Sunday, February 28, 2010

Barro: Stimulus Hurts Economy

Robert Barro is a Harvard economics professor and Hoover Institution senior fellow. Barro concludes last year’s stimulus program will generate $600 billion of public spending at the cost of $900 billion in private expenditure; in sum, “a bad deal.”

Here’s how Barro arrived at his cost/benefit analysis of a package originally estimated at $787 billion but now priced at $862 billion:

1. We need an empirical model based on the history of past fiscal actions in the U.S. or other countries.

2. Burro uses long-term U.S. macroeconomic data to estimate the effects on GDP of increased government purchases (the spending multiplier) and increased taxes (the tax multiplier).

3. The spending results are based on wartime defense outlays, which show large positive values in the early stages of wars (extra spending of 26% of GDP in 1942) and large negative values in war aftermaths (27% of GDP in 1946).

4. Burro uses the defense-spending multiplier because such spending can be precisely estimated from the available data and it provides a reasonable gauge of nondefense government purchases.

5. He arrives at a stimulus spending multiplier of 0.4 within the same year and about 0.6 over two years, meaning that if the government spends $300 billion in 2009 and 2010, GDP will rise by $120 billion in 2009 and $180 billion in 2010.

6. For the tax multiplier, Burro uses a newly constructed measure of average marginal income-tax rates, estimating that an increase in marginal tax rates reduces GDP around minus 1.1. Hence, an increase in taxes by $300 billion lowers GDP the next year by about $330 billion.

7. Burro notes that Christina Romer, Obama’s Council of Economic Advisers chair, had with her husband done the research on tax multipliers, developing tax multipliers of even larger magnitude. Romer, however, hasn’t worked on spending multipliers, so shouldn’t assume spending values above one that that don’t conform to Burro’s work.

8. Burro estimates the 2009-10 fiscal-stimulus package, $300 billion of added government purchases in 2009 and 2010, goes back down to its 2008 level of zero in 2011, even though the added spending might be permanent. He also assumes taxes do not change in 2009-10, meaning the stimulus is deficit-financed. He then estimates GDP rises by $120 billion in 2009 and $180 billion in 2010—compared to a baseline of no stimulus package, while other parts of GDP fall by $180 billion in 2009 and $120 billion in 2010.

9. Such a deal looks good because we "buy" the added government outlays by paying 60 cents on the dollar in 2009 (losing 180 in private spending to get 300 in government spending) and 40 cents on the dollar in 2010.

10. But the added $600 billion of government spending leads to a correspondingly larger public debt we must pay for by raising taxes. Assuming a tax multiplier of -1.1, then applying with a one-year lag, Burro shows the higher taxes reduce GDP by $330 billion in each of 2012 and 2013.

11. That means the path of incremental government outlays over 2009-13 in billions of dollars is +300, +300, 0, 0, 0, which adds up to +600. The path for GDP is +120, +180, +60, -330, -330, adding up to -300.

12. The projected effect on other parts of GDP (consumer expenditure, private investment, net exports) is -180, -120, +60, -330, -330, which adds up to -900. So over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditures.

Friday, February 26, 2010

BiC, not BRIC (II)

I recently argued Russia didn’t belong in the BRIC group of developing country powers—Brazil, Russia, India, China. The group was really BiC, not BRIC, because Russia, the former Soviet Union, is a major, established, European power that doesn’t belong with the three developing non-European giants.

In an article entitled “Taking The 'R' Out Of BRIC,” Forbes has now published its own analysis of why Russia doesn’t belong with the others. Forbes, however, gives a different reason for excluding Russia. It says Russia is too weak to be a BRIC economy. Last year, Russia’s real GDP declined by -8% to -10%. That compares to Brazil's GDP decline of -5.5%, as China and India grew by 8.3% and 6.5%, respectively.

