Day: February 23, 2011

Prank Phone Call Reveals the Real Wisconsin Governor

/ Jim Luke

Governor Scott Walker in Wisconsin gets totally pranked and reveals a lot.  No, it’s not about the money. It’s about busting the unions and he’ll lie if he has to.  From Yves Smith, the author of Econned and a blogger extrordinaire  at naked capitalism :

The Beast’s “David Koch” Speaks to Wisconsin Governor Walker

I was alerted about and listened to this recorded phone conversation between a caller claiming to be David Koch and Walker a couple hours ago and did not post it then over concern that might not be real. However, the governor’s office has issued a press release attempting to defend the governor’s half of the conversation. Per reader Doug Smith, who pinged me about the official statement:

Here’s the press release from Walker’s office:

The Governor takes many calls everyday. Throughout this call the Governor maintained his appreciation for and commitment to civil discourse. He continued to say that the budget repair bill is about the budget. The phone call shows that the Governor says the same thing in private as he does in public and the lengths that others will go to disrupt the civil debate Wisconsin is having.

I listened to the full tape. Walker said nothing at all that would indicate his appreciation for civil discourse. For example, at one point he describes a gambit under consideration where he’d invite the 14 Senators to join him in a conversation. Walker says ‘not a negotiation, a conversation’. Then he goes on to describe the purpose of this conversation: if they can get the 14 into a room, the law may support the notion that the session has officially begun — at which point, even if the 14 leave again, the quorum for the session would be there and the Republicans can move forward with votes even in the absence of the 14 Dems. Walker says, he’d be happy to have the 14 ’scream at him for an hour’ if he could accomplish this legal tactic.

Civil discourse? Not a whiff of that in anything Walker said when he thought he was speaking to Koch.

Oh, at one point after “Koch” suggested Walker bring a baseball bat to the possible meeting, Walker did say “I’ve got on in my office. A Slugger”.

You can listen below:

 

 

Public Sector Unions: U.S, Canada Compared

/ Jim Luke

From Stephen Williamson (emphasis mine):

One simple way to look at unions comes from Econ 101, where we just apply standard monopoly power arguments. Labor law gives workers the right to effectively act as a monopoly seller of labor. Result? The union drives up wages and extracts rent from the firm. But that argument goes only so far. As long as the firm faces competition, this has to discipline the union. Extract too much rent and you drive the firm out of business.

So what is going on in Wisconsin, Indiana, and Ohio? In general, union organization is not an easy thing in the United States, relative to what happens in other rich countries. Twenty two states, mainly in the south and in the middle of the country have right-to-work laws. In some states, state employees have much less power to form unions relative to what exists in the private sector. However, in Western Europe, unions tend to be relatively powerful. In Canada, labor law is much more conducive to union formation and power. For example, most (if not all) Canadian provinces do not allow the hiring of permanent replacement workers during a strike, and some will not permit the hiring of temporary replacement workers. Strikes of public service workers in Canada are infamous, from old-time disruption in the post office to more recent strikes involving garbage collectors and transit workers in Toronto. The difference in labor laws in Canada and the US is reflected in unionization rates. The US has a unionization rate of only 7% in the private sector, and 29% in the public sector. In Canada, the comparable statistics are 16% in the private sector and 71% in the public sector.

Now, if we believe Scott Walker, the Governor of Wisconsin, public spending in Canada should be wildly out of control. We know, of course, that government is doing much more redistribution in Canada than is the case generally in the United States. But in Canada actual expenditures of all levels of government on goods and services amounted to 21.2% of GDP in Canada in 2009, and 20.6% of GDP in the US. Not much difference there. Further, in spite of union power in the public sector, the Canadian federal government was able to turn around a deficit which had exceeded 5% of GDP in the mid-1990s. Before the recent recession, the Canadian federal government had been running surpluses for several years. We all know how that compares to recent US fiscal performance.

Is Scott Walker likely to save much money by picking on his public sector unions? That’s very doubtful. He’s certainly creating plenty of unproductive conflict. Is what he is doing politically smart? That’s hard to tell. Picking a fight with unions in Madison, Wisconsin may not be the brightest idea. Anyone who has spent time in Madison (4 years for me) knows that there is a large reserve army of people who would enjoy nothing better than spending a couple of weeks camping out in the State Capitol building to bother a Republican Governor. This might play well in the rest of the state, however, where Madison is sometimes viewed as sin city.

