Economics

Is The US Destroying the Middle Class?

With a certain frequency, commentators see fit to worry as to the extinction of the US middle class. One among these, it seems, is one Edward Luce, who composed a piece on “The crisis of middle-class America” for the Financial Times. The piece profiles two families making about $70k/yr each, and worries as to the future of them and families like them. Both are, by coincidence, families of loyal Democrats, and the piece sports the requisite concerns about the potential dangers of tea party barbarians howling at the gates of the US order.

I feel myself in an odd position in regards to such stories. The particular definition of “middle class” picked for the story is a family income threshold which five years ago was frustratingly above our families income, and which now is embarrassingly below it. In this regard, I recognize myself to be uncharacteristically fortunate. However, having recently made a good deal less than this (and coming from a family which never exceeded such a total, even adjusting for inflation) I feel that I have some familiarity with the sort of middle class world being discussed — while I can’t escape the feeling that this seems a very squalid and foreign world to the Financial Times writer.

Added to this sense of class conflict is that Luce seeks to build up his story with juxtapositions of facts which sound like they mean more than they do. Continue reading

Are Public Employees Overpaid?

If you believe what you read on blogs or hear from certain politicians and pundits, a new kind of haves-vs.-have-nots class war is brewing across the land. Not between the rich and the poor, but between private and public sector workers, as related here.

Scandalous stories of public officials enjoying lavish or disproportionate pay and benefits at taxpayer expense, such as in Bell, Calif., and elsewhere , frequently make headlines and prompt calls for reductions in such compensation.

As with many other economic and taxation issues, the answer to the question posed in the title of this post usually depends on which side of the political spectrum you are on. Conservatives tend to answer “yes,” while liberals tend to answer “no” .

But which side is correct?

Before I delve into that question, I will first make some disclosures.  I am a full-time employee of the state of Illinois, making $35,000 per year. I do not belong to a union, and due to the nature of my job and agency, probably never will. I have only received one raise the entire time I have been so employed (nearly 4 years) due to a promotion to a slightly higher job level. I do not expect to receive any raises for the foreseeable future; in fact a pay cut is a distinct possibility. Prior to that I worked 20 years in private sector employment in the newspaper field. In some instances the pay and benefits were comparable to, and even better than, my current job. In other instances they were not as good.

Now to the question: are public employees overpaid? That depends on who you ask and how one defines “overpaid”. The average pay of state and federal employees in general is higher than that of private sector workers in general. When broken down by education, profession, etc. the picture is not as cut and dried. For lower-skilled jobs requiring only a high school or vocational education — e.g. custodians, receptionists, guards — the public sector pays better, whereas for professional jobs requiring a college degree or higher (attorneys, doctors, CPAs, etc.), the private sector pays more — often a lot more. These articles from Kiplinger and from Governing.com explain the differences in greater detail.

Two of the biggest reasons for these disparities are that 1) public employment tends to have a greater percentage of jobs requiring a college education or beyond and 2) public sector jobs are more likely to be unionized.

Public employee unions are a favorite bete noire of fiscal conservative politicians and candidates at the moment, and much of the public seems to agree with them. The fact that public employees continue in many (though not all) states and localities to enjoy benefits most private employees no longer have, such as regular salary increases, defined benefit pension plans, and caps on health insurance premiums and co-pays, arouses resentment among ordinary citizens who are forced to pay for such benefits via taxation.

Although many officeholders and candidates talk a good game when it comes to reining in public employee benefits, in practice the most frequent targets of budget cutting measures such as layoffs, furlough days and pay cuts, are lower or mid-level non-union employees. They often end up being punished for the sins (real or perceived) of their higher placed or unionized colleagues, simply because they are the easiest targets — not protected by either union contracts or political/personal connections.

The biggest problems on a state and local level are pension deficits — the growing gaps between the amount of money in public pension funds and the amount of benefits those funds are expected to pay in the future. According to this report by the Pew Center on the States, pension shortfalls are fiscal time bombs that threaten to devour entire state and city budgets if nothing is done to defuse them before it is too late.