Russia’s problems go beyond 2009’s oil price drop. While 65% of Russia's export earnings come from oil and gas, the sector accounts for only 20% of Russia’s overall GDP. And other more oil-dependent economies, such as Kazakhstan and Saudi Arabia, suffered much smaller GDP declines last year. Ira Kalish, director of global economics at Deloitte Research, says Russia’s problem is “a combination of corruption, poor governance, government interference in the private sector and insufficient investment in the oil and gas sector."

Other countries are corrupt. All the BiCs, for example. Here’s what’s different in Russia, according to Wharton professor Philip Nichols:
In most countries, the mistrust generated by corruption leads to disengagement from government institutions and the creation of relationship-based networks. In Russia . . . these networks . . . are not as pervasive as in the other BRIC countries. . . people [instead] turn to the government for direction. And so it seems that corruption ... has the odd and indirect effect of further concentrating power in the government.

Forbes concludes the warning signs of more economic trouble for Russia are growing--for example, the increasing rate of non-performing loans on Russian banks' balance sheets. Russia needs strong leadership to stabilize its financial situation, to encourage foreign investment, and to attract management expertise. But Forbes views as “slim” the prospects of that happening soon.

Wednesday, February 24, 2010

Why We Worry about P.I.G.S.

Washington Post columnist Robert Samuelson writes about Greece's acute debt crisis. In 2009, its government debt was 113% of GDP. The budget deficit for 2009 was 12.7% of GDP. Two-thirds of Greek debt is owed to foreigners.

Greece is a euro country, and any Greek default would undermine market confidence in other euro countries' ability to service their debts, especially the other “P.I.G.S.”--Spain, Portugal and Ireland. Serial defaults would threaten the global economic recovery.

Samuelson shows how the euro contributed to the crisis. Greece borrowed at low interest rates, because nobody believed the euro bloc will allow one of its own to default. Of course if Greece does default, the guarantee will vanish and trigger a flight from many other countries' debt.

While the most discussed remedy to Greece’s debt crisis is to force the country to cut spending drastically, Desmond Lachman of the American Enterprise Institute argues that any forced austerity would be too punishing. Greece would need spending cuts and tax increases equal to 10% of GDP, which would generate a savage recession worsening existing unemployment, already at 10%. "No sane country is going to accept that," Lachman says.

According to Samuelson, the issue is far larger than Greece. It threatens almost every advanced welfare state—the United States, Britain, Germany, Italy, France, Japan, Belgium and others. All face some combination of huge budget deficits, high debts, aging populations and political paralysis. Current deficit spending may aid economic recovery, but its persistence truly threatens long-term prosperity.

Michael Barone notes most Americans are dismayed by Obama’s and congressional Democrats’ big government programs, along with the specter of federal budget deficits that will soon double the national debt as a percentage of GDP. Democrats’ problems mean Republicans should soon have a mandate to cut spending sharply. But Barone cautions spending cuts can be politically perilous. The Economist last week issued a similar warning.

Tuesday, February 23, 2010

The gospel according to Walter Russell Mead.

I’m increasingly drawn to whole paragraphs Mead rolls out, almost without effort, day after day. See if you agree with these Mead thoughts:

people, not experts:
the emerging Tea Party . . . movement’s . . . ruling passion is a belief in the ability of the ordinary citizen to make decisions for himself or herself without the guidance or ‘help’ of experts and professionals. No idea has deeper roots in American history and culture and by global standards Americans have historically distrusted doctors, lawyers, bankers, preachers and professors: everybody who presumes that their special insider knowledge gives them a special right to decide what’s best for the rest of us and historically no political force has been stronger than the determination of ordinary Americans to flatten the social and political hierarchy.

basic structure broken:
Today . . . our core institutions . . . cost more than we can pay but they don’t do what we need. We have colleges our people cannot afford — and that often leave graduates without a basic grounding . . . We have a health system that we cannot pay for and which fails to cover enough people. We have a public school system which has been failing too many of our children for far too long, costs unconscionably large amounts of money considering its poor performance — and vested interests block necessary reforms. Our federal, state and local governments are locked into an employment system and mode of organization that we cannot pay for — and that does not do the job. Our retirement system is a time bomb and all our political class can do is watch the fuse burn.

