The central portion of While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis covers the history of public employee unions, which turn out to be a surprisingly recent phenomenon. Politicians were traditionally opposed to public employees’ right to unionize, strike, or collectively bargain for wage and benefit increases. They saw their constituents as the taxpaying public and did not think that the government was such an abusive employer that unionization was necessary to protect workers. Calvin Coolidge, as governor of Massachhusetts, summarized the feeling of the average politician: “There is no right to strike against the public safety by anyone, anywhere, any time.”
The result was that public employees were generally paid less than private sector workers, but could not be fired for incompetence or unproductivity and had better benefits, including small pensions that typically started at age 65 or 70 or upon becoming totally disabled.
All of this was changed in 1958 when an aide to New York Mayor Robert F. Wagner, Jr. suggested that city workers could be a large enough voting bloc to ensure his reelection. Wager signed an executive order authorizing city workers, notably those of the transit system, to unionize and bargain collectively. As the percentage of Americans working for the government grew, other politicians began to see support for public employee unions as a way to get votes. State politicians around the country allowed public employees to unionize shortly after Wagner’s executive order. President John F. Kennedy allowed federal government workers to unionize starting in 1962.
According to the author of While America Aged, public employee unions should be able to win much higher wages and benefits than private company unions. The UAW could shut down GM or Ford with a strike, but they couldn’t vote the GM and Ford CEOs out of office. Once a sufficiently high percentage of voters are unionized public employees, there is essentially no limit to the obligations imposed on the state. Because it would cause too much backlash from non-union non-government employed voters, most of the money extracted from taxpayers will be taken in the form of long-term health care and pension promises. A voter working at Walmart gets upset hearing that a bus driver is earning $130,000 per year. If instead the bus driver is paid $70,000 per year and able to retire at age 41 (MBTA here in Boston), it is tougher for a voter to figure out how much is being spent. Pushing most of the spending out 10-50 years gives the politicians who agreed to the obligations at least 10 years in which to move to the next level of government before the true cost of the agreement becomes apparent.
Reading this book makes it clear that recovery from the Crash of 2008 is speculative. In the previous severe economic downturns, e.g., the 1980 Jimmy Carter malaise, U.S. workers did not face effective competition from workers in India and China. Government was a smaller percentage of GDP and public employees were not paid so much more than private sector workers. Most importantly, the pension obligations of governments were tiny compared to today because they’d only had a decade or two to develop. As all of the wealth and value that was in GM eventually had to be transferred to retirees (and then another $100 billion of taxpayer money, when the value of GM’s business was not sufficient), it may be the case that most of society’s wealth has to be transferred to the 41-year-old retired bus drivers of the MBTA here in Massachusetts, the 50-year-old retired fire department workers of California, et al.
Private companies have gotten out of this trap by wiping out their shareholders and shedding their obligations in bankruptcy. For governments, however, there is essentially only one way out of this trap: grow the tax base dramatically. That was essentially what the GM management and politicians who agreed to the pensions had relied on. The company or economy would expand forever at whatever rate it had in the best decade that anyone could remember. According to classical economics, however, wage growth is impossible without capital investment. If a company spends $1 billion to equip its factories with better machines, an hour of labor will have more value and the company will bid up wages until the factory is fully staffed. In our prostrate economic condition, however, business isn’t investing. So the tax base isn’t going to grow via wage increases. The alternative is to grow the population size until the U.S. is as densely populated as mainland China.