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The Public Policy
Governments’ Bad Investments
Final proof that the ongoing financial crisis is not a crisis of free markets.
The Wall Street Journal reports that municipalities all over the nation are teetering on the verge of bankruptcy (“Local Debts Defy Easy Solution,” September 23). This may be the final proof that the ongoing financial crisis is not a crisis of free markets, as populist politicians and media have characterized it. The municipal debt crisis is a political crisis, one created by politicians making bad decisions with taxpayer money in order to funnel it to their cronies and supporters.
Why are municipalities in so bad a position? For the most part, because of deals cut with public employee unions. One of the prime benefits a labor union brings to its members is a fat pension plan that, in theory, is generously funded by the citizens of the municipality the union members work for.
For union-friendly politicians, this was a sweet deal. They could reward their labor supporters with generous benefits, while passing the buck of raising taxes to pay for those benefits on to their successors years into the future. Now those bills are coming due. As the Journal says, state and local pension plans “have promised over $3 trillion in retirement benefits,” while their pensions assets “are at least $1 trillion shy of that.” California’s pension shortfall is larger than the GDP of Saudi Arabia, oil riches and all.
This massive liability puts state and local governments in a bind. They simply cannot balance the needs and wants of workers, creditors, taxpayers and retirees. Someone, somewhere, will have to suffer, unless state and local can fob the problem off onto the federal government.
Sen. Robert Casey (D., Pa.) and Rep. Earl Pomeroy (D., N.D.) are sponsoring legislation to allow the Pension Benefit Guaranty Corporation (PBGC) to engineer a taxpayer-funded bailout of the Teamsters’ pension fund. If enacted, the Casey-Pomeroy bill could set a precedent to have federal taxpayers bail out the states.
That would be a disaster. It will turn the PBGC into a pension fund variant of Fannie Mae and Freddie Mac, the two government entities most to blame for the original financial crisis. Unions and local governments simply have to be held to account for their bad investments. Furthermore, members of these underfunded pension schemes should be able to opt out and put their funds into defined contribution 401(k) plans or other retirement vehicles.
States and municipalities should recognize their deals with labor unions as bad investments and take steps to end those agreements. The federal government should not bail them out. However, Congress has made it difficult for local governments to go into bankruptcy. If America is to break the vicious cycle of bad public investment, that needs to change.
That is what should have happened with General Motors. Bankruptcy would have allowed GM to rebuild itself as a company that sold cars to meet the needs of drivers, rather than to fund its pension plan. But the political clout of the United Auto Workers prevented that from happening. Instead, the federal government poured massive amounts of taxpayer money into the firm to keep its failed business model going. Now, as the car companies’ re-privatization approaches, the nation’s Inspector General says that shares will have to be priced at $134 each for taxpayers to recoup their investment.
If there is a silver lining in this situation, it is the public revulsion at the bailouts — something to which Congress should pay heed. The new Congress will need to recognize that streamlined bankruptcy procedures for states and municipalities are badly needed, and to pass such procedures within its first 100 days.
With such procedures in place, state and local governments will be able to take the steps necessary to restore themselves to fiscal health. Of all the bad investments governments have made over the years, the overly generous deals given to unionized public sector employees are perhaps the worst. If bankruptcy brings an end to those unwarranted privileges, the rest of us will have a shot at a much fairer deal from government in the future.
Mr. Murray is a recovering former unionized public sector employee.
About the Author
Iain Murray heads the Center for Economic Freedom at the Competitive Enterprise Institute and is the author of Stealing You Blind: How Government Fatcats Are Getting Rich Off of You.
Letter to the Editor View all comments (26) | Leave a comment
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Bill Hussein O'Stalin| 10.1.10 @ 8:14AM
Your concept of a special bankruptcy process for state and local government is a good idea. It will allow them to shed their over generous and underfunded pension plans.
Alan Brooks| 10.1.10 @ 8:15PM
Doesn't matter how things are fiscally-- education in America will always be overpriced and substandard.
