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On August 4th an interesting analysis of public sector compensation was posted on the blog Inflection Point Diary entitled “How to Figure Out How Much Money a Local Government Manager Makes.” In this decidedly conservative analysis, the conclusion was that “real annual compensation [is] at least 33 percent higher than the ‘salary’ the city would have told you about if you called to ask this question.” This 33% is typically called salary overhead, and must include the current year funding required for everything not included in straight salary – such as the value of all current employee benefits, as well as the current year funding requirements for all future retirement benefits for the employee. In the private sector, a generous overhead percentage would be about 25% – about 9% for the employer’s contribution to social security and medicare, a 6% employer contribution to the employee’s retirement savings account, and roughly another 10% for the employer’s contribution towards the employee’s current health benefits. If only the difference between private sector employee overhead were only 33% vs. 25%, however. In reality, because public sector employees receive defined retirement benefits that are anywhere between 3x and 10x (that’s right 10x, ref. Social Security Benefits vs. Public Sector Pensions) better than someone with a similar salary history can expect from social security, and because these future benefits must be funded as part of a public employee’s total compensation each year, public sector salary overhead can often reach 100%. This is particularly true for public employees who work in safety-related occupations, such as police officers and firefighters (ref. The Price of Public Safety). With all this in mind, how much do firefighters really make? To perform this analysis I obtained payroll data for the firefighters employed by the City of Sacramento. The data is for the most recent 12 months, and does not include the top management of the fire department. It does include data for 543 individuals. The numbers are probably a bit low, on average, because there are undoubtedly people on this list who didn’t complete a full year of work, but the calculations to follow will assume all of the payroll data represents 12 months of full-time work. In terms of basic pay, the “base hourly earnings” of Sacramento’s firefighters was $74,000 per year. Overtime, on average only added $10K to that total, which suggests that – at least in Sacramento’s case – overtime is not creating a crippling additional burden to the department expenses. But when you add “incentive earnings,” “holiday payoff,” “other earnings,” “sick payoff,” “other payoffs,” and “vacation payoff” to the total, the average firefighter in Sacramento makes $101K per year. This does not include health and retirement benefits, however. To get to the true number, I then reviewed the current Labor Agreement in force between the Sacramento Firefighters Union Local 522, and the City of Sacramento. I then verified with a senior attorney with the City of Sacramento that certain of my assumptions were correct. In particular, the City pays 100% of firefighters current and retirement health insurance benefits, and the City pays 100% of firefighters retirement pension contributions. So what is all of this worth? Calculating the value of current benefits is relatively easy, particularly if you simply want to pick a conservative number. In the firefighters labor contract, health insurance benefits are covered up to a maximum of $1,200 per month, and after 20 years of service, the City pays 100% of this coverage for life. The City also pays a uniform reimbursement of $871 per year, tuition reimbursement of up to $1,500 per year, along with life insurance, and subsidized parking or subsidized mass transit benefits. There are certainly other benefits not identified in a relatively cursory review of the 81 page labor agreement Sacramento’s firefighters are under, but it is fair to assume the value of current benefits averages about $12,000 per year, raising the total compensation for the average Sacramento firefighter to $113K per year. But we haven’t yet accounted for the current year funding requirements for future benefits, such as retirement health and pension payments. If you refer to Sacramento’s reported payroll data, the average pension fund contribution per firefighter per year is $31K, which means – since the City pays 100% of this contribution and the firefighters contribute zero in the form of payroll withholding – the average compensation for the average Sacramento firefighter is actually $144K per year. But it doesn’t end here, because these pension fund contributions are based on CalPERS official return on investment projection for their fund, which is 4.75% per year, after adjusting downwards for inflation. I would argue that the chances that CalPERS is actually going to earn this sort of real, inflation-adjusted return is zero. For much more on why it is absurd to expect a 4.75% year-over-year return on hundred billion dollar funds in this era, read The Razor’s Edge – Inflation vs. Deflation, Pension Funding & Rates of Return, and Sustainable Pension Fund Returns. For these reasons, a truly conservative fiscal strategy for pensions would be a pay-as-you-go model, where pension fund allocations aren’t even invested because the present value of the money is not discounted. Using such assumptions would go a long way towards guaranteeing solvency to pension funding, and would dismantle the pernicious alliance of public sector pension funds and Wall Street brokers and speculators (ref. The Axis of Wall Street & Unions). And why should public sector employees collectively invest taxpayer’s money into public equities and other private sector investments where they (1) exercise influence over the management of these companies as shareholders, (2) reap the sole benefit of windfall returns from these investments when they occur, and (3) compel taxpayers to make up the shortfall whenever these investments do not perform adequately? But just in the interests of presenting a realistic calculation of what firefighters in Sacramento are really making each year in total compensation, let’s use a rate of return that might actually be achievable, one-half the rate CalPERS clings to, a return of 2.375%. What happens? As explored in the posts Maintaining Pension Solvency, and Real Rates of Return, where charts are depicted showing the entire logic of this calculation, if you assume 30 years working, 30 years retired, a pay history wherein annual salary doubles in real dollars over the employee’s career, and a retirement pension based on 90% of the employee’s final year of pay, at a fund return of 4.75%, to maintain a solvent pension fund you would have to set aside 30% of the employee’s salary each year. This 30% calculation is a bit lower than the percentage actually being set aside by the City of Sacramento for their firefighters. The 34.9% of salary that Sacramento contributes into CalPERS for each firefighter probably reflects the fact that CalPERS is currently underfunded, plus other more conservative assumptions than are made in this simplistic example. The point is this: If you make these assumptions and use a projected rate of return of half what CalPERS still claims they can earn, you will get a result that is, if anything, too low. And based on a rate of return of 2.375%, it is necessary to contribute 60% of salary into CalPERS each year to keep each firefighter’s pension solvent. Total compensation has to include current year funding requirements for future benefits. Using a realistic rate of return of 2.375% (after adjusting downward for inflation), pension funding requirements double, which means the average firefighter in Sacramento – if these pension commitments are honored – is really making $174K per year. And while the City of Sacramento doesn’t accrue for, much less fund, their future obligation to provide retirement healthcare benefits to their firefighters, it is still a liability, and it is still necessary to apply the present value of these future costs to the years these employees are actually working. This fact will easily put the annual total compensation for the average Sacramento firefighter at $180K per year. So how much do firefighters in Sacramento work, in order to earn $180K per year on average? Returning to the labor agreement, firefighters working the “suppression” shifts, i.e., most of them, the guys who staff the firehouses and are on call 24 hours per day, typically work two 24 hour shifts every six days. That is they work a 24 hour shift one in every three days. During these 24 hour shifts, most of the time, they have time to eat and sleep, in addition to performing their duties. But if you review the agreement, you will see that by the midpoint in their careers, after 15 years, firefighters will earn the following quantity of 24 hour shifts off with pay – 6.53 for holidays, 9.33 for vacation, and 2.0 for personal time. This means, not including sick leave, the average firefighter works 2 shifts of 24 hours every 7 days. Two days per week. This estimate is not significantly skewed by overtime pay, since on average, Sacramento firefighters are only logging about 8% overtime