Growing Gloom for States and Cities; What About Solutions?

A New York Times article accurately describes a set of fiscal realities in Sunday’s editorial A Growing Gloom for States and Cities. The New York Times wildly misses the mark as to who is to blame for this crisis.

NYT: Washington should have been trying to find a way to help states avoid the layoffs and cutbacks that have contributed heavily to the high unemployment rate. Instead, it seems to be doing everything possible to make the situation worse in state capitals around the country.

Mish: That is essentially correct (except the implied tone). I proposed three items that would most assuredly help cities and states. Once again, here they are.

1. Scrap Davis-Bacon and all prevailing wages laws that force up costs of construction and other projects at the city, county, state and federal level.
2. End Collective Bargaining of public unions. Governor Scott Walker in Wisconsin shows the dramatic results that can happen if this is done. School districts that had budget deficits hugely in the read, saw them immediately go into the green, and not even for reasons that one might think. I wrote about it in Union-Busting is a “Godsend”; Elimination of Collective Bargaining is the Single Best Thing one Can do for School Kids
3. Pass national right-to-work laws. Again this will help cash-strapped cities, counties, and states that have to deal with union-mandated pricing instead of competitive pricing. The goal of government should be to provide the most benefit for the least cost. The goal of unions is to provide as little work as possible for the most cost. It’s time we end that model.

We can easily avoid the layoffs the NYT mentions if public unions accepted lower wages. They won’t. Instead, unions cannibalize younger workers for the sake of maintaining preposterous wages and benefits at the top vs. wages and benefits in the private sector.

Point blank, the public is fed up with higher taxes to support public unions who get vastly superior wages, benefits, and guarantees than they do.

NYT: A recent report from the Center on Budget and Policy Priorities showed that nearly all states will spend less on vital services in 2012 than they did in 2008, after inflation, even though there are more children in public schools and more poor people on the Medicaid rolls.

Mish: Sounds like a good idea to me. We have overpaid for services delivered. My proposals above will help address that issue.

NYT: And now comes the Budget Control Act of 2011, the deal reached in Congress to cut $2.4 trillion over the next decade in exchange for raising the debt ceiling. Although the deal could have been worse and was structured by White House negotiators to reduce the impact on safety-net programs like Medicare and Medicaid, it will do real damage at the state and local level.

Mish: The budget deal could hardly have been worse. There were no spending cuts, tax hikes, or reforms in the measure. The only agreement was to cut a lousy $2.4 trillion ($240 billion a year), all back loaded, not Congressionally binding, when the budget deficit is $1.4 to $1.6 trillion a year. How could it possibly have been worse?

NYT: The credit downgrade that resulted from the debt crisis has yet to directly affect state and city bonds, many of which are now absurdly rated higher than Treasury bonds, but credit scrutiny will only get stricter for already weakened states and cities.

Mish: I certainly agree it is absurd for city and state bonds to be rated higher than US treasuries. However, the S&P downgrade of the US was fully warranted, even if the S&P went about it in a horrendously sloppy manner. Moreover, increased scrutiny of city and state bonds is a fabulous thing. They are living beyond their means and accurate bond ratings can only help.

NYT: If investors start to get nervous about the public sector, borrowing costs could go up. Stock volatility is also taking a toll on state pension funds, which are often heavily invested in the market. Last Monday, when the Dow Jones fell by more than 600 points, the California retirement system lost $6 billion. Declines in the market also lower income tax revenues for state coffers.

Mish: It is the height of absurdity to manage interest rates, bond ratings,etc. for the benefit of the stock market. The fact of the matter is stocks are priced for perfection and they should fall because perfection is not on the way. Thus, the NYT is openly encouraging bubbles to bail out pension plans.

I have a better idea: Let’s start tackling the idea that promises to public union workers and government workers are untenable and need to be reduced.

Come to think of it I need to add point 4 to my list. Here it is.

4. Immediately kill defined benefit plans for government workers and accept the idea that promised benefits will be reduced voluntarily or via bankruptcy.

NYT: The Republicans who produced this artificial crisis, and are responsible for its effects, say they would like nothing more than to see a reduction in state as well as federal spending. That is where government hits closest to home, affecting the size of classrooms, the bulbs in streetlights, the asphalt in potholes, and the lines in emergency rooms.

They are well on their way to achieving their goal, making life more difficult in every city and town.

Mish: That is one of the biggest pieces of nonsense in the entire article, chock full of complete nonsense.

It certainly is not Republicans who support Davis-Bacon, Collective Bargaining for public unions, or forced union employment against the free-will of employees. Indeed forced union employment is tantamount to forced slavery.

I discussed the slavery aspect of forced union membership many times. Here are a pair of articles to consider:

• Paul Krugman, Stephen Colbert, Bill Maher, others, Ignore Extortion, Bribery, Coercion, and Slavery; No One Should Own You!
• Professor at Alaska University Chimes in on Public Unions and the Situation in Wisconsin

Thus, not only does ridding the US of collective bargaining for public unions and instituting national right-to-work laws make economic-sense, it also makes moral-sense.

However, there is plenty of blame for Republicans too. They failed to put these issues on the table. Republicans and Democrats alike refuse to do anything about bloated defense budget that could easily be cut in half at no expense to the security of the US. Indeed, if the US stopped trying to be the world’s policeman, our security concerns and enemy list would plunge.

So, yes, I blame Republicans too, but 180 degrees removed from what the Times suggests. Finally, it is primarily Democrat support for unions and untenable union pensions that is at the heart of the crisis in city, state, and municipal governments.

There is plenty of blame to go around, let’s recognize all of it, and for the right reasons.

About the author: Mike “Mish” Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management. His top-rated global economics blog Mish’s Global Economic Trend Analysis offers insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.