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  • Cutting Public Sector Wages Will Make Recession Worse


    Bob Pollin and Jeff Thompson: Public sector wages are not higher than comparable private sector; cuts will fuel recession -   February 25, 2011
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    Cutting Public Sector Wages Will Make Recession WorsePAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. And in Wisconsin, Governor Walker continues to be determined to pass legislation that will essentially take away collective bargaining rights from public sector workers. The protests also continue, and some counter-protest. On Saturday, Tim Phillips, president of the Americans for Prosperity organization, something mostly funded by the now rather notorious Koch billionaire brothers, told a group of counter-protesters, at the edge of the union march, that cuts were not only necessary, but that they represented the start of a much needed nationwide move to slash public sector union benefits. Phillips said:

    ~~~

    TIM PHILLIPS, PRESIDENT, AMERICANS FOR PROSPERITY: We are going to bring fiscal sanity back to this nation.

    ~~~

    JAY: Now joining us from Amherst, Massachusetts, are the authors of a recent article in Nation magazine titled "Betrayal of Public Sector Workers", Bob Pollin, who's codirector of the Political Economy Research Institute there, PERI, at the University of Massachusetts, and Jeffrey Thompson. He's an assistant research professor at PERI. Thank you both for joining us.

    ROBERT POLLIN, CODIRECTOR, PERI: Thank you for having us, Paul.

    JAY: So what do you make of Mr. Phillips' statement that we need sanity back in fiscal affairs, and we're going to start at the state level, taking on the public sector unions?

    POLLIN: Well, to begin with, there is a crisis in public sector finances. The cause of the crisis is the broader crisis, the great recession brought on by Wall Street. The recession blew a gigantic hole in the public sector finances. Public sector revenues, tax revenues, fell by 13 percent, which is unprecedented over the recent history to have such a huge drop in tax revenues, which is, of course, tied to the decline in people's income, the amount they spend that generates sales taxes, and their property values. So that's why we have a crisis in the state finances now. It doesn't have to do with the wages of elementary school teachers or nurses or firefighters. Those wages, they're--one of the lies that's being repeated now is that public sector workers are paid a lot more than everybody else. Well, that's actually just flat-out false. When you measure the actual pay levels and you control for people's ages and educational levels, public sector workers make less on average than people in the private sector. Indeed, in Wisconsin, public sector workers on average, after you control properly, make about 8 percent less than private sector workers. So the crisis is not due to the public sector workers, Paul. The crisis is due to what happened on Wall Street. And what we're seeing now is that public sector workers, their unions, their pension funds are getting attacked for a problem that they didn't cause.

    JAY: Jeff, the argument that's coming from the supporters of Governor Walker is that when you add all the compensation package together--and they point out to the fact that public sector workers in Wisconsin don't contribute very much either to their pension plan or to their health care plan--that in fact that does put them a leg above private sector workers. Is that true?

    JEFFREY THOMPSON, ASST. RESEARCH PROFESSOR, PERI: No, that's not true. Even after you account for non-wage compensation--health care benefits, pensions, etc.--workers in the public sector across the country, including in Wisconsin, still face a penalty relative to their private sector counterparts. It is true that in the public sector the benefit package is better. It makes up a larger share of total compensation than in the private sector. But they're not coming out ahead even when you factor in total compensation. And I wanted to make a point regarding the idea of a return to fiscal sanity. You know, that idea, I think, is a great idea. It's just that Governor Walker seems to have no concept of what that means. Fiscal sanity, fiscal responsibility, implies that you take seriously the idea of funding public services. So a serious approach to the problems that are faced in Wisconsin in terms of their current and future budget shortfalls include considering generating new revenues. And they will include some budget cuts as well, but a balanced approach that doesn't take up totally phony causes that will not help at all in their budget situation, which is busting the public sector unions. That's completely not a serious approach. It's completely the opposite of sanity.

    JAY: Bob, most states in the United States have a balanced budget amendment. And explain the context for this and what role does it play, given the current crisis.