How did the situation get that bad? In most cases it was due to a variety of factors — yes, generous union contracts played a part, but so did repeated failure on the part of lawmakers to invest properly in public pension funds, demographic changes (aging of the Baby Boomers, people living longer), and investments tanking due to the recession. No one factor can be singled out, and the entire blame for the pension crisis cannot be laid at the feet of one person or group of people. But regardless of who is or was to blame, the problem has to be dealt with, not swept under the rug.

Private sector employees are quick to point out that while they have to support public employee benefits with their taxes, public employees are not forced to do the same for private employees — they can choose whether or not to do business with a private company.

I agree, and this is in my opinion an argument that should be taken most seriously. For that reason, public employees are by necessity accountable to the public and will always be subject to various restrictions and considerations that do not apply to private employees (e.g., their salaries being public information).  This is not “unfair” or unequal, but simply part of the deal one signs up for when working for a government body.

Another claim often made by private employees is that government workers, by virtue of the pay, job security and benefits they enjoy, are artificially insulated from the realities their privately employed neighbors face — the constant threat of being fired or laid off, lack of retirement security, worry about medical bills, etc.

That might, perhaps, be true of top officials/administrators with strong political connections who make six-figure salaries, whose spouses have equally high-paying positions, and whose children or other family members are completely healthy. Otherwise, I am not so sure.

Many public employees, particularly non-union ones, are regularly threatened with layoffs or missed paychecks (most often at the end of a fiscal year). Given the poor financial standing of many public employee pension funds, combined with the fact that some public employees don’t get Social Security, I’d say many of them (including myself) who are 10 years or more away from retirement are just as worried about their retirement as you are.

Also, most public employees do not live in a bubble or a vacuum. Most used to work in the private sector at some time in their lives, and many are married to spouses who work in the “real world” or are currently unemployed or disabled. Their grown children, their parents, their siblings, and their friends and neighbors  include private employees or unemployed persons looking for work. The only exceptions I can think of might be political “dynasty” families like the Kennedys or Daleys. Plus, public employees pay all the same taxes everyone else does — federal, state, sales, property, the whole works. If taxes go up, it cuts into their budgets too.

Just because someone has a government job doesn’t mean they have, or should have, no interest in whether private business succeeds. If factories close and move overseas, if private companies go bankrupt and abolish or raid pension funds, if high taxes drive up the cost of living, if college education becomes unaffordable without taking on ruinous levels of debt — it affects them and their families too. It is in everyone’s interest, no matter what kind of job they have, to have a fiscally sound and honest government, competent public employees, and a sustainable tax structure.

Also, do not forget that for every instance in which a public official received undeserved pay, pensions or perks at taxpayer expense one could probably cite an equally egregious case of a private business executive enjoying lavish pay and benefits at the expense of fired workers, closed factories/offices, or raided pension funds. Greed is greed no matter where it occurs, and no sector of the economy is exempt from the effects of original sin.

Finally, since this is a Catholic blog, we should approach this issue from a religious perspective as well. Christ Himself chose a public employee, Matthew the tax collector, to be one of His Apostles. He also told His followers to “render unto Caesar what is Caesar’s and unto God what is God’s.” So, apparently, He did not believe that working for the government was inherently evil, unproductive or exploitive.

Some more pointed advice was given by Christ’s precursor, John the Baptist, to the public servants of his day who came to see him (Luke 3:12-14):

“Even tax collectors came to be baptized and they said to him, “Teacher, what should we do?”
He answered them, “Stop collecting more than what is prescribed.”
Soldiers also asked him, “And what is it that we should do?” He told them, “Do not practice extortion, do not falsely accuse anyone, and be satisfied with your wages.”

John was referring to practices for which the public employees of the day were notorious — tax collectors often overcharged citizens and pocketed the “profit” they made, while Roman soldiers were known for shaking down citizens of the provinces they occupied for money, food, or other goods. Here John is telling them simply to do their duty, not demand any more of the public than the law requires, and be content with what they are paid. If today’s public officials and employees did the same, there would be a lot fewer problems.