hours. One can make as much or as little as one wishes with these numbers. There is nothing here suggesting firefighters are overpaid or underpaid. Because before having a discussion regarding whether or not firefighters are overpaid or underpaid, it is important to simply present the facts – here is how much firefighters are paid. It is left to each reader, voter, financial analyst, policymaker, and firefighter to ask themselves: Should firefighters make $180K per year, on average, to work two 24 hour shifts per week, and can we afford this? And should the premium, in terms of salary overhead, for public safety personnel be nearly 100%, if not more? Working from the bottom up, it is virtually impossible to extract accurate figures to quantify just how much money public sector unions spend on political activity. For example, money spent at the state level on politics, as tracked by the National Institute on Money in State Politics, or, in California, as tracked by the California Fair Political Practices Commission, only track one subset of political spending. These figures, staggering though they may be, don’t show data for local races (every city council, county board of supervisors, water board, school board, police commission, fire commission, etc.) – and, equally significant, these databases are unable to clearly identify the source of donations that have been run through foundations or independent expenditure campaigns, or political parties – often several times – before appearing on a candidate or issue campaign’s disclosure report. For these reasons, in order to get a good idea of what public sector unions are really spending on political activity, you have to work from the top down. Using California as an example, you can estimate how much public sector unions spend on state and local politics each year if you can accurately identify three variables: (1) How many public sector workers are members of unions, (2) what the average annual union dues payment is per worker per year, and (3) what percentage of union dues are used by the unions for political activity. Answering the first question is probably the easiest. According to the U.S. Census Bureau, in California in 2008 there were approximately 400,000 state government workers (ref. 2008 Public Employment Data, State) and approximately 1,450,000 local government workers (ref. 2008 Public Employment Data, Local). This means there are about 1.85 million state and local government workers in California. To determine how many of these workers are unionized, there are at least two sources available, one is an authoritative study from around 2002 entitled “California Union Membership, A Turn of the Century Portrait,” which references data from the California Dept. of Industrial Relations, as well as data from the U.S. Census Bureau, and corroborates this data with a series of surveys administered to union locals throughout California. This study determined that, at that time, 53.8% of California’s public sector workers were unionized. Another more recent source of information comes from UnionStats.com, an online database, updated annually, that tracks union membership and coverage, constructed by Barry Hirsch (Andrew Young School of Policy Studies, Georgia State University) and David Macpherson (Department of Economics, Trinity University). Using data from the U.S. Census Bureau and the Bureau of Labor Statistics, they have compiled a variety of interesting data, including “Union Membership, Coverage, Density, and Employment by State and Sector, 1983-2009.” By clicking on the 2009 link provided under this section on the left column of their home page, a spreadsheet comes up with a number consistent with the earlier 2003 findings, that is, 55.8% of California’s state and local government workers are now unionized. This means there are just over 1.0 million unionized state and local government workers in California. How much do they pay each year in dues? According to a July 7th, 2010 guest editorial published in the San Jose Mercury entitled “Teachers’ unions political funding inappropriate,” authored by reform activist Larry Sand, “Teachers’ dues in California average about $1,000 per teacher per year, with about 30 percent of it going for political spending.” What about police, firefighters, corrections officers, and other public safety personnel – virtually all of whom are now unionized in California – who comprise about 13% of the state and local government workforces – about 240,000 employees? How much do they pay annually in union dues? According to information provided by Vallejo, California’s post-bankruptcy City Manager, Joseph Tanner, and as reported by George Will in a Sept. 11th, 2008 Washington Post column entitled “Pension Time Bomb,” “using fiscal 2007 figures, each of the 100 firefighters paid $230 a month in union dues and each of the 140 police officers paid $254 a month, giving their unions enormous sums to purchase a compliant city council.” If this is typical, it would equate to at least $2,750 per year in union dues for police and firefighters in California. Even if the Vallejo situation is far from typical, it’s probably accurate to estimate California’s public safety workers pay their unions at least $1,000 per year in union dues. Between teachers and public safety employees you have accounted for about 55% of California’s unionized public employees. Getting information on each of the unions may yield more startling total union revenues, but if you simply assume that public employees who are bureaucrats, nurses, administrators, maintenance employees, etc., are paying on average $500 each year in dues to their unions, then you can calculate the average payment for the entire 1.0 million unionized California state and local public employees is $750 per year. This is probably a conservative estimate, but using this number yields a total dues revenue to California’s public sector unions of $750 million per year. How much of this is used for political activity? Returning to Larry Sand’s commentary, 30% of CTA funds are allegedly used for political activity. Most inside observers I’ve talked with suggest the percentage is higher than this, for a variety of reasons. If you review the California Fair Political Practices Commission website, don’t just look for data on election financing. Review the public disclosures by lobbying firms, and click on the pages that list their clients. Despite the unceasing uproar over the pernicious influence of “corporate lobbyists,” estimates of how much of the overall revenue to lobbying firms come from the public sector nearly always exceed 50%, and the source of this money is not just public sector unions, and their many political action committees and other organizations, but also from public agencies themselves! If one considers the level of power exercised by union operatives over public agencies – where the political appointees who supposedly manage these agencies come and go, but union power is a continuous reality – you can begin to imagine how the political agenda of taxpayer-funded public agencies and the public sector unions who influence these agencies are usually one and the same. Another argument supporting the estimate that at least a third of union dues go to support political activity – if not much more – is the ability of the unions to reallocate money to political activity from their general fund when they choose. A recent example, reported on July 7th, 2010 in the Education Intelligence Agency blog post entitled “California Teachers Association Shifts $2 Million of Dues Money to PAC,” states the following: “CTA very much wants Jerry Brown elected governor and Tom Torlakson as state superintendent of public instruction. So, for a single year, they increased the PAC allocation to $26.30 [per month, up from $18.30 per month], without raising total dues any additional amount. This maneuver will generate an additional $2 million or more for the PAC.” How this loophole works in California is also explained, “This sleight-of-hand would not be permitted at the federal level. But because state law allows the union to collect dues and PAC money in the same lump sum, CTA can claim that the general fund money is not the exact same money being added to the PAC coffers.” There’s more. When assessing public sector union influence on politics, there are in-kind contributions that, while reportable, cannot be objectively quantified. What would it cost a private sector interest to send busloads of activists to events to demonstrate for the TV cameras, or use other assets such as existing office resources, in order to wage a political campaign? Whenever a public entity does this, they are required to register this as an “in-kind” donation, and assign a monetary value to this. But these in-kind values can be understated in the mandatory disclosures, and more significantly, these are contributions that are in addition to the hard costs that are funded through collection of union dues. Finally, what about the indirect influence of public sector unions, the way they trade on the credibility of public servants – firefighters and police officers in particular – to advance their agenda in political campaigning? What about the influence of activist teachers in our public schools and universities, who advocate