Why we should fire all civil servants and public school employees (but only for five minutes)

It is troubling that in a time of high unemployment state governments and school districts in Oregon and other states may have to lay off hundreds of thousands of people. The U.S. Education Secretary has warned that without an additional $23 billion in emergency federal aid, 100,000 to 300,000 public school teachers and administrators could lose their jobs. But the federal government itself is already running alarming deficits and might not come up with the money.

There is an obvious alternative to firing so many people: keep them all on but make the necessary savings by reducing their salaries and fringe benefits. To some extent this has already been done, with freezes in salaries and benefits here and there, and perhaps even a few actual reductions in pay. But other public employees continue getting raises, and cutting pay is politically difficult even for a lame duck like Governor Kulongoski.

Even leaders who are willing to cut salaries might not legally be able to do so because of collective bargaining contracts with various unions. “A contract’s a contract,” as Ken Allen, director of the state American Federation of State, Country and Municipal Employees was recently quoted in an Oregonian headline.

This indeed is a problem. Oregon unions are reported to be hopping mad about Kulongoski’s proposed continuation of pay freezes, and the chances they would agree to substantial reductions in pay are nil. And starting July 1 the Oregonian reports that “union-represented state workers are scheduled to get step increases of 4.75 percent.” Just to pay for this raise for those remaining would require firing about 5% of these workers. (So much for labor “solidarity”!)

Perhaps I am wrong here, but normally collective bargaining contracts merely specify what people will be paid if they have a job and do not guarantee that anybody will have such a job. That is why layoffs are possible when money must be saved.

If this is the case, there is a solution to our current woes. It is an unhappy solution, one that no one would advocate except for the fact that the alternatives are all worse. The state of Oregon must fire all state civil servants and school employees. The laws providing for collective bargaining for state employees must be repealed. All former employees who would like a job would be hired with salaries and fringes determined on the basis of the available money (subject to further reductions later on if that proves necessary). Although vested rights in PERS would be preserved, just as they are for layoffs today, no future rights would be accrued and the state would shift to a defined contribution retirement system for all workers.

To avoid even temporary closing of schools, lack of police and fire protection, and throwing the prison gates open, the newly hired employees could go on the payrolls five minutes after they are fired from their previous positions. (Details could be worked out in advance.)

These admittedly draconian steps would avoid increasing unemployment, keep our schools fully staffed, and allow the state budget to be balanced. They would inflict moderate amounts of pain on all state workers rather than the huge amounts of pain that would be inflicted on those state workers who will lose their jobs under our current system.

The bottom-line question we must answer is whether Oregon government primarily exists to serve the people of Oregon, or whether its prime function is to promote the well-being of the people who work for it even when this conflicts with the general interest.

More on the "carried interest" scandal

To their credit, Congressional Democrats have proposed legislation greatly reducing the ability of investment fund managers to get away with paying a 15% capital gains rate income tax on their sometimes billion dollar earnings.

This morning the Wall Street Journal published an attack on this proposed legislation. Unfortunately, the article is available on-line only to subscribers to the on-line WSJ, so I cannot direct you to it here.

I have sent a letter to the editor responding to this article. It follows:


****************************
To the editor:

John Rutledge’s defense of allowing investment partnership managers to pay a 15% federal income tax on their often huge compensation is not lacking in nerve.

Rutledge points out that no special loophole was created to allow them to get away with this, since it just “reflects two long-accepted tax practices.” But the very fact that these “practices” allow managers who make a billion dollars a year to pay a much smaller percentage of their income than do the custodians who clean their offices suggests that these practices should no longer be accepted.

This injustice is just one more example of the pernicious gamesmanship encouraged by taxing income from different sources at different rates in the first place. The proposed legislation that Rutledge criticizes does not go far enough. Congress needs to tax all personal income----salaries, dividends, capital gains, you name it!----at the same rate. While this might produce adverse economic effects in the short run, in the long run it would make our economy more efficient by eliminating much complexity and releasing a lot of accountants and tax lawyers to more productive activities.

Paul F. deLespinasse, Ph.D.

