January 2012

Yandle: Everyman’s Deficit

by Anne Sutherland on August 13, 2010 · 1 comment

in Bailout Watch, Deregulate to Stimulate, Economy, Nanny State, Odds & Ends, Stimulus to Nowhere

Clemson University economist Bruce Yandle has published a new paper that compares the federal government’s spending habits with that of the average family. Yandle effectively bridges the gap between private common sense and public finance.

As he relates, overspending and government bailouts have created a federal deficit of $1.4 trillion. Already at 10 percent of GDP, this is only predicted to rise. A series of graphs clearly show the alarming rate at which government outspends itself.

Professor Yandle also highlights how government programs “lack a coordinated way to assess their effectiveness.” As a result, their budgets expand without any true gauge of their success or failings, or “how government-provided services can be improved.”

The paper goes on to explain how government- supported programs crowd out similar private sector efforts. Yandle shows a more uniform government approach does not, and cannot, provide individual cases with individual commitment as effectively as private enterprises such as charities can.

Private sector donations and causes are further squeezed out as businesses and individuals realize that it is often more profitable for them to lobby for more government support than turn to the free market economy.

Yandle then addresses President Barack Obama’s fiscal proposals. In his 2010 State of the Union address, Obama compared the government’s fiscal troubles to those faced by the average family. Yandle writes that “[t]he call to freeze discretionary spending brought a few chuckles, since that part of the budget accounts for just 17 percent of the total. But 17 percent matters in a 2010 budget that totals more than $3 trillion. We have to start somewhere.”

He goes on to cite a Gallup poll that showed the American public becoming increasingly concerned with its government’s fiscal situation. “Part of the explanation for this surge in interest in the federal budget deficit may reflect the surge in the deficit itself.” Never before has America faced such a deficit, with the prospect of such drastic consequences for the Everyman family.

Professor Yandle concludes that in the coming years, the federal government’s “Golden Handcuffs” will no doubt be strained, to not much avail, while the average family tightens its purse strings, nervously awaiting government cuts or increased taxes.

“Everyman’s Deficit” is a crash course in why we need to reduce the size of government. The paper clearly emphasizes and explains the benefits of private sector enterprise over government mismanagement. It should be a required read for all congressmen–and voters!

The Dangerous Minds of Urban Planners

by Marc Scribner on August 12, 2010 · 7 comments

in Deregulate to Stimulate, Economy, Legal, Personal Liberty

Since the U.S. Supreme Court’s 2005 Kelo v. New London decision, significant attention has been paid to the way government interacts in the property development realm. The case centered on a comprehensive redevelopment plan meant to augment pharmaceutical giant Pfizer’s new research and development campus (Pfizer announced construction in 1998 and decided to close the facility in 2009). The city devised a plan, financed in part by $15 million in bonds, which included financing for the Fort Trumbull State Park and a mixed-use development adjacent to the Pfizer campus. City planners estimated that the project would create 1,000 jobs and bring in new tax revenue.

After several homeowners refused to sell, the city of New London, Connecticut, initiated eminent domain condemnations through a public development corporation set up to complete the plan. The private developer of the mixed-use property was to receive a 99-year lease at $1 annually in exchange for developing the property in a manner consistent with the city’s plan.

The U.S. Supreme Court—in an unfortunate 5-4 decision—upheld the Supreme Court of Connecticut’s ruling. The lower court found that projected increased tax revenues and job creation resulting from potential economic development satisfied the requirements of the Fifth Amendment’s Takings Clause, which restricts private property condemnations by government only when the land is taken for “public use” and that the owner is given “just compensation.” This ruling, many scholars fear, has essentially rendered the Takings Clause meaningless in terms of its ability to actually protect individual property owners from unnecessary and unjust seizures. Justice Sandra Day O’Connor went as far to write in her dissent that the U.S. Supreme Court’s decision was “to wash out any distinction between private and public use of property—and thereby to effectively delete the words ‘for public use’ from the Takings Clause.”

Fundamentally, property development is an area where government has very little positive to contribute. Government cannot accurately forecast future economic conditions, as the New London-Pfizer situation demonstrates, and public officials have far less expertise in real estate development than private sector investors. Moreover, land-use restrictions such as zoning distort the real estate markets and are often used to justify public-sector involvement in real estate, as the private sector isn’t capable of fighting city hall—or so the story goes.

