What Really Happened In Wisconsin

Greetings from the Left Coast!

To really understand the implications of the failed attempt to recall Gov. Scott Walker, you must first understand the scope and severity of a huge financial time bomb that’s looming on the horizon: unfunded public pension liabilities. By “unfunded public pension liabilities,” I mean retirement benefits, health insurance benefits, etc., that state and local governments have an obligation to pay to current and former workers, but which have no identified source of funding. When the bills come due, it will be a scramble to figure out how to pay for them.

How big is the problem? The Pew Research Center estimated that it was at least $1 trillion at the end of fiscal 2008. Orin Kramer – a Democrat, and the former chairman of New Jersey’s pension fund – said it was $2 trillion at the end of 2009, and $2.5 trillion at the end of 2010.

How did we get into this mess? Because public sector unions contribute huge sums of money to help elect politicians who will be sympathetic to their contract demands. These politicians then give the unions what they want, thus insuring that the unions will continue to contribute huge sums of money to their next re-election campaign.

In the private sector, there is a built-in limit to what a union can extract from a business, because there is a limit to what the business can afford to pay. Beyond that limit, the business fails, and everybody loses, including the union workers, who no longer have jobs. But in the public sector, “management” is not negotiating with its own money – it is negotiating with other people’s money: specifically, the taxpayers’ money. There is no down side to giving the unions what they want, because, by the time the bills come due, either those politicians will be long gone, or enough time will have passed that they can avoid being associated with the fiscal train wreck that will ensue. So politicians have continued to kick this can down the road, and we’re now looking at as much as $2.5 trillion in unfunded public sector pension liabilities with no idea of how we’re going to pay for them.

For years, even the champions of the labor movement were opposed to the idea of collective bargaining by public sector unions. In August, 1937, FDR wrote the following to Luther Steward, the president of the National Federation of Federal Employees:

“…meticulous attention should be paid to the special relationships and obligations of public servants to the public itself and to the Government.

“All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service. It has its distinct and insurmountable limitations when applied to public personnel management. The very nature and purposes of Government make it impossible for administrative officials to represent fully or to bind the employer in mutual discussions with Government employee organizations. The employer is the whole people, who speak by means of laws enacted by their representatives in Congress. Accordingly, administrative officials and employees alike are governed and guided, and in many instances restricted, by laws which establish policies, procedures, or rules in personnel matters.

“Particularly, I want to emphasize my conviction that militant tactics have no place in the functions of any organization of Government employees. Upon employees in the Federal service rests the obligation to serve the whole people, whose interests and welfare require orderliness and continuity in the conduct of Government activities. This obligation is paramount. Since their own services have to do with the functioning of the Government, a strike of public employees manifests nothing less than an intent on their part to prevent or obstruct the operations of Government until their demands are satisfied. Such action, looking toward the paralysis of Government by those who have sworn to support it, is unthinkable and intolerable. It is, therefore, with a feeling of gratification that I have noted in the constitution of the National Federation of Federal Employees the provision that ‘under no circumstances shall this Federation engage in or support strikes against the United States Government.’”

In 1955, George Meany, the former president of the A.F.L.-C.I.O., stated, “It is impossible to bargain collectively with the government.”

In 1959, the Executive Council of the A.F.L.-C.I.O. stated, “In terms of accepted collective bargaining procedures, government workers have no right beyond the authority to petition Congress – a right available to every citizen.”

But, over time, greed overcame common sense, as it often does in the political arena, and the vicious circle of union dues -> campaign contributions -> recipients of the contributions give concessions to the unions -> unions collect more dues (often from workers who have no choice about whether they want to be union members, and who have the dues automatically withheld from their paychecks) -> more campaign contributions -> repeat ad infinitum has become commonplace. Both parties are guilty, but it is, in fact, more of an issue with Democrats, because the Democrats have chosen to align themselves closely with the unions, and, in return, 80% - 90% of union's political contributions go to Democrat candidates. In the case of the National Education Association and the American Federation of Teachers, that number is closer to 95%.

As a result, public employees in general often have higher compensation than their private sector counterparts. According to the Bureau of Labor Statistics, as reported in USA Today in March, 2010, federal workers in 2008 earned an average salary of $67,691 for jobs that existed both in government and in the private sector – the average pay for the same jobs in the private sector was $60,046. According to other BLS reports, government entities spend 1.7 times as much on health care per employee-hour worked, and nearly twice as much on retirement costs. Public sector workers are far more likely to have “defined-benefit” pensions that are guaranteed to pay out for the remainder of a retiree’s life.

