The Betrayal of Public Workers
The Great Recession and its aftermath are entering a new phase in the United States, which could bring even more severe assaults on the living standards and basic rights of ordinary people than we have experienced thus far. This is because a wide swath of the country’s policy- and opinion-making elite have singled out public sector workers—including schoolteachers, healthcare workers, police officers and firefighters—as well as their unions and even their pensions as deadweight burdens sapping the economy’s vitality.
The Great Recession did blow a massive hole in state and municipal government finances, with tax receipts—including income, sales and property taxes—dropping sharply along with household incomes, spending and real estate values. Meanwhile, demand for public services, such as Medicaid and heating oil assistance, has risen as people’s circumstances have worsened. But let’s remember that the recession was caused by Wall Street hyper-speculation, not the pay scales of elementary school teachers or public hospital nurses.
Nonetheless, a rising chorus of commentators charge that public sector workers are overpaid relative to employees in comparable positions in the private sector. The fact that this claim is demonstrably false appears not to matter. Instead, the attacks are escalating. The most recent proposal gaining traction is to write new laws that would allow states to declare bankruptcy. This would let them rip up contracts with current public sector employees and walk away from their pension fund obligations. Only by declaring bankruptcy, Republican luminaries Jeb Bush and Newt Gingrich argued in the Los Angeles Times, will states be able to “reform their bloated, broken and underfunded pension systems for current and future workers.”
But this charge is emanating not only from the Republican right; in a front-page story on January 20, the New York Times reported on a more general trend spreading across the country in which “policymakers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.”
Considered together, state and local governments are the single largest employer in the US economy. They are also the country’s most important providers of education, healthcare, public safety and other vital forms of social support. Meanwhile, the official unemployment rate is stuck at 9 percent—a more accurate figure is 16.1 percent—a full eighteen months after the recession was declared over. How have we reached the point where the dominant mantra is to dismantle rather than shore up state and local governments in their moment of crisis?
Why States Need Support During Recessions
The Wall Street–induced recession clobbered state and local government budgets. By 2009, state tax revenues had fallen by fully 13 percent relative to where they were in 2007, and they remained at that low level through most of last year. By comparison, revenues never fell by more than 6 percent in the 2001 recession. Even during the 1981–82 recession, the last time unemployment reached 9 percent, the decline in state tax revenues never exceeded 2 percent. These revenue losses, starting in 2008, when taken together with the increased demand for state services, produced an average annual budget gap in 2009–11 of $140 billion, or 21 percent of all state spending commitments.
Unlike the federal government, almost all state and local governments are legally prohibited from borrowing money to finance shortfalls in their day-to-day operating budgets. The state and local governments do borrow to finance their long-term investments in school buildings, roads, bridges, sewers, mass transit and other infrastructure projects. They have established a long record of reliability in repaying these debt obligations, even during the recession. Nevertheless, these governments invariably experience a squeeze in their operating budgets during recessions, no matter how well they have managed their finances during more favorable economic times.
If, in a recession, states and municipalities are forced to reduce their spending in line with their loss in tax revenues, this produces layoffs for government employees and loss of sales for government vendors. These cutbacks, in turn, will worsen conditions in the private market, discouraging private businesses from making new investments and hiring new employees. The net impact is to create a vicious cycle that deepens the recession.
As such, strictly as a means of countering the recession—on behalf of business interests as well as everyone else in the community—the logic of having the federal government providing stimulus funds to support state and local government spending levels is impeccable. The February 2009 Obama stimulus—the American Recovery and Reinvestment Act (ARRA)—along with supplemental funds for Medicaid, has provided significant support, covering about one-third of the total budget gap generated by the recession. But that leaves two-thirds to be filled by other means. ARRA funds have now run out, and the Republican-controlled House of Representatives will almost certainly block further funding.
In 2010 roughly another 15 percent of the budget gap was covered by twenty-nine states that raised taxes and fees-for-services. In general, raising taxes during a recession is not good policy. But if it must be done to help fill deepening budgetary holes, the sensible way to proceed is to focus these increases on wealthier households. Their ability to absorb such increases is obviously strongest, which means that, unlike other households, they are not likely to cut back on spending in response to the tax hikes. In fact, ten states—New York, Illinois, Connecticut, North Carolina, Wisconsin, Oregon, Hawaii, Vermont, Rhode Island and Delaware—have raised taxes progressively in some fashion.
Of course, the wealthy do not want to pay higher taxes. But during the economic expansion and Wall Street bubble years of 2002–07, the average incomes of the richest 1 percent of households rose by about 10 percent per year, more than three times that for all households. The richest 1 percent received fully 65 percent of all household income growth between 2002–07.
One charge against raising state taxes in a progressive way is that it will encourage the wealthy to pick up and leave the state. But research on this question shows that this has not happened. We can see why by considering, as a hypothetical example, the consequences of a 2 percent income tax increase on the wealthiest 5 percent of households in Massachusetts. This would mean that these households would now have $359,000 at their disposal after taxes rather than $370,000—hardly enough to affect spending patterns significantly for these households, much less induce them to relocate out of the state. At the same time, a tax increase such as this by itself will generate about $1.6 billion for the state to spend on education, healthcare and public safety.
But even with the ARRA stimulus funds and tax increases, states and municipalities have had to make sharp cuts in spending. More severe cuts will be coming this year, with the ARRA funds now gone. These include cuts that will reduce low-income children’s or families’ eligibility for health insurance; further cuts in medical, homecare and other services for low-income households, as well as in K–12 education and higher education; and layoffs and furloughs for employees. The proposed 2012 budgets include still deeper cuts in core areas of healthcare and education. In Arizona, the governor’s budget would cut healthcare for 280,000 poor people and reduce state support for public universities by nearly 20 percent. In California, Governor Brown is proposing to bring spending on the University of California down to 1999 levels, when the system had 31 percent fewer students than it does today.
State and Local Government Workers Are Not Overpaid
Even if state and local government employees are not responsible for the budgetary problems that emerged out of the recession, are they nevertheless receiving bloated wage and benefits packages that are holding back the recovery? Since the recession began, there has been a steady stream of media stories making such claims. One widely cited 2009 Forbes cover article reported, “State and local government workers get paid an average of $25.30 an hour, which is 33 percent higher than the private sector’s $19…. Throw in pensions and other benefits and the gap widens to 42 percent.”
What figures such as these fail to reflect is that state and local government workers are older and substantially better educated than private-sector workers. Forbes is therefore comparing apples and oranges. As John Schmitt of the Center for Economic Policy Research recently showed, when state and local government employees are matched against private sector workers of the same age and educational levels, the public workers earn, on average, about 4 percent less than their private counterparts. Moreover, the results of Schmitt’s apples-to-apples comparison are fully consistent with numerous studies examining this same question over the past twenty years. One has to suspect that the pundits who have overlooked these basic findings have chosen not to look.