A recent study on New York City rezoning found that upzoned areas (those where zoning restrictions were eased to allow more types of development) were predominately populated by lower-income minorities outside of “high growth areas.” While upzoning will have beneficial effects on the neighborhood and the city as a whole, eliminating burdensome land-use restrictions such as zoning altogether should be preferred. Removing these restrictions would also neutralize the red-tape cutting argument for more government involvement in real estate development.

Real estate development policy nationwide has also become more beholden to ideological planners. The so-called “smart growth” and “New Urbanism” movements, which aim to promote “sustainable” and “livable” urban development, have begun to dominate urban development policy discussions across the country. These ideological movements have also received support from government bureaus such as the Environmental Protection Agency. Proponents desire to limit “suburban sprawl” and attempt to create denser developments closer to the urban cores, supported by expensive public “livability” projects and transit systems. A new method of promoting and enforcing this ideology is the form-based code.

Form-based codes, which have become quite popular as zoning alternatives in the southeastern United States, go far beyond the government invasiveness of Euclidian zoning regulation. Unlike traditional zoning, form-based codes specify regulatory compliance and land-use requirements that go beyond broad separation of uses restrictions. While they are touted as an improvement over zoning, form-based codes are in reality considerably worse. Public-sector meddling (and the resulting distortions) is increased across the board, which includes new requirements on green space (e.g., shade trees on private property and public parks), accessibility to public transit, and construction guidelines. In essence, form-based codes further undermine the spontaneous order that largely characterized the real estate market prior to the Euclid v. Ambler Reality decision by greatly enhancing the ability of central planners to dictate the terms of development.

Government in recent years has grown more interested in “aiding” the private sector in real estate development through public-private partnerships. The justifications generally given are that markets alone can’t bring about redevelopment—although, if true, policy makers rarely try to understand why that is the case (perhaps consumers don’t want them in the first place?)—and the existing public institutions are inadequate or counterproductive. Most often, this entails either a comprehensive redevelopment plan as was seen in Kelo or the development of large single-purpose structures such as stadiums and indoor shopping malls.

Unfortunately, these are merely symptoms of the disease: the command-and-control urban planning mindset. Planners presumably get the same rush that the political class feels when it “democratically” exercises its authority over the unwashed masses, and have convinced themselves (and much of the rationally ignorant public) that they produce significant social returns. This is not the case. In reality, they are merely misdirecting taxpayer dollars and private investment into development projects that no one desires enough to privately provide—another example of the road to Hell being paved (a bit more literally in this case) with good intentions.

Government Spends Billions Bailing Out Foreign Firms and Countries, and Replacing American Jobs With Foreign Green Jobs

by Hans Bader on August 12, 2010

in Agriculture, Bailout Watch, Deregulate to Stimulate, Economy, Employment, Energy, Environment, Global Warming, International, Natural Resources, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Stimulus to Nowhere, Trade, Zeitgeist

Our government spent as much money bailing out foreign firms as some countries spent on stabilizing their entire financial system.  Much of the money in the $140 billion AIG bailout actually went to mismanaged foreign firms that dealt with AIG.  The government also used that bailout to give billions to the Wall Street investment firm Goldman Sachs, an immensely rich and profitable company that didn’t even need the money.  (While harming most banks, and the productive  sectors of the economy, the recent financial reform bill will benefit politically-connected Goldman Sachs, which endorsed it.  Goldman Sachs is one of the biggest donors to liberal politicians.)

Earlier, the Obama administration devoted $6 billion in taxpayer money to bailing out Greece, which ran into trouble because of generous pensions that let many occupations like hairdressers retire at age 50.

American workers are also suffering due to the stimulus package.  It is using taxpayer subsidies to replace U.S. jobs with foreign green jobs. It also destroyed thousands of jobs in America’s export sector.

Even more jobs will end up overseas if the Obama administration’s poorly conceived global warming legislation passes.

Reason magazine has an insightful article called “Five Lies About the American Economy.”

