Public Safety Unions and the Financial Apocalypse

Imagine for a moment that two premises are beyond serious debate: (1) That there will be another financial crisis within the next five years that will equal or exceed the severity of the one experienced in 2009, and (2) That the political power of public safety unions will prevent local governments from enacting pension reforms sufficient to avert a financial disaster when and if the next financial crisis hits.

What will these public safety unions do?

It’s distressingly easy for politicians to dismiss both of these premises, but since for the moment we’re not, imagine the following: Major European banks have declared insolvency because their debtors have all defaulted on payments, the Chinese stock market has collapsed because their export markets are shrinking instead of growing, and the deflationary contagion reaches American shores. Across the nation, speculative buying is replaced by panic selling. Housing prices fall, defaults accumulate, and the pension funds lose half their value overnight. In a cascading cycle reminiscent of 1929, deflation sweeps the global economy.

Meanwhile, pension reform has been limited to incremental adjustments to the pension benefits for new employees. Millions of retirees and active public safety workers still expect pensions that are roughly equivalent to the amount they made at the peak of their careers. But the money won’t be there.

How will public safety unions use their political power to address this challenge?

If the present is any indication, the solutions won’t be pretty. In San Jose and San Diego, public safety unions lead the charge to roll back local pension reforms enacted by voters. In counties across California, public safety unions lead the charge to undermine in court the reforms enacted by the State Legislature in the Public Employee Retirement Act of 2014. That’s all fine while the economic bubble continues to inflate. But what do we do when it pops? What do we do when there’s no money?

When challenging public safety unions to exercise their political power to advocate on issues other than law and order or their own compensation and benefits, a reasonable response is that public safety unions, like any government union, shouldn’t be involved in politics. The problem with that response is that they already are. Government unions, and their partners in the financial community, are a major cause of the economic bubble we’re experiencing. Their insatiable appetite for high returns, 7% or more, compels the financial engineering that creates unsustainable economic growth. When the crash comes, government unions will blame “Wall Street.” But in reality, they will share the blame, because they didn’t want to admit that their pension benefits relied on unsustainable rates of economic growth.

If there is another economic crash, public safety unions will face a choice. They can use their political power to strip away every remaining service that local government performs that isn’t related to public safety, raise taxes, and support “fees” on everything from green lawns to vehicle miles driven. They can support the creation of an authoritarian, oppressive state, raising revenue through rationing and regulating our water, energy, land use, home improvement, etc., at levels that make today’s annoying excesses seem trivial. They can hide behind environmentalism and egalitarianism to tax the last bits of vitality and freedom out of ordinary productive citizens. They can even hide behind faux libertarian ethics to charge exorbitant fees for rescue services, or profit from draconian applications of asset forfeiture laws. If they do this, it may be enough for them. But the price on society will be hideous.

There is an alternative.

Public safety unions can recognize that sustainable economic growth occurs when people have fewer impediments to running their private businesses. They can recognize that large corporations use regulations to eliminate their smaller competitors, and that excessive regulations of land, energy and water are the reasons that California has such a high cost of living. They can recognize that competitive resource development and cost-effective infrastructure development can only be achieved when the environmentalist lobby and their allies – the corporate and financial elites – are confronted and forced to accept less crippling restrictions.

Better yet, public safety unions can begin to recognize these political precepts NOW, before the financial apocalypse. Along with hopefully accepting more pension reforms instead of always fighting them, these unions can also protect their members’ futures by fighting for economic reform and more rational environmentalist restrictions. The sooner these reforms are adopted at the state and local level, the more resilient our economy will be when the economic implosion occurs. If pension benefit cuts are inevitable, because the money isn’t there anymore, with economic and environmentalist reforms the cost-of-living will also be cut.

America’s excessive public employee pension benefits have created a four trillion dollar monster, pension funds ravaging the world in search of high returns during the late stages of a credit expansion that has granted present growth at the expense of future growth. The day of reckoning is coming. Public safety unions can help prepare, for their own sake as well as for the sake of the citizens they are sworn to protect.

 *   *   *

Ed Ring is the president of the California Policy Center.

RELATED POST:
The Coming Public Pension Apocalypse, and What to Do About It

13 replies
  1. talltalk says:

    private security in neighborhoods, instead of all this expense. all the money needs to be spent by neighborhoods for their own private security.

    police don’t respond quickly anyway, this system does not work and its costing too much, a waste of money.

  2. SkippingDog says:

    Imagining something doesn’t make it real. The entire premise of this piece is BS.

  3. Tough Love says:

    No Skippy, the entire premise of PUBLIC Sector pensions that are 3 to 6 TIMES greater in value at retirement than those of comparable Private Sector workers …. while those PRIVATE Sector Taxpayers are called upon to pay for 80% to 90% of the total cost of PUBLIC Sector pensions ….. is BS.

  4. talltalk says:

    the only thing tough love does is apply logical fallacies. there is no way to win debates using logical fallacies.

  5. Tough Love says:

    Talltalk,

    What did I state that is false or a “logical fallacy” ?

    Please be specific.

  6. S Moderation Douglas says:

    a causal fallacy:

    you commit this fallacy when you assume that a necessary condition of an event is sufficient for the event to occur. a necessary condition is a condition that must be present for an event to occur. a sufficient condition is a condition or set of conditions that will produce the event. a necessary condition must be there, but it alone does not provide sufficient cause for the occurrence of the event. only the sufficient grounds can do this. in other words, all of the necessary elements must be there.

    (Texas State College of Liberal Arts, Department of Philosophy: “Confusion of Necessary with a Sufficient Condition”)

    you are implying that because public workers pensions are higher, they are overpaid respective to similar private sector workers. in some cases that is true, in some cases it is not. that would make it a “necessary, but not sufficient” condition. there is overwhelming empirical evidence that, because average wages in the public sector are lower, the higher pensions are not sufficient to raise their total compensation above that of the private sector in most cases.

    and no, it’s not just a handful of overpaid private sector doctors and lawyers.

