January 2012

Public Sector Unions’ Heavy Burden on Taxpayers

by Ivan Osorio on January 5, 2010 · 2 comments

in Economy, Labor, Politics as Usual, Regulation

As the old saying goes, when you start getting flak, you must be over the target. That seems like a good reason for the hysterical response by Gerald McEntee, the head of the American Federation of State, County & Municipal Employees (AFSCME), the nation’s largest government employee union, to a recent article in The Economist that explains the burden that public sector unionism imposes on cash-strapped governments — and thus on taxpayers. McEntee, apparently, is outraged at the suggestion that government employees are “spoiled rotten,” and argues that, according to the Bureau of Labor Statistics (BLS), “when comparing pay within occupations public employees do not receive more than their counterparts in the corporate world.” I don’t know to which BLS data McEntee refers, because I’d like to see it. (Paid subscription needed for The Economist story.)

Meanwhile, BLS’s 2008 National Compensation Survey finds mean hourly earnings for public sector workers as being just over $5.00 higher than those for private sector workers. The difference is less “within occupations,” as McEntee insists, and the 2006 edition of the Survey, which found a similar gap, includes a caveat that would seem to justify his distinction.

Earnings averaged $19.29 per hour in June 2006 for civilian workers in the United States. Average hourly earnings were lower for private industry workers ($18.56) than for State and local government workers ($23.99). Part of this difference can be explained by differences in the occupational and industrial composition of the two sectors. For example, high-paying professional and related occupations are relatively more common in State and local government than in private industry.

So far so good, right? Wrong! The Survey compares only “earnings,” which it describes as “regular payments from the employer to the employee as compensation for straight-time hourly work or for any salaried work performed.” In other words, this doesn’t include benefits, which are far greater for public sector workers than for private sector ones.

BLS’s own numbers bear this out. The most recent BLS release on employee compensation (issued December 9, 2009) states that, during September 2009, “[p]rivate industry employer compensation costs averaged $27.49 per hour worked,” while, “[s]tate and local government compensation costs averaged $39.83 per hour worked” — a difference of over $12.00 an hour.

Moreover, a greater proportion of public employees get benefits, and the get a greater employer contributions. According to a July 2009 BLS release:

• Medical care benefits were available to 71 percent of private industry workers, compared with 88 percent among State and local government workers. About half of private industry workers participated in a plan, less than the 73 percent of State and local government workers. (See table 2.)

• Employers paid 82 percent of the cost of premiums for single coverage and 71 percent of the cost for family coverage, for workers participating in employer sponsored medical plans. The employer share for single coverage was greater in State and local government (90 percent) than in private industry (80 percent). For family coverage, the employer share of premiums was similar for private industry and State and local government, 70 and 73 percent, respectively. (See tables 3 and 4.)

• Among full-time State and local government workers, virtually all (99 percent) had access to retirement and medical care benefits. Of full-time workers in private industry, only 76 percent had access to retirement benefits and 86 percent to medical care. Part-time workers had less access to these benefits in both private industry and in State and local government; about 40 percent of parttime workers had access to retirement benefits and about 25 percent had access to medical care benefits. (See tables 1 and 2.)

• Sixty-seven percent of private industry employees had access to retirement benefits, compared with 90 percent of State and local government employees. Eighty-six percent of State and local government employees participated in a retirement plan, a significantly greater percentage than for private industry workers, at 51 percent.

And still that’s not all. As Don Bellante of the University of South Florida, David Denholm of the Public Service Research Foundation, and I note in our Cato Institute study on the topic, another benefit unionized government workers get is job security unlike any found in the private sector. (The online edition of The Economist also features a letter to the editor by Bellante, Denholm, and me.)

[O]ne of the earliest studies (using 1975 data) to take fringe benefits and the incidence of unemployment into account is by Don Bellante and James Long, although their study does not distinguish between union and nonunion employees. The study found that on the basis of hourly pay alone, there was not a significant difference between local-government employees and comparable workers in the private sector. However, adding in the significantly higher value of fringe benefits received at that time by local-government workers gave a slight advantage to local public employees. Further, adding in the effect of differential probability of unemployment spells on expected annual earnings raised the rent element in local government pay levels to over 10 percent.

