A friend emailed me an article about public employee salaries and pensions and asked my opinion. Here was my reply:
He does sound like an angry white guy 🙂
I think he has missed a big part of the point, though. Bureaucracies can’t reward themselves; it is politicians who trade handouts from the public treasury of tomorrow for votes today. And Republicans have been almost as bad as Democrats in this regard, and the Greeks just as bad as Californians, so it looks like a fundamental flaw of our political systems, not something specific to a party.
He doesn’t propose any solutions. Probably the only workable one is to prevent government workers from voting. That was pretty close to what the Framers wanted, by excluding D.C. from the electoral college, House, and Senate. Now that government payrolls have grown to such a huge percentage of the workforce at all levels, we probably need to do that in state politics as well.
So… were the Framers wiser than we are today? They figured out that there was an inherent conflict of interest in allowing a government worker to vote because he would almost surely vote for politicians who promised to expand the government and increase salaries for government workers. The folks who drafted various state constitutions didn’t bother to exclude government workers from state elections because at the time no more than 1 or 2 percent of American households could possibly have been dependent on a government paycheck (since government at all levels was such a tiny percentage of GDP).
It seems harsh to deny the franchise to what will soon be nearly half of all American workers, but perhaps it is the only way to save the country from insolvency.
[Of course, I recognize the impracticality of getting any such change to the American system passed; roughly 50 percent of voters would be almost guaranteed to vote against it! So mostly this idea is good for understanding how democracies collapse once a sufficient percentage of the citizens are government workers. Note that Greece was under military dictatorship until 1974. The economic collapse occurred after 36 years of democracy and roughly when their first large batch of government workers retired with pensions approved by democratically elected leaders. U.S. government workers were first allowed to unionize and collectively bargain for wages and pensions in the early 1960s. Our problems became acute after about 50 years and would have occurred much sooner if not for a near doubling of our population due to immigration (population explosions are great for government finance).]
Is there any evidence at all that putting the capital outside of any state was a deliberate act by the Framers to keep government workers from voting?
seems to me that the situation will balance itself again once everybody is on a government paycheck: no need for votes, no plunder of government treasury. Or?
The above ranks with Communism as a cute political theory. Unfortunately political theories might cause some substantial damage if put into practice without proper evidence and testing. The questions I’d like to pose then are:
– are all countries where government workers vote in bad economical shape? and is the economical shape the country is in, whatever it is, due to its government or due to external economic forces?
– is there any country where government workers do not vote? how are things there?
– if government workers, the very same people who control the law and its enforcement, cannot vote, won’t they simply start to act as a protection racket? they might not need the vote to get 100% of the income and bring the country to insolvency anyway.
The problem with cute political and economic theories is that, as Popper would probably say, they ain’t science. As such they are little more than opinion, unless we figure out a way of testing the damn things — and for real, no computer simulations, they damn well fail to include the very mess humanity is and what it entails with the economy.
Phil,
Under the original terms, I believe you had to be a white, male, land owner in order to vote. It’s hard to imagine that, had the land ownership requirement stood time, we would have an income tax to support all of these programs that are sinking us.
– Government workers
– people on welfare, or receiving money from the government for whatever reason
Also, move tax day to election day. It’ll serve as a reminder to be careful of what parasite gets voted into office.
Can democracies be replaced by another democracy (constitutional reform), or do we have to pass thru an anarchy or an authoritarian state as a transition? 🙁
You are opening Pandora’s box. If government employees should not be allowed to vote, then what about employees of contractors who derive 100% of their business from government? What about shareholders of those contractors? What about officials of public sector unions?
If we’re operating in the realm of measures that can’t be passed, just attack the problem directly: require a balanced federal budget on an accrual basis, fully accounting for unfunded liabilities; ban federal borrowing; and tie dollar value to a fixed basket of commodities.
EDZ; I don’t think that locating DC in its own non-state location was primarily intended to prevent government workers (then a tiny percentage of the population) from voting. But once there, the Framers were careful not to let the tail wag the dog.
Federico: You assert that my proposed system, of restricting voting to those not on the government payroll, is dangerously experimental. I would claim that our current system is the big experiment! It is unprecedented in world history that government workers constitute a near majority of the voters (maybe an actual majority since they are organized and many don’t have to work on Election Day). You could argue that the Soviet Union was a successful example because most folks worked for the government and most folks voted. However, I would respond that (a) it wasn’t sustainable, apparently, and (b) the voters did not have as much of a choice as we do now, i.e., that there was an element of dictatorship/authoritarianism.
Sean: Thanks for the reminder that voting eligibility was not always so simple. http://www.history.org/foundation/journal/spring07/elections.cfm is a good article on the subject. Some of the Framers seem to have intended that voting would become more widespread after Independence, but the Constitution left eligibility up to the states.
John: as far as requiring a balanced budget… as long as local, state, and federal governments promise to pay pensions there will be no way to know whether a budget is balanced or not. (Unless you are friends with God and can get answers to the following questions: “How long will the average person who retires in 2060 live?”; “What will returns on public equities be like in the year 2107?”; “Will the U.S. economy continue to grow at anything like its historical rates?”)
