Tag: government employees

Why We Shouldn’t Expand Government

Fareed Zakaria’s new column is titled (at least on the Washington Post website) “Why Americans Hate Their Government” or (in the paper) “Why We Hate our Government.” But some of the points he makes might better be seen as reasons not to keep on expanding a government that has grown beyond its competence.

Washington is having one of its odd debates as to whether the Obama administration’s rollout of HealthCare.gov was worse than the Bush administration’s response to Hurricane Katrina. But whatever the answer, if there is one, the real story is that both are examples of a major, and depressing, trend: the declining competence of the federal government. Paul Volcker, former chairman of the Federal Reserve, has been saying for years that most Americans believe their government can no longer act effectively and that this erosion of competence, and hence confidence, is a profound problem.

“The federal service is suffering its greatest crisis since it was founded in the first moments of the republic,” scholar Paul Light writes in his book “A Government Ill Executed.”

Over the past decade, the federal government has had several major challenges: Iraq, Afghanistan, a new homeland security system, Katrina and Obamacare. In almost every case, its performance has been plagued with mismanagement, massive cost overruns and long delays.

Zakaria argues that this was not always the case: “In the 1940s, ’50s and ’60s, federal agencies were often lean, well managed and surprisingly effective.” Maybe so, depending on your metric. But of course in those decades the federal government had not yet undertaken cradle-to-grave responsibilities. Maybe the lesson is that if you want competent government, you should limit it to manageable tasks.

On the other hand,

If you want the federal government to tax (and borrow) and transfer $3.6 trillion a year, if you want it to build housing for the poor and give special benefits to Alaska Natives, if you want it to supply Americans with health care and school lunches and retirement security and local bike paths, then you have to accept that such programs come with incentive problems, politicization, corruption, and waste.

In that case, this is the business you have chosen.

Wisconsin: Post-Mortem & Predictions

Last night’s vote by the Wisconsin-based portion of the Wisconsin Senate has received enormous attention. The scope of collective bargaining by school district and other government employees has been narrowed, and the state will no longer automatically garnish workers’ wages to pay union dues.

This was the right thing to do. But how much of a difference will these changes actually make to the state’s bottom line? As I’ve noted, the presence or absence of collective bargaining is not strongly correlated with school district spending. Instead, unions have won their massively (42%) above- market compensation through well-funded political action; which brings us to the question of automatic paycheck deduction of union dues.

Without automatic dues withdrawals, will public school unions still be able to afford their fantastically successful political activities? There’s no reason to doubt it. Given the huge compensation premium public school employees enjoy over their private sector counterparts, they have a powerful incentive to voluntarily keep funding the political action that helped win it.

Indeed, we can see this already in right-to-work states like South Carolina. Public school employees there have no collective bargaining rights and there is no automatic union dues withdrawal, but the Palmetto State nevertheless has a teachers’ union and an administrators’ association that have spent large sums of money on political action. It’s worked. Despite not being the wealthiest of states, South Carolina still spends roughly $12,000  per pupil on its public schools, and its public school teachers earn more than the state’s median household income. The teacher and administrator groups have also successfully defeated every legislative effort thus far to open up the state’s education system to private sector competition and parental choice.

The only way to rein-in out-of-control public school spending is thus to give both families and taxpayers an alternative to the government monopoly status quo. Cut taxes on folks who pay for their own children’s education, or who donate to non-profit scholarship organizations that subsidize private school tuition for the poor. Many states are doing this already on a small scale. By so doing so on a larger scale, families will have much greater choices and taxpayers will reap enormous savings.

The Importance of Incentives

NPR reports on more doctors giving up private practices and going to work for hospitals. Hospitals think they can manage care better and get more patients, and doctors like being relieved of administrative headaches. But it isn’t a perfect solution. Reporter Jenny Gold notes one of the problems:

GOLD: This isn’t the first time hospitals have gone doctor shopping. In the 1990s, hospitals bought up as many practices as possible. Dr. Bill Jessee is the president of the Medical Group Management Association. He remembers the ’90s as something of a disaster.

Dr. BILL JESSEE (President, Medical Group Management Association): The first thing a lot of physicians did was took a vacation. And when they came back, they weren’t working as hard as they were before their practice was acquired.

Indeed. This is a standard insight of economics. People work harder when they have something to gain. There are real benefits to the division of labor, including corporations where salaried employees contribute to a joint product, but there are also risks that employees won’t work as hard when their compensation isn’t directly tied to their output. Managers and economists have searched for solutions to the “shirking” problem. In this case the hospitals are experimenting with bonus systems based on how many patients the doctors see. The problem is much more significant, of course, in government, which is far more restricted in its ability to use merit pay, bonuses, or other performance-related pay systems. Thus the widespread impression that government employees don’t work as hard as private-sector employees – and one reason that it’s a good idea to leave as many services as possible in the private sector.

The NPR story also reminded me of Malcolm Gladwell’s New Yorker article on Philo T. Farnsworth, the inventor of television. Gladwell dismisses the romantic notion of the lone inventor and says that Farnsworth would have been better off working for a big corporation, where other people would have worried about raising capital, fending off lawsuits, and all the little details of management and left Farnsworth free to invent:

Farnsworth was forced to work in a state of chronic insecurity. He never had enough money….he did not understand how to raise money or run a business or organize his life. All he really knew how to do was invent, which was something that, as a solo operator, he too seldom had time for.

