Monday, January 11, 2010

The Reasons for America's Unemployment Woes

All the chatter about Chicago economics vs. Keynesian economics is diverting attention from the real cause of America's high unemployment rate--namely, that the modern-day path to the middle-class increasingly runs through the government, and government can only create so many jobs.

According to The Atlantic, while "health care, education and government payrolls grew over the last ten years, the rest of the jobs market shrank." The previous sentence is somewhat redundant. Most education jobs are public jobs and therefore government jobs (Yes, Virginia, your local high school teacher and UC Davis professor are government workers--taxpayers pay their salaries and benefits). Also, a substantial portion of healthcare dollars are spent by governments--taxpayers finance Medicare, Medi-Cal, and a host of other public programs (HHS, NIH, etc.). Do you see the problem yet?

If not, you need to understand that government cannot expand indefinitely--at some point, the people paying into the system (i.e., the private sector) will be unable to support the number of people deriving a direct salary from taxpayer dollars (i.e., government workers and beneficiaries). If government directly or indirectly created most of the jobs in the last decade, where is the private sector growth that will sustain these new jobs? And how has government managed to expand when the December 2009 national unemployment rate is double what it was back in December 2007?

Obviously, Americans and their elected representatives have failed to create a consistent strategy of dealing with outsourcing and the decline of manufacturing. In the past, the bloated and leveraged financial sector shielded Americans from the decline in private-sector middle-class jobs. Now that the finance sector has imploded, the failures of job creation have been laid bare for all to see. Where do we go from here?

It used to be that a union job was the ticket to the middle class; however, union membership has been declining, except in the government sector, where many government employees have demanded and received substantial benefits unavailable to the general public (e.g., pensions, lifetime medical care, etc.). It's not surprising that unions have been losing members--as manufacturing declined, so did union membership. These days, unions tend to focus on low-level service workers, like hotel staff and janitorial workers, to fill their membership rosters. Janitorial work, now increasingly linked to a union, has almost become a better ticket to the middle class than many other available non-union jobs. In San Francisco, for example, unionized janitors and door attendants receive pensions and medical benefits, which is wonderful, except that most non-unionized workers do not have similar benefits and are at-will. When did joining a union or the government become the best path for an aspiring middle-class worker? And how did non-union, private sector employment become so unstable?

First, Americans became intellectually lazy. They didn't vote, and they didn't read the actual text of any proposed bills. A "record-breaking" California voter turnout is only around 75% of all eligible voters, and at the federal level, a 50% turnout is typical. (See HERE for more federal voting stats--only Colorado, Minnesota, South Dakota, and Wyoming appear to have 70%+ voter turnout.) Basically, Americans relied on their government to look out for them, which, as we've seen, was a massive failure in judgment.

Second, lobbyists gained massive political influence, separating politicians from individual constituents. A lobbyist (or a union) can promise to deliver a substantial number of votes and/or dollars. A single voter, or even a small neighborhood association, cannot compete with a lobbyist and is therefore less influential. Accountability has become so poor, my own local representative, Pete Constant, lied to me. (See HERE for more on San Jose City Councilmember Pete Constant's vote against government transparency.) San Jose's mayor, Chuck Reed, also voted against government transparency. To add insult to injury, Reed ran for mayor on a government transparency/sunshine platform. By separating politicians from their constituents, lobbyists have made it easier for politicians to shirk their duties and promises.

Third, too many Americans still believe that a free lunch exists. Increasing government means we either have to print money--thereby digging ourselves and our children deeper in debt--or we have to cut services somewhere. As Peggy Noonan once wrote, the great baseline question in all political life is, "Whose ox is being gored?" In other words, "Who is getting screwed?" In California's last round of budget negotiations, the people who suffered were the ones who lacked political clout--the homeless, the poor, parks and recreation, the disabled, etc. In addition to cutting funding for the poor and disenfranchised, California also compounded problems by raising the sales tax, which disproportionately impacts the poor. There has to be a better way.

Fourth, Americans have failed to counter the political influence of public sector unions. As cities became larger, most Americans stopped getting to know their neighbors and failed to create community organizations that focused on holding their representatives accountable. In addition, the growing diversity within big cities, coupled with an ever-increasing workload, made it more difficult to create any real sense of community. Increasing social fragmentation meant that local citizens voiced their distress only in response to an emotional event, and even those victories appeared solely cosmetic. In San Jose, California, for example, residents protested over the name of a particular district. In Campbell, California, people protested about the allegedly offensive name of a doughnut shop.

Meanwhile, public employees--government lawyers, teachers, prison guards, police, etc.--have kept their eyes on more serious issues. Although the rights and wages of average private sector workers have been declining for decades, government workers have received generous pay raises and pensions. According to Steve Malanga, "A the Employee Benefit Research Institute estimated that the average public sector worker earns 46% more in total compensation than his counterpart in the private sector, largely because government employers spend 60% more per worker on benefits than counterparts in the private sector." In addition, according to the BLS, approximately 36% of government workers are represented by unions vs. 7% for non-government employees. Government workers were also nearly five times more likely to belong to a union than were private sector employees. As they say, membership has its benefits.