need a revolution:
The United States has rarely been in greater need of rapid transformation than we are now. The information revolution, the rapid development of the global economy, the shift of cultural and economic power from Europe toward Asia, the enormous wave of immigration that since the 1960’s has been remaking the body politic once again, the breakdown of the progressive or blue social model as industries and financial markets rise and fall with a velocity not seen [before]: these changes are taking place all around us, but our institutions and policies are very far from keeping up.

Monday, February 22, 2010

You Saw It Here Too

The Economist published a piece entitled, “A Study In Paralysis” keyed to James Fallows’ Atlantic article. It did so the day after my “Raising America,” an entry based on the same Fallows essay. The Economist seems inclined towards Fallows’ view that America is ungovernable at present, though it blames the American people who want “small government,” but “seem wedded to the expensive benefits of the big one they actually have, such as Social Security, health care for the elderly and a strong national defence.”

Wednesday, February 17, 2010

Raising America

The U.S. political system “sucks. . . a parliamentary system without majority rule.”

--John Podesta, ex-chief, Obama Transition Team

Democrats thought all they had to do was return to power, and the country would get better. After all, Democrats are the national elite, have the brains and wealth, dominate the media, government, unions, academia, and the non-profit world, and control the mass culture. Their strength at the top explains why one of the meritocracy’s own, Barack Obama, became leader of us all. Once Democrats took back the White House office suites “that Texas cowboy” usurped for eight hopeless years, America would begin working once again.

A year later, after one year of total Democratic control, things still aren’t working. Signs of real concern, even desperation, are appearing within Democratic ranks. James Fallows is the Democratic former Atlantic Washington editor and U.S. News editor who in an earlier life was the first insider to write that Jimmy Carter’s presidency was failing. Now Fallows takes on our current failure in a long (nearly 11,000 words) Atlantic cover article titled, “How America Can Rise Again." Everything about Fallows’ package says, “IMPORTANT! MUST READ!”

You don't have to read it. Fallows takes a long road to say it’s our political system, not its leader, that “sucks.” As Fallows puts it, “the American tragedy of the early 21st century: a vital and self-renewing culture that attracts the world’s talent, and a governing system that increasingly looks like a joke.” Fallows uses the word “demosclerosis” and says, “One thing I’ve never heard in my time overseas is ‘I wish we had a Senate like yours.’” He adds, “since it takes 60 votes in the Senate to break a filibuster on controversial legislation, 41 votes is in effect a blocking minority. States that together hold about 12% of the U.S. population can provide that many Senate votes.”

Actually, the GOP’s “blocking minority” of 41 includes senators from half the nation's 10 largest states: Texas (#2 in population), Florida (#4), Ohio (#7), Georgia (#9), and North Carolina (#10). An inconvenient truth, as is recalling that when Republicans wanted to bypass the filibuster in 2005-6 to confirm Bush’s Supreme Court nominees Democrats were blocking, Democrats branded any such move “the nuclear option”—something never to be done. Now that filibusters have instead frustrated Democrats seeking universal health care and cap-and-trade climate control, Fallows thinks it’s time to overcome “demosclerosis” with a constitutional fix of the Senate.

Elsewhere in the article, Fallows raises additional concerns for anyone who thinks compromise is necessary to democracy. Quoting another source, he calls cities ineffective because they have “different sections with different constituencies: labor, the city council, the mayor, interest groups, and contractors. Every [constituency] a brake, so lots of people can stop the [city] anytime.” Isn't that how democracy is supposed to work--it forces dialog between differing interests? Winston Churchill said, “democracy is the worst form of government except all the others that have been tried.” But Fallows leaves Churchill unmentioned, instead quoting John Adams who wrote, “Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There never was a democracy yet that did not commit suicide.”

