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The same economic problems all the way through

As some of my recent posts suggest, I've been spending more time lately looking into state and local finances. And what's really amazing is how, well, familiar it all seems.

The federal government is facing a short-term economic problem driven by a collapse in revenues (which means it has less money to spend) and a sharp rise in unemployment (which means there are more people who need temporary government help). In the longer run, there's a pension problem, but the bigger issue is health-care costs.

Oh, I'm sorry. Did I say "the federal government?" I meant state and local governments. The problems are similar at all levels. The differences are that the federal government can deficit spend to smooth out the short-term crunch, which no state but Vermont can do, and that pensions make up more of the long-term problem for the states than for the feds, as the states don't have responsibility for Medicare.

The background to the pension problem is similarly familiar. States have essentially deferred their employee compensation into the future. That led them to hire more and/or better people without fully paying for it. If that sounds a bit to you like the recent consumer credit bubbles, where people bought more and/or better things while deferring the costs into the future, well, that's exactly right.

By Ezra Klein  | October 13, 2010; 1:52 PM ET
Categories:  states  
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State, of course, do bear the Medicaid burden and, according both to the CBO and to the Senate, the Obama/Pelosi PPACA created history's largest unfunded mandate on states by shifting a portion of the Medicare burden from the federal budget to the state budgets. This was the topic of roll call vote #390 (111th Congress, 1st Session, 23-Dec-2009, details at p. S13831 of the Congressional Record), in which Senate Democrats simply waived the requirements of the Unfunded Mandates Act and loaded the states up with future debt.

It's true: states face problems due to irresponsible defined benefits programs awarded to direct employees and to nonproductive citizen and due to unfunded mandates imposed by an irresponsible federal government. It's also true (as Klein noted earlier today) that it's unjust to penalize employees and citizens who contributed the demanded amount into ill-conceived programs: a 50 year old who has paid into Medicaid or into a state's defined-benefit pension rightfully expects the promised benefits.

So what's the solution? First, benefits of ill-conceived and irresponsible programs can't be promised to younger employees and citizens. Second, the same younger employees and citizens must pay for the promises made to others. Popular -- certainly not; however, the money simply isn't there... so there are few meaningful alternatives (that is, alternatives not based on accounting trickery or mathematical quirks).

There are many opportunities for government size and cost reduction -- all need to be explored. Perhaps the many private firms which now profitably collect residential waste can invade the turf of government-funded trash collection: in California, which offers data on the subject, this step alone might fund the pensions of retiring sanitation workers.

Posted by: rmgregory | October 13, 2010 2:56 PM | Report abuse

The National League of Cities has been following the budget crisis at the local level for quite a while. Here is their latest report on the fiscal conditions of cities:

Posted by: miqcie | October 13, 2010 4:18 PM | Report abuse

Um, we already have private contractors picking up our trash in my smallish (60K population) California town...

Just this morning I read our local town blog where one of the topics was the $162,000 annual salary of our town's park and rec director. The only justification for this salary was that "every other city is paying at this level". This is why almost every town and county here in California is in the same (leaky) fiscal boat. In private industry, if salaries get ahead of themselves, there's a correction, whether it's years of no raises (our family's experience) or layoffs. Local governments, with union contracts, don't have this ability to adjust salaries to the current economic reality. So, our town has a parks and rec director making about $70k more than a comparable position here in SoCal in private business, and a multimillion dollar pension liability for this person going forward. Obviously, we can't afford this, and this is just one of our town's employees.

Posted by: Beagle1 | October 13, 2010 4:45 PM | Report abuse

Never going to happen Ezra because your proposal attacks the very heart of the unions' negotiating power. Remember how the unions blocked/watered down/deferred any removal of the tax exclusion for employer provided healthcare benefits? They didn't want it negotiated like regular wages because that didn't play to their negotiating strengths.

In the same way, bring more of the present value of future benefits to the actual present and the transparency of what public employees are actually getting will be that much clearer to distracted taxpayers and they won't stand for it. The unions know this and accordingly want benefits deferred so that when reality, and crunch time, arrives, they can say "a contract is a contract" which is a powerful bargaining chip they don't have before something has been signed.

You are quite right about this recalling the consumer credit bubble in that a huge enabler was the sheer complexity of the system that obscured true costs (such is the level of taxpayer advocate oversight that it took government itself, in the form of the SEC, to bust the NJ government on pensions!), plus agency problems whereby mortgage originators lost the incentive to monitor by spinning out their liabilities to relatively disinterested and uninformed external investors (not unlike politicians having little incentive to monitor because liabilities for pension agreements are spun out on to relatively disinterested and uninformed taxpayers).

Posted by: bdell555 | October 14, 2010 12:49 AM | Report abuse

Mr. Wangpeng(ROC):

Posted by: happywwwppp | October 15, 2010 3:19 AM | Report abuse

Mr. Wangpeng(ROC):

Posted by: happywwwppp | October 15, 2010 3:22 AM | Report abuse

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