The list of special benefits goes on. Most government workers are not "at-will." Private sector workers, on the other hand, can be fired at any time, for any non-illegal reason. Most government workers are eligible for pensions; most private sector workers are not. I could continue, but the point is that public sector unions have no serious grass-roots counterweight and therefore no real check to their power. Much of Obama's stimulus package, for example, was used to maintain government jobs, not to create new jobs in the private sector. See HERE and HERE for more information. In short, while citizens have been busy protesting cosmetic issues, government workers--their numbers and political clout growing each year--have gotten their unions to give themselves benefits unavailable to the average worker.

Until we focus on creating middle class jobs that are not dependent on the government, we will only be putting band-aids on the open, festering wound that is our unemployment rate. Instead, we must ameliorate the sources of our economic problems, such as the unchecked influence of unionized government employees; declining wages and benefits in the private sector, especially among middle class workers; declining standards in the public education system, where education expenditures have increased even as high school diplomas and college degrees have become practically worthless; ballooning entitlement programs, especially Medicare; and a military budget so bloated and dishonest that Republican John McCain refused to vote for it, and Democrat Russ Feingold had this to say: "I strongly oppose this fiscally irresponsible and misguided bill...[It] will overburden our troops and will likely hurt, not help, our efforts to eliminate the global threat posed by al-Qaida and its affiliates. And it is stuffed with earmarks and wasteful spending, such as $2.5 billion for 10 C-17s that the Defense Department does not want, and $130 million for a Presidential helicopter program that has been canceled." (Before any misguided readers chide me for not adding immigration to the aforementioned list, see HERE.)

So now what? I'm not usually the type to complain without offering solutions, but in this case, I just don't see any silver bullets. I have posted some suggestions before. See HERE if interested. Below are more suggestions:

1. Kill your television, or at least maim it. Limit television viewing to a maximum of three hours per day, especially if you have children. Mass media has become almost worthless as a tool of edification and too much television tends to destroy a child's ability to think critically (read Neil Postman's Amusing Ourselves to Death for more on this topic). I've coached youth basketball for several years now, and it's always obvious which kids watch too much television. In every single instance, the children who are best able to follow directions and remain calm have parents who limit their television time.

2. Put the primary sponsoring legislator's name within each law or code section. For example, instead California Civil Code 1X, we would see California Civil Code 1X (J. Beall). Instead of 42 USC 26XX, we would see 42 U.S.C. 26XX (B. Boxer). The same rule should be followed with any amendments/changes to the law. As an attorney, I've read many inane and poorly-worded laws. Some laws are so convoluted, I'm certain a lobbyist typed up the darn thing while sitting on the toilet and emailed it to his favorite legislator minutes before a deadline.

Yet, there is no reason why legislators cannot pass clear, easy-to-understand laws. They just need better incentives to do so. To borrow an example from food labeling, when certain cities forced food manufacturers to disclose trans-fats, the disclosure created accountability, and companies reduced or eliminated trans-fats. Kraft (KFT), for example, responded by removing the offending fat from its Oreos. By the same token, if we clearly associate laws and amendments with a U.S. Senator, U.S. Representative, or state legislator, they will work harder to reduce any offending fat/pork or convoluted language.

3. There is no reason governments should be able to have undefined and underfunded retirement benefits. If a 401(k) is good enough for Joe the Engineer, Joe the Doctor, and Joe the Plumber, then it should be good enough for Joe the Government Worker. Giving government workers pension in an era of increasing public sector unionization is asking for fiscal trouble. Just ask Warren Buffett: "Whatever pension-cost surprises are in store for shareholders down the road, these jolts will be surpassed many times over by those experienced by taxpayers. Public pension promises are huge and, in many cases, funding is woefully inadequate." (from Berkshire's 2007 Annual Letter)

Furthermore, if the majority of private sector workers do not receive lifetime medical benefits before the age of 65, neither should the majority of government workers. We need a more equal playing field, where the fortunes of government employees are closely tied to the fortunes of regular taxpayers. If that means government employees' salaries have to rise to match private sector salaries, so be it. I have no problem with teachers and police officers making more money, as long as the costs are obvious and not hidden through accounting gimmicks.

If anyone has any great ideas, now is the time to publicize them, and now is the time to hold politicians accountable. Without more vigorous citizen participation, we'll be stuck with the government's solution, which Dave Barry aptly summarizes this way: in 2009, "Washington, rejecting 'business as usual,' finally stopped trying to solve every problem by throwing billions of taxpayer dollars at it and instead started trying to solve every problem by throwing trillions of taxpayer dollars at it." So it goes.

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