What is happening is that, across the country, voters are realizing that this is simply unsustainable, and something must be done to defuse that huge, ticking fiscal time bomb. And, in Wisconsin, that time bomb was about to explode. When Scott Walker took office, the state was looking at a $3.6 billion deficit between 2011 and 2013.

According to another USA Today article in February, 2011, Wisconsin was one of 41 states where public employees earned higher average pay and benefits than private workers in the same state. The average Wisconsin public school teacher may have only made $50,000 in wages, but s/he also received $45,000 in benefits. The school districts paid the entire cost of their pension plans, the entire premium for their medical and vision benefits, and half of the cost of dental coverage. Family health care coverage for a public school teacher was costing the state an average of $26,844 per year.

What Gov. Walker did, that earned him the eternal hatred of labor unions everywhere, was to restrict – not eliminate entirely – collective bargaining rights. Public sector unions could no longer bargain for benefits, and wage increases were limited to the rate of inflation. He also eliminated the automatic deduction of union dues from workers’ paychecks and required public unions to re-certify annually. He also asked public school teachers to pay 5.8% of their pension costs and 12.6% of their health care costs. That’s still substantially less than the national average for government workers, as well as substantially less than what private sector workers pay on average – if they have pensions at all.

While all of that made the public sector unions go ballistic, it struck the citizens of Wisconsin as being eminently reasonable. And despite the best efforts of his union opponents, Walker retained his governorship…and it wasn’t even close.

Meanwhile, out in the People’s Republic of California, both San Diego and San Jose passed ballot measures that cut public-sector pensions. San Diego’s passed with roughly two-thirds of the vote, and San Jose’s passed with 70% of the vote – proving that even here on the Left Coast, in the bluest of the blue states, the folks are starting to understand the magnitude of this problem and show their willingness to do something about it. I find that quite encouraging.

Thanks for listening.

UPDATE 6/8/2012: In his syndicated column this morning, Charles Krauthammer addressed this same issue - arguing that this is nothing less than the beginning of the end of public sector unions. As evidence, he reports that, since the Wisconsin government stopped forcibly collecting union dues from employees' paychecks, making membership truly voluntary, membership in the state's largest public-sector union has dropped by more than 50%. And, in neighboring Indiana, where a similar reform was enacted by Gov. Mitch Daniels via executive order seven years ago, government-worker union membership has fallen by 91%! Clearly, even their members don't like what the unions are doing.

Stick a Fork In France - It's Done

You can stick a fork in France - it's done. A majority of French voters are not willing to give up their entitlements, have taken an abrupt left turn back toward socialism, and elected as president someone who is promising a 75% tax on millionaires.

Bear in mind that France's public debt currently stands at 80% of its GDP (we're at 67% and rising fast). Their government spending equals 55% of their GDP, and their total tax burden is roughly 42% of total domestic income. They haven't had a balanced budget since 1974. But none of that matters - the citizens want more government spending.

But the thing about millionaires is that they're much more mobile than lower-income people. There are already indications that the wealthy are making plans to leave France rather than pay a 75% tax rate. This isn't a new thing for France - even back in 2006, it was estimated that, on average, one millionaire per day left the country. When Sarkozy was elected, he made a public plea for them to return and help rebuild the country. So much for that idea.

M. Hollande's election has also emboldened the Greek left, which is not at all happy about the austerity measures that had been put in place to control their own sovereign debt problem - which stood at 143% of their GDP back in 2010.

Odds are that our own next President will have to deal with the worldwide financial crisis that will result when Greece defaults on its debt, and is followed over the cliff, lemming-like, by Italy (public debt of 119% of GDP in 2010), and then France. It ain't gonna be pretty, folks, but that's what happens when a majority of voters feel that they are entitled to more than their government can afford to give them. And we're not far from that point ourselves.

Some Inconvenient Facts (About Unemployment)

I was fascinated by an article in this morning's local paper about how the economy was in a "virtuous cycle," and that 32 economists who were polled by the AP expect unemployment to drop below 8% by election day. This is, no doubt, cause for rejoicing at the White House, where the fondest dream is to have the reported rate below 8% by election day. But here are some inconvenient facts:

As CNBC recently reported, although 115,000 jobs were added in April, the total employment level actually dropped by 169,000. In other words, more jobs were lost than were created. How, then, did the unemployment level fall from 8.2% to 8.1%? Because another 342,000 people gave up and stopped looking for jobs, which means they are no longer counted as part of the "U-3" unemployment rate, which is the one that is always reported. The labor force participation rate fell to 63.6%, which is a 30-year low. The "Persons Not in Labor Force" number has risen to over 88 million. That's up roughly 8 million people since President Obama took office, and the trend shows no sign of leveling off.