    POLLIN: Most states have a requirement that they run a balanced budget on their operating activities, so that their day-to-day operations, they can only spend as much each year as they take in in tax revenue. They do borrow money. As we all know, states and municipalities borrow money for capital projects, infrastructure projects. And, by the way, they have been extremely reliable in paying back and covering all of their obligations for those capital projects. But now, with the operating budgets, unfortunately the states are in a situation where whenever there's a recession, they will always fall into a crisis with respect to their operating budgets, because a recession means people's incomes go down, people's property values go down, people's spending go down, so, therefore, income tax goes down, sales tax go down, property tax revenues, they all go down. But meanwhile we still have the commitments to run our schools, to run our hospitals, to run our police stations, to run our fire stations. And so you always will face this. Now, the way that you solve it in the short term, the way that we've done it for the past two years, is to have the federal government give funds (it's called revenue sharing) to the states. And that's what's happened over the last two years through the stimulus program. That's covered about one-third of the budget gap for the states. But the states are in this fix now, and especially with the Republicans saying that they're not going to fund the deficits anymore of the states. Well, then you have what we could call a procyclical effect; that is, the situation in the states worsens the recession.

    JAY: There's--also seems to be a bit of a plan, almost, to defund state governments and set this struggle up with public sector unions. For example, we were just looking recently at the estate taxes, and state estate taxes in many states simply don't exist anymore. They were phased out in 2008. There's about 20 that reestablished them, but Wisconsin's not one of the states that did. And, you know, they're talking about needing $137 million by June. Well, last year they collected $158 million in estate taxes, and this year they won't have any. So what do you make of that, this sort of almost deliberate defunding of the states through lack of taxes setting up this fight with public sector unions?

    THOMPSON: The American right-wing conservative movement opposes what the public sector does. And there has been a long-term agenda in terms of their political organizing. You know, Grover Norquist, famously promised to reduce the size of government so small that they could drown it in a bathtub. And there have been concerted efforts to push legislation across states to undercut income taxes, to eliminate estate taxes. This is a consistent approach. So it is a plan, year in, year out. And I think that what you're seeing in Wisconsin this year, and also in Indiana and Ohio, is they're seizing on the current economic crisis to push the anti-union portion of the longer-term, bigger-picture effort of the American right wing to radically curtail and eliminate much of the public sector. A big problem why they're not able to just roll through their agenda is the fact that most Americans really do appreciate the public services they receive from state and local governments. They like their schools, they like having good quality roads, they like feeling safe in their communities, and they fund police and firefighters. They like having clean public parks. So there's a lot of support across the country for quality public services, but they're able to take advantage of the current economic situation and the real pain that many households across the country are facing, to push this portion of their agenda.

    JAY: So, Jeff, what are some of the alternatives? If public sector workers' wages aren't the real cause of the budget shortfalls, what's the alternative for state governments?

    THOMPSON: Bob pointed to the primary cause for the crisis that states find themselves in. It's the overall crash in the economy, which is driven by the financial crisis and problems on Wall Street. The way out is really, I think, bread-and-butter public finance. States have to look at their budgets, and they have to levy tax increases. There's no two ways about that. People value the services. The services the public sector provides help form the communities that people enjoy living in. There are going to continue to be squeezes in budgets. There's no way around that. But states really do need to be more aggressive in generating new revenues. And I think the most economically attractive approach at this point, we do not--in principle, we don't want to be raising taxes in a recession. Everybody does know that. But the alternative here is worse. Cutting spending in vital areas is worse. And so, given the position that we're stuck in, the best approach is for states to levy temporary tax increases on high-income households. Two-, three-year patch revenues to get us out of this deep hole is really the best approach in terms of generating economic growth and protecting vital services that really make states attractive places to live.

    JAY: Bob, in Wisconsin the unions have more or less agreed to all the kind of cuts that Governor Walker wanted from them. The joke right now is Walker can't take yes for an answer. He's very focused on the issue of undoing their collective bargaining rights. And that seems to be the issue that's spreading into some of these other states. What is the history of this, of public sector having collective bargaining rights? Why does this battle matter?