Fallows’ solution to our current political situation is, and I’m not joking, to wish for “an enlightened military coup, or some other deus ex machina by the right kind of tyrants.” Fallows doesn’t really want generals to rule America (he calls David Petraeus unworthy of comparison with the “right men on horseback” like George Washington or Dwight Eisenhower—neglecting to mention both were elected twice so didn’t need coups). Fallows favors “plutocrats” instead, plutocrats like Warren Buffett, Bill Gates (!), or Ted Turner (!!!).

You can’t make this stuff up. To be fair, Fallows is realistic enough to write he won’t get his Ted Turner dictatorship, and we’ll just have to “muddle through.” But given the intensity of his distress with democracy, one would think his agenda presents special challenges.

It turns out Fallows' agenda is an orthodox, in Walter Russell Mead's words, feed the “blue beast" ("blue" as in "blue state," Democratic state) agenda. As Mead explains, "the Democratic wing of the Democratic party" looks back with nostalgia to the 50’s-early 60's “blue model," when big business, big labor, and big government (largely run by Democrats) worked together to build highways, build great universities, pour money into science and academia through the Pentagon research agency, and create the intellectual powerhouses that drew top immigrants to America. To Fallows and other lovers of the "blue model", no future looks as good as the America of their baby boomer childhood.

"Blue model" America, in Fallows' eyes, has from the Reagan era onward run into Republicans deliberately “giving governmental efforts a bad name.” Fallows calls Republicans “nihilistic, equating public anger with the sentiment that ‘their’ America has been taken away,” and says Republicans define success as stopping Obama. For the country, and for Fallows, Republican success means "dysfunction.”

In quite a reach, Fallows (who recently lived in China for three years) incredibly compares the current Republican-influenced U.S. political system to the “feckless” rule of rage-filled and frustrated pre-Communist China. Fallows would instead recommend “today’s Communist leadership. . . widely seen as pulling the country nearer to its full potential rather than pushing it away. . . we could use more anger about the fact that the gap between our potential and our reality is opening up, not closing.”

Does it really come down to this? To save America from Republican-influenced efforts to stop "feeding the blue beast," we need a Chinese Communist dictatorship? What's particularly weird is that when Fallows wrote the article, Democrats controlled the White House, the House, and 60 Senate votes, and actually could ignore all Republican objections.

Given Fallows’ long, awkward, and in the end, failed defense of the “blue model,” perhaps it’s time he and his fellow intellectuals considered, along with the rest of us, how best to tame rather than keep feeding the government “blue beast."

Sunday, February 14, 2010

The Blue Beast

Walter Russell Mead is onto something in his description of the “blue model,” which has become the “blue beast” (“blue” as in “blue state,” i.e., Democratic).

The “blue model” is the America Democrats pine for, the post-war (1946-1965) society of growing government, big business, and big unions, oligopolies and monopolies providing lifetime employment, competing and cooperating with each other according to understood rules, providing security to the great American middle class. Democrats ran the show, the country grew economically, expanded government, and moved toward “more and better services each year,” with college “expected to become more and more affordable.”

Now, according to Mead, “The breakdown of the blue model” is both the core American society problem and key to the Democratic party’s troubles:
Blue states really are blue; the “progressive imagination” remains staunchly blue, and blue model interest groups like public school teachers, government employees, the remnants of the private union movement and the much healthier labor movement among public employees shape and mostly fund what Howard Dean famously called “the Democratic wing of the Democratic Party.” Most Americans. . .like the blue model [and] the security it once provided, but they understand that the great task of our times isn’t to save the blue model but to move on.

The problem, as Mead sees it, is with Democrats. They believe the exact opposite: that the blue model is the only way to go:
Democratic policy is increasingly limited to one goal: feeding the blue beast. The . . . service providing institutions of our society — schools, universities, the health system, and above all government at municipal, state and federal levels — are built blue and think blue. The . . . Democratic Party thinks its job is to make [public services] bigger and keep them blue. Bringing the long green to Big Blue: that’s what it’s all about.