So what’s wrong with public employees earning well? Nothing. The problem lies in their making so much above private sector workers — and that we’re all paying for it. Taking all of the above into account, McEntee’s assertion that, “it is not government employees who brought the American economy and state and local budgets to the brink of disaster” falls flat. As my co-authors and I also note:

A September 2008 National League of Cities survey of the nation’s city financial officers paints a discouraging picture. “Confronted with declining economic conditions driven by downturns in housing, consumer spending, and jobs and income, city finance officers report that the fiscal condition of the nation’s cities has weakened dramatically in 2008,” says the report. An overwhelming majority of survey respondents identified employee-related costs as having increased substantially: wages (cited by 95 percent of respondents); health benefits (86 percent); and pensions (79 percent). Wages and health care costs were cited by respondents ahead of all other costs, except for inflation (98 percent).

Even worse, the greatest costs associated with public sector unions often do not become apparent for many years, in the form of pensions. As we also point out, “Politicians can further shield themselves from public scrutiny by back-loading the rents paid to their union supporters, so that they come due at a later time, when they will be somebody else’s problem.” As Cato’s Chris Edwards notes, “state and local workers have very generous defined-benefit (DB) pension plans compared to private sector workers. These plans have been overpromised and underfunded, which has created huge long-term gaps in government budgets.” The Pacific Research Institute’s Steven Greenhut, in his cover story in the new issue of Reason, explains the severity of this problem:

Public pensions have swollen to unrecognizable proportions during the last decade. In June 2005, BusinessWeek reported that “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,” numbers that have risen since then. State and local pension payouts, the magazine found, had increased 50 percent in just five years.

None of this is likely to deter union efforts to increase unionization in government — and to even stretch the definition of government’s reach. Again, as Don Bellante, David Denholm, and I note:

Now some unions are trying to expand the definition of “public” by trying to organize government contractors. Washington state provides a good example of this. There, the trend began in 2001, when voters approved a ballot measure, Initiative 775, to allow independent long-term health care providers to unionize and bargain collectively over hours, compensation, and working conditions.39 Then in 2007, Washington state authorized collective bargaining for adult-home-care providers who receive Medicaid and other state aid.40 Stretching the definition of “public employee” to any home-care provider who may contract with the state can give a public employee union a foothold in the private sector.

BigGovernment.com features a good history of this new, brazen union tactic.

And brazenness is a trait public employee unions know well. Steven Greenhut explains in City Journal how some government workers game the system:

Government employees use various scams to boost their already generous benefits, which include fully paid health care and cost-of-living adjustments. The Sacramento Bee coined the term “chief’s disease,” for example, to refer to the 82 percent (in 2002) of chief’s-level employees at the California Highway Patrol who discovered a disabling injury about one year before retiring. That provides an extra year off work, with pay, and shields 50 percent of their final retirement pay from taxes. Most of these disabilities stem from back pain, knee pain, irritable bowel syndrome, and the like—not from taking bullets from bad guys. The disability numbers soared after CHP disbanded its fraud unit.

As I document in my new book, Plunder!, government employees of all stripes have manipulated the system to spike their pensions. Because California bases pensions for employees on their final year’s salary, some workers move to other jurisdictions for just that final year to increase their pay and thus the pension. Even government employees convicted of on-the-job crimes continue to collect benefits. Municipalities have adopted Defined Retirement Option Plans, or DROPs, in which the employee earns his salary and his full defined-benefit retirement pay at the same time, with the retirement pay going into an account payable upon actual retirement. And as average Americans work longer to sustain themselves, public employees can retire in their early fifties with their plush benefits.

And yesterday, The Las Vegas Review-Journal provided an example that illustrates how difficult it is for municipalities with unionized workforces  to curb costs:

Last week, two unions balked at the city’s budget-cutting ultimatum: wage cuts of 8 percent in each of the next two years, no salary increases of any kind and no promises to “catch up” at a future date — or else, mass layoffs of public employees.

Firefighters warned that such cuts would result in higher insurance costs and all sorts of carnage because of longer emergency response times. City officials called the warning a scare tactic.

Then the Review-Journal reported that the Las Vegas City Employees Association — the bargaining group that represents most city workers outside of public safety — sent a belligerent letter saying it would not come to the table till every other union had submitted to cuts.

So far the unions have agreed to a reduction in cost-of-living wage hikes of 1 percentage point. Not a pay cut, mind you, just a slightly smaller raise. How generous.

It is the parlous state of state and local government coffers that has raised the considerable interest in government employee unions we are now seeing. If there is a silver lining in this story, it is that this public interest it still appears to be growing, and such interest is not something union bosses are likely to welcome. As my co-authors and I explain in our letter to the editor in The Economist online, public employee unions’s political advantages can only outrun economic reality for so long.

