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Home Publications Blogs Beat the Press David Brooks on Wisconsin: Flaunting Ignorance of Economics

David Brooks on Wisconsin: Flaunting Ignorance of Economics

Tuesday, 22 February 2011 05:38

Let's all have a hearty round of laughter at David Brooks' expense. He doesn't know that employer side payments for benefits like pensions and health care come out of workers' wages. In his column today, he tells his readers that public employees in Wisconsin should have to pay for these benefits just like private sector. Apparently he doesn't know that they already do.

Go into any economics department and tell the faculty that you think employers should have to pay more for workers' Social Security benefits. The ridicule with which that suggestion would be greeted should be heaped on Mr. Brooks for failing to understand basic economics. And of course, we actually have data that show that the higher benefits received by public sector workers in Wisconsin are more than fully offset by lower pay.

Of course the bigger mistake in Brooks' column is the assertion that we are looking at a decade of austerity. This may prove true, but this is a policy choice. We had unbelievably incompetent economic policy in the last decade. The Fed and the Bush administration allowed (arguably encouraged) the growth of an $8 trillion housing bubble. It was fully predictable that it would collapse and lead to a serious recession.

Unfortunately, economic policy continues to be guided by people who were too incompetent to recognize this bubble and the danger it posed. The route out of this downturn is simple: the government needs to spend money to create demand. This is the economy's problem at the moment, not a scarcity of resources. However, the incompetents control the debate and are now promising us a decade of austerity rather than taking the simple steps that would be needed to get back to full employment.

Comments (20)Add Comment
written by Ron Alley, February 22, 2011 6:47
When I read the column, I considered the source, shook my head and still thought UFB!
David Brooks on Wisconsin: Flaunting Ignorance of Economics
written by Kenneth Fingeret, February 22, 2011 7:27
David Brooks a tool of the oligarchy. Wealth and power he bows down to and licks their boots clean.
written by ron , February 22, 2011 8:25
I remain unconvinced that the housing bubble and its aftermath was the result of incompetence. I believe it was intentional. Capitalism needs to expand and crash to survive. The past several expansions have been based on creating and selling debt. The banks and finance industry knew that the mortgage industry could create debt by expanding credit. It also knew the market would crash if it did so.
Fiat Money, Low-rated comment [Show]
Free Markets Require Zero Sum Trade-Off of Wages or Benefits, Low-rated comment [Show]
written by Thomas Williams, February 22, 2011 9:10

Good point but a bit simplistic.

In the private sector the forces you cite are true. However, in the public sector, the total labor costs can be disguised a bit. During good times workers are lured via fat benefit packages which are paid by taxpayers.

Tradionally, very secure jobs (public sector, banks, insurance companies) pay a discounted wage. Higher risk (like construction), higher pay. Lower risk, lower pay.

Look at the total pay package, including benefits. It should be @ 90% of the comparable job in the private sector.

What causes these problems is the "stickiness" of benefits. Wages can easily be negotiated up or down as circumstances require. Benefits are difficult to reduce in the short term.

Of course this was really exacerbated when politicians underfunded benefit obligations, leading to massive liabilities.

Thanks for your attention.
written by bryan, February 22, 2011 10:23
Dean, I feel it is a lack of resources that is causing this austerity madness. But resources of a different nature than I think you are referring. I think the elites know that our natural resources are quickly disappearing with no plan to back those up. And they are doing everything they can to slow growth of peoples standards of living so that they slow the consumption of these natural resources. If they actually got their act together and restored the middle class, the elites would have to cut back on their consumption of resources and they don't want that.
written by zapster, February 22, 2011 10:27
"In truly competitive countries, either wages are very high or benefits are very high, but not both"

Tell that to Denmark, a highly-competitive country with high wages, high benefits, very low unemployment even now, and are world leaders in several industries. The fact is, the high-wage, high benefit countries have all recovered much faster than the US.
Secure jobs and discounted wages
written by Allan Lane, February 22, 2011 1:56
Mr. Williams,

if the public sector jobs should receive wages that are "90% of the comparable job in the private sector" because "very secure jobs (public sector, banks, insurance companies) pay a discounted wage", then can you show me that the wages of the top Goldman Sachs and JPMorgan bankers and AIG insurance executives are somehow discounted to only 90% of what they should be in comparison to some other, more insecure, private sector job?

You also cite "construction" jobs as "higher pay" jobs because they are so insecure. I'm not sure what world you are living in, but if bankers and insurance executives are getting only 90% of what they deserve, and construction jobs count as high-paying jobs, it's not the world I live in!
Who owns the state
written by Gladwyn d'Souza , February 22, 2011 1:59
I keep hearing in CA how the state borrows from the
Public Employees Pension. If so why does the pension call the loan, take over the state, and run it like a coop?
government needs to spend money to create demand?, Low-rated comment [Show]
Spend money to create demand?
written by Dick, February 22, 2011 2:33
How does "government...spend money to create demand"? I honestly don't see what government can do to create demand. Can someone supply a few examples of such government-supplied demand creation? Thank you.
doofus incharge
written by dilbert dogbert, February 22, 2011 5:55
Mr Baker,
Please keep hammering home the blindness of those who could not see the housing bust and its consequences.
Spend money to create demand
written by Jay, February 22, 2011 6:43
I believe government spending could go to infrastructure, transportation, and communications to increase some demand. I haven't traveled internationally in a while but we are usually lagging in those areas. We could use expanded high speed rail. Improved broadband internet service like Asian countries. Adoption of green technology. More or improved public transportation. The DC metro seems to fall apart at least once a month. Investment in public parks and recreation centers. I am sure there are others that can come up with more ideas. But personally I feel we need some form of innovation to get us out of this deep of a slump.
written by RAL, February 22, 2011 7:37
The route out of this downturn is simple: the government needs to spend money to create demand. This is the economy's problem at the moment, not a scarcity of resources. However, the incompetents control the debate and are now promising us a decade of austerity rather than taking the simple steps that would be needed to get back to full employment.