This is the reason that so many of us work for big companies, of course: in a big company, there is always someone to do what we do not want to do or do not do well–someone to answer the phone, and set up our computer, and arrange our health insurance, and clean our office at night, and make sure the building is insured. In a famous 1937 essay, “The Nature of the Firm,” the economist Ronald Coase said that the reason we have corporations is to reduce the everyday transaction costs of doing business: a company puts an accountant on the staff so that if a staffer needs to check the books all he has to do is walk down the hall. It’s an obvious point, but one that is consistently overlooked, particularly by those who periodically rail, in the name of efficiency, against corporate bloat and superfluous middle managers. Yes, the middle manager does not always contribute directly to the bottom line. But he does contribute to those who contribute to the bottom line, and only an absurdly truncated account of human productivity–one that assumes real work to be somehow possible when phones are ringing, computers are crashing, and health insurance is expiring–does not see that secondary contribution as valuable….

Philo Farnsworth should have gone to work for RCA. He would still have been the father of television, and he might have died a happy man.

Public Pensions as Property Rights

On Thursday I noted that former California House Speaker Willie Brown said we shouldn’t worry about the cost of government workers’ pensions because “My guess is that the State of California, like most places involved with pensions, is going to cease to pay them.”

My former colleague Andrew Biggs, writing at The American, says Speaker Brown and I are, believe it or not, too optimistic:

In most states, accrued public-sector pension benefits carry an effective property right, either through legal rulings or outright constitutional provisions. As Donald Kohn, the vice chairman of the Federal Reserve Board, put it, “For all intents and purposes, accrued benefits have turned out to be riskless obligations.”

Some states interpret these rights as prospective, meaning that not only does a public-sector employee have a right to the benefits he’s already earned, but he has a right to continue earning benefits at the same rate no matter how financially unsustainable the pension formula may be. These provisions make state pension benefits far more assured than even Social Security, which the federal government can legally cut at anytime.

Plus, he says, the pension shortfalls are even larger than most analysts think.

Resume worrying.

How the Debt Crisis Will Stop

The economist Herb Stein famously said, “If something cannot go on forever, it will stop.” That’s a good riposte when people wring their hands over something unsustainable. Of course, that fact doesn’t tell you how unsustainable situations will stop, and some ways are less pleasant than others.

I thought of “Stein’s Law” when I read former California Assembly speaker Willie Brown’s response to a question about whether California’s lavish public-employee pensions would bankrupt the state:

No, it’s not going to bankrupt the state. My guess is that the State of California, like most places involved with pensions, is going to cease to pay them.

Another State and Local Bailout?

Rep. George Miller (D-CA) has introduced a bill that would give state and local governments another $100 billion to prevent public sector job cuts. The bill was written at the behest of the U.S. Conference of Mayors and other local special interest groups addicted to federal largesse.

These days it’s hard to open a newspaper without reading a tug-at-the-heart-strings story about state and local officials having to make the “painful” decision to cut supposedly crucial government spending. Very rarely do journalists dig in deeply and examine in detail where state and local governments are actually spending their giant budgets.

Sometimes stories highlight some superficial waste, such as this Los Angeles Times story reporting that “As Los Angeles County supervisors prepare to carve deeply into everything from public safety to social services, they also are spending millions in taxpayer dollars to burnish their public images, pay for chauffeurs, hold parties for friends and lobbyists and support pet projects.”

The story assumes that every penny L.A. County spends on public safety and social services is a penny well spent. Like their federal counterparts, state and local programs are rife with waste, fraud, and excess. Unfortunately, for every 100 stories you read about teachers being furloughed, you might read one that questions the basic efficiency of the services being provided or possible private-sector alternatives.

In a new Cato Policy Analysis on the cost of public education, Adam Schaeffer found that the Los Angeles school district’s real per-pupil cost is $25,000 – not the $10,000 it reports. This compares to average Los Angeles private school per-pupil spending of $8,400.

The rise of public sector unionism is another subject that should be getting more media attention as state and local politicians warn of having to “slash” programs. According to a recent study by Chris Edwards, half of the $2.2 trillion that state and local governments spent in 2008 went to employee wages and benefits. Edwards found that “public sector unions push up the costs of the public sector workforce in the United States by about 8 percent, on average, but the increase would be more in states with highly unionized public sectors such as California.”

The lavish benefits that state and local politicians have bestowed upon public employees have created massive unfunded liabilities. A recent study by Robert Novy-Marx and Joshua Rauh calculated that state and local pensions are underfunded by a whopping $3.2 trillion. Jagadeesh Gokhale and Chris Edwards estimate that public employee health benefits are underfunded by an additional $1.4 trillion.

Another bailout for state and local government like the one Congressman Miller is proposing creates a disincentive for state and local policymakers to implement necessary reforms to get their budgets and future liabilities under control. It also creates a disincentive for local citizens to be vigilant when it comes to state and local spending. Why bother attending city council or school board meetings when the federal and state governments are picking up a hefty portion of the tab for local spending?

The decades of increasing centralization of what were traditionally local responsibilities has fueled extravagant spending at all levels. Instead of continuing to aid and abet state and local politicians who are only too happy to spend the “free” money the federal government shovels their way, it’s time to get back to our constitutional roots with a return to fiscal federalism.