Origins of the Public Employee Pension “Crisis”

/ Jim Luke

What’s an “unfunded pension liability”?

As part of the efforts of conservatives who are desperate to cut government spending (particularly on any kind of employee or social benefit spending), we are being treated to an unending drumbeat of “unfunded pension liabilities” are killing state and local government budgets.  Since it’s all couched in accountant-type talk and delivered with serious faces and ominous tones, the message received by people is it must be because public employees are being compensated with overly-rich pension schemes.  Usually there are a few anecdotes about some police officer, teacher, or city official somewhere that’s retired with a six-digit annual pension.  Of course, the fact that a few anecdotes don’t establish anything when we’re dealing with millions of workers doesn’t stop the media.  Scare tactics make good politics and TV.

So let’s blow away some of the fog about “unfunded pension liabilities” and public employees.  First, the concept of “unfunded liabilities” is a very, very murky, fuzzy area.  The way a pension plan works (an old-fashioned defined-benefit plan) is that in the present the employer makes a promise to the worker to pay a pension of a certain fixed amount in the future when the worker retires.  Let’s say the worker is making $50,000 a year now and the pension promise is to pay $20,000 per year in 20 years (these numbers are much more common than the inflated 6-digit anecdotes talk-radio hosts cite as “proof”).  The employer is obligated by accounting rules to both pay cash right now for the salary to the worker and to also make payments right now into a fund (the pension fund) which is invested.  Then in 20 years when the employee retires, the pension fund pays the money back to the employee by paying the $20,000 pension each year.  The trick is in the “investment” part. The employer only needs to put just enough into the pension fund now so that when the money sits there for 20 years accumulating interest and dividends there will be enough in the fund to pay the pension for the worker’s remaining life after retirement. We want to know if the employer is putting enough into the pension fund now and whether or not the pension fund has enough money in it now.  “Enough” all depends on things that will happen in the future, and the future, of course is unknowable. But we can make assumptions about it.  The critical missing pieces of information are:  What rate of return or interest rate will the invested pension fund earn from now until the employee retires? How many years will be until the employee retires? and How many years will the employee live after they start receiving the pension.  If you know these things, then the rest is just math.  But we can’t know this stuff for sure.  We have to make assumptions.

If we make these assumptions on future rate of return and life of the worker then we can determine if the fund has enough in it right now that will grow to be enough in the future. If the amount in the fund is greater than what we calculate/assume will be needed, then it is overfunded.  If  the fund actually has less in it right now than we estimate it should to pay the promised benefit in the future, then we call the difference between the actual and the projected “ought to have” is called an unfunded liability. Technically, even if the pension fund is underfunded at the time the worker retires, there is still no problem as long as the employer is able to make up the difference so that the worker gets the full pension that they were promised (and gave good labor for years earlier).

The existence of an unfunded pension liability is a very serious issue for a private business or corporation. The reason is because a private corporation stands an high chance of not even existing when it comes time to pay the pension. To make it worse, without rules that limit how much unfunded pension liability a private company can have, an incentive exists for the private business to intentionally defraud the worker.  They could make promises now, receive labor in return now, and then never deliver the payment for that labor in the form of the pension.  Even with rules against unfunded pension liabilities there are still large numbers of firms that go bankrupt and default on their pension obligations and stick the federal government with the bill (see Pension Benefit Guaranty Corp.). When the entity in question is a goverment, the seriousness of an unfunded pension liability is lessened, although not entirely absent.  This is because the government entity is much, much less likely to disappear or not be able to raise funds in the future – they have the power to tax.  And, just how many government entities, states or cities, have disappeared in our history – pretty close to none.

But the state and local government “unfunded pension liability” boogie man is even less threatening than it has been made out to be.  The really, really scary numbers are largely the result of the assumptions made.  As it turns out the nature of compound interest means that even very, very small differences in assumptions (future investment rate of return, lifespan of retirees) will change the unfunded pension liability estimate dramatically.  Further, what’s a “realistic” assumption of rate of return is strongly influenced by stock market crashes.  So for example, many state and local governments (and many private companies also) actually had fully-funded pension funds in 2007. But then the financial world world collapsed due to the unregulated speculation of the big banks.  Those pension funds lost literally billions and billions (some estimate in the trillions) of dollars worth of investments in the crash.  Rate of return likewise dropped as The Federal Reserve has kept interest rates very low.  So now the new “realistic” assumptions on those funds future performance make them look like they are seriously unfunded.