As with most problems in a fallen world, there is no perfectly just way to balance the need for a professional, competent government workforce with that of a private sector free of unnecessary taxes and regulation. This does not mean, however, that we should not attempt to find as just a resolution as possible. However this will require people who are not to blame for the situation to help clean it up, and at considerable personal cost.

For public employees, this means more work for less pay, more out of pocket expenses, and for some, no job at all. For the rest of us it could mean higher taxes, reduced services or some combination of the two. All these things will impact thousands, even millions, of good, hardworking people who are simply doing the best they can and had no part in creating the situation. It may not be perfectly fair, but life ain’t fair.

Twirling, Twirling Towards Freedom

On Monday night there was a debate between Connecticut Senatorial candidates Richard Blumenthal and Linda McMahon.  During the debate Linda McMahon asked Mr. Blumenthal, “How do you create a job?”  Blumenthal’s answer was, well, see for yourself.

Watching this, I couldn’t help but be reminded of another example of genius on display.

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Why Is This Bad?

Rookie hazing is common to all American professional sports.  Normally it amounts to rookies carrying veterans’ bags, being dressed up in women’s clothing for “fashion shoots,” or simply having to buy dinner for the veterans.  Well last week Dez Bryant of the Dallas Cowboys was subjected to the latter.  Unlike most rookie hazing incidents this caused headline news.  Why?  Because the bill came out to just under $55,000.  That’s a lot of steak.

This has led to all sorts of outrage.  I think this nugget from Peter King’s (never-ending) column fairly represents the typical media reaction to the story.

This doesn’t deserve a monumental amount of coverage, but one thing should be said to the Cowboy veterans who delighted in spending about $2,500 per man (one estimate I heard for the 22 to 25 men who attended this dinner) as most of America struggles to pay for weekly groceries: Stop being pigs. It’s disgusting.

This comes from the same column in which Peter King discusses his three-hour meal with Texans running back Arian Foster.  People are struggling with the grocery bills and Peter King is out carousing with football players?  What a pig.

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Oh What a Tangled Web…

Few things are more annoying to me than the obstruction of both semantic quibbles and logical fallacies to a clear understanding of reality. Thus my experience as a Distributist has become one of near-perpetual annoyance, given the proliferation of both throughout the Distributist camp. Here I want to address a few of the latest examples of this obstruction, and provide some insights as to how and why it ought to be overcome.

First, there is John Medaille’s interview with the Young Turks, in which he declares that one cannot be in favor of both free markets and capitalism, simply because he has defined a free market as a situation in which there are vast numbers of competitors, and capitalism as a situation in which economic power has been concentrated in the hands of a few large firms. When challenged on this distinction by the interviewer, who asserted that capitalism could be defined as a free market economy while this economic concentration could be defined as corporatism, Medaille essentially had no choice but to agree. He then decided to add that “the capitalism we have” is what he claims to be talking about, regardless of how one wants to “define it in the abstract.”

By answering in this way, however, Medaille might leave you with the impression that people who claim to be in favor of capitalism aren’t interested in criticizing that which “we have”, when it is beyond obvious to anyone who actually reads the material of self-identified pro-capitalist organizations such as the Mises Institute that they view “what we have” as corporatism or statism or state-capitalism or some variation on that theme, and oppose it as well.

Read the rest here.

California Nightmaring

In a remarkably good article here at newgeography, Joel Kotkin details how California has been transformed from the Golden State to the state most likely to go bankrupt.  He sums up his argument as follows:

What went so wrong? The answer lies in a change in the nature of progressive politics in California. During the second half of the twentieth century, the state shifted from an older progressivism, which emphasized infrastructure investment and business growth, to a newer version, which views the private sector much the way the Huns viewed a city—as something to be sacked and plundered. The result is two separate California realities: a lucrative one for the wealthy and for government workers, who are largely insulated from economic decline; and a grim one for the private-sector middle and working classes, who are fleeing the state.

