Shut Down.

Estimates of the consequences of the shut down. Also checkout MacroAdvisors shutdown calculator and run your own estimates.

Deficit and Stimulus

Here is a very useful graphic on the budget deficit and its history. And here is a useful collection of papers on the effectiveness of the previous stimulus.

Public vs. Private Sector Pay

I thought I would wrap up a bunch of the blog posts on public sector versus private sector pay, and union versus non-union. First, in this debate I've come to realize people's prior beliefs are strong, even if uniformed. Showing them data merely results in what has been called the confirmatory bias. They pick out the parts that validate their position and discount the data which does not. There have been many posts and op-eds but let me point you to a few. Adam Ozimek had a useful post which point to the related empirical work:

He linked to three reports (here, here, and here) that show that public sector wages are no higher than, and often lower than private sector wages.

A final point I’d like to make is that a wage premium is not equal to public sector union power. A powerful union may use all of it’s bargaining power to negotiate for absolute job security, which could then select for a different set of workers with lower unobservable skills. In this case you would observe wages equal to or even below private sector wages despite a clearly powerful union. Some would argue this is exactly what teachers unions do.

Part of the discussion of public versus private is also a union versus non-union argument. I think Adam does a good job of discussing it. I would suggest that he should include an interaction term as well (ie union*public) as well.  That said I think the evidence is that there is a wage premium for lower educated union public workers. There is a negative premium for higher educated non union public workers (ie university professors).

On the issues of the relationship between public sectors unionization and spending, taxing and state deficits, John Sides of the monkey cage has produced a bunch of nice bivariate correlations. (here, and a lot more here, and a final roundup here). He notes here, that a single comparison of two points is misleading, but multiple comparison of all combinations of two points is just a regression! Of course, like any regression it is still subjected to an omitted variables bias.

The current state budget shortfalls probably have far more to do with the housing market, than public sector unions. As this graph suggests.

Here is the macroeconomic case against unions.

Useful Comments from Richard Freeman on Labor Unions with this jewel here:

If you had the ear of Wisconsin Governor Scott Walker, who is pushing a bill to strip public sector unions of their bargaining power through the state legislature, what would you say?

I would say: consider what happened to John Howard, former Prime Minister of Australia. When he gained control of both houses of parliament, he did what the governor of Wisconsin seems to want to do: he forced through the legislature (in which his party had a small majority) a policy to radically restrict union activity, with the goal of basically de-legitimising that institution in society. John Howard was thrown out of office in the next election; he even lost his own seat. If you push to undo an institution that is part of the fabric of society, one that many people believe should be available to workers who want it (whether or not they themselves want to be part of it), you might find yourself pushed aside.

Removing collective bargaining from the public sector and lodging all power with employers will not solve the economic problems of U.S. states and cities. It will just remove one mechanism for bringing workers and management in the public sector together to deal with the fiscal problem that neither of them caused.

Here is a good comment from inside higher ed.

Here are my earlier comments. (here and here).

Op-ed

In what is sure to be supreme irony. My op-ed on changing the nature of the debate was cut from about 750 to around 500 words. Given that one of my main points was that we do not take time to make the complicated arguments, I think I've proved my point. As for how we change the nature of the debate? I'm at a loss. I guess we as consumers of information have to change our demands. Here is the full op-ed with links.

Changing the Nature of the Debate. 2/21/11 Taggert J. Brooks, PhD

I have to admit the last week has been quite an emotional roller coaster for me. As a state employee who will be receiving a large pay cut, my morale is low. As someone who is teaching health economics I can hardly think of a more salient example of the struggles we face with rising health care expenditures. But as an economist I’ve been infuriated by the level of debate. I’ve spent too much of my time trying to raise the level of discussion on both sides in the comments section of this newspaper, or the Facebook walls of my friends and former students.

We need to change the nature of the debate.

In December Congress moved to extend unemployment insurance benefits to another group of recipients to an unprecedented 99 months . Republicans claimed that this would only delay recipient’s job search and inflate an already high unemployment rate . Republicans were right. Unemployment Insurance (UI) artificially reduces the incentives to find work by increasing the cost of taking up employment. Larry Katz finds a one week extension typically increases unemployment duration by 0.2 weeks. This is supported by ample economic research. But Democrats cried foul. They argued that failure to extend benefits would throw thousands off UI resulting in painful decreases in their family’s income, and it would cause the ensuing macroeconomic consequences associated with falling consumption . Democrats were right too, and there is plenty of research to back their argument. Why the seemingly contradictory conclusions? The reason is unemployment insurance is a blunt policy tool.