Voting the Bums Back In

by Ryan Young on August 12, 2010

in Politics as Usual, Zeitgeist

Many people think change is in the air. Voters are angry. And they want to throw the bums out. That’s the dominant narrative this election cycle. But at least during primary season, that narrative is fitting poorly with actual election results. Politico reports:

Six incumbents have lost this season: Sens. Arlen Specter (D-Pa.) and Bob Bennett (R-Utah) and Reps. Alan Mollohan (D-W.Va.), Bob Inglis (R-S.C.), Carolyn Kilpatrick (D-Mich.) and Parker Griffith (R-Ala.). Larry Sabato, a political scientist at the University of Virginia, pointed out in Arena that factoring for those losses translated into a 98.3 percent win rate for incumbents so far in 2010.

That 98.3 percent win rate will drop on Election Day. But probably not by much. Not even if one or both chambers switch parties. In 2008, incumbents running for re-election had a 94.9 percent success rate. In 2006, when Congress changed parties, the re-election rate was still right around 94 percent. The last time re-election rates went as low as 90 percent was in 1992 — nearly two decades ago.

The sad truth is that incumbents are safe. It doesn’t matter that Congress’ approval ratings are in the low teens. Voters just aren’t going to throw out very many bums. Voters may despise Congress as an institution, but most people have positive opinions of their own representative.

That’s why the average tenure in the House is more than 14 years, or seven terms. And most turnover isn’t from losing elections. It’s from retirement, or running for other office, or death; for many, politics is literally a lifelong career.

So expect a lot of familiar faces to be sworn in when the 112th Congress convenes in January, even if power changes hands.

Though I will, of course, be very happy if events prove me wrong.

Government-Sanctioned Lying and Reparations Increase National Debt: The Pigford Class Action

by Hans Bader on August 12, 2010

in Agriculture, Bailout Watch, Economy, Employment, Energy, Environment, International, Legal, Natural Resources, Odds & Ends, Personal Liberty, Politics as Usual, Regulation, Sanctimony, Stimulus to Nowhere, Trade, Zeitgeist

There are only 36,697 black farmers in the entire country, but in a class-action lawsuit, more than 86,000 African-Americans claimed to have suffered from race discrimination by the Department of Agriculture during their time as farmers.   They are getting “‘virtually automatic’ $50,000 payouts” at taxpayer expense, thanks to the Obama administration.  It has repeatedly loosened the requirements for payouts in a class-action lawsuit against the government known as the Pigford case, in order to make such payouts possible.  Essentially, the Obama administration is using the case to award race-based reparations to people who never farmed or even intended to farm.  The government’s collusion with the plaintiffs’ lawyers in this case will ultimately cost taxpayers billions.

The next time you hear President Obama on TV challenging his critics to identify any unnecessary government spending that can be cut, and suggesting that there is no waste to be found in the federal budget, keep this case in mind.  In 2009, Obama made a big show of ordering his cabinet to come up with a measly $100 million in cuts even as he submitted a record budget request of $3.67 trillion (not counting hundreds of billions in “emergency” spending).  That $100 million was less than 0.003 percent of the budget, and is much smaller than the billions that the government will ultimately waste on the Pigford case.

The Congressional Budget Office has estimated that “President Obama’s policies would add more than $9.7 trillion to the national debt over the next decade.”  That’s despite the fact that there are $3 trillion in tax increases built into the president’s budget.

Obama recently signed a deficit-expanding $26 billion public-employee bailout.  The stimulus package is now expected to cost $75 billion more than predicted.  The stimulus package is using taxpayer subsidies to replace U.S. jobs with foreign green jobs. It also destroyed jobs in America’s export sector.

One issue in the Pigford case was the fact that people with bad credit ratings didn’t get loans from the Agriculture Department as often as people with good credit ratings.  That was deemed “discrimination” because African-Americans tended to have lower credit ratings on average than whites.

Spinning the Defeat of Cap-and-Trade

by Marlo Lewis on August 11, 2010 · 1 comment

in Global Warming

Barring the trickery of a lame duck conference committee, cap-and-trade is dead in the 111th Congress. Some blame Obama for not taking a more hands-on role. Others blame environmental groups for waging a $100 million lobbying campaign without winning a single GOP convert to the Kerry-Lieberman cap-and-trade bill. Others blame the allegedly “well-funded denial machine,” even though proponents, who include major corporations like British Petroleum, must have outspent CEI and its free-market brethren by more than 100 to 1.