Mead argues we must instead check the “blue beast”:
We don’t have the money to keep throwing more and more of it into dysfunctional public schools, overpriced state colleges and government at all levels. In the competitive world we all live in now, our society has no choice but to learn how to do these things much more cheaply. Otherwise the blue sector will drag the whole country down with it.
This from a Democrat!

Friday, February 12, 2010

You Saw It Here, First (unless you read the Washington Post)

Peggy Noonan builds her latest column around the exact, same exchange between Obama and Sen. Blanche Lincoln (D-Ark.) featured in this blog last week. Makes me want to believe myself.

The threat’s not serious. Seriously.

I have long asserted that Democrats are rational in their opposition to war, because spending money at home instead better supports their constituencies. Only rarely, however, are Democrats willing to argue against even having a “war on terror.”

Yet during his recent appearance on the #1 cable news show “The O’Reilly Factor," Jon Stewart in fact made the most plain-spoken case I’ve seen for easing up on the war on terror. Stewart confirmed my suspicion that Democrats may not share the fear of terrorists the rest of us have.

Stewart’s views are important. Young people, especially, hang on his words.

For your consideration, the exchange that brought out Stewart’s relaxed views about terrorists:

O'REILLY: Now Iran's building, you know, nuclear weapons over there. And if they get them, they might give them to some guy named Ahmed, who might take then to them Cleveland and blow everything up. So what are we going to do with that?

STEWART: Well, doesn't Pakistan have a nuclear weapon?

O'REILLY: Yes, they do.

STEWART: Well, couldn't they give it to somebody?

O'REILLY: I don't know. I don't think…

STEWART: Doesn't Russia have nuclear weapons?

O'REILLY: Russia does.

STEWART: Couldn't they give it to somebody?

O'REILLY: They could.

STEWART: The problem isn't the country that gets them. The problem seems to be the weapon. I think the strategy of what we've done and, again, thank you guys for ratcheting up the fear on this. . .

O'REILLY: I believe the — Ahmadinejad, you know, he wants to drive you and all the other Jewish people into the sea.

STEWART: So what — so I cannot control that. I cannot control what those things are.

O'REILLY: So what we can control is we can stop them from having a nuclear weapon.

STEWART: No. Here's the thing. You might be able to stop them from having a nuclear weapon.

O'REILLY: Right.

STEWART: But as technology grows and becomes more accessible to people, this is going to become an increasingly difficult problem. And here's what we can't do. Here's what we can't do.

O'REILLY: All right, what can't we do?

STEWART: Our strategy for battling terrorism can't be that you overthrow governments and then make the United States military commit 150,000 troops to those lands until they can somehow stabilize the governments…

O'REILLY: I agree with that.

STEWART: …long enough so that you can prevent 10 people from plotting destruction in a basement. Terrorism…

O'REILLY: It's bankrupting the country. . . But you don't seem too concerned about Iran. You just don't seem to be that concerned about it?

STEWART: Because Iran, like most of these other countries, has a self-preservationist streak. And I am a firm believer that that self-preservationist streak keeps them — they're not — they understand, look, there is no theory of mutual destruction with Iran. Let's say they get one off. It would be tragic.

O'REILLY: Well, how would we trace it? . . . They can't get a guy with underwear, and they can't get the answers.

STEWART: Let's look at the geniuses we're up against.

O'REILLY: All right, I got…

STEWART: Richard Reid was the airplane bomber.


STEWART: He tried to take that explosive and put it in his shoes.

O'REILLY: Right.

STEWART: It took them eight years, and the plan they came up with in eight years is why don't we try sticking it under that guy's genitals? That's what they did in eight years. They moved from the guy's shoes up to his underwear. . . That's who we're up against.