But the debate shouldn’t be about extending or not extending UI. The debate should be about how we sharpen the blunt tool, about how we get the good things out of UI without creating the bad things? Sadly we seem far from that type of discussion. Maybe because it would never fit on a bumper sticker.

Wisconsin’s current troubles provide us with other examples of how we need to change the nature of the debate. Unions are complicated entities – and much like UI - they do both good things and bad things. Looking specifically at the K-12 teachers union, since they appear to be Governor Walker’s primary target, we hear about their resistance to change and their protection of bad teachers. Unions are blunt instruments. They are designed to protect worker’s rights, but in so doing they often protect bad behavior and bad workers. The debate should be about how we reduce the bad things that they do, and improve the good things they do. How do we sharpen the tool? The Governor’s actions have circumvented that conversation.

One of Governor Walker’s examples for wanting to eliminate collective bargaining comes from the Milwaukee Teachers' Education Association (MTEA). He decries the union’s attempt to reinstate Viagra coverage with their health insurance . The implication is that the union is defending a bunch recreational drug users. I’m quite sure there is some of that, but I’m also sure there are prostate cancer survivors in that same mix. I think we can all agree their desire to have intimate relations with their spouses is a legitimate health issue. But we can’t blame the union entirely for the bluntness of their defense, we should also blame the insurance company. Why can’t they cover the medicine for the cases we all think are legitimate, and not cover it for the cases some of us might find frivolous? We need to sharpen our tools, the debate should be about how we do that, not about avoiding the conversation. We should not abandon our teachers nor our prostate cancer survivors.

Our current health care system guarantees this will continue to be a problem. But we need to end the winner take all mentality. There is a third way. Honest discussion, debate and a willingness to wrestle with complicated ideas, that can’t be reduced to sound bites. It will take leadership on both sides. But more than that, politicians will have to become educators, because the problem really is us. We want our cake and want to eat it too. Edmund Burke had it right. Politicians should not be mere puppets for the majority of their constituents; they should be advocates for the public trust. Otherwise we are doomed to painfully oscillate between extreme world views.

Teacher Compensation

Teacher compensation data is here. Here are two plots of total average compensation (salary plus fringe) for the top 40 school districts and the bottom 40, of the 425 districts. Its important to remember that this is not starting salary, but includes all teachers, even those with 30 years of experience.

The Enemy

The enemy is US.

Wisconsin 2010-2011 General Fund Appropriations

This is data from Table 10 from Act 28.

This link which takes you to the "Many Eyes" website in order to have a bit more room to play around with it.

Wisconsin's Budget Problems

This is going to be a long post, but I've been asked by a fair number of former students and friends, from both sides of the political aisle to comment on what is happening in Wisconsin.

First, lets look at the budget problem. The State of Wisconsin has had a structural deficit since days of  Tommy Thompson (current issues here). They are largely the result of large increases to K-12 spending, tougher sentencing laws (map here), and tax cuts in early 2000. To be sure, there are other factors (such as rising healthcare expenditures) contributing to our current problems. But those three changes were the genesis.While they did occur under a Republican Governor, every Governor since has kicked the can down the road. And now the healthcare expenditures are starting to bite as well. Doyle was the most creative in using temporary tricks and one time money to close the gap. Even raiding a fund we will have to pay back. Andrew Reschovsky discusses efficient tax policy and proposes some tax altering policies which might be used to close the gap. If you are interested in understanding why Wisconsin taxes are higher than other states, read this excellent piece by Todd Berry and Dale Knapp. Higher taxes are in part to fund higher spending, and in part due to less efficient taxing. The reasons for the higher spending are clearly outlined, in the piece but include paving roads no one else paves, K-12 benefits packages, and subsidizing higher education tuition. (although this last one has obviously declined substantially recently).

Looking more specifically at the current budget repair bill. It appeared it was only made necessary by the tax expenditures (yes that is spending too) that happened at the end of January. Read Bob Lang's Legislative Fiscal Bureau's (LFB) Jan 31st report.