Corvallis, Oregon

A version of this letter appeared in the Wall Street Journal on May 28, 2010.

Masking the federal budget deficit

A very good article by my colleague, Ahsan Habib:

By Ahsan Habib
Daily Telegram

ADRIAN, Mich. —

Two things happened on April 21. First, I looked at my copy of the Wall Street Journal. The headline said “Debt Masking Under Fire,” referring to a practice of Wall Street banks.

Second, the 2010 edition of the Economic Report of the President came in the mail. I opened to Page 423, a historical table of government finance. According to the table, in 2009 the federal debt reached an unprecedented level of $1.5 trillion. The same table also shows that during 2009 and 2010, the federal government’s debt increased by about $1.9 trillion dollars not by 1.5 trillion, the size of the deficit.

Why did the debt increase by about half a trillion dollars more than the budget deficit? Is there a debt masking by the federal government as well?

The answer is yes. In 1968 President Johnson signed into law a provision which would let the federal government treat Social Security funds as current year revenue. They gave up the age-old principle of measuring revenue by the taxes collected for current expenditures. Every year the federal government receives some money from the public not as tax per se but as payment for future claims.

There are about half a dozen such accounts. The list includes Social Security trust fund, civil service retirement fund, federal supplementary medical insurance trust fund, federal hospital insurance trust fund, unemployment trust fund, military retirement fund, transportation trust funds, employee life insurance and more. Money in these accounts is not tax revenue for current expenditures. These are payments for the future obligations and are meant to be kept as reserve. That is how these funds operated since their inception, and it continued until 1968.

The net effect of the new reporting rule was to reduce (mask) the federal deficit as long as the trust funds were in surplus. In subsequent years, several attempts were made to reverse the procedure and treat Social Security as an off-budget item. 1986 was set as a target year when this reversal would take place. But in that year, the Gramm-Rudman-Hollings rule threatened to cut many programs. So the federal government found an easy escape from Gramm-Rudman-Hollings mandated cuts by using the trust funds surpluses to reduce a deficit. Similar concerns also prevented another attempt to revert to the old system during early 1990s.

With President Johnson’s proclamation, “reported” federal deficits went down. But some people were not happy with that. That is why they refused use it in showing the debt level of the government. As a result, the economic report of the president reports two types of federal debt: one that is held by the public and the other, the gross federal debt. Clearly the latter is larger than the former. To see why the latter is the true measure, ask anyone what is our current national debt. No one will say it is $7.5 trillion, which emerges if we ignore intragovernment debts. Rather, everyone will say that the federal debt now is about $12 trillion or about 83 percent of our GDP.

This masking of federal budget deficit also explains the paradox of how we had federal budget surplus for three years during the time of President Clinton, but our national debt still increased every year. This happened because in each of those so-called surplus years the federal budget would have shown a deficit if the intragovernment debts were not counted as current revenue.

In March of 2010, an unprecedented thing happened. For the first time, Social Security paid more than it collected in revenue. Which means instead of adding to the Social Security trust fund and hence lowering the federal budget deficit, it will actually increase the federal budget deficit. This will make the people in Washington very uncomfortable.

My prediction is that sometime in the future, either by President Obama or by a future president, rules of the game will change again. Instead of including Social Security funds in the current budget, they will propose to treat the funds as off-budget item, the way it was prior to 1968.

Perhaps the practice of debt masking will be clear from the following example. Say my monthly income is $600 and each month I spend $800. I have a monthly deficit of $200. But suppose my brother gives me $250 each month to save for his son’s college education. I use that money to mask my deficit and claim to have a surplus of $50.

Looks great until my nephew goes to college. Then I will have to come up with a huge sum of money to start the payback phase of my life. It appears our federal government has now entered its payback phase.

Ahsan Habib is a professor and chair of the economics department at Adrian College.

Excellent denunciation of anonymous on-line comments

Columnist Leonard Pitts Jr. has once again written a column I have been tempted to write, thus relieving me of the need to do so.

This one is a fervent denunciation of the things people seem to say when they post anonymous on-line comments about published op-ed newspaper columns.