Friday, February 05, 2010

You Saw It Here, First (Barely)

Rich Lowrey, editor of National Review, has a piece on how public employee unions are bankrupting the country, and he also draws heavily on California examples.

Obama: “My Way or . . . My Way”

The Washington Post’s Charles Lane has focused on a single exchange during President Obama’s meeting with senate Democrats February 3. Lane writes that Sen. Blanche Lincoln (D-Ark), arguing that the Democrats’ ambitious legislative agenda was sowing job-destroying “uncertainty” in the business community, asked the president, “Are we willing as Democrats to push back on our own party?”

Obama’s revealing reply,
If the price of certainty is essentially for us to adopt the exact same proposals that were in place for eight years leading up to the biggest economic crisis since the Great Depression -- we don’t tinker with health care, let the insurance companies do what they want, we don’t put in place any insurance reforms, we don’t mess with the banks, let them keep on doing what they’re doing now because we don’t want to stir up Wall Street -- the result is going to be the same. I don’t know why we would expect a different outcome pursuing the exact same policy that got us into this fix in the first place. If our response [is] “we don’t want to stir things up here, we’re just going to do the same thing that was being done before,” then I don’t know what differentiates us from the other guys. And I don’t know why people would say, boy, we really want to make sure that those Democrats are in Washington fighting for us.

OK. In other words, we’re Democrats, we don’t care about polls, we don’t care what happened in Virginia, New Jersey, and Massachusetts, we just keep doing what we did all last year, and the people will (eventually) love us for it. Folks have two choices, and only two choices: Bush or Obama, and they chose Obama.

Thursday, February 04, 2010

Coming Chinese Hegemony

From George Will:

[Robert Fogel, a Nobel Prize-winning economist,] expects that by 2040 China's GDP will be $123 trillion, or three times the entire world's economic output in 2000. He says China's per capita income will be more than double what is forecast for the European Union. China's 40% share of global GDP will be almost triple that of the United States’ 14%. Fogel finds many reasons for this, including the increased productivity of the 700 million (55%) rural Chinese. But he especially stresses "the enormous investment China is making in education."

Wednesday, February 03, 2010

Understanding Leviathan III: California Disease Spreads

"The problem with socialism is that eventually you run out of other people's money.”

--Attributed to Margaret Thatcher (1976)

In America, we don’t use Thatcher’s word, “socialism.” Democrats don’t openly preach socialism. But Democrats are the party of government, believe government knows best, are moving government in a democratic-socialist, Western European direction, and are systematically forcing the higher taxes that will pay for their government Leviathan.

This week, Obama announced the largest federal budget—measured as a share of Gross Domestic Product (GDP)—since Word War II: 25.4%. Even if Obama gets all the tax increases he seeks, the deficit will still represent a staggering 34% of the total $3.8 trillion budget. As the Wall Street Journal editorializes, it seems the Obama “spending boom”
is deliberate. It is an effort to put in place programs and spending commitments that will require vast new tax increases and give the political class a claim on far more private American wealth.

Obama’s new budget, combined with government expenditures at state and local level, means 43% of our GDP will go to government. Such a percentage moves us toward France (61% of GDP in government’s hands), Sweden (58%), Denmark, Belgium, and Norway (56%), the UK (50%), Germany (49%), and Canada (47%). It also moves us away from China (22%), Russia (21%), and India (20%)—all ex-socialist countries, by the way—as well as South Korea (29%), Taiwan (21%), Brazil and Hong Kong (17%), and Singapore (16%).

Which economies grow faster, the ones owned by the government, or the ones in the hands of private entrepreneurs? In 2008, France, Sweden, and Canada GDP grew 0%, Germany and the UK grew 1%, while Denmark shrank 1%. The EU as a whole grew 1%, as did the U.S., fitting right in with the well-cared-for welfare states Democrats admire.