Today’s Climatewire (subscription required) features interviews with Exelon Corp. VP Betsy Moler and Phil Sharp, President of Resources for the Future, who lament that Republican lawmakers, the “inventors” of “market-based” environmental policy, have turned against their own “invention.” If I catch their drift, Moler and Sharp are trying to spin GOP opposition to cap-and-trade as self-contradictory, hence as unstable, hence as reversible. As Climatewire reports, Moler is not ready to “throw in the towel” and Sharp entertains the hope that a “new kind of coalition” will emerge in the next Congress.

Now, let’s look at this notion, peddled by Moler and Sharp, that Republicans betrayed themselves and besmirched their own legacy by blocking cap-and-trade. Here’s how it’s discussed in Climatewire:

In an interview, Moler said that her deep disappointment was the rejection by Republican leaders in Congress of a market-based strategy for raising the price of carbon emissions, to speed transitions by power plants, industry and consumers to cleaner energy.

The Democrats called it “cap and trade.” Republicans labeled it “cap and tax,” and the change in one word proved lethal.

“The thing that just amazes me, confounds me, surprises me is how successfully the Republican leadership and a lot of the people who would be potentially negatively impacted have been in vilifying what have historically been market-based solutions,” Moler said.

Inventors Turn on Invention

“Cap and trade is really a Republican instrument that grew out of a lot of the Republican thought leaders as a market-sensitive, market-friendly, anti-command-and-control mechanism” to reduce sulfur- and nitrogen-based air pollution in the 1990 Clean Air Act amendments. “Now, some of the same people who invented it have turned on it as an energy tax,” she said. “It’s a huge missed opportunity. I don’t know where you go next.”

Moler’sregret is seconded by Philip Sharp, president of Resources for the Future, who, as a Democratic House member from Indiana, stood with Moler in the 1990s in the energy deregulation campaign. Sharp was a pivotal factor in Congress’ adoption of the 1990 Clean Air Act amendments and the 1992 Energy Policy Act, which opened the way for FERC’s electricity market orders four years later.

“I’m not here to say cap and trade is the only way to do this,” Sharp said in an interview. “It worked magnificently with SO2 and a couple of other instances.” Scaling it up massively to deal with economywide carbon emissions is another question. “We don’t know we can manage it as effectively,” he said.

“But what is really unfortunate in the public debate is that the current Republican leadership has overthrown one of the great Republican successes in this country [under President George H.W. Bush], to capitalize on the flexibility of the marketplace” in achieving regulatory change, Sharp said.

“I don’t think people appreciate the extraordinary challenge that represented and the difficulty of getting it done” in the 1990s, he said. Now, with the demise of that approach, Congress has invited U.S. EPA to step in on the climate front “and regulate the living [daylights] out of everything and see how well a modern economy works doing that.”

Moler and Sharp miss several key points.

First, the Title IV acid rain cap-and-trade program enacted under President George H.W. Bush is not the “magnificent” success they suppose it is. As Kenneth Green, Steven Hayward, and Kevin Hasset of the American Enterprise Institute note, prices of tradable sulfur dioxide (SO2) emission permits have been highly volatile: “SO2 trading prices have varied from a low of $70 per ton in 1996 to $1500 per ton in late 2005. SO2 allowances have a monthly volatility of 10 percent and an annual volatility of 43 percent over the last decade.”

Second, utilities participating in the SO2 emissions trading program could meet all or part of their obligations by purchasing low-sulfur coal and/or installing scrubbers, a commercially-proven emission control technology. In contrast, there is no low-carbon coal, and no commercially-proven technology to “scrub” carbon dioxide (CO2) emissions out of power plant exhaust streams.

