May 16

Talk with a typical liberal-leaning voter and soon enough you’ll find that reducing income-inequality ranks as one of their most vaunted public policy goals:  just about any legislation can be justified as righteous if it claims to hit that mark.

In discussing income inequality, the liberal commentariat will invariably point to some kind of statistic showing that the gap between the people at either end of the earnings bell curve “has never been wider”.   Or put differently, “the rich are getting richer and the poor are getting poorer”.    What these people miss, as economists like Thomas Sowell and Alan Reynolds have repeatedly demonstrated, is that the people at any given percentile of the curve change over time.   As Sowell says when talking about supposedly stagnant household incomes:

“The problem is you’re talking about households, rather than flesh and blood human beings.   One of the real fallacies that runs through a lot of talk about income is confusing statistical categories with actual flesh and blood people.”

Income Inequality Sowell vs. Krugman

Essentially then, static comments made about a dynamic curve are meaningless.   By contrast, longitudinal studies following particular people over the course of their earning careers tend to show upward trends.

It turns out that one group of people, tracked longitudinally, have been on a particularly nice up-slope: public sector employees.   And within that group, unionized public employees enjoy the greatest income differences when compared to their private sector counterparts, with a big chunk of that difference coming from sweetheart benefits packages.

The Real "Income Inequality" Gap

Numerous reports and articles are finally presenting the blizzard of statistics that all point to the same conclusion:  public sector jobs, relative to their private counterparts, have become a great gig that are also bankrupting their financiers. The Cato Institute published Chris Edwards’ “Public Sector Unions and the Rising Costs of Employee Compensation” in their Winter 2010 Cato Journal.    Steven Malanga, Senior editor of the Manhattan Institute’s City Journal, chronicled the issue with specific regard to California.  It is a sorry tale. Even sorrier is that it has become epidemic amongst towns, cities and states across the country. Reason magazine’s excellent February 2010 cover story on the topic was entitled “Class War“.    And in a recent Wall Street Journal editorial, there is this eye-popping statistic:

What if government workers earned the average of what private workers earn? States and localities would save $339 billion a year from their more than $2.1 trillion budgets. These savings are larger than the combined estimated deficits for 2010 and 2011 of every state in America.

Zeroing in on New York’s infamously dysfunctional state government, one quickly encounters the union-front “Working Families Party”.  I’ve always wondered if a dual-income couple with a few kids in the public schools, working a combined 100+ hours a week but being in the top tax bracket, qualified as a “working family”.   The WFP was almost single-handedly responsible for getting the legislature to pass 2009’s tax hike for top earners, matching neighboring New Jersey’s top bracket of 8.97%: a true race-to-the-top-which-is-actually-the-bottom.   The tax hikes were ostensibly to avoid cuts to “necessary” state programs and services, often staffed, of course, by union workers.

New York’s Triborough Amendment, (a form of “evergreen clause”), allows unions to keep their existing contract terms if negotiations fail to reach a new contract.  In other words, a local school board, for example, has absolutely no ability to compel their teachers union to accept reduced raises or benefits in a new contract; the teachers can “fail to reach a new contract” and enjoy the more generous terms of the existing contract instead.

Then there’s the issue of pension liabilities.   In the private sector, if you have a 401K or IRA and you take a hit in the stock market or elsewhere, you’re stuck.   But in states like New York, with guaranteed pensions that can’t be reduced once payments begin, those losses need to be made up by the taxpayers.   A local school board can suddenly have a multi-million dollar swing in their annual contribution requirement to the state, potentially wiping out attempts to hold the line on other spending over which they have more discretion.   Reason magazine reports that “[i]n New York state, local governments may have to triple their annual pension contributions during the next six years, from $2.6 billion to $8 billion, according to the state comptroller.”

So in summary, we have unions using their members’ dues to lobby for maintaining the status quo, and being successful at that. All of this now takes place in the face of the weakest economic environment in at least a generation.    It would seem that this issue should result in disgust from the overwhelming majority of people, i.e., the group that does not belong to a union. Rather than the government serving the people, the people are serving the government, and (switching metaphors, I know) the government diners are super-sizing their orders when instead they should be counting calories.  Like some genetically doomed organism, this parasite is killing its host.    One wonders how this situation persists.

I’d suggest that non-reporting of simple math has a lot to do with it.

What a difference a few percentage points make

Albert Einstein is reputed to have said that “the most powerful force in the universe is compound interest”.    Likewise, the compounding growth of state and local deficits, caused in large part by Kevlar-encased union compensation contracts, is beginning to present itself like the smoking van recently found in Times Square.

At any given vote, a union pay raise of say, 4%, might not sound so bad.   But compared with a raise of 2%, over time, as the chart to the right shows, the magic of compounding is going to make all the difference.  And for illustration purposes only, by looking at 6%, it is clear that “reaching for yield” pays off handsomely (swap in the words “Retirement Account Balance” for “Annual Salary” and this one chart should motivate any new college grad to start saving early).

This week in New York, local voters will be entering their voting booths to decide the fate of their school budgets and other initiatives.    Let’s hope that they begin to diffuse a bomb whose fuse is already lit.

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