they write:

“The Economic Policy Institute (EPI) has issued a series of papers on state- and local-government employees — covering Wisconsin, Ohio, Michigan, New Jersey, and Minnesota, with others surely to come — all concluding that public employees earn less than similar private-sector workers, even after accounting for their more generous benefits. From the Washington Post’s Ezra Klein, to Paul Krugman of the New York Times, to AFL-CIO chief Richard Trumka, left-leaning commentators have used these studies as talking points.”

“But those talking points are wrong. As we showed in a recent paper, the EPI studies substantially underestimate public-sector compensation. (EPI disagreed, and we recently published a response.) Here’s what they leave out:

“Overall benefits: EPI uses Bureau of Labor Statistics data on benefits, but the BLS doesn’t publish benefit data by state; rather, it groups them together by region. The EPI study on Wisconsin workers, for instance, uses benefits data for the East North Central Census Region, which includes Illinois, Indiana, Michigan, Ohio, and Wisconsin. So if Wisconsin public employees receive more generous benefits than workers in nearby states, which was part of Governor Walker’s rationale for increasing employee contributions, we wouldn’t know it from EPI’s data.”

“Pensions: EPI’s approach underestimates public-employee pension benefits by around one-third, because it counts only what employers contribute today, not what employees will receive when they retire. State and local pensions invest far more aggressively than private plans, meaning that for a given level of guaranteed retirement benefits, state and local pensions put aside significantly less money today. Unlike a 401(k), of course, if the investments go sour, it’s the government — meaning, taxpayers — who bear the cost.”

“Simply put, if a public and a private employee received the exact same benefit, EPI’s approach would report that the public employee received significantly less.”

“Retiree health care: Four out of five public employees receive subsidized retiree health coverage, which allows them to retire in their 50s without having to buy insurance in the more expensive individual market. The California State Department of Personnel Administration states that “a career State employee secures an additional $493,851 worth of compensation during the first 20 years of retirement.” For a Milwaukee public-school teacher, retiree health coverage is equivalent to a career-long salary increase of over 20 percent. The EPI studies treat retiree health care as if it does not exist: They simply omit any reference to it.”

“Job security: It’s well known that public-sector jobs offer far greater job security than the private sector, with less than one-third the chance of being fired or laid off. Economists going back to Adam Smith have believed workers will trade off compensation against job security, such that more secure employment should pay less. For Wisconsin workers, we calculated that job security was worth about an extra 9 percent of pay. For California workers, job security is worth about an extra 15 percent of pay.”

“In short, the EPI studies undercount pension benefits, omit retiree health coverage, and ignore the value of job security. The errors can really add up — to 30 percent more compensation, in the case of California.”

Richwine and Biggs conclude; “Sadly, it's easier to put out a dozen poor studies than to get a single analysis right. But many fights on public-sector pay are yet to come in states around the country. Taxpayers and their advocates need to be ready to counter false claims about government pay.”

The dollar impact of employee costs on government deficits isn't the only issue — there's the issue of equity:

Borrowing money to pay for current government spending involves deferred taxation. And when elected officials make contracts with unions to pay for open-ended pensions and benefits, they are again kicking taxation off to the future. The problem is that one of the parties to these decisions — the party that will fulfill such government promises — was not represented: the future taxpayer. So deficit spending and open-ended benefits for government employees are a form of "taxation without representation."

In postponing taxation, politicians make a claim on the earnings of the future taxpayer for the purpose of handing out free goodies to the current taxpayer. Government contracts with government employees should only extend for the term of those officials approving such contracts, or two years. The next electorate may vote in officials who wouldn't sign such agreements. This is why "defined benefit" pensions have got to go. Such pensions are neither fair for the future taxpayer nor for the public employees who may lose their pensions. Better to own your pension than to rely on the willingness of future taxpayers to fulfill promises to which they didn't agree. Better to take the money and run.

If it is true that no Congress can bind a future Congress, then how can any Congress bind a future electorate or the future taxpayer? For that matter, how binding is any contract made for someone who didn't agree to it? Not even Congress should presume to sign agreements that others must fulfill — except for the voters that gave them power.

If current taxpayers are unwilling to pay the price for current government, then scale back current spending. But don't make future generations into tax slaves.

Change may be OK for the rest of America, but not for government employees. They don't appreciate the gravity of the sovereign debt crisis, or that bankruptcy looms, or that ruin is at hand. If money is short, that's your problem.

As the amount of government employees increase this will be a growing problem. Most reasonable steps to restrain public-sector employment costs are smothered by the unions. Study after study has shown that states and cities could shave 20% to 40% off the cost of many services — firefighting, public transportation, architectural and engineering services, garbage collection, administrative functions, even prison operations — through competitive contracting to private providers. But unions have blocked many of those efforts. Public employees maintain that they are underpaid relative to equally qualified private-sector workers, yet they are deathly afraid of competitive bidding for government services.

Unless we break the stranglehold of the public employees’ unions and the reverse the trend of the growing public sector the works and writings of Hayek, Bastiat, Hazlitt, Misses, and Friedman will have gone for nothing and we will all be serfs to the government bureaucracy.

So as The Judge so elegantly puts it on Freedom Watch: "Does the government work for us or do we work for the government?"