Jim O'Brien| 10.1.10 @ 8:58AM
The federal government has certainly set the "standard", and the pace of reckless spending.
The Demo-Socialists gained control of Congress in January 2007. In the 3 years and 9 months since then, the national debt has increased by 57%, from approximately $8.6 trillion to the current $13.5 trillion.
Higher taxes are not the answer. Huge spending cuts are needed yesterday.
City Treasurer| 10.1.10 @ 10:26AM
When I was in the 5th grade,Mayor Wagner used capital budget funds (bonds) to keep the fare at 10cents.(Even in the 5th grade I knew this was a bad idea) Years later Theadore Kheel (fellow investor with Charles Rangel in the Dominican Condo) said money was the cheapest part of a labor settlement (he knew pensions would be a time bomb. It's taken years but the desire for "show Projects (municipal stadia etc) and other temptations have brought us all to our ruin.
John DuBose| 10.1.10 @ 1:35PM
Same sad song, 99 th verse. Government power fouls thing up. Always has. We will keep making the same old mistakes until a majority finds personal intregity enough to turn down the free lunch. I am not holding my breath.
SpiralArchitect| 10.1.10 @ 4:09PM
I have said it and will always say it, again and again:
Unions are evil.
Designed for a good cause they have long outlived their usefulness.
Unions are nothing more than a burdonsome parasitic growth that will take this nation down the drain - if it has not already done such. >:(
Roy| 10.1.10 @ 8:27PM
Unions aren't evil - they are just like any other corporation. They exist to get the best deal for their shareholders.
The problem is not the unions but the government, which intervenes in what should be a private negotiation between two corporations and puts its fat slobby butt all over one side of the scale.
The UAW couldn't arrange all those ridiculous contracts if it weren't for the fact that when they go on strike, government guns are pointed at their employers to forcibly prevent anyone else from being hired to do their jobs.
Oregonian| 10.2.10 @ 1:49PM
Roy: without the government intervention, there would no longer be union "corporations" who use their members' dues to buy political favors. Working Americans understand that their right to earn fair payment for their skills and abilities is held hostage to seniority, the last refuge of the disinterested and incompetent. Unions in private industry have been steadily losing membership, and when government at all levels begins to cut spending, workers in the public sector will also begin to see the light.
Alan Brooks| 10.1.10 @ 9:24PM
Unions built this country.
chuck| 10.2.10 @ 7:45AM
And now they are destroying it.
Howard| 10.2.10 @ 4:16PM
No more so than other people.
Howard| 10.2.10 @ 4:20PM
My post was supposed to be positioned directly below Alan Brooks. I have been a union member in the past. I believe they bring little intrinsic value, especially in the Public Sector. Even George Meany, the old AFL-CIO chief thought there was no sense for public unions. The negotiations would not be fair as public officials looking for votes would bend over to accommodate the unions to the detriment of taxpayers.
Ole Sarge| 10.3.10 @ 10:57PM
Same with the minorities I hear tell, both are bull.
Fredrick Ward| 10.1.10 @ 11:44PM
Unions have no viable use in the free market of today. At one point, when there were no recognized worker's rights, they were useful. However, they have become a greater part of the problem than supportive of the solution.
The simple and prudent thing to do when there is a shortfall is to cut the program benefits to meet the available funding. These sweet heart deals shouldn't have been made to begin with and now they should be rectified with real achievable benefits programs.
As a side note I remember when I was younger working in construction trade. I was a professional painter. I worked around union workers all the time, and if anyone else has they will know what I am referring to. The first thing I noticed was how much they don't work. They get two thirty minute breaks, and an hour lunch. They get their at 7 Am and leave at 3 PM. While they are there they get next to nothing done in comparison to real workers. The next thing that you will notice is that if you dare say anything they find offensive they will whine like no other and go tell 'mommy' to try and make you stop. It's quite hilarious actually, but also very pathetic.