Our analysis indicates that for the three-year period, aggregate, general fund tax collections will be $202.8 million lower than those reflected in the November/December reports.  More than half of the lower estimate ($117.2 million) is due to the impact of Special Session Senate Bill 2 (health savings accounts), Assembly Bill 3 (tax deductions/credits for relocated businesses), and Assembly Bill 7 (tax exclusion for new employees). 

Tax expenditures are bad public policy and bad tax policy. However, closer inspection reveals that in fact the tax expenditures affect the 11-13 budget only.  Interestingly the tax expenditures add  up to about 140 million, which is 50% of the projected 11-13 savings from higher health and pension contributions from state employees. Money is fungible, but passing tax spending, then three weeks later screaming about rising deficits, strikes me as a little intellectually dishonest, or at least inconsistent. 

On the question of public sector compensation. Yes, my non-wage benefits and the non-wage benefits of all state employees are very good. And they will still be very good even after the proposed concessions. But when making comparisons you can't merely look at non-wage benefits without considering the wage side as well. Total compensation is the economically relevant concept. As this Heritage document explains, it is about the incidence.

Incidence of labor Taxes. The relatively elastic demand for labor, coupled with the assumption of a highly inelastic supply of labor, means that labor bears most of the initial economic incidence of taxes on labor income. It has become common to assert that all taxes on labor income fall on the worker, including the employer's share of the payroll tax, the employers; share of the payroll tax, the unemployment compensation tax, and the portion of the income tax that falls on wages and salaries.

In other words, labor bears the burden of income taxes, and both sides of the payroll tax, along with any benefits. So we should compare total compensation, and not look merely at pieces of the compensation pie. It is akin to watching someone try to lose weight. What matters is total calories consumed. If you merely look at the breakfast someone has consumed you might be led to the wrong conclusion. They might have a large breakfast, but a far smaller lunch and dinner. There are other reasons simply comparing benefits is problematic, and challenging. The Minneapolis Fed talks about the case of pensions here. And by the way, Wisconsin pensions are not underfunded like Minnesota's.

One of the challenges in the discussion is that talking about public versus private sector includes large swaths of very different people, different jobs, different skills, different education. So saying things like "public sector workers are over paid", are useless statements, just like saying public workers are underpaid is useless. That is true for some and not true for others. Relative to what? This EPI paper does a good job of addressing the case for Wisconsin. It uses a wage equation to adjust our salaries for inputs such as age, education and experience, etc. It also correctly adjusts our salaries for the fact that public employees work fewer hours (on average), but it is missing some things, like the fact that our jobs are generally more secure. Given that public employees generally have increased job security (although that doesn't look to be the case in the next budget) one would expect a lower salary. The conclusion of the paper:

On an annual basis, full-time state and local employees and school employees are under-compensated by 8.2% in Wisconsin, in comparison to otherwise similar private-sector workers. When comparisons are made for differences in annual hours worked, the gap remains, albeit at a smaller percentage of 4.8%.
...
Furthermore, average annual total compensation for a full-time worker without a high school education is 14% greater in state and local government ($36,935) than in the private sector ($32,415). High school graduates approach earnings and compensation equivalency between the private and public sector.

So, some workers appear to be overpaid, based on the wage equations and some underpaid. On average, we are underpaid. But as I said, we probably should be a little underpaid.

A former student sends me this cato paper which talks about public sector unions and the rising cost of employee compensation. I don't have time to dig in to the national trends on unions and public sector employment now, but I will comment on unions below. I did want to include the reading for future reference.

In terms of the rest of the proposal I have two comments, first on Walker's tactics as the relate to the budget, and second on collective bargaining and unions.