Dean Baker at Center for Economic and Policy Research has a new paper out available that explains the crisis isn’t what it’s made out to be and that the cause is most certainly not “overly generous pensions for public employees”.  The primary cause is the financial collapse created by Wall Street and our government’s inept and failed attempts to fully stimulate the economy back to recovery.  The abstract:

There has been considerable attention given in recent months to the shortfalls faced by state and local pension funds. Using the current methodology of assessing pension obligations, the shortfalls sum to nearly $1 trillion. Some analysts have argued that by using what they consider to be a more accurate methodology, the shortfalls could be more than three times this size. Based on these projections, many political figures have argued the need to drastically reduce the generosity of public sector pensions, and possibly to default on pension obligations already incurred.

This paper shows:

  • Most of the pension shortfall using the current methodology is attributable to the plunge in the stock market in the years 2007-2009.
  • The argument that pension funds should only assume a risk-free rate of return in assessing pension fund adequacy ignores the distinction between governmental units, which need be little concerned over the timing of market fluctuations, and individual investors, who must be very sensitive to market timing.
  • The size of the projected state and local government shortfalls measured as a share of future gross state products appear manageable.

Report – PDFpdf_small | Flashpdf_small

Observations on Wisconsin

/ Jim Luke

I’m noticing that the media is being somewhat slow to pickup on the real story happening in Wisconsin and not spreading to Indiana and Ohio. It’s not about fixing state deficits or finances. It’s about busting unions, pure and simple.  As such, it’s part of an long-term effort that the right wing of American politics has been pursuing since the late 1960’s to increase the share of GDP that goes to profits and elite investors and to reduce the share of GDP/national income that goes to the middle class/working class.

Steven Pearlstein of the Washington Post is starting to get it, though:

The last time any elected leader made such a direct and brazen attack on the legitimacy of the union movement was when Ronald Reagan risked havoc in the skies by firing hundreds of striking air-traffic controllers and preventing them from ever getting their jobs back. This dramatic bit of union-busting became a turning point from which organized labor never really recovered – and, like the Wisconsin imbroglio, skillfully played off resentment of public employees whose pay and benefits exceed that of the average taxpayer.

But rather than playing Reagan to Wisconsin’s truant teachers, Walker overreached, refusing to give up his union-busting even after the unions agreed to his benefit-cutting demands. Now that he has allowed the unions to reframe the issue from one of greedy public servants to one of political revenge, Walker has single-handedly succeeded in bringing more attention, unity and sympathy to the union movement than it has had since . . . well, since Ronald Reagan took on the control tower. A mischievous columnist might even take this opportunity to speculate whether this is the beginning of the revival of labor’s fortunes

Pearlstein also observes how all the conservative talk about “running government like a business” is pure nonsense.  No sane business leader interested in building a long-term successful business would approach workers this way, something I can attest to from my own corporate and consulting experiences:

Back when I was working at Inc. magazine in the mid-1980s, we loved nothing better when approaching a public-sector issue than to ask how the private sector would handle it. Faced with the situation in Wisconsin, we would have called up Tom Peters or Peter Drucker and posed the example of a new chief executive brought in by the shareholders (i.e., the voters) to rescue a company suffering from operating losses (budget deficit) and declining sales (jobs). Invariably, they would have recommended sitting down with employees, explaining the short-and long-term economic challenges and working with them to improve productivity and product quality in a way that benefits both shareholders and employees.

Now compare that with how Wisconsin’s new chief executive handled the situation: Impose an across-the-board pay cut and tell employees neither they nor their representative will ever again have a say in how things will be run or get a pay raise in excess of inflation. A great way to start things off with the staff, don’t you think? Remember that the next time you hear some Republican bellyaching at the Rotary lunch about why government should be run more like a business.

This situation, both the efforts to bust the unions and the protests, which started in Wisconsin but has spread will, I think be a major turning point in U.S. political economy.  It’s too early to tell if which way things turn.  It could spell a determined u-turn back to the early 20th century and worse working conditions and wages share of GDP/GNI, or it could be the beginning of the reversal of the 1970’s-1980 conservative revolution (is that an oxymoron?)  and a return to progressive values.  Too early to tell.