SIR – Public-sector unions have entrenched their privileges through a combination of political dynamics that have proven extremely difficult to overcome. For example, the ability of taxpayers to move away from jurisdictions where they consider the pay of public employees to be excessive is severely circumscribed by the costs of moving itself.

The benefits enjoyed by unionised government workers give those workers a very strong incentive to work to influence the political process. By contrast, the taxpayers who must bear the costs of those benefits do not have a comparable incentive for political involvement, because those costs are widely diffuse and therefore are not as visible. Such an arrangement can only last so long before it runs headlong into economic reality, as the 2008 bankruptcy of Vallejo, in California, made clear.

For more on public sector unions, see here and here. (Thanks to Marc Scribner for help looking up BLS data.)

Congress Mulls More Credit Card Restrictions, in Legislation Likely to Backfire on Consumers

by Hans Bader on January 5, 2010 · 3 comments

in Deregulate to Stimulate, Economy, Legal, Politics as Usual, Precaution & Risk, Sanctimony

Some in Congress want to impose interest rate ceilings on credit cards and restrictions on interchange fees.  Australia tried the same thing, and it backfired, harming consumers by forcing credit card companies to increase annual fees on responsible credit cardholders and scale back rewards programs.  (Ironically, recent interest rate hikes are partly the product of a law recently passed by Congress, the CARD Act, which forces responsible people to bear the costs of irresponsible borrowers.)

As law professor Todd Zywicki notes in the Wall Street Journal, the proposed legislation would harm both consumers and small businesses, since it would

reduce the quantity and quality of credit cards by restricting credit availability and cutting back on product innovation or ancillary card benefits. This is exactly what happened when Australian regulators imposed price controls on interchange fees in 2003: Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%. Innovation, especially in terms of improved security and identity-theft protection, was stalled. Card issuers also increased their efforts to attract higher-risk customers who generate interest and penalty fees to offset lower interchange revenues from lower-risk transactional users.  The most important pro-consumer innovation in payment systems of the past two decades has been the general disappearance of annual fees on most credit cards. Cardholders now carry and use multiple cards at little or no cost. The consequences for consumer choice and competition have been profound—card issuers compete for consumer business literally every time they open their wallet to make a purchase.  Annual fees are essentially a tax on card-holding. Policies that produced a return of annual fees would strangle this process of competition by making it more expensive for consumers to hold multiple cards and to switch cards easily. Small businesses, three-quarters of which rely on credit cards, would also have to pay more to maintain access to multiple credit lines, stifling the most potent engine of economic recovery.

Earlier, Congress and the President misguidedly attempted to reduce burdens on irresponsible credit card borrowers, through a new law, the CARD Act of 2009 (Credit Card Accountability Responsibility and Disclosure Act), that backfired and resulted in the return of annual fees, bizarre interest rate hikes for some responsible borrowers, and the elimination of many cash back and rewards programs.

All these bailouts are taking their toll on the economy.  Economists and real estate experts say a $75 billion mortgage bailout program devised by the Obama administration is actually harming the economy, the housing market, and the construction industry.

Regulation of the Day 95: Buying Wine in Ohio

by Ryan Young on January 5, 2010

in Nanny State, Personal Liberty, Regulation, Regulation of the Day

It is illegal to buy more than 288 bottles of wine per year in Ohio.

If you drink that much wine by yourself, then you have more important problems to worry about than regulatory compliance. But if you host of lot of parties or are building up a wine collection, you run a real risk of hitting the limit.

“The level was set to establish what would seem to be a reasonable amount for personal use,” according to the Ohio Wine Producers Association’s executive director, Donniella Winchell.

Since the law is somewhat difficult to enforce, no violators have yet been found. But when there are, the Ohio Department of Public Safety Investigative Unit will come knocking. Because while buying 288 bottles of wine is perfectly fine, buying 289 poses a threat to public safety.

(Hat tip to CEI colleague Megan McLaughlin)

Government Uses Takeover of Mortgage Giants to Deliberately Increase Their Massive Losses at Taxpayer Expense

by Hans Bader on January 5, 2010

in Bailout Watch, Economy, Politics as Usual, Precaution & Risk, Regulation, Sanctimony

The Wall Street Journal notes that the Obama administration has used the federal government’s bailout of mortgage giants Fannie Mae and Freddie Mac to do the exact opposite of what the federal government claimed it would do when it took them over a year ago.  It took them over in the name of winding down their risky loan portfolios, so they would stop running up losses at taxpayer expense.  But the Obama administration is deliberately making them run up huge losses to help out irresponsible borrowers who potentially might default on their mortgages.  “In today’s Washington, we suppose, it only makes sense that the companies that did the most to cause the meltdown are being kept alive to lose even more money.”