I think Walker's tactics are ill thought out. In the case of high speed rail, not only did he give back 810 million to the feds (which by the way was not remitted to WI tax payers but spent elsewhere, like CA), but that maneuver also cost us money, since we were committed to some expenditures that were covered by the 810 million, that we can not get out of. I am not a fan of highspeed rail. But I'm less of a fan of returning money to the Feds. As they say when you are hungry, you eat what is given to you. He did the same thing with 23 million in broadband money from the Feds, and who can be against improved broadband? And now this budget repair bill is likely to cost us another 47 million in federal money. I understand the argument that we should not take the money. But as I've said before, it is unwise to unilaterally disarm. The federal government is not reducing our taxes by the amount we give back, rather it is being spent in other states. To hand back money is foolish. Wisconsin already receives far less than its share of federal money. We get back 82 cents for every 1.00 we send to Washington. I fully understand that we have a budget issue at the federal level, but unilaterally disarming will not solve the problem. It will only make us relatively poorer. To use another metaphor it is equivalent to showing up to a gun fight, and out of principle putting the gun down. Not a bright idea. We need the politicians in Washington, Republicans and Democrats to solve the Medicare/Medicaid/Healthcare conundrum. We need them to set the priorities of the nation. They are failing. And no, the Tea Party is not offering a solution. Shooting down random spending bills is hardly a method of establishing priorities. Bowels/Simpson proposal was an attempt to start the conversation. Look at how quickly everyone fled the conversation.

On to the issue of collective bargaining. Maybe Scott Walker is a genius. The debate seems to be about collective bargaining rights, and not the 8% pay cut. Everyone has already offered to give up the benefits. Yet, the fight over collective bargaining continues. Which means this isn't entirely about repairing this budget, but the fight over collective bargaining is really the fight about future cuts. As in the future cuts that will occur in the 11-13 budget. Walker needs to break the union in order to cut State Aids by 900 million. Now I'm not a fan of unions. I think there are millions of examples of how they do bad things (faculty example here).


That said, we should understand the role of unions. As I mentioned I am no fan of unions. But remember they are merely a monopolist (for another view see this), meant to - at times - counterbalance a monopsonist. Why do the NFL and MLB have players unions? In part they counteract the State sanctioned monopoly of the owners (at least in the case of the MLB). And in the case of the NFL it is just to counteract the monopsony power of the owners. Since local government's educate 90% of the K-12 kids, they might be viewed as a monopsonist. 

Stripping away the collective bargain rights in this fashion has unfortunately put us on a path of confrontation and contentiousness. I now have no hope that we will be able to collectively address the budget problems going forward. Rather than negotiating a smooth path to a different equilibrium we collectively bargain, we will be stuck in a political seesaw where we bounce from the Republican vision of the future to the Democrat's vision, back and forth. The pain is in the dynamics. This increases the pain, it doesn't reduce it. Make no mistake in 4 years we will have a Democrat in the capital and he will pull the same shenanigans to payoff the public sector employees.

I also think its enormously hypocritical to exempt the police, firefighters, and the troopers. Not only did he exempt them he requires in the budget repair bill that funding for their departments be kept at 2009 levels or above. Therefore Walker further protects them from the cuts coming to state aids.

UW Faculty have not, until recently been able to collectively bargain. Doyle gave us the right to vote on it, and there has been a large push on UW-L's campus. Faculty have decided to go ahead with the vote, which is now guaranteed to pass. (Even many who would have voted against it might vote for it because they really hate having their rights taken away).

I am a bit offended by the tenured faculty that walk around campus claiming we need a union. They complain that we need more rights to negotiate our working conditions. I teach 9 credit hours. Other than being in the classroom for those hours and holding office hours, I have near complete autonomy over how I do my job. I can think about what I want, I can work on what I want. We set our own curriculum, we decide on our own research agendas, we hire and fire our colleagues, and provide input into the hiring or our leaders, who in the end will have very little influence on what we do. We - at least some of us - have tenure. We are the last people that need a union to bargain our work rules. We write them!  We do not work in a coal mine or a steel mill, and complaining as if we do makes us sound like we are divorced from reality, and insults those union workers who do not have it as well as we do.

But my job is very different than most other state workers.

A few parting shots. Politicians in Madison like to control the UW-System, but they currently provide less than 18% of the funds for our operation. How many private sector firms do you know where the 18% share holder calls all the shots?

For those of you that say "get a job in the private sector". I could, far easier than many. After all the unemployment rate for PhDs is quite low. And it would pay more (bls). Or I could just get a higher paying job in another state (AAUP data). Or maybe I'll just figure out a way to make a little money on the side.

For some more background on State and Local Taxes. The Tax Foundation is a wonderful non-partisan source. Here is the history of state and local tax burden in Wisconsin. Here is a wealth of data on all states.

Update: Here is a Chicago Fed symposium on the public v private compensation issue.