ideologies consistent with their union leadership when teaching impressionable young students, even when these ideologies may be counter to mainstream political sentiment? Taking all this into account, the calculations that come out of this exercise are probably conservative – California’s 1.0 million unionized public sector employees times dues of $750 per year times one-third equals $255 million per year, over $20 million per month. This is what public sector unions are probably spending on politics, and for the many reasons detailed here, this number is probably quite low compared to reality. The implications of this are clear: In California, public sector unions enjoy an overwhelming financial advantage in virtually every political cause or candidate they support. They have used this advantage to take over California’s State Senate and State Assembly, as well as many of California’s City Councils, County Boards of Supervisors, and various local administrative districts, especially in the major urban areas. In turn, this has resulted in years of relentless and unwarranted increases to public sector employee pay and benefits, to the point where public sector employees in California now easily enjoy pay and benefits that are, on average, at least twice what people earn on average in the private sector. Union control of California’s state and local governments has also resulted in a big-government agenda being successfully advanced for decades, meaning the number of government jobs and programs is swollen well beyond what might be optimal for California’s economy and private taxpayers. If none of this seems compelling given the alleged power of California’s corporate interests, one may consider the following: (1) Corporations are reluctant to fight the unions – whenever corporate interests begin to support public sector union reform, the unions threaten retaliatory legislation and initiatives. To-date, corporations have consistently backed down in the face of these threats. (2) Many corporations don’t care if the state government is inefficient via unionization. In some respects, they actually welcome the tax burden and the increased regulations, because large corporations are better able to withstand the higher overhead, and better able to employ lobbyists to garner a share of the spoils in the form of subsidies or special exemptions. Their smaller emerging competitors, however, cannot withstand these impacts, and hence are undermined as competitors. To think California’s public sector unions provide “balance” to corporate interests is naive. Anyone who thinks it will be easy to rescue California from the grip of public sector unions is encouraged to go out and raise campaign donations from people and organizations who don’t have to give you a dime if they don’t want to. Then compare this to the $20 million per month that perpetually flows into the political coffers of public sector unions through automatic withholding of union member dues. And never forget, as a taxpayer, this is your money they have used to take control and bankrupt our state. There’s a relatively recent analysis entitled “The Deflationary Impact of the Coming U.S. Commercial Real Estate Bust,” by Sean Daly, posted May 27, 2010 on Seeking Alpha, that reminds us the commercial real estate bubble hasn’t gone anywhere. And if you count the vacant windows in the strip malls, it isn’t hard to see the reality. Daly goes further, and in nearly 3,000 words of commentary, quotes, captions and attributions, and over a dozen charts, explains that commercial real estate loans generally have five year maturities, and the ones negotiated during the bubble boom are coming due starting in 2011. Daly also observes that the ultimate victims this time will be the 8,000+ community banks, not the big banks and Wall St. firms. Among Daly’s conclusions as to the deflationary impact of all this is this decidedly non-trivial gem: “this vicious cycle [widespread insolvency of community banks] starts to hurt the local economies just as the municipal bond defaults start to occur…worse case, the real estate industry in China goes bad and the two downturns hit the global economy at the same time.” As noted on a June 8th post entitled “The China Bubble,” using data from USA Today, MoneyLife, 60 Minutes, China Expat, and others, real estate values in China have appreciated at 3 to 5 times their rate of GDP growth for a decade, commercial vacancy rates may already be as high as 50%. and the construction industry could comprise over 50% of China’s GDP. What happened to the U.S. residential real estate market, and is about to happen to the U.S. commercial real estate market, is also happening in China. There are plenty of deflationary pressures on the global economy today, as enumerated on April 4th in a post entitled “Pension Funding Rates of Return:” (1) trillion dollar pension funds can’t appreciate faster than the rate of general global economic growth, which over the past 60 years has averaged about 3.0% per year, (2) public equities over the past 85 years have appreciated at a real annual rate of 2.8% per year, (3) central banks are already flooding the world with currency to stave off deflation, (4) money market funds are only returning 1.0% per year, (5) the stock market has been flat for the last ten years, (6) household and consumer debt are still at unsustainable levels and nobody is buying anything, (7) banks are holding foreclosed residential real estate assets to avoid further drops in asset values, (8) the commercial real estate market is hanging by a thread, (9) the bond bubble is about to pop, (10) we can’t extract abundant reserves of natural resources because environmentalists have successfully legislated or litigated development to a standstill, (11) the business community has given up and has decided the government is their new customer, and (12) public sector unions have taken over our state and local governments in California – demanding wages and benefits that are bankrupting us – and they are successfully exporting that model to other states and to Washington DC, guaranteeing the tax burden on job creating businesses will go up, not down. Also creating a deflationary economic impetus is the relentless aging of humanity. As the percentage of retirees increases, the percentage of total consumption that must be supported through the financial return on passive investments increases. Technology-driven, ongoing increases in productivity makes supporting higher percentages of retirees economically feasible, but to avoid macroscopic speculative distortions to the economy induced by gigantic pension funds desperate to maintain their solvency when sustainable returns are no longer adequate, it may be that retirees need to be primarily supported through contributions from current workers. As it is, the aging populations of Japan, Europe and the United States face deflationary pressure because the more pensioners and bondholders we’ve got, the more claims on economic output are held by nonproductive members of society. Their savings, concentrated in pension funds and bonds, are chasing a diminishing percentage of productive assets, making these assets explode in value. When the collateral collapses, the loans go into default, the banks go bankrupt, and economic activity implodes. To end a deflationary spiral, new investment needs to create new asset classes at a faster rate than over-valued assets correct downwards. To make this happen, government policy needs to adhere to two basic principles: First, remove the uncertainty that hangs over the private sector by backing off aggressive new legislation, and simplify and clarify existing legislation. The thousands of pages of new legislation that are as transformative as they are labyrinthine, enacted with the barest of mandates, written by interns, proofed by lobbyists, and rammed through Congress using unprecedented tactics, is not making businesses want to expand into new territory. Businesses bear the consequences of new laws more than the lawmakers do, and need to thoroughly understand what these new laws will cost and how they will comply. It is a heavy burden to lay onto business at the same time as the economy is slowing. An additional source of uncertainty facing business are the scheduled expiration of the Bush tax cuts. It is difficult to see how imposing additional taxes on the economy is going to be stimulative (ref. Art Laffer’s June 6th commentary “Tax Hikes and the 2011 Economic Collapse“). The second way government policy can help to avoid a deflationary spiral is to invest deficit spending into projects that will yield a long-term return on investment. As argued in “Sustainable Economic Returns,” if deficit spending is indeed our economic elixir, we should be engaging in responsible development of domestic fossil fuel reserves and building nuclear power plants. We should be constructing desalination plants, canals and reservoirs (above and below ground), and we should be building and upgrading our bridges and freeways. Government should also be funding more strategic military spending, space exploration and development, and other ultra-high tech initiatives. All of these projects could be public-private partnerships, and could rely on deficit spending. But along with the temporary economic stimulus