Over Christmas Eve, the Obama administration not only lifted the $400 billion limit on the bailout (and showered their CEOs with cash), but also ended “a key requirement of the 2008 bailout—that Fan and Fred begin shrinking the portfolios of mortgages they own on their own account, which total a combined $1.5 trillion.”

The Obama administration is now deliberately making them lose money:  “the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures. . . Fannie reported last quarter that loan modifications resulted in $7.7 billion in losses.”

“Much of this is being done off the government books,” to hide the costs of the Obama administration’s record deficit spending.  And their CEOs are being paid a fortune, the Journal notes, because “Fannie and Freddie are exempt from the rules” limiting compensation at private banks.

The mortgage crisis was caused partly by the reckless government-sponsored mortgage giants Fannie Mae and Freddie Mac, and partly by the affordable-housing mandates imposed on them.

But Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.”

And banks will now be pressured to make even more risky loans.  The House has approved Obama’s proposal to create a politically-correct entity called the Consumer Financial Protection Agency. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”  The Community Reinvestment Act was a key contributor to the financial crisis.  But the Administration’s proposal would direct the new agency to enforce the Community Reinvestment Act without regard for banks’ financial safety and soundness.

Obama’s financial-regulation plan is “largely the product of extensive conversations” with two lawmakers responsible for the current financial mess, the corrupt Chris Dodd, and Barney Frank.

Another $75 billion in taxpayer money is already being wasted on mortgage bailouts that economists and real estate experts say is actually harming the economy and the real estate market.

“Was Swine Flu a False Pandemic?”

by Michael Fumento on January 4, 2010 · 1 comment

in Health and Illness, Odds & Ends

No, that’s not Michael Fumento asking. It’s a pharmaceutical industry blog declaring, “That’s the contention by more than a dozen members of the Parliamentary Assembly of the Council of Europe, which reportedly plans to conduct an inquiry into the influence that drugmakers may have had on the World Health Organization, scientists and governments. A resolution was introduced last month by Wolfgang Wodarg, a member of Germany’s Social Democratic Party who chairs the Parliamentary health committee.”

I won’t weigh in on the secondary question. Lots of people had a hand in pushing a pandemic. But it remains that the World Health Organization was given and took upon itself sole authority to actually declare the pandemic. That’s where initial attention should be focused. They rewrote the definition so that they could declare what was clearly a very mild strain of flu to be the first pandemic in 40 years, causing a cascade of events that haunts us still and will do so long into the future. They need to be called to account.

Hayek on Freedom

by Ryan Young on January 4, 2010

in Odds & Ends, Personal Liberty, Sanctimony, Zeitgeist

Think for a minute about how progress is made. It doesn’t follow a constant, linear path. It is unpredictable. It comes in violent fits and starts. It happens at the whim and fancy of genius.

Everyday life is much the same. Life is what you make of it. You have to be free to find what’s best for you. That means making wrong choices sometimes. It means not just trial, but error. Or, as Hayek put it:

“If we knew how freedom would be used, the case for it would largely disappear… It is therefore no argument against individual freedom that it is frequently abused.”

-F.A. Hayek, The Constitution of Liberty, p. 31.

In Case You Missed it: Lone Voice of Reason at CPSC

by Angela Logomasini on January 4, 2010

in Environment, Nanny State, Precaution & Risk

In 2008, Congress passed Consumer Product Safety Improvement Act of 2008 (CPSIA), which regulates lead and certain chemicals in toys. Never mind the fact that the trace levels are too low to pose a health risk, this draconian law is putting small businesses out of commission and forcing charities to toss old books, toys, and other items.

Small businesses and others who have been fighting this crazy law since its inception, have been given a hand by one of the CPSC’s commissioners who recently published an excellent piece in the Wall Street Journal on why Congress needs to step up to the plate and fix the mess created by this act. Commissioner Ann Northup also calls colleagues at the CPSC to the plate for making things worse than necessary:

“For the past several months, American businesses have been caught in the middle of a classic standoff between the federal commissioners in the majority, who argue that the statute ties their hands, and members of Congress, who claim they wrote flexibility into the law and blame the commission for any harsh consequences. Although the commission steadfastly refused to reach out to Congress to seek clarifications to the law, Congress has now reached out to us—asking the agency last week for a list of recommendations to amend the statute.

