The Public Policy

The Next Leap Forward on the Road to Serfdom

By From the October 2010 issue

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The growth of government in America has not been gradual. Rather, government spending has remained a consistent fraction of our economy except for periodic dramatic bursts to new, and too often permanent, levels. The Civil War, World War I, and World War II all increased government spending and control over the American economy to new -- and permanent -- highs.

Franklin Roosevelt refused to let a good crisis go to waste and used the Hoover recession to enact the New Deal. His big-government solutions were supposed to lead to economic recovery, but instead lengthened the recession into a 10-year Great Depression -- longer if you measure up to when civilian employment recovered and even longer if you measure up to when the stock market recovered: the Dow Jones Industrial Average peaked at 381 on September 3, 1929, and didn't hit that mark again until November 24, 1954.

Lyndon Johnson used his supermajorities in Congress to pass Medicaid and Medicare and to create the new cabinet post of Housing and Urban Development.

Still, federal spending as a percentage of the economy averaged 20 percent of GDP from 1970 through 2007. The growth of social welfare spending was masked by the decline of defense spending from 10 percent of GDP under Eisenhower to 4 percent today.

Obama, Reid, and Pelosi jumped spending from 20 percent of GDP to 24.7 percent in 2009 through the massive TARP bailouts, the $878 billion "stimulus" package, and a doubling of domestic discretionary spending that will add a trillion to the debt over the next decade.

At this writing, it appears that Obama & Co. will have failed to pass cap and trade legislation, which would have added $800 billion in new taxes by 2020 -- taxing existing real energy to subsidize non-economic or nonexistent energy sources. This tax increase on the American people was brought forward by Al Gore in 1993 and again by Gore in 2009, but with the damaging revelations of "Climategate," Gore, like Sisyphus, finds himself forced to begin again.

Furthermore, the value-added tax -- the silver bullet the left hopes will turn America into Europe without the charming cathedrals -- and "Card Check," which would have forced several million Americans into labor unions, remain beyond the reach of Tantalus.

However, there remains, within grasp, one more great leap forward on the road to serfdom: a federal bailout of the $3 trillion in unfunded state and local pension plans.

OVER THE YEARS politicians have "hidden" their payoffs to organized labor, which now commands union dues from 32 percent of state and 43 percent of local government workers by promising them rich pensions that would be paid out after said politicians were retired or dead. Well, that day has arrived and governors, state legislators, and mayors find themselves having promised $3 trillion more than they had planned to steal from taxpayers.

Luckily for them, a trial run is already under way to nationalize the unfunded liability of state and local government workers' pensions. That is House Democrat Earl Pomeroy's "Preserve Benefits and Jobs Act of 2009," which would put federal taxpayers on the hook for the $165 billion that Moody's estimates is the underfunding of multi-employer, union-controlled pensions. Pomeroy's legislation sets no limit on federal taxpayers' liability, and has 51 co-sponsors in the House and a more modest sister bill that might slip through the Senate.

The size of the federal government often confuses us into thinking that most government workers work for the federal government. In fact, much federal spending simply passes through Social Security, Medicare, Medicaid, and some 80-plus welfare spending programs to individuals.

There are "only" 2,854,000 federal civilian workers. That includes 711,800 postal workers. There are an additional 1.2 million Americans in the military.

State governments employ 4,850,000 workers, 2,021,200 of whom work in state colleges and universities.

Local governments pay 13,570,000 employees. Of those, 6,834,700 are in education.

Why would federal congressmen and senators add $3 trillion in federal debt to pay off the overpromises of state and local politicians?

Money and power.

When labor unions demanded union dues from 33 percent of the workforce in 1955, almost all union members were in the private sector. John F. Kennedy signed the executive order that allowed federal unions. State-by-state laws were enacted or governors unilaterally allowed the formation of teachers' unions that target half of state and local employees as well as police and fire unions and AFSCME.

Today only 12.5 percent of workers are paying union dues -- only 7 percent of private sector workers, and fully 37.4 percent of government workers.

Fifteen million unionized employees paying $500 in union dues a year creates a political slush fund of $7.5 billion each and every year. The Communications Workers of America v. Beck Supreme Court decision found that only 20 percent of union dues were spent representing workers. That frees up almost $6 billion per year for "other stuff."

Of all the paying customers of the Democratic Party, only the trial lawyers come close to commanding these sorts of resources.

To gin up the base, Democrats could move on such a bailout before November 2, or they might choose to avoid irritating taxpayers before the election and wait until a lame-duck session of Congress if Republicans capture either or both houses of Congress. Or, if Democrats retain slimmer majorities in the House and Senate, they could move before 2012 or hope to reelect the president and enact the bailout in a second term.

WHILE THIS PUBLIC SECTOR pension bailout will remain on the Democrats' to-do list -- just as Gore's energy tax was on the agenda in 1993 and 17 years later in 2010 -- there are reasons to believe taxpayers can avoid a bailout that would be twice the size of TARP plus the Obama stimulus.