    ” 3 to 6 TIMES greater in value at retirement ” is just sensationalist blather. even more moronic when calculated to two decimal points. unless you compare the wages …and… benefits of …similar… public and private workers, you might as well be pissin’ up a rope.

  7. Tough Love says:

    Quoting SMD …..

    ” there is overwhelming empirical evidence that, because average wages in the public sector are lower, the higher pensions are not sufficient to raise their total compensation above that of the private sector in most cases. ”

    BS …. and simply stating such means nothing.

    PROVIDE the readers with that “overwhelming empirical evidence”.

  8. S Moderation Douglas says:

    “….after controlling for multiple factors including level of education, hours worked and non-cash compensation, Keefe found that, on average, full-time state and local employees are undercompensated compared to “otherwise similar private-sector workers.”

    http://www.epi.org/publication/public_sector_workers_earn_less/
    _____________________________
    “Our re-estimation of the much-used wage equation plus adjustments for proper valuation of pensions and retiree health insurance indicates that the two roughly balance out. The estimated difference nationwide is about 4 percent in favor of private sector workers.”

    https://www.google.com/url?sa=t&source=web&rct=j&url=http://crr.bc.edu/wp-content/uploads/2011/09/slp_20-508.pdf&ved=0ahUKEwj7jM7j-oHNAhUE7CYKHScvDGw4ChAWCB8wAg&usg=AFQjCNFzRRCyttEMXyJMBEL7jSh7WPaqiA&sig2=yRhi7FThYWDGsgGXhUGQ-w
    __________________________
    ” But even after accounting for the value of retirement, healthcare, and other benefits, state and local employees earn less than private sector counterparts.”

    http://www.nirsonline.org/index.php?option=content&task=view&id=395
    __________________________
    “Our analysis finds that the average state pays salaries around 12 percent below those paid by large private-sector employers for similarly-skilled workers.”

    However:

    “In the average state, state government employees receive a total compensation premium of around 10 percent relative to private-sector employment.”

    Butt:

    According to Table 4, page 60, this compensation premium is almost entirely due to compensation in the lower forty percent of workers. Those with a Bachelor’s degree, and above are either “roughly equal” in total compensation, or have a total compensation lower than the private sector.

    “It is worth considering how government may continue to attract better-educated employees despite a seeming compensation penalty.”

    A State-by-State Ranking of Public-Employee Compensation – American Enterprise Institute
    _____________________________
    The studies all agree:

    “Public employees in the lowest one-third of the wage distribution are paid more than their private sector counterparts. Those in the middle third are paid about the same. And those state-local workers in the top one-third are paid about 20 percent less than private sector workers.”

    (Center for Retirement Research)

    Ergo:. “…the higher pensions are not sufficient to raise their total compensation above that of the private sector in most cases. ”

    (Moi)

  9. Tough Love says:

    SMD,

    When I saw the reference to University Professor Jeffrey Keefe I didn’t need to read more ……….

    I suppose very long tenure (and likely funding/grants from sources [Public Sector Unions?] supporting pre-determined study results) is what has stopped Rutgers from terminating this fellow.

    In fact, one of your favorite references, Andrew Biggs, has enumerated MANY of the VERY material flaws in Keefe’s work. While many, the one flaw that ALONE should disqualify ANY credibility as well as continued employment as a university professor, is his insistence that in calculating the annual pension-cost-element of Public Sector “Total Compensation” (wages + pensions + benefits), Mr. Keefe insists that what the gov’t entity ACTUALLY CONTRIBUTES in that year is the correct figure ….. no matter that virtually every other economist believes that the correct figure is an estimate of the present value of the pension benefits ACCRUED IN THAT YEAR (using assumptions consistent with the strength of the guarantee that those accrued pension benefits will indeed be paid).

    Point ….. in several years, NJ (Rutger University’s home State) contributed nothing (yes nothing) towards its Public Sector pensions, all while NJ’s workers accrued another year of (undeniably) very valuable pension benefits.

    Not a problem under Keefe’s logic…. there was NO COST. Really ? Only in academia would someone with such off-the-wall ideas keep their job.

  10. S Moderation Douglas says:

    “Give me a one-handed economist! All my economics say, ”On the one hand? on the other.”
    Harry S. Truman

    Here you have four major studies that are all remarkably close on the approximately 10-12% average pay (wage) deficit for public workers. Three of them (Keefe included) all determined that even with benefits, public workers are roughly equal or earn slightly less in total compensation.

    One of my favorite references, Andrew Biggs, in nationwide data, agreed with the other three studies on the approximate twelve percent public wage deficit, but calculated the total compensation as ten percent higher for public workers. This difference was primarily due to using a risk free discount rate instead of the assumed rate of return. I still strongly recommend reading all four studies, front to back.

    There are two reasons I continually recommend Biggs, perhaps over the others. He has a much more detailed description of methodology (and the inherent margin of error, intentional or otherwise.) And he has a much better documentation of compensation dispersion between the lower skilled workers and the professionals.

    According to his nationwide data, those workers with a Bachelor’s degree are roughly equal to the private sector in total compensation …even with pensions and retiree healthcare discounted “correctly”. (Biggs calls a 2% difference statistically insignificant.) Which means, I reiterate, 60% of state workers are either “roughly equal” in total compensation, or significantly undercompensated.

    In other words:

    “…the higher pensions are not sufficient to raise their total compensation above that of the private sector in most cases. ”

    Unless you think Jeffrey Keefe somehow sabotaged Biggs data?

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