The U-3 unemployment rate has now been above 8% for the longest continuous period of time since the Great Depression. But it would be even worse if we still counted those people who have given up and stopped looking for work. As zerohedge.com points out, government forecasting agencies, including the CBO, assume that the labor force grows by about 90,000 people every month as the US population continues to increase. Yet the U-3 number that is constantly being reported is based on an ever-shrinking labor force. The "U-6" unemployment rate, which includes people who are neither working nor looking for work - but would like to work and have looked for work sometime in the last 12 months, and also people who would like a full-time job but have had to settle for part-time work, is at about 14.5%.

Personally, I think those 32 economists were correct, and that the reported U-3 unemployment rate will be below 8% by election day...but it will not be because of economic growth and job creation - it will be because the Obama Administration will continue to lower the labor force participation number until they can report the number they want. As the old saying goes, "Figures don't lie, but liars figure."

NOW Do We Get To Say "I Told You So?"

"If you like your health care plan, you can keep your health care plan." - Barack Obama, August 11, 2009.

http://www.whitehouse.gov/realitycheck/3 (video available as of the date of this post): "Linda Douglass of the White House Office of Health Reform debunks the myth that reform will force you out of your current insurance plan or force you to change doctors."

"...if you've got health insurance, you like your doctors, you like your plan, you can keep your doctor, you can keep your plan. Nobody is talking about taking that away from you." - Barack Obama, July 16, 2009.

"If you like your current insurance, you keep that insurance. Period. End of story." - Barack Obama, weekly address to the nation, July, 2009.

Associated Press, August 25, 2011:

"Nearly one of every 10 midsized or big employers expects to stop offering health coverage to workers after insurance exchanges begin operating in 2014 as part of President Barack Obama's health care overhaul...another one in five companies are unsure about what they will do after 2014. Another big benefits consultant...found in a June survey of large and smaller employers that 8 percent are either "likely" or "very likely" to end health benefits after the exchanges start.

"The surveys, which involved more than 1,200 companies, suggest that some businesses feel they will be better off dropping health insurance coverage once the exchanges start, even though they could face fines and tax headaches. The percentage of companies that are already saying they expect to do this surprised some experts, and if they follow through, it could start a trend that chips away at employer-sponsored health coverage, a long-standing pillar of the nation's health system.

"'If one employer does it, others likely will follow,' said Paul Fronstin of the Employee Benefit Research Institute...former insurance executive Bob Laszewski said he was surprised that as many as 8 or 9 percent of companies already expect to drop coverage a couple of years before the exchanges start."

NOW do we get to say "I told you so?"

Yet Another Big Lie

Greetings from the Left Coast.

There are several Big Lies that I'm getting really tired of hearing, but very near the top of the list is the one that says we could address our budget problems if only the "rich" would pay their fair share. If they were only willing to pay a little more, we could solve this thing - but those evil Republicans keep "coddling" them, to use Warren Buffett's words. The trouble is, the math just doesn't work.

Let's set aside, for the moment, the point that if Warren Buffett really thinks his taxes are too low, he could send a check to the U.S. Treasury at any time, and look at the facts and figures provided by the Internal Revenue Service.

According to the IRS, in 2009, 235,413 people filed tax returns reporting a million dollars or more in income. In aggregate, those people earned $726.9 billion. The federal deficit in 2009 was roughly $1.4 trillion. That means if you had taken all of the reported income away from those 235,413 people who made a million dollars or more, it would only have covered about half of the federal deficit for that year.

I'm not sure exactly how much more in taxes Mr. Buffett thinks he should be paying, but I seriously doubt that he is willing to contribute 100% of his income. So the fact of the matter is that making the rich (or better yet, the "super-rich") pay just a little bit more would be a proverbial drop in the proverbial bucket compared to our current level of deficit spending.

Here's another tidbit to think about. If you make $160,000 or more, you're in the top 5% of earners in America. You and your fellow five-percenters already pay almost 60% of all income taxes collected. (And the other 95% of taxpayers would like to thank you for your disproportionate contribution, especially the bottom 50% who paid almost nothing.) In aggregate, you and your fellow five-percenters earned slightly under $3 trillion. Therefore, if the government had taken all of your money, it wouldn't have been enough to cover Obama's budget.

So let's be honest about this. If you want to punish the rich people for being so successful by taking more of their money away, if that would somehow make you feel better, just say so. If you believe in income redistribution - that money should be taken from people who have earned it and given to people who have not earned it - just say so. But stop pretending that this is will somehow magically solve our massive deficit problem. It's class warfare, plain and simple. As many others have observed, we don't have a deficit problem because taxes are too low - we have a deficit problem because spending is too high. And "taxing the rich" won't solve the problem, because all of the rich people put together don't earn enough money to eliminate the deficit even if we took all of it! Don't buy into the Big Lie.