I have a question on the pensions. Don’t they just buy annuities and transfer that risk to an insurance company? If not why the hell not?
Tekumse: A standard annuity product is matched to life insurance, which is how the insurance company can do both without risking bankruptcy. The life insurance payout is not adjusted for inflation, so neither is the annuity. A government pension is a guaranteed amount of money in constant (inflation adjusted) dollars. Another problem is that there isn’t nearly enough life insurance sold to balance the amount of pensions being promised by local, state, and federal governments. So if the insurance company’s actuaries were not exactly correct about life expectancy the company might go bankrupt and then, apparently, tomorrow’s taxpayers would have to bail them out.
If you put all pension funds into TIPS to deal with the inflation risk you’d still have the unknown life expectancy risk to handle. In Boston we promise to pay a 41-year-old retired MBTA bus driver a comfortable inflation-protected income until he dies. The only way to be sure that we were putting enough money aside today would be to buy enough TIPS that he could earn $50,000 per year off just the TIPS indefinitely. I think that would be roughly $3.5 million worth of TIPS (they yield about 1.5% after inflation? (source)). That is probably the true cost of the guy’s $50,000/year pension, but no public official wants to say “I spent $3.5M on a bus driver’s pension”. (And of course in Massachusetts there are a lot of public employee pensions that promise more than $100,000 per year until the death of both the former employee and his or her spouse.)
I am quite sure there are annuities which can grow at fixed percentage, but I am not quite sure if this can be set to inflation. I see your point about the size of this. Living in a small place I have rare contact with government in its local, state or federal level so I tend to greatly underestimate its size.
Phil,
I never said that the current system is not experimental from some point of view. What I *am* saying is that all political theory (and economic theory for that matter) is at best some cute fluffy fantasy, without –ever– any previous solid empirical evidence that allows a fact based informed judgment.
Looking back in history will show many different societies with some degrees of economical/political similarities, but so what? we have no way of testing if their relative success or failure is due to what we understand about them or not.
What I am saying is also that the best we can actually do is to try stuff but be open to going back to the old system/going forward to something new if what we are trying is not providing the desired outcome.
And keep in mind, you could devise a system that could sort whatever problem in the future at such terrible present expense to make it impracticable. The goodness of a system is purely contingent.
There is nothing we can do now. But it is worth recognizing exactly what went wrong because once the collapse comes we can use those facts when writing the charter for the next country. Some of the things I would put in there would be single 10 year terms for federal judges (so they continue to be independent, but don’t become serve into their 90s), 12 year term limits for legislators, 6 year terms for house members so they aren’t continuously running for office, and removal of the supremacy clause – state law overrides federal law in the state with a few exceptions, which are enumerated (foreign diplomacy, military, money supply. nothing expansive like interstate commerce).
So, should you be allowed to vote if you work for an industry that hires a lobbyist who influences political decisions?
Carl: Note that I did not propose cutting off Welfare recipients, nor folks whose job is indirectly influenced by the government. If we did that, we’d be left with almost no voters at all! I don’t think an employee of Lockheed Martin has quite as bad of a conflict of interest as a civil servant. The Lockheed Martin worker does depend on big government, but not on pension promises 50-100 years in the future. Also, the Lockheed Martin worker can be taxed into poverty if government spending grows sufficiently.
While a discussion of theory is useful, what about concrete action, on an individual level?
If as Phil suggests, bringing change to the system and getting it passed is practically impossible, what should a young guy who is not a government worker do?
Should I pack up and move to a different state or a different country?
Should I put all my savings into stocks or a foreign currency that won’t depreciate during a Greece-like fiscal/financial crisis?
Should I wait for the collapse to come and pass, and hope/pray that my savings won’t get wiped out, and that I might still have something left afterwards?
The solution:
1. Pass legislation requiring all organisations to make sufficient allowance for future liabilities in today’s budgets & require the budget to balance. This should also apply to companies. This should get the problem ‘out in the open’.
2a. Pass legislation forcing the sum of public employee income+benefits (current and future) from ever exceeding XX percent of GDP. So public employee benefits are all relative to this maximum: giving more to firemen takes away from teachers and tax collectors.
AND/OR:
2b. Contract out all public work to private companies that must bid for the city/state/federal contract on a regular basis.
“John: as far as requiring a balanced budget… as long as local, state, and federal governments promise to pay pensions there will be no way to know whether a budget is balanced or not. (Unless you are friends with God and can get answers to the following questions: “How long will the average person who retires in 2060 live?”; “What will returns on public equities be like in the year 2107?”; “Will the U.S. economy continue to grow at anything like its historical rates?”)”
Phil, accrual-based accounting (rather than cash-based) attempts to answer exactly these questions, and in so doing determine whether defined-benefit pension plans are overfunded or underfunded. Changes in circumstances regarding investment returns, mortality, etc. can require recalculation of the level of funding. It’s far from perfect, but it is standard for publicly held corporations, and far better than budgeting the biggest government on earth on a cash basis, which is what they do now.
