Friday, February 18, 2011

Wisconsin Showdown: Private Sector v. Gov Unions

People supporting Wisconsin's government workers don't seem to understand they are actually supporting fiscal suicide.

Part 1: Wisconsin is not proposing anything unusual. Almost half the states have already outlawed government unions (i.e., right-to-work states). In all right-to-work states, a family can buy a 4/2 house in a safe neighborhood for less than $180K (at least as of 2011).

While correlation does not equal causation, higher government employment costs generally require higher taxes. Higher taxes tend to favor government workers, not private sector workers. In an ideal system, the private sector does not work to provide an ever-increasing share of resources to government workers; instead, the private sector maximizes the income of non-government workers while minimizing inflation and government costs that do not benefit the public at large.

It appears, however, that government unions tend to do too well in compensation negotiations, especially with Democratic politicians, which means that wherever they exist, they have over-reached. Voters don't usually notice the government's generous compensation schemes until there's a recession, which suddenly exposes the actual costs of government. Indeed, recent data shows that public sector unions lack real checks and balances and tend to work against the interests of the public at large. (See Economist articles cited at the end of this post, showing government workers have negotiated trillions of dollars of benefits for themselves--yes, I said "trillions," with a "t.")

Generally, the more powerful government unions become, the easier it is for them to use non-unionized workers (the general public) to benefit unionized government workers. (Imagine a government-sponsored snowball gaining more and more traction, sucking up compliant politicians along the way.) During a recession, when revenues decline, states that have allowed government unions tend to drive out all but very high earners and union members. This is because politically-connected and politically-protected employees (government unions) and people with unique skills usually have high job security.

Thus, as long as recessions and layoffs exist, if someone wants to own a home in a state with government unions, s/he must either join a union; have sources of income unrelated to the job market (inheritance, a trust); or make a very high income in the private sector. Since not everyone can make a very high income in the private sector, government unions appear to drive out non-unionized middle class and poor residents. Furthermore, as we will see in the second part of this post, not only do government unions tend to work against the interests of the public at large, they drive out jobs and increase unemployment by imposing higher costs on corporations and businesses.

Do you support home ownership for the poor and middle class? Then you ought to figure out whose side you're on--the government unions, who drive up taxes and costs for everyone else, or the middle class and poor, who deserve a shot at buying a home even if they're not in a union.


Part 2: Let's assume we have two states, X and Y. In state X, gov workers must negotiate benefits that are reasonable, because the absence of gov unions forces them to accept reasonable, predictable compensation. In Y, gov unions exist, and they demand and receive millions more annually than in state X. During a recession, State X can more easily cut costs than State Y, which must cut services and raise taxes to pay gov unions. State X's financial flexibility is directly related with its refusal to allow collective bargaining for its government workers.

You are someone who wants to buy a home, an entrepreneur, or a business that is considering expansion. You realize that State X can offer you lower taxes and costs and therefore a better environment to grow your employees and business b/c it has fewer long term fiscal obligations and more financial flexibility.

You also realize that State Y has no choice but to come after businesses and/or potential customers (i.e., taxpayers) to pay off gov unions during a recession. In other words, state Y must raise taxes if its gov unions refuse to agree to substantial pay and benefit cuts. State X, on the other hand, can ask the highest earning members of its government workers to accept lower benefits and salaries, thereby avoiding higher taxes, which reduces the burden on the private sector. State X's ability to demand that its highest earners in the gov workforce accept pay cuts also allows the state to avoid laying off its newer or lower-earning members. Avoiding layoffs allows State X to maintain its services, whereas State Y must cut services or create disincentives for private sector expansion.

Thus, we can see that gov unions are capable of driving investment and private sector jobs to states that lack gov unions, creating a death spiral for states with gov unions (absent a quick economic recovery). In short, if gov unions negotiate unreasonable compensation or refuse to reduce current and long-term compensation during a recession, the state's private sector has an incentive to disfavor expansion in the state.

Bonus: more here, from The Economist ("Three Trillion Dollar Hole," October 14, 2010) and also here, from The Economist ("A Gold-Plated Burden," October 14, 2010):

CHUCK REED is the Democratic mayor of San Jose, California. You might expect him to be an ally of public-sector workers, a powerful lobby in the Golden State. But last month, at a hearing on pension reform held by the Little Hoover Commission, which monitors the state’s government, Mr Reed lamented his crippling public-pensions bill. “City payments for retirement benefits have tripled over the last ten years even though our workforce has declined dramatically, and we have billions of dollars in unfunded liabilities that the taxpayers must pay,” he said. Mr Reed estimated that the average cost to his city of employing a police officer or firefighter was $180,000 a year. Not only can such workers retire at 50, but some enjoy annual pension payments greater than their salaries. They are also entitled to cost-of-living increases of 3% a year, health and dental insurance for life and lump-sum payments for unused sick leave that could reach hundreds of thousands of dollars.

More here, on one particular difference between the private sector and government sector (data from 2008-2009).

22 states refuse to allow collective bargaining:

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