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CBS News Joins the Attack on Public Employees

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Tuesday, 21 December 2010 05:53

Way back in the last decade the United States had a huge housing bubble. The Wall Street banks made money hand over fist making and selling the loans that fueled this bubble. The economic policymakers and regulators who were supposed to prevent the growth of such dangerous bubbles, people with names like Greenspan, Bernanke, Paulson, and Geithner, assured the public that everything was just fine. When they were proved horribly wrong, they then congratulated themselves for avoiding a second Great Depression.

This background is important to any story on the financial problems facing state and local governments, since it is 90 percent of the picture. It also would be good if the public remembered this history, since many of the people who either profited from the bubble or failed to take measures to counter its growth are now at the forefront in demanding that state and local governments sharply reduce their budgets and that public sector employees take big cuts in pay and benefits.

On Sunday night, the CBS News show 60 Minutes joined this campaign. The piece begins by telling viewers that:

"in the two years, since the 'great recession' wrecked their economies and shriveled their income, the states have collectively spent nearly a half a trillion dollars more than they collected in taxes."

That's not what the data show. If we look to the Commerce Department's National Income and Product Accounts we find that in total state and local government spent $45 billion more than they took in (line 27). CBS does not give a source for the "nearly half a trillion" number.

It is also worth noting that any shortfall is due almost entirely to the recession caused by the collapse of the housing bubble. If revenue had increased in step with normal growth (2.4 percent real growth, plus inflation), state and local governments would have had an additional $290 billion since the start of the downturn.

Another way to think about the size of the state and local government shortfall is that we could envision the Federal government giving state and local governments trillions of dollars in loans at below market interest rates as they did with the Wall Street banks through TARP and the various Fed special lending facilities. If the state and local governments got $3 trillion in loans at rates that were 4 percentage points below the market rate, and then they relent this money at market rates, it would largely make up for the shortfall in revenue they have faced. (It would provide them with $120 billion a year in additional revenue.)

When the governments repaid their loans, plus the below market interest, the Treasury and the Fed would then get all their money back, plus a small premium. This would allow people like Treasury Secretary Timothy Geithner and the Washington Post editorial board to declare that they made a profit, just as they have with the TARP. This would be one possible solution to the fiscal problems faced by these governments.

The piece also told viewers at the onset:

"There is also a trillion dollar hole in their public pension funds."

In fact, this shortfall is overwhelmingly attributable to the plunge in the stock market that followed in the wake of the collapse of the housing bubble. According to Federal Reserve Board data (Table L.119) if pension fund assets had increased at just a 5 percent nominal rate since the 4th quarter of 2007, they would have $935 billion more money at the end of the third quarter than is currently reported.

While some of us did try to warn of the risks that the housing bubble posed to the economy and financial markets (we were not featured on 60 Minutes, which was busy touting deficit stories even then), the primary fault of state and local officials was listening to Wall Street and the mainstream of the economics profession, not excessive pensions.

It would also be useful to provide a basis for assessing this "trillion dollar hole" since it is virtually certain that almost none of CBS's viewers regularly deal with such numbers. The discounted value of GDP will be more than $400 trillion over the next 30 years (roughly the period in which this shortfall will have to be addressed). This implies that additional revenue equal to 0.25 percent of GDP over this period should be sufficient to cover this projected shortfall. By comparison, the increase in annual defense spending associated with the wars in Iraq and Afghanistan is approximately 1.8 percent of GDP, more than 7 times larger than amount of revenue needed to cover the projected pension shortfall.

Another point of comparison is the revenue that could potentially be raised from a financial speculation tax. Such a tax could easily raise more than 1.0 percent of GDP, four times the projected shortfall, with the incidence being born almost entirely by Wall Street banks and speculators.

The segment also includes assertions that imply state and local workers are overpaid. In fact, after adjusting for education and experience state and local workers earn slightly less than their private sector counterparts. Public sector workers do get higher pensions on average than workers in the private sector, but this does not offset the pay difference. It is also important to remember that many public sector workers are not covered by Social Security so that their pension is virtually all of their retirement income.

Interestingly, New Jersey Governor Chris Christie is presented as a heroic visionary in this story because of his willingness to make cuts in areas like public and education and to force workers to take pay cuts. In one instance he is shown telling teachers complaining about cuts in their benefits that they should get another job if they are unhappy with their pay.