Thankfully the commission responded, in part, by agreeing to extend the stay on testing and certification for lead content. This window gives Congress time to consider such common-sense changes …”

CPSC commissions now can stop passing the buck. Let’s see if more than one commissioner is willing to do the right thing.

Image credit: Steve Webel’s photostream on flickr.

LibertyWeek 75: Credit Cards, Government-Style

by Richard Morrison on January 4, 2010

in CEI Projects, Podcast

Richard Morrison, Jeremy Lott and Marc Scribner get together to bring you Episode 75 of the LibertyWeek podcast. We take on Ben Bernanke’s recession theories, Canada’s struggle to provide affordable energy, the high cost of government-regulated credit cards, bringing booze to Salt Lake City and the FDA’s critics on the left.

Regulation of the Day 94: Plastic Shopping Bags

by Ryan Young on January 4, 2010 · 3 comments

in Deregulate to Stimulate, Features, Nanny State, Regulation, Regulation of the Day, Zeitgeist

Retailers have traditionally provided free shopping bags to their customers as a courtesy. Washington, DC’s city government – known for being less than courteous – is now requiring stores to charge customers five cents for each plastic bag they use at checkout.

The tax is environmentally motivated. Since the city is acting so urgently on shopping bags, that implies that they must be the most urgent environmental threat facing DC. If that’s the case, then DC must be a veritable ecological paradise, or else its priorities are misplaced. One or the other must be true.

There were 84 unsolved murders in DC in 2009, by the way.

In lieu of plastic bags, the city is urging people to buy reusable cloth bags. But those have an environmental footprint nearly 100 times larger than a plastic bag, according to Sierra Club data. They have to be used many, many times before they cause any savings. They are also a haven for bacteria if not regularly washed. And washing them adds to their footprint.

Washington, DC has a lot of problems. Expensive but inferior schools, crime, violence, high taxes and spending – the list is long. The epidemic of plastic bags littering the streets is right at the bottom of that list. It should be prioritized accordingly. The regressive plastic bag tax should be repealed.

Obama’s Recent $75 Billion Mortgage Bailout Fails: Harmful to Economy, Housing, and Construction, Say Economists and Real Estate Experts

by Hans Bader on January 4, 2010 · 2 comments

in Bailout Watch, Deregulate to Stimulate, Economy, Legal, Politics as Usual, Regulation

Economists and real estate experts are saying that a $75 billion mortgage bailout program designed by the Obama administration has backfired and harmed the housing market, reports The New York Times:

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good. . .experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

That “’has the effect of lengthening the crisis,’ said Kevin Katari, managing member of Watershed Asset Management. . . ’We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway,’ and ‘banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books,’” delaying a recovery in the housing market and the construction industry.

The failed mortgage bailout is reminiscent of the government’s attempt to reduce burdens on irresponsible credit card borrowers, through a new law, the CARD Act of 2009, that backfired and resulted in the return of annual fees, bizarre interest rate hikes for some responsible borrowers, and the elimination of many cash back and rewards programs.

Earlier, the government pushed through billions more in other mortgage bailouts, to bail out even reckless high-income borrowers, and forced financial institutions the government took over in the name of fiscal responsibility, like Freddie Mac, to run up billions in losses bailing out irresponsible borrowers.

Banks will now be pressured to make even more risky loans. The House has approved Obama’s proposal to create the so-called Consumer Financial Protection Agency. Government pressure on banks to make loans in economically-depressed neighborhoods was a key reason for the mortgage meltdown and the financial crisis. Yet Obama’s disturbing proposal would empower the new agency to enforce the Community Reinvestment Act without regard for banks’ financial safety and soundness.  The Community Reinvestment Act was a key contributor to the financial crisis.

The mortgage crisis was also caused by the reckless government-sponsored mortgage giants Fannie Mae and Freddie Mac, and by federal affordable-housing mandates. But Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, tax cheat Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.”

Worse, the Obama Administration lifted the $400 billion limit on bailouts for Fannie and Freddie, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.

Obama’s financial-regulation plan is “largely the product of extensive conversations” with two lawmakers responsible for the corrupt status quo, Chris Dodd and Barney Frank, and it expands the reach of regulations that have been used by left-wing groups to extort pay-offs from banks.

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