Tag Archives: wall street journal

Tim Pawlenty on Public-Sector Unions

Minnesota’s Governor has an op-ed in today’s Wall Street Journal, arguing that the growth of public-sector unions presents a major problem for any small-government reformers.

Federal employees receive an average of $123,049 annually in pay and benefits, twice the average of the private sector. And across the country, at every level of government, the pattern is the same: Unionized public employees are making more money, receiving more generous benefits, and enjoying greater job security than the working families forced to pay for it with ever-higher taxes, deficits and debt.

Governor Pawlenty notes three principals he’d like reformers to consider. First, normalize pay between the private and public sectors.

Second, get the numbers right. Government should start using the same established accounting standards that private businesses are required to use, so we can accurately assess unfunded liabilities.

Third, we need to end defined-benefit retirement plans for government employees. Defined-benefit systems have created a financial albatross for taxpayers. The private sector dropped them years ago in favor of the clarity and predictability of defined-contribution models such as 401(k) plans. This change alone can save taxpayers trillions of dollars.

Our own Eileen Norcross champions both these policies. Her recent paper, The Crisis in Public Sector Pension Plans, co-authored with AEI’s Andrew Biggs, uses New Jersey’s public-sector unions as a case study for the growing government work-force. They also discuss the moral hazard inherent in defined benefit plans:

From the perspective of workers, defined benefit pensions in the public sector are risk-free; they are guaranteed benefits by the state, which has the power to tax. This means, of course, that from the perspective of the taxpayer, the liability is a near-certainty. The discount rate chosen to value future liabilities in the plan, therefore, should reflect the low-risk character of the benefits promised to workers.

From the government’s perspective, it is appealing to use a higher discount rate to estimate plan liabilities because it produces a lower annual contribution. By contrast, a low discount rate will result in a higher annual contribution required by the employer (in this case, the government) to fund pension obligations.

Eileen and Andrew were also part of a Mercatus panel discussion with Utah State Senator Dan Liljenquist, Scott Pattison of the National Association of State Budget Officers and Jim Musser of Mercatus. Today she also released another paper, Getting an Accurate Picture of State Pension Liabilities.

Last year I addressed the incentive for governments to gamble with public employees’ retirement savings in an op-ed. Giving public employees control of their own savings is essential for any kind of fair relationship between governments, their employees, and the taxpayers. An accurate accounting system is crucial to any fiscally responsible discussion.

Correction: In my AOL piece there is an error: I wrote “Then there was New Jersey Gov. Christie Todd Whitman, who from 1998 to 2003 held “pension holidays,” suspending employee payments into the pension system so workers could spend the money elsewhere. . . . Today, New Jersey’s public pensions lack billions of dollars in funding, and both public employees and taxpayers will suffer.” Instead, the piece should read “so employers“, i.e, the state of New Jersey, could spend the funds elsewhere. Thanks to reader John for bringing that misstatement to my attention.

Public Sector Inc.

The Manhattan Institute has a new website: Public Sector Inc. featuring the latest research, news, interviews, and articles on public sector unionism and in particular on the crisis in state and local pensions. Edited by Manhattan Institute fellow, Josh Barro, the site includes my article on the discount rate and how it has affected the management of pensions as well as a podcast with E.J. McMahon on the same topic.

Reform of public sector unionism is sure to be a major policy issue facing the states in the coming decade. Josh notes at PSI’s blog that Governor Tim Pawlenty in Minnesota has written in today’s Wall Street Journal about what states need to do to fix the fiscal disaster that public sector unionism has delivered to state governments – and that includes getting the accounting of public sector liabilities, right.

The Remedy Is Also the Problem

Meredith Whitney writes in yesterday’s Wall Street Journal, there’s no need to guess if states will be bailed out of their debt troubles.

They are being bailed out right now, many times over. They are being bailed out by federal bonds, federal transfers, and as I and many others have argued, by fictional accounting. One sobering fact: in 2009, 30 percent of California’s new debt issuances were subsidized by Build America Bonds. States with massive budget gaps have been subsidized to take on more debt rather than tackle the drivers of budget crises: a sustained period of unsustainable spending.

Yet, as Ms. Whitney writes, the reaction of some economists should any local or state government end up unable to pay its bondholders  (like the City of Harrisburg) is yet another federal bailout.

Delay on Bush-Era Tax Cuts May Cost You in January

Companies across the nation are starting to worry that workers will see an unwelcome increase in their withholding come January. Congress hasn’t decided on whether or not to extend the Bush era-tax cuts. If they are allowed to expire, then the Treasury Department might delay the release of tax withholding tables. Payroll administrators warn that this scenario means millions of people will see their tax bills inflate by the April 15th filing deadline.

As reported in the Wall Street Journal, Treasury typically releases withholding tables in mid-November.  These tables are distributed to all business and payroll providers to calculate the amount of taxes withheld from paychecks.  Higher withheld taxes mean lower take-home pay for American workers.  In tough economic times, any reduction to take-home pay is likely to be met with public outcry.