While such an approach may be an effective short-term strategy it is absolutely disastrous in the long-term. At any point in time it will be difficult for long-time workers to leave their jobs with the state and find comparable employment elsewhere, especially in the midst of the worst downturn in 70 years. However, as new workers come into the labor force, lower pay and worse benefits in the public sector will make these jobs less attractive. This means that New Jersey's schools and other public agencies will have less choice in selecting their workforce, which is likely to lead to a deterioration in the quality of education and other public services. This is not obviously far-sighted thinking.

Comments (13)Add Comment
...
written by Mike B., December 21, 2010 7:57
I don't see where you get the NIPA number - I don't see a line 41. Line 27 (Net state and local government saving) gives a value close to yours, but opposite in polarity (spending 48 billion more than receipts). Line 39 [Net lending or net borrowing (-)] gives a much larger value, larger than half a trillion. This might be the basis of CBS's number. I don't know which line is the appropriate one for this purpose.
Baker's Great Leap Backward: Extracting Surplus From Local Govt, Low-rated comment [Show]
...
written by Ron Alley, December 21, 2010 8:40
quote]Interestingly, New Jersey Governor Chris Christie is presented as a heroic visionary in this story because of his willingness to make cuts in areas like public and education and to force workers to take pay cuts. In one instance he is shown telling teachers complaining about cuts in their benefits that they should get another job if they are unhappy with their pay.

The Corporate Party agenda is to demonize "class warfare" while stoking warfare within the middle class. Candidly, there is a lot of resentment toward teachers (and other unionized government employees) among economically insecure parents who have no realistic opportunity to unionize and who are dissatisfied with the academic progress made by their children. 60 minutes is hopping on the bandwagon and gratuitously demonizing teachers. The attack fulfills the Corporate Party agenda of fomenting conflict within the middle class and thereby avoid call for sacrifice by the well to do.
...
written by fuller schmidt, December 21, 2010 9:06
Sign me up for a $1T 4% below market rates loan.
Workers under attack
written by Scott ffolliott, December 21, 2010 10:09
Workers everywhere need to join hands together and support one another for workers are the only ones who will demand fairness, safety and justice for workers
Public Workers, Low-rated comment [Show]
...
written by Kenneth Fingeret, December 21, 2010 10:48
Hello Dean Baker,

As all the people in the US should know that there is a war on between the extremely wealthy and powerful and the rest of us. If you can lower the salaries of workers (including pensions and other indirect compensations)it is easier to take the remainder and enrich the the wealthy and powerful. Bonus points for reducing the educational system until there are only a few educated people and the rest of us are left with job skills only fit for manual labor of one sort or another and the pay commensurate with the job (aka peasants, serfs or slaves).
yes if only the bubble had continued...., Low-rated comment [Show]
...
written by Chris, December 21, 2010 11:55
Regarding public workers....
My experience as an individual who has done physical labor for perhaps 5 of my 30 adult years is that pace is what keeps one able to come back day in and day out. Demanding physical work requires rest. Digging holes to build highways is taxing. Point is, we can focus on others or we can focus on our own tasks. Personally my sense of outrage is towards those who have cause societal damage. "Mind your own business", worked in kindergarten, works as an adult.
...
written by a different chris, December 21, 2010 12:23
I guess we're so used to it now that Dean didn't even mention that almost the first sentence was a statement of economic ignorance - the "defict", rather than the "debt", was stated as a problem.

Now neo-libs and wingers of all stripes can argue with me about how much of a problem the "debt" is becoming, but saying the "deficit" is just shows pure ignorance. Even Dick Cheney understood that.
Thank you...
written by Douglas, December 21, 2010 3:19
...for eviscerating this 60 Minutes piece. I watched it Sunday night and was very disturbed by the one-sidedness and omissions you mentioned. I agree with the poster above that stories like this are all about deflecting attention and stoking inter-middle class conflict.

The striking thing about the US isn't the power of public unions, it's the LACK of bargaining power among private sector workers, where most unions are a shell of their former selves.
Steve Crofts Sucks
written by bobbyp, December 21, 2010 8:48
That was pretty sucky, Steve. Really, really bad.
...
written by MB, December 22, 2010 7:53
Here is a link to a recent article about ordinary retirees from Phila city government. City pensions have been very controversial because of big payouts to elected officials but also because the city already had large problems funding the pensions even before the financial crisis. Overall the story has been complicated and confusing. But this is a good profile of the ordinary reality for retired city workers.

http://www.philly.com/philly/blogs/our-money/111249379.html?viewAll=y

MEET PHILLY'S 'PENSION PROBLEM'

DROP is a drop in the bucket when it comes to pension costs. We wanted to know: Who are the real faces of Philadelphia's pension system?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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