Third, unlike sulfur, which is an impurity or contaminant in coal and oil, carbon is intrinsic to the chemistry of fossil fuels. Consequently, whereas emission control requirements for SO2 do not logically entail an unlimited agenda aiming at total abolition of the fuel, emission control requirements for CO2 do imply abolition as the ultimate objective. Such extremism is reflected in the apocalyptic rhetoric of the global warming movement, in petitions demanding that EPA establish national ambient air quality standards (NAAQS) for CO2 at 350 parts per million and for other greenhouse gases at pre-industrial levels (not even a global depression lasting several decades would be sufficient to lower CO2 concentrations to 350 ppm), and in Al Gore’s campaign to “repower America“ with “zero-carbon energy” within “ten years.” More pertinently, pull-out-the-stops, sky-is-the-limit regulation lurks in the Waxman-Markey and Kerry-Lieberman bills’ escalator clauses, which all but ensure that the explicit emission reduction target (83% below 2005 levels by 2050) would be superseded by more aggressive requirements.

Fourth, just because a “market-based” approach is more efficient, in principle, than command-and-control regulation does not in any way obligate Republicans to support Waxman-Markey or Kerry-Lieberman if those same Republicans oppose all regulatory climate policies.

Fifth, every Republican in the Senate voted for the Murkowski resolution to block EPA regulation of greenhouse gases via the Clean Air Act. So it’s silly to say that Republicans “invited U.S. EPA to step in on the climate front ‘and regulate the living [daylights] out of everything. . .’” President Obama threatened to veto both the Murkowski resolution and the much weaker Rockefeller bill, which would merely postpone EPA regulation of stationary sources of greenhouse gases for two years. It’s the Democratic leadership, not the GOP, that has “invited” EPA to make climate policy through the regulatory back door.

Finally, Republicans betray themselves (ask President George “Read My Lips; No New Taxes” Bush) when they vote for rather than against higher taxes. Because carbon is intrinsic to the chemistry of fossil fuels, a carbon cap-and-trade scheme is a virtual broad-based energy tax. The same cannot be said of the SO2 program, which was merely a virtual pollution tax. Moler and Sharp would like GOP lawmakers to believe they can win elections by becoming the Party of Energy Taxes. Fortunately, most Republicans don’t need much coaching to realize that is complete bunk.

Why Government Layoffs Tripled in June

by Ryan Young on August 11, 2010 · 2 comments

in Economy, Employment, Labor, Politics as Usual

This graph from just-released Federal Reserve data caught my eye. It shows government layoffs and discharges from late 2000 through June of this year (raw data set downloadable here). Government jobs are remarkably stable. According to this BLS chart,government workers enjoy roughly three times the job security of private sector jobs. Government workers also compensated more than twice as well as the people who pay their salaries.

For most of the last decade, government workers had as small as a 1-in-200 chance of getting fired or laid off in a given month. This stability mostly held up even during recessions, which are marked as the shaded areas in the graph.

But notice the big spike that happened this June. The economy is out of recession. But times are still tough. And government deficits are at record highs. Is the sudden jump in layoffs and discharges due to government cutting spending to avoid fiscal disaster?

I’d guess not. June was when large numbers of temporary census workers finished their jobs. Still, for one shining second, I thought that Washington had come to its senses.

Financial “Reform” Harms Farmers, While Leaving Corrupt Government-Sponsored Mortgage Giants Unreformed

by Hans Bader on August 11, 2010 · 2 comments

in Agriculture, Deregulate to Stimulate, Economy, Environment, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Zeitgeist

Farmer Betsy Jensen explains how the so-called financial “reform” bill signed by President Obama will harm agricultural markets, and thus farmers, in today’s New York Times. Particularly damaging will be its restrictions on derivatives, which “traders who buy and sell wheat or corn” use to insure themselves against risk. Worried farmers like Jensen are “well aware that the system would not function without” those traders. Farmers like Jensen also use derivatives to protect against swings in prices for the crops they sell, and “swings in the cost of fertilizer, fuel and other staples.”

While it imposes harmful red tape on agriculture, the financial reform bill deliberately does nothing to reform the corrupt government-sponsored mortgage giants Fannie Mae and Freddie Mac, even though Treasury Secretary Geithner admits that they were a “core part of what went wrong“ in our financial system.  The bill’s 2,315 pages are full of payoffs for special interests.  (Obama received $125,000 in contributions from Fannie Mae and Freddie Mac executives.)

At Obama’s direction, Freddie Mac and Fannie Mae ran up tens of billions of dollars in losses bailing out out delinquent mortgage borrowers, some of whom had high incomes. The Obama administration rewarded them for going along with this by showering their executives with $42 million in pay.

