Categorized | economy

If our states were in business, the government would be bailing them out.

Funny, that’s what the government is doing, in fact.

Reason has a must-read article on how our states mismanaged their budgets between recessions. The irrational growth of state spending, far outpacing inflation and population growth, did not produce any measurable increases in the quality of state services while putting the states in untenable positions for the inevitable bust. Money quote:

Here’s a hypothetical that puts this trend in a more understandable context. In 2002 you and your friend (call him “Mr. State Government”) come out of the recession with jobs paying $50,000 a year. During the next five years you receive cost-of-living adjustments from your employer, so by 2007 your salary is $59,500. Your pal, on the other hand, has jacked his annual earnings up to $90,500.

But the 81 percent increase over five years only tells part of the story. Since 2002 total revenue collections have been well above the levels needed to maintain services each year. This windfall has a cumulative impact. In just five years, taking inflation into account, the states collected $2.2 trillion more than they would have needed to maintain revenues at 2002 levels.

Let’s put this another way. After 2007 we were clearly experiencing an economic downturn. If the states had merely maintained their existing programs between economic downturns, they would have been able to deliver a $2 trillion tax cut at the end of 2007. Imagine the impact that might have had.

This is a real drain on the economic productivity of the states. I have a particular beef against state and municipal employees, who are, in my opinion, the least productive members of our economy. Yet they receive unprecedented job security, inflated benefits, and, a prize the rest of us are denied, fixed benefit pensions. Every state employee paycheck comes with a bill to be paid in the future: that employee’s pension. So the growth of state employees that the numbers above point to points to a massive current and future drain on the state’s productivity.

There are two solutions that business-oriented folks should push. The first is to restrict the growth of state, county, and city government spending to something more closely approximating the growth of population and inflation, say no more than 10%. Almost all states have balanced budget amendments, but no state has laws or amendments restricting the growth of state, city, and county government. The second is to bring state employee compensation more in line with private sector compensation. That means, yes, that some employees should be paid lots and lots of money (like teachers), but most state employees should take a haircut on wages and benefits. And no state employee, other than those already in the system, should be put on fixed benefit pensions. The “second taxpayer bill” represented by pensions is an economic disaster waiting to drain the lifeblood out of business and entrepreneurship. State employees — including police and firefighters — deserve the same deal the rest of us get: fixed contribution retirement plans.

More importantly, state, county, and municipal governments need to harvest the same entrepreneurialism, energy, and ideas that private industry does in order to increase efficiency, customer service (doesn’t it burn you up that state employees that are paid better than you are and have better health care and better pensions treat you like dirt?), and innovation. States and cities can only do this if a.) they have the same freedom to reward the best employees and fire the worst; b.) they have the latitude to generously reward the innovators and producers; c.) they aren’t collecting taxes to pay pensions. How about a Tax-Supported Employee Entrepreneurship Referendum?

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