they would bestow, they would provide sustainable economic returns in the form of effective military deterrence, ongoing technological leadership, and assets of infrastructure that would yield permanently cheaper energy, water and transportation. Instead, government is channeling trillions of dollars into pension funds and public sector jobs. The economic goal of stimulative deficit spending should be to make basic resources cheaper through infrastructure upgrades and high-tech innovation, not to pour borrowed money into Wall Street’s public employee pension funds while relentlessly expanding the government employee payroll. If consumers are spending less for basic resources, which will improve their personal cash flow, and if businesses are able to operate in a regulatory environment that is reasonable and fairly predictable, then the preconditions are met to create new asset classes whose growth may offset the shrinkage of the bubble assets. Meeting these preconditions will mean individuals and investors will be able to afford completely new products, enabling growth of new industries limited only by ones imagination – genetic therapies, cars with full auto-pilot, android care-givers, a revolution in education, even better communications, space tourism. If deflation is the trend we’re to avoid, it is essential to stimulate the economy. But this stimulus must be implemented via policies that yield long-term appreciation to our national assets, our infrastructure, and our competitiveness, affording us the wealth to develop entire new industries and services for an aging, technologically empowered, increasingly enlightened civilization. If you have concluded, like I have, that 21st century labor unions in America nearly always create more harm than good, and if you have concluded, like I have, that the fight against union power is increasingly tilted in favor of the unions, it is easy to become overwhelmed. After all, the primary focus of CIV FI is to explore ways to restore financial sustainability to public institutions, and more generally, to our economic life in the wake of the debt bubble. Why is more and more of our content focused on the rise of unions? It isn’t as though unions never had a place in our national dialogue, or a role in the fight to implement humane work rules, workplace safety, and better wages. But even as many of my liberal friends often proclaim, the role once relegated to unions now belongs under the government – and the role of government in this regard should be to create uniform basic minimums that employers must adhere to, not become unionized itself, and create laws and regulations that favor unionized employees to the detriment of everyone else. There are so many facets to the abuse, corruption, wealth-destruction, economic decline, loss of freedoms, undermining of democracy, extortion and outright theft that comes with unions today, that volumes could be written about the problem. Public sector unions have hijacked our public employee workforces, taken away their incentives to excel, bribed them with over-market wages and ridiculously over-market benefits, introduced massive inefficiencies to government operations, ruined our system of public education, bankrupt our government entities in the process, bought our elections, control our politicians, and now they are using the power they’ve achieved in government to go back out and recapture the private sector. If you don’t believe any of this, and especially if you do believe all of this, you may wish to refer to the following information sources to further understand just how far union power now extends, and also to learn how to join the fight to stop them before it’s too late. This list includes resources focused on California – because if we can stop them here we have a real chance to stop them in the rest of the nation: Public Sector Union Reform – Online Resources Citizens Power Campaign – a political action committee working to reform California’s public sector unions through the initiative process, and their sister site for community building, Unplug The Political Machine. Pension Tsunami – daily links to news reports nationwide on public sector unions and the pension crisis (sign up for daily text email). Cal Watchdog – good source of public employee union activity and government waste in general. Read “Plunder – How Public Employee Unions are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation” by Cal Watchdog Editor Steven Greenhut. Devil At My Doorstep’s Blog – updates on union activity nationwide. Read “The Devil At My Doorstep,” by Devil At My Doorstep Blog Editor Dave Bego. National Right to Work Committee – combats compulsory unionization nationwide. Public Service Research Council – information and updates to fight union control of government. Center for Union Facts – information about the political activities and criminal activity of unions. Free Enterprise Nation – fights redistribution from taxpayers to government employees and their allies. National Institute on Money in State Politics – tracks election spending by state and by interest group. California Fair Political Practices Commission – database of political expenditures and donations. What defenders of unions frequently assert is that unions are necessary in order to help guarantee a “living wage” to workers. While this sounds reasonable, it has been taken to extremes. For example, in California’s public sector, unionized state and local workers average $60K in wages and $40K in benefits per year, while private sector workers average $30K in wages and $10K in benefits per year. And even $100K per year isn’t enough to live a middle-class lifestyle – because in order to pay the over-market wages to unionized public sector employees, higher taxes and hidden taxes have inflated the prices for housing, utilities and consumer goods. The irony is deep. Public employees could afford to make less, if they made less! Instead they are barely breaking even, impoverishing the rest of us, and destroying the free-market economy that tax revenue depends on. As goes California, so goes the nation. One of the greatest misconceptions on the left may be the suggestion that “us” refers to workers (hopefully unionized workers), along with government programs and regulations, and “them” refers to big business, their friends on Wall Street, and their puppets in government. At the risk of merely presenting an opposing paradigm that is equally over-simplified, here are some alternative scenarios. The open-minded reader may find them instructive. For over a decade, Wall Street has enjoyed an incestuous and exploitative relationship with public sector unions, because public employee pension funds have poured more new money into their equities markets than any other single source. This isn’t leveraged money or trading turnover, either, this is new money, cold hard cash that is transferred from the pockets of taxpayers into government payroll departments and turned over to the pension funds. In the United States each year, the pension fund contributions of 25 million government workers – at $10,000 per year each, which is probably a very conservative estimate – pour over 250 billion dollars into Wall Street. The way Wall Street seduced public sector unions into thinking they could ask for retirement benefits that, on average, are quadruple what the average private sector worker can expect from social security is the single biggest example of how Wall Street seduced the entire nation into believing they could enjoy a quality of life far in excess of what they actually were earning. Public sector union leadership can hardly be blamed for believing that their trillion dollar pension funds could earn 8.0% per year, forever, during an era when debt in general was exploding, asset bubbles were inflating relentlessly, and collateral-generated cash was inundating the economy. But now the party is over, and while the Wall Street barons smoke the proverbial cigarette and consolidate their winnings, public sector union officials are still doing their dirty work – intimidating politicians into raising taxes to continue feeding money into Wall Street pension funds that cannot hope to achieve 8.0% annual returns. Who else has a vested interest in suggesting an 8.0% annual rate of return is feasible forever, with trillion dollar investment funds, other than Wall Street and Public Sector Unions? At least in the case of Public Sector Unions, their leadership believed this nonsense, and now find themselves backed into a corner. During the real-estate bubble boom, Wall Street suckered everyone, by lobbying for the left-wing policies of lending money to people who couldn’t afford to borrow the money, which built the financial house of cards, and by lobbying for the right-wing policies of deregulating investment banks, so they could collateralize the mortgage-debt house of cards into 50 trillion dollars of phony money. And when the whole ridiculous scam collapsed, Wall Street took all the money off the table, collected bail-out money, and turned the United States into a debtor’s prison. The choice of the term “axis” to describe how public sector unions are the unwitting partners of Wall Street is not accidental. Because as the historical use of the term “axis” suggests, these alliances are pragmatic partnerships of entities who have become corrupt and grandiose, and are doomed to tragic dissolution. The only question is what equivalent of wars and poverty will we now have to endure as we struggle to reform Wall Street and roll back the delusional and unsustainable level of entitlements currently expected by Public Sector Unions. Here are some factors to consider as we hopefully move towards an economy based again on realistic and sustainable financial principles: 1 – “Big Business” has been just as victimized and suckered by a poorly regulated Wall Street as the public sector unions. Unlike these unions, however, big business didn’t collude with Wall Street to impose trillions of dollars of liability onto taxpayers in order to fund unsustainable and inequitably generous public sector employee compensation packages. 