Like any centrist pundit, George Skelton runs hot and cold. Sometimes he gives too much credit to the right-wing and their ideas, but other times he cannot resist the need to debunk myths with facts. In his column in Monday’s LA Times, we get Skelton the debunker, showing that the attack on public workers is not going to produce any meaningful budget savings:
Based on my e-mail, many people believe that the way for Sacramento to make ends meet is to cut state employees’ salaries by, say, 10%. Well, in the last year, most have been cut by 14% through furloughs. And the state still has a $19-billion projected deficit.
For the fiscal year starting July 1, Gov. Arnold Schwarzenegger is proposing to cut salaries by 5%, require workers to contribute an additional 5% of pay to retirement and cut the workforce by 5%. That would save a mere $1.8 billion.
Even if Schwarzenegger could fire every state employee under his control – roughly 230,000 – it still wouldn’t balance the books.
Skelton mentions that over 70% of the state budget goes to local governments and schools, which is a result of the backfilling of lost local revenues when Prop 13 passed. While some critics may be thinking of unnamed bureaucrats working in a Sacramento office, the most common state worker is a teacher, a nurse, a police officer, a firefighter. Those are people whose pensions are in the crosshairs.
And what of those pensions? As Skelton proves, they’re a drop in the bucket:
And those pension costs? The governor has budgeted $3.8 billion in state contributions for the next fiscal year. But only $2.1 billion of that would burden the bleeding $83-billion general fund. The rest would come from self-sustaining special funds.
So even if employee pensions didn’t cost the state a cent – an impossibility – the savings would fill only 11% of the general fund deficit hole.
OK, but what about the favorable pension deals made in 1999? The governor’s recent pension pacts roll back those deals for the unions that agreed to the governor’s pact. But how much does that help the budget?
But the grand savings? All of $72 million a year. And only $43 million of that helps the general fund.
Skelton’s mythbusting of the “pensions are the problem” argument is truly epic. He deserves a ton of credit for writing it. But even though he has destroyed the myth that pension costs are behind the state budget deficit – a deficit caused instead by 30 years of artificially low tax rates and the worst recession in 60 years – I don’t expect facts to slow down the desire to attack public workers.
Some of that is due to the right-wing’s interest in using this crisis to gut government services, and break the politically powerful unions that have played such a key role in preserving Democratic power in California.
Cruickshank’s piece also frames the pension argument in an interesting way — a way that we don’t hear enough about. Like many people on California’s pro-labor left, he sees public pensions not as a cost but as an opportunity–a standard that can be used to push private sector wages and retirement benefits up so that more people join the middle class. To this way of thinking, the business community’s attack on pensions isn’t about protecting taxpayers — it’s about keeping private sector wages and benefits lower.
This is a good summation of my views. And history bears this out. It’s the same approach that FDR took to dealing with the Great Depression, which pulled the nation out of the doldrums and restored some growth before a hasty and ill-advised return to austerity in 1937 crashed the economy. Ultimately, these kind of wage-growing and job-creating policies produced the basis of the prosperity enjoyed for nearly 30 years after the end of World War II.
Mathews goes on:
I think there’s at least a grain of truth in that perspective. But to my (admittedly middle of the road) ears, it sounds a bit too much like an irresponsible liberal answer (we can’t cut spending because it hurts the economy) to the conservative mantra (tax hikes are always bad because they hurt the economy).
This is because what I’m saying swims against the tide of 30 years of economic discourse that has now become thoroughly obsolete.
Many pundits are too busy fighting the last war. By the end of the 1970s, it became accepted wisdom that the problem was the liberal state created in the New Deal had grown too large, was taxing too much and spending too much. The way out of the era’s stagflation, it was said, was to remove the waste and excess. “Small is beautiful” – or as Jerry Brown put it in 1976, “I’m not conservative, I’m cheap.” Americans came to believe that the answer to an economic crisis was to spend less, and that would produce restored growth.
It’s debatable if this was ever really true. As we know, the US economy never actually recovered from the early 1980s recession; only a succession of debt-fueled asset bubbles made it look like there was any job or wage growth.
Which brings me to the point I made on Sunday: in an economic crisis characterized by too much debt and low wages, we need to return to a policy of government stimulus, and strongly oppose any policy that might further erode wages. That includes attacks on pensions.
I didn’t come to that conclusion on my own. Economists who have studied similar crises have reached the same conclusion. Richard Koo studied the Japanese “lost decade” and coined the theory of a “balance sheet recession” that can only be resolved through government-provided stimulus, since the private sector has no willingness to borrow any new money:
In an ordinary, garden-variety recession, as we learned in school, the private sector uses money more efficiently, and a budget deficit is considered bad. But when the private sector is completely absent and paying down debt at zero interest rates, and the government doesn’t borrow this money, what happens? Even a child would understand the whole thing could collapse. The only way the government can turn this economy around is to do the opposite of the private sector — borrow the money the private sector saved and spend it, which means fiscal stimulus. That’s what saved Japan from entering a Great Depression.
This is a totally different situation than what was faced in the 1970s. Yet the reflexive policy prescription from many centrists and conservatives is to return to the 1970s, slash spending and wages, and hope for the best. In a balance-sheet recession, that merely leaves the private sector with less resources to repair its balance sheet, even though government can and should make up the difference.
These stimulative responses may sound like an “irresponsible liberal answer” – but only if we refuse to move beyond the outdated theories of the 1970s.
Of course, as Mathews notes, my arguments may not be picked up by either gubernatorial candidate in 2010:
Cruickshank’s argument deserves more attention. His views follow classical economic lines — when times are bad, government should do more, not less. But that’s an argument we, unfortunately, are not hearing (or having) in California, where the gubernatorial nominees of both parties claim that the state’s problems would be solved if the government were more frugal.
Mathews is probably right here. We know why Whitman backs austerity – she’s a corporate CEO, that’s all they know how to do, and they don’t care about the consequences for working Californians. As to Jerry Brown, he too may be fighting the last war. Let’s hope he’s ready to fight and win this one.