John: I’m well aware that the state-of-the-art in accrual accounting is very advanced. On the other hand, Enron and AIG had the world’s best accountants. Short of an all-TIPS portfolio and a letter from God telling you the date on which each of your current workers and their spouses will die, I don’t see how it is possible for an accountant’s estimate to be more than a hint at what future liabilities are likely to be.
I don’t think that pension accountants predicted the runaway inflation of the 1970s. Nor did they predict that the U.S. government would, in the 1960s, create Medicare, a system that gives doctors and hospitals an incentive to keep Americans alive indefinitely. Nor, probably, did they predict the corporate looting that has substantially reduced returns to investors in U.S. public companies (their predictions about corporate profits might have been accurate, but not that an ever-increasing slice of those profits would be captured by top managers). Nor did the accountants predict the Collapse of 2008-?, which has erased many years of investment returns.
So… a balanced budget using accrual-based accounting would probably be better than what we have now, but it would not prevent government workers from voting for defined benefit pensions that will insulate them from the effects of a collapse in the U.S. economy. Which is why we need to stop them from voting because it is very expensive to maintain a significant fraction of the population on an entirely separate income growth curve from the rest of the economy (as we’ve demonstrated with Wall Street, GM, and government workers during 2008, 2009, and onward).
Richard: That’s an interesting idea, holding public employee compensation and government spending overall to a fixed fraction of GDP. That would be a useful amendment to state and federal constitutions.
Bob: What to do on an individual level? Until we grow the population to its expected 600 million-1 billion by 2100, the U.S. is still a fairly pleasant place to live. It just isn’t a great place to do most kinds of businesses (which is why so many Americans are unemployed, of course). If you want to maximize your lifetime income, you’d have to stay in the U.S. and choose a government-sponsored industry (e.g., finance, health care, etc.) or emigrate to a high-growth country such as China or Brazil. As far as savings go, there is no way to predict which country will outperform expectations. So if you want to be financially comfortable in most of the world’s countries you’d need to own a basket of investments in all of those countries and currencies. Right now, for example, an investor in U.S. stocks who bought in during 1999 is about as rich as he was back then (Dow Jones/S&P are at 1999 levels) but he has suffered a 1/3 reduction in wealth in Euro. And relative to a lot of other currencies he has done even worse. Our investor would have done vastly better if he’d bought stocks and bonds in developing countries, Europe, Australia, etc., plus some U.S. stocks in case the U.S. happened to continue its long run of success (which sadly we did not).
Good post, Phil. Though I would take it further and say that anyone that does not pay Federal taxes should not be allowed to vote. CNN Money notes that 47% of Americans will receive a tax credit or pay 0% taxes. These people also get all the services of government without any contribution – they have ample self-interest to vote to remove even more wealth from the few remaining that still have not moved to Brazil or China.
It also shows how hopelessly broken our system is and what little chance there is of reforming it.
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RE: “The Lockheed Martin worker does depend on big government, but not on pension promises 50-100 years in the future.”
Our recent experience with GM shows that sadly this is not the case, the Fed government will step in and bailout these pension funds if they are politically favored groups (big unions).
Source from CNN Money:
http://money.cnn.com/2009/09/30/pf/taxes/who_pays_taxes/index.htm
philg: I’ve enjoyed your long format articles discussing your economic recovery plan, investing guide, and educational experiences. Since a large percentage of your posts revolve around observations of the flaws in our current political system. Creating a stable productive political system is a tough problem, its surprising we’ve done so well on only the second or third go around. I’d be interested to see you write a long format article about how you’d organize things to avoid some of the worst of these. Bonus points if there is any chance of getting any ideas implemented. Who knows, this seems to be a time when people are so frustrated that anyone can start a new political movement so long as it’s named after a beverage (tea party, coffee party, etc.).
zhenre: While there are problems with our political system, I don’t think fixing them is the hardest or most important issue facing us. We desperately need to improve the actual administration of government independent of politics.
While this is all a little tongue in cheek, the question really does focus on what is essentially a giant conflict of interest. The problem is, I really do see different tiers of government employees, and some of them irritate me a lot more than others. As an example of an irritation, guess when public swimming pools close in San Francisco? Sundays and Holidays, exactly when people who work and kids who go to school are free to use them. At least they’re open on Saturdays… of course, the expensive private clubs around SF are actually open when working people are most likely to be able to go.
That said, would you consider public university professors to be “government employees”? Would a math professor making 70K at Berkeley after a 6 year PhD and 2 year post-doc be denied the right to vote, while his counterpart over at Stanford would get to vote? While I feel a little bad for professors in the sciences, and they’re not all wildly productive and successful, I think that society gets a pretty goo deal out of these folks (though they get about as crap a deal as you can imagine).
Actually, since math professors are increasingly unlikely to be US citizens, maybe none of this matters anyway.
Neal: Execution is certainly a big problem as well, and one not constrained to the public sector. Certainly private monopolies are similarly frustrating and have similar track records. I’ve had all kinds of issues setting up simple online bill pay with my utilities companies, and as phil likes to point out GM was also fairly weak on innovation and poor at dealing with exploding benefits and the like. Of course as the size of the govt. grows the consequences of its failings become more severe.