2 – The industrial products of corporate America, i.e. “Big Business,” create wealth. The financial products of Wall Street – properly regulated and at an appropriate scale – can assist in capital formation, liquidity, and economic growth, but that scale has been exceeded by at least an order of magnitude. At their current scale, Wall Street financial products are simply engines to expropriate massive amounts of wealth from the economy, producing nothing in return. 3 – Passive investments such as the giant, trillion dollar public employee pension funds, will not see returns of 8.0% (inflation-adjusted 5.0%) again for a generation. There is too much money out there chasing too few genuine investments. You can’t saturate an economy with near-zero interest rate credit, then expect trillion dollar investment funds to perform at high single digit rates of return. The spread is too big. 4 – Local public governments who issue bonds at tax-free rates of return of 5.0% or more to finance investments in their pension funds where they expect to generate rates of return that exceed 5.0% (notwithstanding the tax-free subsidy that is a further economic drain) are delusional. This practice of issuing “pension obligation bonds” is based on assumptions that are false. Pension obligation bonds will hasten a local public entity’s descent into bankruptcy, not alleviate it. 5 – Public sector bond holders and public sector pensioners represent the same phenomenon – non-productive members of society (passive investors and retirees) who have placed demands on the economy that can no longer be fulfilled. The level of bond interest rates is too high, the level of public sector pension benefits is too high, the amount of money tied up in these obligations is too high a percentage of our national wealth, and as a result, both of these groups are destined to see their returns and their benefits reduced – and the sooner this happens, the less severe the resulting economic hardship will be to the nation. 6 – There is NO comparison whatsoever between the “crisis” facing Social Security and the catastrophe facing public sector pensions. As argued in “Funding Social Security vs. Public Sector Pensions,” the U.S. is on track, within a generation, to be paying as much in absolute dollars to public sector retirees each year as they will be paying to social security recipients, despite the fact that social security recipients will be four times as numerous. Social security can be fixed with moderate adjustments: slightly lower benefits, slightly higher retirement ages, slightly higher withholding, and a slightly higher cap on wages before withholding ceases. Only the Wall Street / Public Sector Union axis has a vested interest in equating the moderate financial challenges facing social security with the totally insolvent public employee pensions. 7 – The solution to restore solvency to taxpayer-funded retiree benefit plans is to move to a pay-as-you-go system, where current workers support retired workers, not rely on passive investment returns. As noted in #6, this will be easy to achieve with respect to social security, but it is impossible to achieve with respect to public sector pension funds unless the benefits are dramatically reduced. And why shouldn’t they be? Public sector employees already make more in current wages and benefits – why shouldn’t they just receive social security like the taxpayers who support them? And why should the government invest taxpayer’s money into the equities market with public employees holding all the upside, and taxpayers holding all the downside? In order to move back to a financially sustainable economy, the United States has a unique window of opportunity to reform Wall Street and reduce the benefits enjoyed by unionized public sector employees. This is because, as argued in “The China Bubble,” the United States still enjoys crucial advantages vs. the rest of the world’s national economies, a fact that grants us another decade or so to make some hard decisions and get back on track. But the beginning of that process depends on voters realizing that “big business” and Wall Street are not in collusion, they are in opposition. Big business creates products and wealth, and Wall Street, along with their henchmen in our unionized government entities – at least in their currently grotesquely overgrown versions – expropriate wealth and create nothing. It isn’t as if anyone isn’t able to hear the warnings of the reactionaries or feel the resentments of the radicals. But beyond both legitimate fears and illegitimate hatreds is a deeper bond among humans that no messenger of tribalism or religion or race or national patriotism or even privilege can erase – the empathy of competition. We see it in the Olympics every two years, as they alternate between summer and winter games, and take us all to every corner of the world. We see these games attract athletes from every nation and engage the passions of the world. An even better example of this empathy of competition would have to be the World Cup soccer tournament – or football – as the rest of the world calls the game. Nearly every nation sends a team, with 64 surviving the qualifying rounds. Every fourth year, as spring comes to an end and on through the summer solstice, through even U.S. Independence day on the 4th of July, the tempers and timelines of the world run a mite slower, as billions of people dedicate hours – in countless cases every hour they can spare – to following this greatest of global tournaments. On Friday July 2nd a very tired team from Uruguay eked a hardfought and lucky decision over an inspired team from Ghana, in a match that exemplified the intense drama of all the games. With overtime expired and one kick left, the Uruguayan defenders desperately repelled shots at the goal, until finally the ball was deflected by the upstretched hand of a defender – not the goalie. The ensuing penalty kick was missed, and the game went into a sudden death where each team is given five penalty kicks. Uruguay edged out on top, hitting four out of five, and Ghana was dealt a heartbreaking and unexpected defeat. Later that day I discussed this game with the cashier at a corner store where an overhead television was showing a rerun of the Netherland’s victory over Brazil, another upset that surprised the world. Recapping the surprising victory of the Uruguyan team elicited chortles of amazement from both of us. And we shared this spontaneous World Cup camaraderie despite being total strangers, despite our lineage originating from opposite hemispheres, despite whatever madness and antipathy might infect various fighting factions in his land or mine. The empathy of competition. You can see this empathy in the eyes of players who have spent every ounce of energy they could store, when their passion has all been poured onto the field of play. And in the exhaustion of passion comes the empathy of knowing you could have been the victor or the vanquished, and every game is another opportunity to prevail. You see empathy in the exhausted eyes of the winner shaking hands with the loser. You see it in the mutual respect the players earn when they give it their all. The harsh reality of competition in the world of business and money might suggest that the empathy and character that is forged on a sporting field cannot be earned and rewarded in the real world. But this suggestion would be wrong, for reasons that are as essential to understanding the beautiful aspects of capitalism as they are unheralded. Empathy is the mitigating redeemer of competition as an activity with moral worth. And competition – the pursuit of individual and collective self-interest – is inevitable. The challenge of capitalism is not whether or not to choose it, but how to regulate it, because no other system of political economy embraces competition. Capitalism at its core is a uniquely practical system that doesn’t deny the human urge to compete, but indeed depends on it. The empathy that is earned by athletes in sports is completely transferable to capitalist competition – the businessperson who empathizes with their counterpart can navigate the negotiations of the marketplace, the sportsmanship that informs a game can translate to commercial exchanges; the line between empathy and enlightened self-interest is fine indeed. And within the framework of capitalism are winners and losers – with only empathy to guarantee the rules of the game stay fair. Decidedly not least, unlike