The financial “reform” law’s restrictions on derivatives could cost U.S. companies as much as $1 trillion in lost capital and liquidity.  While regulators may ultimately decide to exempt farmers themselves from many of those harmful restrictions, it is doubtful that they will exempt the agricultural traders who are needed to provide “enough liquidity, or money” for the agricultural markets to “function” properly.

Not So Ancient History – How CEI (and friends) Nixed Early Action Crediting (on three separate occasions)

by Marlo Lewis on August 10, 2010

in Global Warming

I’m posting three relatively obscure items by which CEI and friends killed a mischievous Trojan Horse strategy for Kyoto-style regulation variously known as credit for early action, credit for voluntary reductions, and transferable credits. The items in question are:

  • Indiana Rep. David McIntosh’s legislation to block funding for an early action credit program.
  • CEI’s comment to the Department of Energy explaining why it does not have legal authority to award regulatory credits for voluntary greenhouse emission reductions.
  • My unsolicited testimony to the Senate Energy and Natural Resources Committee advising the Senate not to give DOE the authority it lacks. 

The brainchild of Sen. Joe Lieberman, the Environmental Defense Fund, and the Pew Center on Global Climate Change, early action crediting was designed to establish the framework for a future cap-and-trade program while growing a corporate lobby of energy-rationing profiteers.

An early credit scheme works as follows. Companies “volunteering” to reduce their emissions before Congress enacts a mandatory program receive regulatory credits they can later apply to meet their obligations under a cap-and-trade scheme. This would quickly corrupt the politics of energy policy. Every “early actor” would have an incentive to lobby for a cap in order to transform his otherwise worthless credits into tradable emission permits worth millions of dollars.

In addition, by amassing inexpensive credits for easy reductions, “volunteers” could corner the market for emission permits that later cost other firms dearly under cap-and-trade. Insiders — big businesses with savvy environmental compliance staffs –  would profit at the expense of smaller firms unable afford carbon accountants and lawyers.

Had Congress enacted an early action program, or had the Department of Energy succeeded in awarding early credits under its own authority, a coalition like the U.S. Climate Action Partnership would likely have formed earlier than it did and be stronger than it is today.

H.R. 2221, introduced by Rep. McIntosh in the 106th Congress, upstaged, and preempted Republican support for, H.R. 2520, New York Rep. Rick Lazio’s companion bill to Sen. Lieberman’s early action  bill (S. 547). McIntosh lined up 32 co-sponsors compared to Lazio’s 15. Credit for early action became politically radioactive with anti-Kyoto House Republicans. Without a viable  House companion bill, Sen. Lieberman’s bill went nowhere.

Three years later, on Valentine’s Day 2002, President Bush naively brought early crediting back from the political graveyard by directing the Department of Energy to “give transferable credits to companies that can show real emission reductions.” DOE convened several comment periods and stakeholder meetings over the next three years to figure out how to transform the existing Voluntary Reporting of Greenhouse Gases Program, established by Sec. 1605(b) of the 1992 Energy Policy Act, into a crediting program.

Through this comment and others, CEI helped persuade DOE’s General Counsel that Sec. 1605(b) provided no authority to implement an early credit program. Dozens of rent-seekers spent hundreds of billable hours trying to game the rules of a revised 1605(b) program, only to have DOE’s GC pull the rug out from under them in the 11th hour.

Our un-invited testimony in April 2005 clarified for Senators Larry Craig (R-Idaho) and Chuck Hagel (R-Neb.) why they should withdraw S. 388, a bill that would give DOE the authority it lacked. The late John Berthoud, then President of the National Taxpayers Union, clinched the argument by confirming for Sen. Craig that blocking transferable credits was an issue of key importance to the free market coalition.

Around the Country with Public Sector Unions

by Ivan Osorio on August 10, 2010 · 1 comment

in Bailout Watch, Economy, Employment, Labor

It’s often a sign that a problem is turning into a crisis when the public outcry over it becomes ubiquitous. That seems to be the case with the stress that government employee compensation is placing on government budgets at all levels, as several news items today indicate.

In a front-page story, USA Today reports that federal employees earn far above their private sector counterparts, and that gap has widened considerably in recent years.

