Friday, March 11, 2011

Confusion from the Best Economics Writer at The New York Times

-- Posted by Neil H. Buchanan

Last week, in "Health Care, Incentives, and Complexity," I briefly mentioned a recent column by the New York Times economics writer David Leonhardt. After questioning Leonhardt's assertion about the incentive effects of health insurance co-pays, I noted parenthetically: "I will have more to say about that column in a future post." This is that future post.

Leonhardt's column was (at least as an initial matter) concerned with the effects of union contracts on states' budgets. His central claim is quite far-reaching:
It has become conventional wisdom to say that public sector unions are inherently problematic because they can use their political influence to win lavish pay from politicians. But that’s not quite right. The real problem with most union contracts for public workers is not the money — it’s almost everything else.
The strength of the column is its demonstration that public employees' pay is anything but lavish. The weakness is its inability to demonstrate that "everything else" is a problem -- except by appealing to broad (and largely baseless, or at least overstated) intuitions about the performance of government.

On the former issue, Leonhardt notes that "academic papers spanning more than 30 years have found that government workers receive compensation that is similar — with somewhat lower salaries and somewhat better benefits on average — to that of private sector workers with similar qualifications." The academic research to which Leonhardt refers thus supports my claim in yesterday's post that public employees have systematically been willing to accept lower salaries in the here and now in exchange for promises of post-retirement benefits that will make up for the lower salaries during one's working life. Public workers thus engaged in an act of trust, and their trust is now being met with the contempt of politicians and commentators who are eager to change the deal, after it is too late for their victims to do anything to mitigate the damages.

Having demonstrated that the combination of pay and benefits for public employees leaves them "modestly underpaid or overpaid, depending on which technical accounting assumptions are used to value their pensions," however, Leonhardt goes off the rails. He argues that politicians have incentives to push off costs into the future, resulting in "government pay that’s skewed too heavily toward pensions and health insurance."

What could "skewed too heavily" mean here? Leonhardt appears to be arguing that the perverse incentives of present-oriented politicians cause them to overcompensate public employees; yet he just showed that the total compensation packages of public employees -- including benefits like pensions and health insurance -- are about the same as similarly-qualified private employees' compensation packages.

At this point, the argument careens into his claim that the public employees' health insurance programs "will probably prove so expensive as to be unsustainable," apparently because of those low co-pays. This leads, somewhat disjointedly, to the suggestion that the rules for pensions and disability programs should be changed, including some ideas that make sense on their own terms (tightening the rules for what counts as a medical disability, for example, or eliminating "double dipping"). Even Leonhardt admits, however, that none of this will help solve states' current budget problems.

In short, we are told that public employees receive about the same amount of total compensation as they would in the private sector, with less up front and more later. We are then told that they cannot get more later, because states will have to cut benefits later. When they cut benefits later, however, there are apparently benefits that can be cut that were a bad idea all along. Making those changes, moreover, would not harm the typical, honest public employee.

Leonhardt's argument to that point, therefore, is simply confused. His next argument, however, is even more odd. Having offered the standard argument that, because the government is a monopoly, it has no incentive to do anything right, he claims that the solution to the short-term budget crisis in the states (and the federal government) "will require dealing with the second failure of government: subpar performance." What does subpar performance mean? Evidently, it is a dressed up version of everyone's favorite trio of culprits: waste, fraud, and abuse. Leonhardt lists some familiar arguments about how unions supposedly protect unproductive workers, and concludes: "Ideally, the states’ current fiscal crisis will end up being the spark that forces government to improve."

Is that the solution? Force government to become efficient? No, Leonhardt tells us, because the budget problems are "too big." "Fat and happy government workers, however easy the caricature may be, are not the cause of our looming federal and state deficits. Neither are spineless politicians. The cause is Americans’ collective desire for low taxes and generous government benefits." So what was the point about the supposed waste? If there is really waste, then we should get rid of it -- although, because even wasteful spending is better than no spending in a very weak economy, we should do so after the economy returns to something approaching full employment.

Leonhardt's argument, therefore, is that public employees' benefits are balanced by lower salaries. But the benefits might need to be cut anyway. But that won't solve the short-term problem, which is inefficient government. But that won't solve the long-term problem, which is low taxes and large benefits. Note also that Leonhardt's claimed "generous government benefits" are not public employee pensions. As we should all know by now, the big benefit driving long-term budget problems is Medicare, which covers all retired workers.

In the end, therefore, it appears that the current crisis is not a reason to do anything that we would not have wanted to do, anyway, which is to find ways to improve the efficiency of government operations, and to rein in the rising cost of health care. Leonhardt, however, could have made those points without over-reaching to claim that unions cause government to do "almost everything else" wrong.

Moreover, because both of those problems are best addressed in the long term, the current crisis is no excuse to slash government spending. Doing so will only make it harder to emerge from the current crisis and move toward solving our real long-term problems.


Michael C. Dorf said...

I agree that Leonhardt's argument is generally confused but I think I can make sense of the seeming contradiction between the concession that govt workers receive roughly the same total compensation as private sector workers and the claim "government pay [is] skewed too heavily toward pensions and health insurance."

Let's begin with the assumption that, other things being equal, government will typically be outbid by the private sector for qualified employees, because the public are unwilling to pay enough in taxes to support paying competitive wages. Govt could respond to the shortfall by cutting employees or paying employees less, and thus getting less qualified employees, but either move would result in a cut in the quantity or quality of services, so government hits upon a third option, which is to pay employees the equivalent of what they could get in the private sector but with a larger relative portion in deferred compensation. A rational employee is indifferent to the mix of current and deferred compensation but the government is not: It can attract better workers today than it would otherwise get by shifting costs to the future, when current office-holders will be gone. And even if govt pension funds start out on an actuarially sound basis, they tend to get raided in tough financial times, leading to under-funded future liabilities. If this is right, it's still unfair to workers to deny them their bargained-for deferred compensation, but at least now we can make some sense of Leonhardt's claims, including his claim that the public want more services than they're willing to pay for.

Kimf. said...

Excellent presentation of the top and rebuttal. I appreciate your blog and stop by often. Thank you for taking the time to present the issue.

Troeltsch said...

I think a problem exists when one tries to make a macro argument regarding "private workers" and "public workers" at all levels.

I have no problem accepting that individuals with higher education, (such as an under graduate degree or graduate degree) may get lower pay than individuals with similar credentials in the private sector.

I am not so sure this argument holds for those individuals without a college education. Indeed, if one were to look at the secular trends in wages over the past twenty years, I would reckon those with lower educational levels in the public sector surely did better up to the financial crisis, and probably do better now due to a higher unemployment rate in the private sector. At the same time, workers with lower education in the private sector were not only experiencing real lower wages, but also losing retirement and health benefits. In addition, they had a higher unemployment rate.

My takeaway is: There is not only a need to disaggregate the assumptions regarding "public workers", but also the need for better econometric studies that look at longitudinal studies that look at cohort effects, rather than cross-sectional studies determining "average benefits".

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Show you said...

I am not so positive this argument holds for subingthose people people with no a university education.

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