Meanwhile where governments control less wealth--in countries outside the NATO area--the story was different. True, Taiwan grew 0% and Singapore 1% in 2008. South Korea and Hong Kong grew 2%, less than the world average of 3%. But Brazil grew 5%, Russia 6%, India 7%, and China 10%. Growth is a high priority in developing countries, which seem to understand that government Leviathans cut off growth, because they “run out of other people’s money.” Could the evidence be clearer?

Yet America continues following the California path to Big Government. As Steven Greenhut writes, there was a time when government work offered lower salaries than private sector jobs, but more security and better benefits. These days, however, government workers fare better than private-sector workers in almost every area—pay, benefits, time off, and job security. According to data from the U.S. Bureau of Labor Statistics, “the average federal worker made $59,864 in 2005, compared with the average salary of $40,505 in the private sector.” Across comparable jobs, the federal government paid higher salaries than the private sector three times out of four.

And now the Obama administration is on a hiring binge, with executive branch employment slated to grow by 2% in 2010 and with the average federal salary going from $72,800 in 2008 to $75,419 in 2010. Beyond that, public pensions have ballooned during the last decade to where more than 14 million public servants and 6 million retirees are owed $2.37 trillion by more than 2,000 different states, cities and agencies, with state and local pension payouts up 50% in five years.

As the U.S. population rose 9% from 1994 to 2004, state and local government employment grew by 13%, public safety workers by 21%, teachers by 22%, judicial and legal employees increased by 28%. Since 1946, state and local government employment has increased from 3.3 million to 19.8 million—a 492% increase as the country’s population increased by 115%. The United States had 2.3 state and local government employees per 100 citizens in 1946 and has 6.5 state and local government employees per 100 citizens now. In 1947, 78% of the national income went to the private sector, 22% to government. Now it’s 57% to 43%. Trend lines are ominous.

Bigger government means more government employees. Those employees are a permanent lobby for government growth. The nation may have reached critical mass; the number of government employees so high it’s politically impossible to roll back the bureaucracy, rein in the costs, and restore lost freedoms.

People who are supposed to serve the public have become a privileged elite that exploits political power for financial gain and special perks. Because of its political power, this interest group has rigged the game so there are few meaningful checks on its demands. Government employees, even when they are incompetent or abusive, can be fired only for the most grievous offenses after a long process.

It’s a two-tier system in which the rulers are making steady gains at the expense of the ruled. The predictable results: higher taxes, poorer public services, unsustainable levels of debt, and massive roadblocks to reforming even the worst performing agencies and school systems.

Tuesday, February 02, 2010

Understanding Leviathan II: California Our Future?

Public spending—the cost of government—is sending California down the toilet. Can we expect the same elsewhere in America?

Meg Whitman is running for governor of California (you’ll have to ask her “Why?!”). To make her point that California wastes taxpayer money on a massive scale, she writes about welfare:
In 1996, California had 21% of the nation’s welfare cases. Today, 32% of all welfare cases in the United States are in California, even though we only represent 12% of the total U.S. population. . . California is nearly twice as big as New York state, but we have five times as many welfare cases.

California lags much of the nation when it comes to moving people from welfare to work. . . Only 22% of welfare recipients in California who are required to meet federal work minimums are working. . .[California] is one of only nine [states failing to enforce fully] the federal government’s five-year lifetime limit on cash welfare assistance. . . Michigan, which enacted sweeping welfare reform in the 90’s,. . .has half the [share] of welfare dependency as California, despite a higher unemployment rate.

These flaws [plus] a monthly cash check that is almost 70% higher than the national average [keep California from] helping more welfare recipients leave welfare for . . . independence and dignity.

Steven Greenhut provides additional information on how California’s public sector is ruining his state. According to Greenhut, huge pension increases have eaten away at public finances most spectacularly in California, where a bipartisan bill that passed virtually without debate unleashed the odious “3% at 50” retirement plan in 1999. Under this plan, at age 50 many categories of public employees are eligible for 3% of their final year’s pay multiplied by the number of years they’ve worked. So if a police officer starts working at age 20, retirement at 50 comes with 90% of the officer’s final salary until death; then the spouse receives that money for the rest of the spouse’s life.