Maybe you haven't noticed, but the federal government has committed trillions of $USD over the past 2 years to "stimulate" the economy to no noticeable effect. Many would argue that the end of the great Keynesian experiment is over. It's called debt saturation. It's time to clear the system, whether it be bad debt or unsustainable budgets.
Now it's time to pay the piper, as austere as it may be. Things that can't go on forever - don't - and all that good stuff.
written by Schofield, February 22, 2011 10:01
You don't engage in mortgage security fraud to the degree we've seen without being psychologically dysfunctional and the source of this can only be the poor quality of nurturing and parenting received as a baby and child. At the heart of economic problems is the value system of parents. George W Bush's early adulthood difficulties with drink and drugs should have been a massive warning about his unsuitability to be President.
written by Bill H, February 22, 2011 11:11
"we actually have data that show that the higher benefits received by public sector workers in Wisconsin are more than fully offset by lower pay."

Not true in California, at least, observably, in San Diego. The highest hourly wage paid for landscape workers is the county, second highest is the city, third is state agencies. The state pays several dollars per hour more than I can pay, and all three government agencies provide fully paid benefits on top of those wages.
written by Tony, February 23, 2011 5:59
As much as I admire Dean as being one of the few who called the housing crises, I just do not agree that more government spending is the answer. I look at Japan, and I think, when the Bob Hope generation dies out in the next few years, and their Baby Boom generation take over financing the Japanese debt, then I and many others are saying that Japan is then going to be in trouble. 95% of there debt is financed domestically and the Japanese Baby Boomers do not have the money, or the will to do what there parents did. Then many believe Japan has two tough choices, either default or devalue the Japenese Yen and cause massive inflation in their country to pay back there debts. I think the European way is a better path with some reasonable degree of austerity. The real problem to me is that Americans have been living beyond their means for the past 25 years, and we need to get them to live in basic homes, drive basic cars, and average at least a 7% savings rate during there working career. Too many Americans own homes, and I believe that number has to come down some more to a more reasonable level, with lower housing prices as well, social security, medicare and public and private pensions are paying more then they are collecting and earning on there investments, and this in my opinion needs to change. I would like to see our country go through a 10-15 year period, where we maintain a very slow growing economy, and allow people to pay down their debts to a more reasonable level, and businesses to write off their debts. The Australian economist Steve Keen, who was one of the few who called this crises, said it best to me when he said that it is all about debt. Today, we have more private debt then when the Great Depression started. And to me, more government loans to just add more debt to me is just not the answer. In ten to 15 years from now, I wonder which economy will look better, Japan or Europe. My bet is Europe, and folks, we have to make a tough choice. Either we go the way of Japan, and hope that works out, or we go the way of Europe. I'll close with quotes from two professors of mine, Dr. Steven Goldman from Lehigh University who said "do not trust anyone who tries to predict the future" and Dr. J. Rufus Fears from the University of Oklahoma who said "wisdom is only gained through suffering." If Steve Keen is right in that it will take 10-15 years to get our debt down to more reasonable levels, then some from of austerity must occur in my opinion, to get our economy moving again. And more government debt in my opinion is not the answer. But then again, since no one knows what the future brings, I could be wrong.
written by Jim, February 23, 2011 5:09
"Let's all have a hearty round of laughter at David Brooks' expense. He doesn't know that employer side payments for benefits like pensions and health care come out of workers' wages."

I'm not surprised David Brooks is ignorant of the real world but Mr.Baker you are also incorrect here. Fringe benefit payments or "Employer Side Payments" as you call them are a direct employer contribution to the overall wage package for a unionized craftsperson. These payments do not come from the employee but are 100% paid by the employer on behalf of the employee to a union trust fund that manages the money for the members of the union. There are some very small deductions, maybe 6-8% of the total wage and fringe benefit package that are paid by the employee for administrative work of the union but that's it. Health care benefits, pensions etc are 100% employer funded. I own and operate a small unionized specialty contracting company in Philadelphia. I know whereof I speak.
written by Jeff Z, February 23, 2011 9:22

What Dean means is that the wages that you pay your workers would be higher in the absence of those benefit payments. Without them, workers would need higher wages to compensate for the fact that they are not enjoying the benefits package you and your firm provide in cooperation with the union. It's a version of the economic concept of implicit costs. If a firm does not provide benefits, workers should consider that in evaluating the job offer. Employers need to consider the quality of the employee they might get under a different (lower benefit) scheme, since that will likely involve productivity differences. Or, you can think about who bears the burden, which can be different from who pays for the benefits (or collects the tax if a good is subject to an excise tax.

However, workers are not likely to take that wage premium and purchase health insurance on their own. It's usually way too expensive. It's cheaper to provide such services collectively, which is the idea behind insurance in the first place. Workers are more likely to spend the premium on consumption as a result.

These sorts of benefit plans could also be regarded as being part of a 'pre-commitment strategy.' The thinking is that I need to make the sacrifices for a specific purpose in a structured way, otherwise I fritter away the extra pay that I would put toward retirement and health insurance on lattes and potato chips.

I applaud your ethical decision to provide benefits and work with the union as best you can.

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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.