sports, capitalism doesn’t merely produce winners and loser, but winners and winners, as capitalism creates wealth and opportunities for all, and not merely a zero sum game of win or lose. The empathy between athletic competitors, the fair-minded channeling of passions in sports, where it is still possible to view these titanic bouts as pure expressions of sportsmanship, teamwork and individual excellence, is an empathy that not only extends to capitalist competition but is needed now more than ever, because empathy is challenged by other factors as never before. Conventional indexes of empathy among young Americans are at all-time lows, and various theories attempt to account for this. Most prominent is the theory of the internet impact, which has encapsulated individuals in virtual realities, where friendships are acquired and discarded effortlessly, where individual accountability hides behind aliases, and identities and reputations are earned without sweat or consequences, but rather by tapping keys. Another theory attributes the decline in empathy to multiculturalism in America, where the conventional wisdom taught in public schools now tends to marginalize the traditional American identity and values, and teaches that all cultures and values have equivalent worth. One may decry or defend multiculturalism, but teaching empathy to children is harder when the American identity is in such rapid transition. Empathy is also under attack by the very blessings that have made life so much more interesting and secure in the developed world, through mushrooming and perpetually transformative new technologies. Where is empathy when the icons of our existence, the furniture of our lives, are completely exchanged for newer and better gadgets every decade or two? Can an alert octogenarian, whose formative years were spent marveling at the wonders of AM radio, easily distinguish between a browser and a search engine? Can empathy overcome the reality of revolutionary new technologies emerging every few years, shredding our interactive fabrics before we’ve even finished installing them? Can empathy cross generations thirty years removed, when new technologies completely redefine how we live every ten years? This is today’s empathy-challenged milieu that demands the empathy of competition receive recognition as the mitigating, moderating core value of capitalism, because capitalism embraces rather than denies competition. Capitalism is the only system that doesn’t deny the innate competitive urges that forged our spirits, as we emerged from being merely participants in nature’s ruthless food chain into a technologically advanced, urbanized species. Only capitalism leaves wholly intact the opportunity for every human being to compete, to win, to acquire, to bequeath, to empower themselves. Only capitalism can enable and inform a world of pluralistic, channeled, and empathic competition. Like nature itself, capitalism creates winners and losers, but within this harsh framework, capitalism preserves incentives and maximizes overall wealth. If anyone might still believe that capitalistic competition isn’t worth encouraging, or that embedded hatreds and the warlike momentum of millennia are ineluctable, or that it is better to seek refuge as members of a select and anointed few, then explain the empathy that saturates humanity as nations compete in the World Cup. Explain the transcendent joy of this simple game that animates everyone. Explain this connecting empathy of peaceful competition, and wonder if maybe this spirit might extend to real life and commerce, and inspire a calming path for our tumultuous world. California is on track to have 2.0 million people working for state and local government. According to 2008 U.S. Census data (ref. 2008 Public Employment Data, Local, and 2008 Public Employment Data, State) there are 1.85 million non-federal government workers in California today. It is becoming increasingly understood by voters and policymakers that a worker’s compensation is not adequately measured simply by referencing their annual salary or total annual wages. Overtime, sick time and vacation time payouts, health benefits, preferred access and rates for loans and insurance, transportation reimbursements, and more, are all examples of current year compensation that belong in any properly compiled estimate of a worker’s total annual compensation. And a heretofore arcane yet huge component of any worker’s total annual compensation is the current year funding requirements for future benefits – such as their retirement pension and their retirement health benefits. In an analysis posted earlier this year entitled “California’s Personnel Costs,” the average total compensation for state and local government employees in California was estimated at $94K per year. In reality we feel this amount is still significantly lower than the true average because (1) public employee retirement pension funds are below the asset value necessary to ensure long-term solvency and therefore current-year payments into them on behalf of public employees will need to be further increased, and (2) assigning a value of $10K per year for the average current benefit package is probably too low, particularly when you take into account the extra vacation, other paid time off, and other reimbursements afforded public sector employees, and (3) the analysis did not take into account current-year funding requirements for any supplemental retirement health benefits. For these reasons, the default assumption on the interactive spreadsheet table below is an average total compensation for California’s state and local employees of $120K per year. In the analysis below, the input assumptions are highlighted in yellow. These assumptions can be changed by any viewer, simply by clicking the cursor onto one of the yellow input cells and changing the number in the cell, then hitting the “Tab” key. The entire table will recalculate. As the table is currently configured, 2.0 million workers making $120K per year would cost $240 billion per year – which is roughly 50% of California’s total state and local budgets combined. The remaining two assumptions on the spreadsheet allow the user to input percentage reduction scenarios both for the number of workers and the amount of average annual compensation. As can be seen, a 20% reduction to both the number of workers, as well as to the rate of compensation for the remaining workers, yields a total reduction of 36%, or $86 billion per year. This scenario is what I would like to call California’s “20% Solution.” (enter new quantities in any yellow cell; to calculate, click cursor within any yellow cell, then move cursor off cell and click again) If you consider what a solution like this would entail, it is important to note the cost should not include any draconian cuts to services, nor to the viability of earnings to employees who keep their jobs. Since most public employees have been getting nearly every Friday off, a 20% workforce reduction would simply mean that the remaining workers would have to work five days a week again. Reducing their generous holiday and vacation allotments incrementally – certainly not by 20% – would serve to easily build up worker attendance to a level sufficient to guarantee ongoing government services at the level they’ve been traditionally available. Similarly, the 20% solution makes a reduction to compensation packages relatively easy to attain. Since public sector workers have already seen their direct compensation cut by virtue of getting nearly every Friday off without pay, all that is necessary is to put them back onto a full-time schedule without increasing their pay proportionally, then cut back on their benefits – current and future – enough to achieve the full 20% reduction in total compensation. The only area where a genuine hardship is inflicted is in the case of the workers who are laid off, which would be nearly 400,000 state and local government workers. But the question must be asked – if our state and local governments can continue to function with the actual labor hours lowered by one day per week – as the furlough Fridays has proven – then why should taxpayers continue to support these unnecessary jobs? Using this interactive spreadsheet, however, one may input any variables they wish. Suppose you wanted to save $86 billion per year but didn’t want to lay anyone off? Then lower every state worker’s total compensation by 36% and you accomplish an identical level of savings. And you still have an average public employee compensation set at $77K per year, which is pretty good. For example, if you simply required public sector employees to collect social security and medicare instead of providing them pensions and supplemental retirement health care (that ordinary taxpayers have to become millionaires to ever hope to match), you could probably afford these reductions with NO reduction to any public employee’s current compensation. Alternatively, of course, some departments could be privatized, or eliminated selectively, ameliorating the hardship of headcount and compensation reductions elsewhere in the public workforce. The value of an interactive spreadsheet is it defines and quantifies the immutability of the constraints we’re under. State and local governments have