Thanks for listening.

Connecting the Dots...

"President Obama's economic advisers estimated Thursday that the economic stimulus package has saved or created about 1 million jobs...Republicans called the White House estimate unreliable, pointing to Bureau of Labor Statistics figures showing...a net loss of 2.4 million jobs since Obama signed the stimulus law in February." - USA Today, 9/13/2009

"With unemployment hovering near 10 percent nearly two years after President Obama signed his economic stimulus package, Mr. Obama is acknowledging that, despite his campaign promises, 'there's no such thing as shovel-ready projects.'" - CBS News, October 13, 2010.

"The White House doesn't create jobs." - White House Press Secretary Jay Carney, August 3, 2011

Um...we've noticed that, Jay. Too bad it's taken you almost three years to figure it out.

Here's Another Prediction I Hope Is Wrong

Greetings from the Left Coast!

Last week, I heard Arthur Laffer interviewed on a national radio program. Laffer is a pretty bright guy who, by the way, supported President Bill Clinton in 1992 and 1996 because of Clinton's conservative fiscal policies. He's the guy who reportedly drew the "Laffer Curve" on the back of a cocktail napkin during a 1974 meeting with Dick Cheney and Donald Rumsfeld. The Laffer Curve basically states that at a 0% tax rate, and at a 100% tax rate, tax revenues would be zero. Therefore, somewhere between those two extremes is a point where tax revenues are maximized. Therefore, raising tax rates beyond that point will actually reduce revenues, and if rates are beyond that point, lowering them will actually increase revenues.

This absolutely worked during the Reagan administration, despite what you may have been told. Every time in modern history that federal taxes have been reduced, federal tax revenue has actually increased. The problem is that Congress is congenitally unable to stop itself from spending more money than it has - so even though tax revenue went up, spending went up even more, and debt increased. But I digress.

Back in June, Laffer wrote a column in the Wall Street Journal predicting what would happen if the "Bush Tax Cuts" were allowed to expire. This is now almost certain to happen, for reasons I'll explain later. Here are the salient points of Laffer's column:

• If people believe that taxes are going to be higher next year, they will attempt to shift production and income into this year if possible. This was demonstrated in the early 1990s when "high income taxpayers" shifted income into 1992 to avoid the expected increase in the top tax rate in 1993, then again at the end of 1993 to avoid the increase in Medicare taxes that went into effect in 1994.
• It is entirely likely that at least part of the reason that the economy is looking as good as it is in 2010 is because that's already happening.
• "When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe 'double dip' recession."

Laffer's estimate is that if the Bush tax cuts expire, Americans will see an average 3% tax increase. If you take away an additional 3% of people's disposable income through added taxation, it's logical to conclude that spending will drop by at least that 3%. Since the economy is currently growing at less than a 3% annual rate, if spending drops by 3% next year, we're back in recession - and that doesn't even take into account the effect the higher tax rates will have on investment and job growth.

The Democrats already chose to kick the ball down the road, and recess for their last-ditch campaign efforts without passing a tax cut extension. It probably won't get any better when they reconvene after the election, either, and here's why.

Even if the Republicans do see a sweeping victory on election day, they won't take office until next year. So the "lame duck" Congress that reconvenes after the election will be the same Congress that we have today. And here's what the math looks like. Nancy Pelosi already has in her hands a letter from 31 Democrats saying that the tax cuts should be extended for all Americans. So, although Pelosi is committed to extending the tax cuts only for the middle class, and allowing the "tax cuts for the rich" to expire, she may not have the votes to pass such a bill. So here is Laffer's prediction of what she'll do:

House rules allow her to bring a bill to the floor under "suspension" of debate, meaning that an immediate up or down vote must be held on the bill, without any debate taking place. However, such a bill requires a 2/3 majority for passage, which the Speaker does not have. So she will bring to the floor, under "suspension," a bill that extends the tax cuts only for the middle class, knowing she doesn't have the votes to pass it. Then, when it fails to pass, she will immediately blame the Republicans for voting against tax relief for the middle class. And if the economy does go off the rails next year, as Laffer predicts, she will blame the Republicans for that, too.

You see, for the Democrat leadership, it's all about their power. They were perfectly willing to see America lose the war in Iraq and come home in disgrace, as long as they could blame the Republicans for it. (Remember Harry Reid's "This war is lost?" And Obama's comment after he took office and saw that the surge was clearly working that, even knowing what he knew now, he would still have opposed it?) And they're perfectly willing to see the economy go off the rails, no matter how many Americans are hurt, as long as they can blame Republicans for it.

Thanks for listening.