Why the optimism?

First, taxpayers are beginning to pay attention. For decades there was believed to be a "grand bargain" in which government workers were paid less than the private sector but in return had greater job security and a modest pension.

Labor unions, though, have pushed government pay upward. Less visible health insurance and other benefits have skyrocketed and gold-plated pensions have gone platinum.

It took a while, but the establishment press and the general public are now aware that the grand bargain is dead. Newspaper stories about the southern California town of Bell (which was paying chief administrator Robert Rizzo $788,000, police chief Randy Adams $457,000, and assistant city manager Angela Spaccia $376,288) hit a raw nerve.

Federal workers' average compensation -- pay, pension, and benefits -- is $123,000 a year. The private sector total compensation is $61,000 a year. An overpayment of $62,000 per worker, times the 2.8 million federal employees, means an overpayment of $174 billion a year.

State and local government workers earn a total compensation package of $80,000 a year, for an overpayment versus the private sector of $19,000 each year. That, multiplied by the 18.4 million state and local employees, adds up to $349.9 billion that taxpayers are overpaying each year.

Federal and state government can be cut back more than $500 billion each year without cutting any services at all. We can provide the present level of government at a reduced cost simply by having pay equity between taxpayers and government employees.

According to the Bureau of Economic Affairs, total government spending (federal, state, and local) is $5.5 trillion. So, cutting $500 billion per year in government spending would save nearly 10 percent of everything government spends.

One reason taxpayers and the media are better informed is the efforts of state think tanks like the Maine Heritage Policy Center and the Illinois Policy Institute, which have used the Freedom of Information Act to collect and post all state employee salaries and pension payments online.

Ohio's Buckeye Institute for Public Policy Solutions has gone one step further in highlighting the high cost of paying and pensioning our civil servants. On its website (www.BuckeyeInstitute.org), one can find the list of all employee pay, and on the top right the actual annual pension any given person would receive if he retired now, and on the top left a calculator to calculate his pension if he retired at a normal age and lived 18 years afterward. In the first 120 days after posting the list, the website drew 755,562 visitors from all 50 states. Buckeye Institute president Matt Mayer plans an iPod app that will allow students at Ohio public universities to check out the pay and pensions of their professors.

State and local workers earning $350 billion more than the real economy would pay is a statistic. Your neighbor's gold-plated pension visible online is an outrage.

PUBLIC OPINION HAS SHIFTED in measurable ways. In Ohio, voters were asked how the state should deal with its $8 billion overspending problem, and 50 percent wanted to reduce the compensation packages of government workers, 27 percent wanted to cut government services, and 16 percent wished to increase taxes. Fully 40 percent of liberals wanted to reduce government pay and pensions. Sixty-seven percent of government workers thought their compensation should be equal to the private sector, 14 percent said "higher," and a sainted 12 percent said "lower."

Nationally, Rasmussen polls find that 77 percent of adults say government workers have more job security than private sector employees. Sixty-seven percent say private sector employees work harder. Forty-six percent believe government workers make more money than comparable workers in the private sector. Fifteen percent say government workers make less and 17 percent say they are paid the same amount.

But the best news for taxpayers hoping to avoid the pension bailout comes from Utah. There, state senator Daniel R. Liljenquist introduced and passed legislation that, beginning July 1, 2011, ends the creation of any more unfunded liabilities. The state was thrown into crisis in 2008 when it fell behind its pension obligations by 30 percent. Utah was heading for bankruptcy and would not be able to fund and pay its pension obligations.

Liljenquist's legislation capped the taxpayers' payment for new state employees at 10 percent for most state and local employees and 12 percent for police and firemen. All new employees will have a defined contribution pension similar to a 401(k). If they want a traditional defined benefit plan and the state's contribution is not enough to cover costs they are responsible for "topping off" their pension contribution. There are no hidden costs to taxpayers. No unfunded liabilities.

Retiring state and local employees have the state kicking in 22 percent of salary for their pensions. New employees will get 10 or 12 percent. As workers retire and are replaced, the savings will increase to $500 million a year.

Republican governor Gary Herbert signed the legislation that passed 55-35 in the House with four Republicans voting wrong (one a highway patrolman, one the battered spouse of a teachers' union member). The Senate vote was 20-9 with no Democrats voting for reform and one Republican (a current police officer) voting against taxpayers.

Utah is the model for reforming state and local workers' pensions in a politically feasible way. Present retirees and employees were untouched. No new hires will create unfunded liabilities, and their compensation packages will approach those of the real economy.

When 10 states have enacted the Liljenquist/Herbert reform, it will be near impossible for the federal government to put together the votes to tax responsible states to bail out irresponsible state and local governments. Until then, we are all in danger of one more giant step forward to America becoming a hybrid of Greece, France, and California. 

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About the Author

Grover G. Norquist is the president of Americans for Tax Reform.