borrowed as much money as it is financially feasible for them to borrow. The Federal government can still borrow money to bail out the state and local governments, but that, too, is financially unsustainable and is encountering increasing resistance from concerned taxpayers. And speaking of taxes, it is ridiculous and futile to think California’s private sector workers are going to accept more taxes when Californians are already one of the most taxed states in the U.S., just so their public sector counterparts can continue to enjoy compensation packages that are, on average, at least twice as lucrative as these taxpayer’s own earnings in the competitive private sector. The choice is reduced to two hard variables – total headcount and average compensation. Hopefully these painful reductions will be made with humanity and wisdom. Within the next few days the U.S. Senate may consider Senate Bill 3194, the “Public Safety Employer-Employee Cooperation Act,” that will require states to grant collective bargaining rights for all public safety workers, including police, firefighters and emergency medical workers. Residents of California have had a front row seat to witness the consequences of allowing unrestricted collective bargaining by public employees. It is increasingly arguable that the root cause of many of California’s most serious problems – the insolvency of the State and most local governments, and the mediocre public school system, to name two big ones – are because of the influence of public sector unions. And public sector union control over California’s State government, which most insiders will acknowledge is “absolute,” is matched by union control over California’s county and city governments. Now we’re going to export California’s problems with public sector unions to the rest of the United States? A report written by Kris Maher for the June 17th, 2010 Wall Street Journal entitled “Bill Gives Public Workers Clout,” quotes the Executive Director of the 325,000 member National Fraternal Order of Police, Jim Pasco, who said “unions wouldn’t be able to negotiate wages and benefits that governments couldn’t afford.” It’s interesting to wonder how Pasco can justify this statement, because if history is any indication, the opposite is going to happen. As documented in “The Price of Public Safety,” in California, it is already common to see public safety workers earn, on average, over $200K per year in total compensation. Much of this compensation has to be used to meet current year funding requirements for their future pensions, because these pension funds today are almost universally insolvent. California’s local government entities are cutting virtually all other government services, including road maintenance, libraries, and public health programs, in order to free up enough money to pay compensation and benefits for their public safety workers. The fiscal crisis facing public sector entities isn’t merely because of unsustainable compensation and benefits being paid to public safety workers, however, it only begins there. Once the other public sector employees see the political clout and the financial compensation the police and firefighters are acquiring, they too will unionize, even if they haven’t already. At this point you are set to experience California’s plight – where nearly every government employee is overpaid, and consequently nearly every government institution in California is facing possible bankruptcy. Without a strong set of regulatory checks, allowing public sector workers to unionize creates an unfair political environment, where public employee unions collect mandatory dues – paid for by taxpayers – to amass literally hundreds of millions of dollars to use for political activity. Public employee unions routinely outspend fiscal conservative reformers by ratios of 5-to-1, or even 10-to-1, or more, essentially using taxpayer’s money to advance their agenda, which is bigger and bigger government to create more union jobs, and higher and higher rates of compensation for unionized government employees. Unionized government results in government employees, through their unions, purchasing our elections and hence our elected officials, who then decide on policy matters affecting the compensation and benefits paid to government employees. For this reason, and for the reasons stated below, national legislation should aim at reforming public sector unions, not expanding them. Why unionization of government workers is a threat to the solvency of America’s Federal, State and local governments, as well as a corrupting influence on the democratic process:
Most everyone respects and appreciates the services performed by public employees, especially those working in public safety. Calling for reform of public sector unions is not personal, it a matter of restoring fiscal sustainability and the integrity of our democratic institutions. Moreover, concern over the unique dangers public sector unions present is not to take issue with unions in the private sector, which at least operate in a somewhat self-regulating environment. Finally, concern over the excessive power of public sector unions does not necessarily equate to an excessively libertarian ideology – many of us would like to see more government investment in our economy. But currently much of our federal deficit spending is being wasted to pay grossly over-market wages to government employees instead of being used for strategic investments that will yield long-term returns to society, such as scientific research, upgraded infrastructure, and military security. Whether or not unions should be allowed to operate at all in the public sector is debatable. But at the least, if unions are going to be permitted to organize public employees, there should be curbs on their ability to (1) compel any public employee to join a union against their wishes, and (2) compel any public employee to allow any portion of their union dues to be used for political activity against their wishes. Unless checks of this sort, at the least, are part of the package, Senate Bill 3194 is a very bad idea. There is nothing wrong with paying a premium to public safety personnel because of the risks they take. And while it is true there are other career choices that are riskier than public safety jobs, and while it is also true that on average, public safety personnel in California – according to CalPERS own actuarial data – have life expectancies that are virtually the same as the rest of us, it is still appropriate to pay public safety personnel a premium. After all, we never know when these people may stand on the front lines when something extraordinary happens – such as what occurred in New York City on Sept. 11th, 2001. People who work in public safety live with this knowledge every day, and they should be compensated appropriately for that. The question is how much of a premium is appropriate, and how much of a premium can we afford as a society? Should a fire fighter make more than a medical doctor? Should a police officer make more than an engineer? In order to get an idea of what public safety employees in California actually make, I obtained a roster that showed the total compensation paid to each employee of a Southern California city. Out of respect for the employees noted on this roster, I won’t identify the city, much less reveal the names of these individuals. And it is fair to state this city probably has a median income somewhat higher than the average for California. It would certainly be interesting as follow-up to obtain this sort of information for other California cities. But even taking all of these factors into consideration, the amounts these folks are making is startling – particularly when you adjust for realistic current year funding obligations for future retirement health and pension benefits. In our example city, using actual data, the fire department has about 100 full time positions. The average annual compensation for these firefighters, if you include current benefits and current funding for future benefits, is $179K per year. But it doesn’t end there, because the pension funding percentage is calculated at 34% of earnings. As argued in “Maintaining Pension Solvency,” if you calculate pension funding requirements for a safety employee in California based on after-inflation returns of 3.0% instead of CalPERS official rate of 4.75%, you need to increase the pension withholding as a percent of payroll by 20%! Making this adjustment yields an average firefighter compensation of $202K per year. And even this figure probably fails to adequately account for current funding requirements for future supplemental retirement health benefits. For our example city’s police department, using actual data, the police department has about 150 full time positions. The average annual compensation for these police officers, if you include current benefits and current funding for future benefits, is $174K per year. If you increase the pension withholding percentage by 20%, in order to reflect realistic rates of future pension fund returns, you will calculate an average police officer compensation of $197K per year – again, probably not including enough to fund future supplemental retirement health benefits. It is important to emphasize these amounts – roughly $200K