Kotkin notes that government spending was completely out of control prior to the present Great Recession:

Between 2003 and 2007, California state and local government spending grew 31 percent, even as the state’s population grew just 5 percent. The overall tax burden as a percentage of state income, once middling among the states, has risen to the sixth-highest in the nation, says the Tax Foundation. Since 1990, according to an analysis by California Lutheran University, the state’s share of overall U.S. employment has dropped a remarkable 10 percent. When the state economy has done well, it has usually been the result of asset inflation—first during the dot-com bubble of the late 1990s, and then during the housing boom, which was responsible for nearly half of all jobs created earlier in this decade. Continue reading

Economics and Moral Hazard

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Another first rate video from the Econ 101 series of the Center for Freedom and Prosperity.  This video exlores the concept of moral hazard in economics.  A moral hazard occurs in economics when one of the parties to a transaction is  insulated from bad effects if the transaction goes south.  This will cause that party to behave more recklessly than if the full impact of the failure of the transaction were felt.  Government bailouts of course establish a precedent that if a big business suffers a loss, that the government might bail it out.  No doubt many of our major financial institutions have learned the lesson that if a financial fiasco is large enough, Uncle Sucker will come to the rescue, and put the taxpayers on the hook for another few trillion that they can’t repay.  Moral hazard indeed!

A Story in Graphs

Once upon a time there was a country — it had its problems as any nation does, but it did well enough. Its people prided themselves on working hard, and they were comparatively well off: less so than the UK, more so than Spain and Italy.

They’d had the good fortune to have none of their infrastructure destroyed during World War II, and after the war they experienced a boom as an exporter. Things slowed, however, in the late 60s and early 70s. Some said this was because the rest of the world got better at growing their own food and manufacturing their own goods. Others said it was because they allowed too much immigration. Some said it was because the welfare programs they created in the 60s ate away at the motivation to work hard.  Others said it was because unions became weak. Whatever the reason, their average income in inflation adjusted terms grew much more slowly than it had, and there was a good deal of discontentment and disagreement as to what to do about it all and who was at fault. Here’s a graph of their average family income in inflation-adjusted US Dollars.

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Progressives Are Not Cynical Enough About Business

One thing my study of economics has taught me is that businesses will tend to act in whatever way they think will bring them the most profit. There may be rare exceptions, and of course businessmen often have mixed motives. But the overall tendency in this direction is very strong.

My guess is that if you surveyed people, many more self-described progressives would say that they agreed with the statement than self-described conservatives. Indeed, progressives often criticize conservatives and libertarians for being insufficiently attuned to the rapacious self-interest motivating businessmen.

Yet oddly enough, it seems to me that one of the main problems with progressive thought is that they don’t take the idea that businesses act to maximize profit seriously enough. For a group that claims to have a low opinion of businessmen, progressives have a strange habit of advocating policies that will only work on the supposition that businesses won’t act to maximize profit, and then react with shock when they proceed to do so.

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Quick Econ Thoughts on Licensing

This was going to be a comment on Blackadder’s post which has turned into a discussion on licensing and whether it raises prices, but since I only have time to write out one thought process today I thought I’d turn it into a post.

Most folks outside economics see licensing as a way of legally certifying duties and providing a means of redress when incompetence occurs. Not only does a plumber who consistently allows sewer gases to enter a home get sanctioned civilly, he can be sanctioned by license loss and prevented from harming other households.

Let’s try two examples on our theoretical plumber here:

1) Say that we have a local economy in which licensing is not mandatory. If I want some plumbing done, I have several options: I could open up the phone book, call around, and hire the absolute cheapest guy who says he’s willing to give plumbing a job. He may do a terrible job, and set sewage to run through my ice maker.

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What the Left Cannot Supply, the Right Will Not Demand

Recently I’ve been toying with the idea of doing a series of posts looking at the recent survey purporting to know a lack of economic knowledge on the Left, with one post for each of the eight questions on the survey. As I look at the list of questions, however, a clear theme emerges, namely that liberals tend to think that the price of a good or service isn’t much affected by the supply of that good or service or visa versa. According to the survey, liberals tend to think that restricting the supply of housing doesn’t increase the price of housing (question 1), that restricting the supply of doctors (through licensing) doesn’t increase the price of doctors (question 2), and that price floors won’t decrease the supply of either rental space (question 4) or jobs (question 8).