    POLLIN: As we know, overall, unionization in the United States has been declining for a generation. The big stronghold in the US at this point is actually the public sector relative to the private sector. In the private sector, unions have been facing a very, very difficult time. At the same time, of course, unions are the bulwark in defense of the rights of ordinary people at work. I mean, you know businesses. We know--I mean, Governor Walker said he was going to call out the National Guard to help bust the unions. Well, the unions--you know, we still are a democratic country, and unions represent the collective voice of the workers. And so that the notion that Governor Walker is seizing on the crisis--and, as you said, the unions have already agreed to accept pay cuts. But what he really wants is for workers not to have any rights, and that that would be the next step, so that workers are already making on average 8 percent less than the private sector workers in Wisconsin. He wants that to be a lot less. Why? Because he already cut taxes on corporations coming into Wisconsin. He declared that Wisconsin is, quote, "open for business", meaning, we're going to keep lowering taxes on business. And how do you fund that? Well, if you're going to have less tax revenues coming in permanently, then you have to pay people less money, that--you're going to have to pay school teachers less, you're going to have to pay policemen less. And, by the way, they're not just talking about pay; they're also talking about walking away from the pension obligations that have already been built up. I mean, this was in The New York Times, that--not only in Wisconsin, throughout the country--that there is widespread discussion about states declaring--being able to declare bankruptcy, which would enable them to break their existing pension obligations. So this is how far some of the talk has gone. And it's not just the right wing here. It is across the country that this kind of discussion is taking place in response to the Wall Street-induced recession.

    JAY: Newt Gingrich had a--I think they had an op-ed in The LA Times just a few days ago calling for Congress to pass a law that would allow states to go bankrupt, and I guess this--exactly for this purpose. Once you go bankrupt, you can undo all your contracts and all your pension obligations.

    POLLIN: Right. Gingrich, and it was coauthored by Jeb Bush. And what their point is also is, well, you know, we won't necessarily have to break all of our pension fund obligations; we just want to have the ability to do it; and once we have that power, then we can bargain harder against the workers. And so at least they are thereby acknowledging that workers actually still have a few rights in this country, defended by their unions. And that's exactly what they're trying to get rid of.

    JAY: Jeff, do you think that to some extent the unions, like, for example, in Wisconsin, the unions agreeing to take all these cuts, and at the federal level President Obama, and to some extent even the unions, although I think at the national level the unions are less on this message, but are kind of buying into the issue that the big debt is the problem, austerity is needed, and everyone has to sacrifice, which is why the unions agreed to Walker's demands on the financial front? I mean, should there be a bigger push-back on this whole argument?

    THOMPSON: Absolutely, yeah, particularly with regard to some of the statements that President Obama has come out with. I've been deeply disappointed. You know, he's buying into some concepts that essentially are bad economics, but also are completely off point. What he should be focusing on, you know, to the extent that he's a policymaker and a cheerleader for energizing my country, he should be talking about doing everything we can to generate jobs to get us out of this hole that we're in. The deficits are not a problem today. You know, focusing the discussion on belt tightening and fiscal issues is--it's--essentially sends you down the road of a no-win situation, and it's bad economics to boot. As regard--with regard to the unions in Wisconsin, knowing that they already face a penalty with regard--in comparison to their private sector counterparts, it is disappointing to see them going ahead and saying, yes, we'll take all the cuts in pay and benefits. But they're in a very tough position, and they're negotiating with their backs against the wall, so, you know, I can't be too hard on them for taking that position. And to some extent, by taking that position, rhetorically they have been able to show the big lie to Governor Walker. So in making that big concession, they revealed his big lie. And I think that was powerful.

    JAY: Bob, looking towards Ohio, New Jersey, Indiana, how do you see this unfolding?

    POLLIN: I think that we need to see a dramatic shift in the terms of the discussion. And I think you raised the point and Jeff gave a good answer. I think we need to put back on the table, Obama needs to put back on the table, the idea of federal revenue sharing, that the federal government is going to keep supporting the states. You and I talked about this the evening of his State of the Union address, and at that time I said, well, are the Democrats ready to start firing teachers and cops? And that's what we've come to. That's--was, like, what? Three weeks ago. Well, here we are. So the Democrats in the federal government are--they're still in control of the White House, they're still in control of the Senate, and they need to say that we've got to stop this insanity, because your point and Jeff's point is absolutely crucial: the mere fact of the Wisconsin workers accepting pay cuts, regardless of whether that's shared sacrifice or not, is actually going to make the recession worse. It has to, because it's withdrawing spending from the economy. And what we actually need to get out of the recession is more spending. So we need more government spending, not less. And the deficit is a problem, but at this moment is a second-order problem. The first-order problem is, you know, 9 percent unemployment 18 months after we declared the recession over.

    JAY: Thanks very much for joining us, both of you.

    POLLIN: Thank you.

    THOMPSON: Thank you.

    JAY: And thank you for joining us on The Real News Network. And don't forget our fiscal issues. The donate buttons are over here, and we can't do this if you don't do that.

    End of Transcript

    DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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