Even during this economic crisis, “3% at 50” has only become more entrenched. California’s unfunded pension and health care liabilities for state workers top $100 billion, and the annual pension contribution has shot up from $320 million to $7.3 billion in less than a decade.

That money will come from taxpayers. The average private-sector worker, who enjoys a lower salary and far lower retirement benefits than California government workers, will have to work longer, retire later, and pay more so that her public-employee neighbors can enjoy the lifestyle to which they have become accustomed.

California taxpayers will also have to deal with worsening public services, since there will be less money to pay for things that might actually benefit the public. Last July, Orange County Sheriff Sandra Hutchens proposed budget cuts over $20 million to make up for falling tax revenue. She slashed 40% of her department’s command staff, cut 30 positions, and made changes that affected about 200 positions through reassignments, demotions, new overtime rules, and other maneuvers. “These are services that we believe are quite important to maintaining public safety, that we’re just not going to be able to continue,” said department spokesman John MacDonald.

But Sheriff Hutchens failed to identify the tight budget’s main cause: In 2001 the Orange County Board of Supervisors had passed a retroactive pension increase for sheriff’s deputies, nearly doubling pension costs from 2000 to 2009’s pension contribution of $95 million—20% of the sheriff’s budget.

So when Hutchens decries an economic downturn costing her department $20 million, she’s silent about a pension increase costing her department more than twice that amount. Had the pension increase not passed, her department could have kept officers on the streets and avoided cuts Hutchens claims threaten public safety.

Union political power is the principal reason California is going bankrupt. Public-sector unions didn’t become legal in California until 1968. Yet now California is spearheading the re-unionization of the country. In a 2003 study of union membership rates, sociologists Ruth Milkman and Daisy Rooks wrote, “California stands out as an exception to the general pattern of the past decade. Against all odds, union density has inched upward in the nation’s most populous state, from 16.1% of all wage and salary workers in 1998 to 17.8% in 2002.”

Milkman and Rooks found that union growth in California’s public sector has far outpaced such growth in other states, for an obvious reason: “Organized labor has more political influence in California than in most other states.” More recent studies found that for the first time in five decades, U.S. unionization rates actually increased in 2008. The reason: increases in California, mainly in the government sector.

Understanding Leviathan I: California's “Shield” Law

Steven Greenhut, director of California’s Pacific Research Institute Journalism Center, offers unusual insight into how government growth harms the rest of us. California government workers and their families, drivers of nearly 1 million of 22 million registered vehicles statewide, have been protected by a “shield” in the state records system between their license plate numbers and their home addresses. It turns out there are great practical benefits attached to a secret "shield."

The “shield” program started in 1978 to hide the personal addresses of police who argued that bad guys could otherwise call the DMV to get addresses, and use them to harm officers or their family members. Then the “shield” program expanded from one set of government workers to another--parole officers, retired parking enforcers, DMV desk clerks, county supervisors, social workers, and other categories of employees from 1,800 state agencies.

Meanwhile, the "shield’s" justification become obsolete: the DMV long ago stopped giving out personal information about any driver. What was left was a perk:
Vehicles with protected license plates can run through dozens of intersections controlled by red light cameras with impunity. Parking citations issued to vehicles with protected plates are often dismissed because the process necessary to pierce the shield is too cumbersome. Some patrol officers let drivers with protected plates off with a warning because the plates signal that drivers are “one of their own” or related to someone who is.

Greenhut adds, “it’s clear that government workers have a rank above the rest of us.” As he notes, if 1 in every 22 California drivers had a license to drive recklessly, people would demand the police protect Californians from the potential carnage. But until a newspaper series exposed the practice, government remained mum. The reason, of course, is that the scofflaws are law enforcement officials and legislators.