Veronique de Rugy comments on pension accounting at NRO.
That is the question raised by a recent headline from Fairfax County:
Now I don’t know whether teachers in Fairfax are underpaid or overpaid. And there may very well be good reason to boost their salaries (or at least to boost those of the top performers). But it makes little sense to argue that a salary boost right now would serve the original purpose of the stimulus (which was intended to stimulate the economy, for those who are still paying attention).
Let’s try to look at this the way a Keynesian would. As Brian Caplan explained a few months back, an important element in the Keynesian model is the notion of wage rigidity. Here, according to Keynesians, is how it works:
- Trouble begins when aggregate demand falls (usually because animal spirits have caused a sharp decrease in investment).
- As this happens, firms have less revenue with which to pay salaries. They might be able to maintain employment, however, if they could convince their employees to take a real wage cut.
- The problem, however, is that nominal wages are “sticky.” Employees do not want to accept lower wages and even if they did, employers would rather fire some people than lower everyone’s wage and have a disgruntled workforce.
The Keynesian solution to this dilemma is to somehow boost aggregate demand to get people spending again. As Brian has more-recently pointed out, an alternative solution that is completely consistent with the Keynesian diagnosis of the problem would be to make sure that all prices—including wages—are as fluid as possible. If we could reduce nominal wage stickiness and get people to accept lower wages during a recession, then we could lower the unemployment rate.
Somehow in practice, however, Keynesian policy usually ends up increasing nominal wage stickiness and the Fairfax teacher story is a case in point.
Addendum: My colleague, Veronique de Rugy, weighs in at NRO, noting that the Administration changed the rules in February to permit stimulus funds to be used for such a purpose.
Veronique de Rugy has a great post at NRO about the potential for a muni debt crisis in the near term. The basic problem: state and local governments are facing a new budgetary reality. Benefits to public employees and Medicaid obligations are growing, while revenues are only starting to show signs of recovery. Is there a tradeoff imminent for governments between paying bondholders, pensioners, or for current services?
Meredith Whitney joined Warren Buffett among those warning of widespread defaults in the $2.8 trillion muni debt market necessitating a federal bailout. However other experts disagree, arguing that taxpayers, municipal workers, and service beneficiaries will feel the coming cuts to local and state governments, thus cushioning debt holders.
Much also depends on the extent to which state and local governments have an accurate picture of their true financial condition. The past few years have revealed sometimes an extreme disconnect between fiscal reality and official accounting, something I would argue the stimulus helped to augment.
Last weekend, President Obama pleaded to the Senate to extend portions of the stimulus bill. As my colleague Veronique DeRugy wrote at NRO, he relied on a tactic known as the “Washington Monument Syndrome”: Threatening to shut-down the most-valued aspects of government first in response to a budget cut. The syndrome gets its name from the Department of the Interior, which has threatened to shut down the beloved (and inexpensive) Washington Monument if its belt is tightened.
I recently learned that this tactic is also sometimes known, more colorfully, as the “shoot the cocker spaniel” ploy.
The idea runs counter to basic budgeting intuition. In economics 101, we teach our students that demand curves slope downward and supply curves slope upward. This is just another way of saying that the last increment of any item you spend money on should be the item with the lowest benefit and the highest cost. So if you cut back, you should cut those low-benefit-high-cost items first.
It also runs counter to the type of budgeting that families and businesses do every day. When a firm’s revenues are down, the least-productive and most-expensive units are the first to go. And when a family’s budget gets tight, they don’t shoot the cocker-spaniel. Instead, they skip a night out.
The Grace Commission famously identified thousands of wasteful spending items at the Federal level and Citizens Against Government Waste continues to point out areas where budgets can be trimmed. Various state think tanks, in conjunction with CAGW, have done the same in a series of “Pig Books.”
The AP is now reporting that the Senate has rejected the President’s pleas. Perhaps the states will crack open the pig books and find something to kill other than the cocker spaniel.