Federal workers have been awarded bigger average pay and benefit increases than private employees for nine years in a row. The compensation gap between federal and private workers has doubled in the past decade.

Federal civil servants earned average pay and benefits of $123,049 in 2009 while private workers made $61,051 in total compensation, according to the Bureau of Economic Analysis. The data are the latest available.

The federal compensation advantage has grown from $30,415 in 2000 to $61,998 last year.

Public employee unions say the compensation gap reflects the increasingly high level of skill and education required for most federal jobs and the government contracting out lower-paid jobs to the private sector in recent years.

However, as Reason‘s Nick Gillespie rightly notes, such touting of government employees’ education credentials “probably reflects credentialism run amok as a demonstrated need for specialized skills.”

Moreover, higher salaries are just the beginning. In addition to generous benefits, many government workers enjoy retirement benefits that most private sector workers can only dream of. Negotiated as part of collective bargaining agreements, lavish pensions allow union-friendly politicians to keep their organized labor supporters happy, while they get to kick the can down the road to their successors — when the bill comes due, it becomes the new office holders’ problem.

And how lavish can those pensions get? Take the city of Bell, California,  where, The Wall Street Journal notes in an editorial, “City Manager Robert Rizzo stepped down after news broke that he was making $800,000 a year to oversee the blue-collar town of 40,000.”  And he’s just the tip of the iceberg.

According to the California Foundation for Fiscal Responsibility, a nonprofit that advocates pension reform, Mr. Rizzo is hardly alone. The foundation lists 9,111 retired California government workers receiving pensions in excess of $100,000 a year. The top earner, one Bruce Malkenhorst, receives $510,000 a year for his tenure as city administrator of Vernon, California (population, 91). Not including health benefits.

These paydays are the inevitable result of the dominance of government unions in city and state politics. While most private workers have 401(k)-type plans that rise and fall in value with economic growth, unions negotiate guaranteed payouts that stay lucrative whether or not the cities can afford them. California Attorney General Jerry Brown is investigating the Bell episode, but he’d enhance his chances to become the next Governor if he proposed more ambitious pension reform.

That is bad enough, but making that situation even worse is the fact that those same politicians who negotiated those generous pensions have neglected to adequately fund them, while setting up rules that could be gamed to increase payouts — sometimes even beyond retirees’ former salaries. Now those states face huge financial shortfalls, which underfunded pension obligations are making far worse. As the Mercatus Center’s Eileen Norcross and Todd Zywicki note in The New York Daily News:

At 44, Hugo Tassone retired from the Yonkers police force with an annual pension of $101,333 – thanks to overtime pay he tacked on to his $74,000 salary. Tassone told The New York Times it was the pension he could collect after 20 years of service that attracted him to the job in the first place.

He’s not alone. In the last decade, half of the police and firefighters who retired in Yonkers collected pensions that exceeded their base pay, in (at least one case) by as much as 75%.

Don’t blame the officers. New York’s pension rules make it pay more to retire than to work.

[...]

But loopholes and gamesmanship aren’t the only reason why public pension systems nationwide face massive funding shortfalls. They are the result of a perfect storm of flawed accounting, which fueled unrealistic employee demands that were then underfunded by politicians. In plans across the country, during booming years of the late 1990s, many workers were promised retirement payouts that were “too good to be true” and, thus, impossible to make good on.

New York’s budget situation is bad. In California, it’s reached a point that Governor Arnold Schwarzenegger calls “unsustainable.” He lays out the numbers in a Los Angeles Times op ed:

We have $500 billion in government-employee pension debt alone, a mind-numbing figure that is six times the size of our entire state budget and 10 times the amount we spend on education.

[...]

We must also reform California’s pension system for government employees, whose costs to taxpayers for just one of our major pension funds have skyrocketed from $150 million a year a decade ago to almost $4 billion this year. Private-sector workers already struggle to pay for their own retirement. Now they are being forced to pay more and more for the government workers’ retirement, at the very time their own retirement accounts have declined. What is worse, in five years those pension costs will grow to well over $10 billion per year, and keep growing from there.

Fixing this will not be easy, but public attention turning to this crisis is a welcome first step.

For more on public sector unions, see here and here.

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