The Treasury Department could just assume that Congress will eventually extend the Bush-era tax cuts, at least for the middle-class, and issue the withholding tables for 2011 as if that were the case. But, if Congress then failed to extend tax relief workers would have too little withheld from their paychecks and see large tax bills come the April 15th tax filing deadline.

If Treasury follows the current law and issues the 2011 tax withholding tables as if the tax relief expires, then workers will see a large decrease in their withheld taxes and lower take home pay.

California May Have a Budget!

Here are some facts:

  • The budget is 99 days overdue. PA and NY’s budgets were also-past due, but they were resolved long ago.
  • According to reports, the state’s $19 billion budget gap is closed:

with what lawmakers call solutions and creative accounting tactics, some of which push off payments to the next fiscal year [MM: Sound familiar?]

  • The deal was made possible by a recent ruling by the state’s Supreme Court. It upheld Governor Schwarzenegger’s mandate that 200,000 public employees take unpaid days off.
  • The deal required $5.3 billion in federal aid. If we extrapolate the result from Sobel and Crowley, the federal aid may stimulate anywhere from $1.7 to $2.2 billion in new state taxes. 
  • Last month, the Wall Street Journal reported:

On the brink of insolvency, California may have to pay its bills with IOUs soon. A budget was due three months ago, and the legislature hasn’t passed one.

The lawmakers can, however, point to a list of other achievements this year. Awaiting Gov. Arnold Schwarzenegger’s signature, for example, is a bill that would bar the state from filming cows in New Zealand. It’s the fruit of five committee votes and eight legislative analyses.

California lawmakers also voted to form a lobster commission. They created “Motorcycle Awareness Month,” not to mention a “Cuss Free Week.”

And they kept the California state rock safe. Senate Bill 624 had sought to bust the rock, serpentine. Adamant opposition protected it, but sponsor Gloria Romero declared this “an issue we should address again.”

What if Stimulus Works, But Government Can’t Get the Timing Right?

As of September 3, 2010, about $154.8 billion of the approximately $282 billion of total funds made available by the Recovery Act in 2009 for programs administered by states and localities had been paid out by the federal government.

That’s the conclusion of a new GAO report, out this week. Similarly, the Wall Street Journal reports this morning that:

[S]pending stimulus dollars fast has turned out to be surprisingly hard.

This reminds me of a point that Megan McArdle raised a few weeks back:

[W]hat if Keynesian stimulus works, but no one can ever actually afford to do it, short of something like World War II, where the government can tap into a patriotic outpouring of national savings by issuing bonds with negative real yields.

She was talking about the sheer size of the stimulus. But we could ask a similar question: What if Keynesian stimulus works, but the machinery of government is so slow and inept, that it is impossible to effectively implement it in time to be effective?

This, of course, was the (near) consensus view among macroeconomists just a little over a decade ago. Writing in the American Economic Review in 1997, Martin Eichenbaum wrote:

[T]here is now widespread agreement that counter cyclical discretionary fiscal policy is neither desirable nor politically feasible.

Perhaps the current struggles to effectively administer stimulus will one day cause that consensus to re-emerge.

Bailouts and Municipal Bonds

City Journal‘s Steven Malanga writes at RealClearPolitics about the possibility of a municipal bond bailout on the horizon. The canary in the coalmine is the SEC’s cease-and-desist order to New Jersey for misleading investors by omitting key information in their bond offerings between 2001-2007. Specifically, the SEC charges that New Jersey misrepresented the state’s pension liabilities. The state indicated it was taking actions to ensure the solvency of its pension funds when in fact pension deferrals were frequently undertaken.

What’s interesting is that the day after this announcement, New Jersey easily sold an offering of short-term notes to banks. The state didn’t have to pay a premium to attract investors. Why aren’t investors more cautious? And why wasn’t New Jersey fined?

As Malanga noted earlier this week in the Wall Street Journal, for years states have been hiding the true size of their fiscal problems behind a range of fiscal manipulations (for a catalog of those, see my latest paper on Fiscal Evasion). Yet the signal sent by the SEC is that there is no penalty or risk for bad behavior. The question Malanga asks: do politicians and muni bond holders simply expect that in the event a state can’t pay its bondholders a federal bailout will pick up the tab?

The Debt Problem: Should We Raise Taxes or Cut Spending?

Writing in Saturday’s edition of the Wall Street Journal, Peter G. Peterson makes the case for tax increases and spending cuts:

While I believe that spending cuts must play a lead role in any solution to our long-term structural deficits, the sheer magnitude of the imbalances requires revenue increases.

The University of Rochester’s Steve Landsburg is a refreshing antidote to this line of thinking:

There is this notion abroad that an extra billion in federal spending can be converted from “irresponsible” to “responsible” as long as it’s accompanied by an extra billion in tax hikes. That’s like saying a $500 haircut can be converted from “irresponsible” to “responsible” as long as you withdraw the $500 from your bank account.

