Tuesday, November 8, 2011

The Perversity of Public Policy

Election Day in Ohio today means that voters are voting on Issue 2-deciding whether or not the law passed earlier this year (SB 5) that would rein in collective bargaining for public employees in the state is retained (a YES vote) or repealed (a NO vote).

The ad campaign by the unions that want to repeal SB 5 argues that if SB 5 is retained there will be catastrophic cuts in police and fire services and that somehow teachers won't be as good in teaching our children as they are today.  It makes for good ad copy but the reality is that if SB 5 does not survive we will inevitably see reductions in essential services and the number of teachers.  Why?  It is simple math.  The more money that is spent on collectively bargained items like benefit costs, pension and retiree health care costs means less money  is available for current wages for the current services of policemen, firemen and teachers.  Such is the perversity of public policy.  You almost never get what is advertised.  

Tax increases never bring in the revenues that are projected.  Tax cuts often result in more revenue. Welfare reform in the 1990's was supposed to throw millions of children into poverty.  Child poverty actually dropped substantially in the 3 years after welfare reform was enacted.  Unemployment benefit extensions tend to do nothing more than keep people on unemployment.  The more money government throws at problems to help people, the more expensive it often becomes.   These are all examples of the perverse effects of public policy.

For example, look at this chart of the inflation in three areas that government is heavily involved in with government programs or subsidies to supposedly help the middle class.  Higher education (college student loans), Healthcare (Medicare, Medicaid, Obamacare) and Housing are all shown in comparison with overall price increases. 

Source:  American Institute for Economic Research

The perverse fact is that as the government attempts to help by throwing money at the "problem" it actually drives overall costs up.  Since there is more money chasing the goods and services in that area of the economy it inevitably pushes prices up in that sector for everyone.  Of course, as prices increase further the public policy argument is that even more government subsidies are needed to deal with the escalating costs.  And on and on the cycle continues...

Look no further than California to see exactly what I am talking about in the case of collective bargaining for public sector employee benefits.  California is totally run by the public sector unions and an extreme liberal agenda.  These groups are in the process of bankrupting almost every governmental entity in the state.  For example, the city of San Jose, California now spends over 50% of its annual budget on pensions and health care cost for its retired city workers.  When this much money is needed for ex-workers there is very little left for current workers and current public services.  Michael Lewis details the impacts on San Jose in "California or Bust" in Vanity Fair magazine that I wrote about in "Because We Can Becomes Because We Can't." 

As a result, San Jose, once run by 7,450 city workers, was now being run by 5,400 city workers. The city was back to staffing levels of 1988, when it had a quarter of a million fewer residents. The remaining workers had taken a 10 percent pay cut; yet even that was not enough to offset the increase in the city’s pension liability. The city had closed its libraries three days a week. It had cut back servicing its parks. It had refrained from opening a brand-new community center, built before the housing bust, because it couldn’t pay to staff the place. For the first time in history it had laid off police officers and firefighters.

I have written several times about the fundamental flaws in the justification for public sector unions, here, here and here.  David Brooks in the New York Times explained just a few of the reasons why public sector unions do not make sense.

In Wisconsin and elsewhere, state-union relations are structurally out of whack.
That’s because public sector unions and private sector unions are very different creatures. Private sector unions push against the interests of shareholders and management; public sector unions push against the interests of taxpayers. Private sector union members know that their employers could go out of business, so they have an incentive to mitigate their demands; public sector union members work for state monopolies and have no such interest.
Private sector unions confront managers who have an incentive to push back against their demands. Public sector unions face managers who have an incentive to give into them for the sake of their own survival. Most important, public sector unions help choose those they negotiate with. Through gigantic campaign contributions and overall clout, they have enormous influence over who gets elected to bargain with them, especially in state and local races.
As a result of these imbalanced incentive structures, states with public sector unions tend to run into fiscal crises. They tend to have workplaces where personnel decisions are made on the basis of seniority, not merit. There is little relationship between excellence and reward, which leads to resentment among taxpayers who don’t have that luxury.

Governor John Kasich and the Ohio Legislature put together SB 5 to attempt to bring some balance to the process and preserve future governmental services.  This is simply too much of a threat for the unions and a reported $25 million has been spent to repeal SB 5.  If they succeed, Ohio will be a much less attractive place to live in future years.  There will be continuing pressures from increasing property and other taxes while essential services will be reduced.  Inevitably it will mean that Ohio becomes a very unattractive place to live and work. 

California, with all of its natual advantages of geography and climate, is seeing business fleeing and the loss of high income taxpayers who have the flexibility to move.  This exacerbates the budget pressures even further.  Which causes more outmigration which creates more budget pressures.  And on and on the cycle continues...

Ohio does not need to become California.  Ohio voters have the opportunity to make sure it does not happen today.

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