per year each – are not for senior management, or even senior employees. This is the average, taking into account entry level public safety employees as well as senior public safety employees. It is interesting to note what the rest of the employees, the non-safety personnel, make in our sample city – making the same adjustments, their total compensation averages $118K per year. That is still quite a bit, considering many of these jobs are relatively unskilled. To put this in perspective, the average private sector worker in California averages $40K per year in compensation – one third what the non-safety workers average in our sample city. Should a non-safety local public employee workforce, one including a large percentage of relatively unskilled positions, have an average compensation per employee of $118K per year? Should safety employees make, on average, $200K per year? Can we afford this? What is clear over the past several years is that as pay stagnated in the private sector, public sector employees continued to receive regular cost-of-living increases. Over the past 10-15 years, public employees also received dramatic increases to their retirement benefits. And as housing prices soared, millions of Californians borrowed against their home equity, and many of them are now paying dearly for that mistake. There are undoubtedly many public sector employees who were caught up in the borrowing frenzy, and are now on the edge financially – but it is fair to wonder why they should be immune from the same cutbacks that have left so many people in the private sector unemployed, or under-employed, or compensated at rates that are a fraction of what they were during the bubble booms. It is also fair to wonder why public sector employees should not be obligated to plan and prepare and save, if they want a comfortable retirement. For non-safety personnel in public service, it is fair to wonder – since they now make more, not less, than private sector workers for similar work requiring similar skills – why in their retirement they shouldn’t simply collect social security and medicare like the rest of us. And even if public safety employees should collect something better than social security in recognition of their role as first responders, it is fair to wonder why their retirement pensions should be literally five times more than the social security payments due retired private sector workers with similar salary histories. As documented in “Funding Social Security vs. Public Sector Pensions,” the fiscal crisis facing social security is trivial and easily solved, whereas the fiscal crisis facing public sector pensions is catastrophic and can only be solved either through massive benefit cuts or crippling new taxes. It is difficult to dispute the contention that the price of public safety cannot be too high. It is difficult to overstate the appreciation anyone should feel for people who stand between us and chaos – the people who protect us, the people who rescue us, the people who save our property. But those people themselves should understand the price we’re currently paying is elevated because of collective bargaining and overwhelming political clout, and is dangerously out of touch with market realities. It would be helpful for everyone to consider the choices involved – cuts to pay and benefits vs. cuts to services, cuts to pay and benefits vs. crippling taxes and economic decline, cuts to pay and benefits vs. investments to advance our technology, our infrastructure, and our military security. All of these elements must be balanced, yet are currently grossly out of balance, because in one way or another, all of them may quite legitimately be described as issues of safety and security for California and the nation. Winston Churchill’s famous quote on this topic goes as follows: “If you’re not a liberal at twenty you have no heart, if you’re not a conservative at forty you have no brain.” Depending on your political persuasion this is not necessarily the most endearing polemic to lead off with, but it certainly frames the issue. Are fiscal liberals governed primarily by their emotions? Are fiscal conservatives governed primarily by their logic? There are countless ways to examine this – to wit: Did the entirely valid emotional desire to see financially less-fortunate families become homeowners create the edifice of sand upon which the financiers of Wall Street built their derivatives house of cards? Did the hyper-literate, ruthlessly logical calculations of economists and bankers – who thought they had mastered the art of risk management – completely backfire on them? Was the forest of fundamentals obscured by trees of logic? In the above set of scenarios, emotion and logic both backfired, but a cynic would disagree with both assessments. A cynic would suggest policymakers knew perfectly well their attempts to sell homes to anyone regardless of their earnings or credit history was bound to fail, and that they pushed these manifestly irresponsible policies because they were taking money off the table the whole time. A cynic would make a similar claim against the Wall Street folks – that they knew the whole scheme was going to crash, but they collected their bonuses, bet against their own clients, concocted elaborate models that obfuscated the otherwise obvious financial chicanery of it all, and laughed all the way to the bank. The point so far is perhaps this – logic is an amoral, bipartisan phenomenon that can be put to use for good or ill, and logic itself is no guarantee of accuracy, just an essential tool to help us hopefully be more accurate than we might otherwise be. And to the extent emotion governs politics, it is generally sincere, whereas logic is only an emotionless tool. Evidence suggests, overwhelmingly, that in a democracy, emotion is a far more powerful political weapon than logic. But sincere emotional appeals that aren’t vetted with logic can be dangerous. Our financial crisis that was enabled by a sincere emotional desire to empower poor families – and to embrace free market principles – is not the only example of valid emotional imperatives producing bad results.
Do we need to help the poor, protect the environment, and reform health care? Of course – but we need to first ensure that sincere emotional motivation has not been hijacked by coldly logical cynics for personal gain, or has been passionately embraced by so many people that cautionary logic is swarmed under and insufficiently employed. Logic takes time. Logic is cold. Logic is heartless. But only logic can ensure a well-intentioned policy will have its intended effect. In a commentary by Daniel Klein entitled “Are You Smarter Than a Fifth Grader,” published in the June 8th, 2010 edition of the Wall Street Journal, some interesting data on this divide between logic and emotion in politics was presented. Klein cited a Zogby International survey that attempted to measure the economic literacy of the respondents, and then correlated their answers to whether or not they self-identified as either Very Conservative, Libertarian, Conservative, Moderate, Liberal, and Very Liberal. The poll had eight questions that tested the respondents understanding of supply and demand, free trade, and other basic economic concepts. In some cases, particularly with the two questions centered on free trade concepts, one may allow for some remaining debate on what might be the right answer, but the results nonetheless showed a sharp divide, with Conservatives and Libertarians scoring four times better than Liberals in terms of the number of answers they got correct. Does such a test conclusively demonstrate that logic is more likely to inform the policy preferences of conservatives, and emotion is more likely to inform the policy preferences of liberals? If so, it would explain a lot. But asking such a question or making such a generalization is futile if, at the same time, the emotional dimension of enlightened altruism vs. cynical opportunism as the motive for a policy preference is not equally explored. In an earlier post entitled “Fiscal Conservatism is Social Justice” this concept is developed further, and is summarized as follows: The left has a rhetorical advantage because their policies are so easy to cloak in virtue. Does this advantage make the left the magnet for the sinners, the opportunists, those with no virtue – their ability to prevail politically merely because they can more easily tar and feather the right with the unjustified but easily applied stigma of having no altruism, no empathy? Ponder this need to redefine the perceived premises of left and right, before descending into the details of the debate. We all want the same things. Without emotion, logic is rudderless and heartless. Without logic, emotion is a potent, capricious hydra, capable of utterly destroying productive institutions as often as it reforms or refines them. Fiscal conservatives need to learn to express the altruistic heart that informs any policy they espouse, especially when they must otherwise depend on the financial literacy of their target audience. And perhaps fiscal liberals need to take classes in finance, and resist the all-too-normal tendency to become overwhelmed by the emotional appeal of their cause. |
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