Coincidentally, I’m currently reading a (surprisingly good) book by Paul Krugman, in which he argues that conservatives tend to minimize or dismiss the part changes in demand have on getting us into or out of recessions. Naturally this got me thinking whether one of the things separating left from right in this country is a difference in the importance of supply and demand in economic phenomenon. For the above issues, at least, liberals seem to be ready to discount the importance of supply, whereas conservatives underestimate the importance of demand.

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Left=Economic Illiteracy?

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Great minds think alike.  I had prepared a post on this subject and I see that Darwin already has posted on the same topic.  Normally I would simply trash my post, but this time I think our readers might find it amusing to see our different takes on this topic.

Everyone loves a pop quiz right, especially on economics!   Here are eight questions.   Possible answers are :   1) strongly agree; 2) somewhat agree; 3) somewhat disagree; 4) strongly disagree; 5) are not sure.

Here are the questions:

 1) Mandatory licensing of professional services increases the prices of those services.

 2) Overall, the standard of living is higher today than it was 30 years ago.

 3) Rent control leads to housing shortages. 

 4) A company with the largest market share is a monopoly.

 5) Third World workers working for American companies overseas are being exploited.

 6) Free trade leads to unemployment.

7) Minimum wage laws raise unemployment.

8)  Restrictions on housing development make housing less affordable. Continue reading

Ideology and Economic Knowledge

Prof Daniel Klein of had a brief piece in the WSJ this week talking about how people’s economic knowledge or ignorance breaks down by ideological lines.

Zogby researcher Zeljka Buturovic and I considered the 4,835 respondents’ (all American adults) answers to eight survey questions about basic economics. We also asked the respondents about their political leanings: progressive/very liberal; liberal; moderate; conservative; very conservative; and libertarian.

Rather than focusing on whether respondents answered a question correctly, we instead looked at whether they answered incorrectly. A response was counted as incorrect only if it was flatly unenlightened.

Consider one of the economic propositions in the December 2008 poll: “Restrictions on housing development make housing less affordable.” People were asked if they: 1) strongly agree; 2) somewhat agree; 3) somewhat disagree; 4) strongly disagree; 5) are not sure.

Basic economics acknowledges that whatever redeeming features a restriction may have, it increases the cost of production and exchange, making goods and services less affordable. There may be exceptions to the general case, but they would be atypical.

Therefore, we counted as incorrect responses of “somewhat disagree” and “strongly disagree.” This treatment gives leeway for those who think the question is ambiguous or half right and half wrong. They would likely answer “not sure,” which we do not count as incorrect.

In this case, percentage of conservatives answering incorrectly was 22.3%, very conservatives 17.6% and libertarians 15.7%. But the percentage of progressive/very liberals answering incorrectly was 67.6% and liberals 60.1%. The pattern was not an anomaly.
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Pope Speaks About Economics Again, "It's the Natural Law, Stupid"

After calling for Catholics to be liberated from their pet ideologies, Pope Benedict is helping flesh out a moral economic vision that puts the standard Left- socialism/Right- Free Markets debate into the dust bin for faithful Catholics.  The bottom-line seems obvious to me- you can’t demonize government and you can’t demonize business- both bring difficulties into play- over-regulation can harm economic development, but lack of regulation can lead to corporate dominance which is a problem when one considers that corporations typically are upfront about being in existence to pad their investor’s bank accounts, not being much concerned with the universal common good. Our Pope clarifies the inherent morality(read Natural Law) in the economy in this article from one of my favorite web sites Zenit.org:

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Set Me Free (From Ideologies) Part 2

 

To follow up on my first installment of “Set Me Free (From Ideologies), I am going to draw again from the rich well of Pope Benedict’s powerful encyclical Caritas In Veritate.  In this case it would seem that in paragraph #25 the Pope is sounding kinda liberal if we would attempt to fit the views expressed into one or another of our American political ideologies. Continue reading

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