Spyder308| 10.2.10 @ 1:12PM
1. States and municipalities are on their ass because the Federal government cut back heavily during the Bush years on social programs and that burden fell back on the states and municipalities.
2. I have a lot of relatives in Ohio and Michigan living on those "fat union pensions." None of them are living the fat life. Fat union pensions are a lie. They are getting by on less that 0.01% of what top management retires on. How about the Senators who retire on full salary after one term, or Congressmen who retire on full salary after a couple of terms? My relatives would like to be on full salary, or be living on a golden parachute.
fran| 10.3.10 @ 9:08AM
Response to Roy's statement: "Unions aren't evil - they are just like any other corporation. They exist to get the best deal for their shareholders."
This is absolutely not true. Corporations create a product or service that the free market voluntarily purchases or not; corporations create earnings on production while unions consume the earnings on that production; corporations employee people who produce real goods or services which are valued at fair market prices. Unions are nothing like corporations.
davelnaf| 10.3.10 @ 10:03AM
The wonder is not that this kind of generosity was allowed to metastasize into the present crisis, but that some dim bulb politicians are trying to continue it in other ways and by any means.
doninwv| 10.3.10 @ 11:36AM
The real threat: Service unions organizing workers who work for corporations dependent on public money; medicaid, medicare. This sector of entry level workers has a high turn over rate. It is not uncommon to have a work force in place that is unionized whose employees had nothing to do with voting for union representation. It seems the larger the employer, like ResCare for instance, the easier it is to make corporations to roll over and adopt so called "neutrality" agreements and in so doing curry the favor of govt and its' money. It also insulates employer to some extent from individual law suits. Another perk is the union acts as a defacto player in management: They play a big part in the co's human resorce divisions and guess what? The lowly entry level employee is helping to fund this through dues. After some time the larger corporation sees the overall advantage of this arrangment and enables the union to go about "farming" more and more employees. Thus gathering tons of clout through out the service sector. Not healthy.
cats1cowboy| 10.3.10 @ 12:06PM
Spyder308 Envy is childish. Grow up.
Paul Benedict | 10.3.10 @ 2:28PM
The Fed monetary policy over the last decade has made bond investment interest returns less than the rate of inflation. THAT is what has emptied union pension plans. The unions always suspected that 401 K's were susceptible to such artifically constructed, man-made, disasters. Hence, they argued for mandated benefits: let employers keep all the additional profits...
Don't blame the municipalities; blame the Fed.
$y| 10.3.10 @ 9:52PM
Shouldn't the Feds bailout S.S. first?
They "stole" 2.5 Trillion from S.S. and left nothing but IOU's!
From the moment LBJ moved those funds to a general fund, we got the shaft!
Union leaders should use membership dues to buck up their pensions, and stop giving millions to Dem politicians!
This is appalling, our senior citizens are messed over but we sure can't allow those union members to go without!
Bennet Cecil| 10.4.10 @ 7:51PM
One remedy is for cities to lay off current workers and hire private companies to provide the needed services. The savings could be used to pay contractual benefits to retired workers. The current workers would contribute to their 401k like the rest of us. The defined benefit pensions etc would stop now.
Michael Mullane| 10.10.10 @ 12:11AM
It is very clear from Iain Murray's article that it is solely opinion as there is not one fact that is correct in reference to the PBGC, Pomeroy and Casey bill, the CA Pension system, and GM. It would take pages to illustrate how short sighted and uneducated this opinion is, and how a simple Google search by any high school student could prove that each point made by Mr. Murray is not only misleading - but in two words - A LIE . Maybe Mr. Murray should spend more time researching his subject than ignorantly ranting about an issue which he clearly knows nothing.
Michael Laden | 10.14.10 @ 8:37AM
A never ending story of burning money even its the government or the investment bankers gambling at the global markets. The "Wall Street" movie shows us again how not todo it on a company level.