Here, according to Landsburg, is why:  

The government’s chief asset—in fact, pretty much its only asset—is its ability to tax people, now and in the future. The taxpayers are the government’s ATM. Make a withdrawal today, and there’s less available tomorrow.

The bottom line: Under reasonable policy assumptions, government’s share of GDP is set to climb dramatically in the coming decades. We can not solve the problem by taxing ourselves to solvency.

Parking Perspectives

In New York City, urban planners are considering new rules which would make it more difficult for developers to construct parking garages, the Wall Street Journal reports.  Currently, parking garages are prohibited if they are expected to increase congestion:

The current process requires developers to show that their garage won’t adversely affect traffic congestion in the immediate neighborhood. Some transportation advocates want the city to take a broader view when considering the issue of congestion, which could make it harder for developers to get permits.

Parking is a complex issue in planing regulation.  On the one hand, some urban critics argue that subsidized parking facilitates urban sprawl by allowing people to easily rely on cars for transportation without bearing the full cost of driving and parking.  On the other, privately-managed, unsubsidized parking garages offer a relatively efficient way for commuters to park in high-density areas while better internalizing the cost of this behavior.

As New York City may move toward limiting parking garages, others are celebrating their contributions to city life.  Baltimore author Shannon McDonald has recently written The Parking Garage: Design and Evolution of a Modern Form, exploring the architectural and utilitarian contributions of American garages.  She points out that in addition to serving the need for storing vehicles in high-density places, entrepreneurs have recently developed new uses for garage roofs including green roof parks, swimming pools, and solar energy plants.

On the Diane Rehm Show with McDonald, Robert Puentes of the Metropolitan Policy Project at the Brookings Institute points out the if municipalities broadened the role of the private sector in parking garage provisions, they could unleash incentives for entrepreneurs to improve the mix of uses of existing garages.

Is Unemployment Insurance Stimulative?

Alan Blinder has an interesting article in today’s Wall Street Journal. 

In it, he says that the Obama Administration is on the right policy track in its attempt to extend unemployment benefits, create more fiscal stimulus, and permit the Bush tax cuts to expire for people earning more than $250,000. 

He makes a claim that has become increasingly popular: policies that tax the rich and redistribute to the poor are not only compassionate, they are stimulative. There was a time when those on the left talked about a tradeoff between redistribution and growth. But Blinder and others now argue that redistribution is, on net, stimulative; that it is possible to have one’s cake and eat it too. 

Blinder begins by conceding a point to the opponents of more generous unemployment insurance. He writes:  

[L]onger-lasting benefits dull the incentive to seek work, which in turn drives up unemployment. Economic research suggests they are right.

But, he says, “one shouldn’t exaggerate the magnitudes.” Furthermore, he sees reason to believe that unemployment benefits can be stimulative. The key to this reasoning is his assertion that the poor are more likely to spend a marginal dollar than the wealthy. That’s why we can tax the wealthy, redistribute to the poor, and see a net gain.

He writes:

[C]onsider three different ways to add a dollar to the budget deficit: increase unemployment benefits by $1, give a $1 tax cut to someone earning $50,000 a year, or give a $1 tax cut to someone earning $5 million a year.

While the immediate impacts on the budget are identical, the near-term spending impacts are not. The unemployed worker struggling to make ends meet will likely spend the entire dollar right away. The $50,000 earner probably will spend the lion’s share of it, saving just a bit—that’s what most Americans do. But the $5,000,000 earner probably will save most of the new-found dollar.

Blinder is referring to the “marginal propensity to consume.” Keynesians have long-argued that the poor have higher marginal propensities to consume than the wealthy. That is, Keynesians believe that if you tax a wealthy guy and redistribute the revenue to a poor guy, the economy will actually grow in the short run. Why? The wealthy guy wasn’t going to spend that money (or at least not much of it) anyway. He was just going to let it sit in his bank account (never mind that savings makes its way into aggregate demand as investment—buy Keynesians have other stories for why that doesn’t work). The poor person, however, is different. He will go out and spend that dollar right away, leading to a multiplier in terms of growth.

In my mind, this makes theoretical sense. The problem is: it doesn’t seem to be true. And President Bush’s Stimulus I provides the evidence. Economists Claudia Sahm, Matthew Shapiro and Joel Slemrod studied the way people spent the stimulus checks that were sent out in the first half 2008. Using data from the Reuters/University of Michigan Survey of Consumers, they found that spending patterns were “strongly at odds with the conventional wisdom.” It turns out that the poor were actually less likely to spend their 2008 stimulus checks than the wealthy. What’s more, analysis of the 2001 stimulus found much the same thing.

Now there may very well be humanitarian reasons for unemployment insurance (I’ll leave it to others to debate those). But is seems to me that the data are making it increasingly more difficult to argue that redistribution through unemployment benefits is both humanitarian and stimulative.