Pitts thinks newspapers should stop allowing people to post anonymously, and I think he has a good idea.

Read his column here.

Sense and nonsense about Social Security

Now that the basic medical legislation has passed, it sounds like new efforts will be made to fix Social Security.

Thanks to the recent meltdown in stocks, it is unlikely that quack panaceas like “privatization” will have much support this time except among diehard conservative fanatics. But reasonable Social Security reforms will be very difficult politically as long as public understanding of the situation is as muddled as is presently the case.

The principal misunderstanding concerns the Social Security Trust Fund, which currently amounts to about 2.5 trillion dollars. The Fund was built up during the last several dozen years because Social Security taxes collected greatly exceeded payments to Social Security beneficiaries.

The stated purpose for building up the Fund was to provide the money needed when Baby Boomers started retiring in larger numbers and the number of taxpaying workers per retiree begins decreasing. This time is now coming.

Many people, however, believe that “there is no money in the Fund” because the U.S. government has borrowed all the money and spent it. This belief reflects basic misunderstandings of how money and banking work.

It is true that the government has borrowed and spent all the money in the Fund, but in return it has placed government bonds for the 2.5 trillion dollars in the Fund, and it pays interest on these bonds. In 2009 it paid the Fund approximately $120 billion dollars in interest, an average rate of 4.86%. The government owes the money it has borrowed from the Fund just as much as it owes money to private individuals and banks that have bought government bonds.

Recent scare articles have claimed that the Trust Fund is already starting to decrease because Social Security payments this year will exceed by $29 billion the amount brought in by Social Security taxes. This is untrue, because the $120 billion in interest coming in will more than take care of the $29 billion shortfall.

However soon enough the time will come when the Fund really begins to be reduced. But why have the Fund at all if this was not going to happen? This will be politically awkward, though, because the government will have to stop financing current operations with the regressive Social Security tax and rely more on the progressive income tax.

Or it can sell more bonds privately to make up the difference, which will not increase the total national debt but simply change its structure----less owed to the Trust Fund, equal amount more owed to other bondholders.

It is true that in several dozen years the Trust Fund will be exhausted, since people are living longer and hence are retired for more years than was assumed when the system was designed. But relatively small increases in the Social Security tax can take care of this problem, and the sooner it is done the smaller those increases will need to be.

[To access some interesting Q & A on the Social Security Trust Fund, click here.]

[This article has run in the Adrian Daily Telegram in Michigan]

As we await Congressional action on health care this afternoon, I read a wonderful letter in the Adrian Daily Telegram (Michigan). It puts the case very neatly that even those of us with good insurance now cannot assume we won't lose it.

I am still not sure whether the current legislation is a good idea. It is beginning to look like we will find out.



Pass health insurance
To the editor,

I have never written a letter to the editor, maybe I was saving up for this one. I love our generous, giving country and all of the generous, giving people who live here. I am proud that we as a nation and as individuals step up and come to the aid of those less fortunate in time of disaster.

As I read Wednesday’s Telegram, I felt disappointed and heartsick. For many in our country, this is their earthquake, tsunami, tornado and hurricane all rolled into one. Approximately 47 million Americans have no or inadequate health care, but many seem not to care. As I read the full-page ad asking Mark Schauer to vote “no” on the health care reform bill, I realized that I know many of the people who are in favor of denying health care to those in need. There was one common denominator among those I know, though I admit that I don’t know all on the list. That common denominator is that they have health care. They all are able to be treated for the serious and the common health issues which face all of us.

The people I know on the list are all very hard workers. They are good people. They deserve everything they have. For those of you who signed the ad, I only wish you the best.

May you always be healthy.

May you never lose your job, thereby losing your health insurance.

May you never lose your health insurance and have a “pre-existing condition” which keeps you from securing subsequent healthcare.

May you never have to choose between medication and food.

May you never have to ignore a lump, an ache or a pain because you can’t afford a visit to the doctor.

May you never have a health emergency which puts you so far in debt you are forced to lose your home.

May your children and grandchildren always be healthy because your health insurance covers the little things which sometimes become big things.

May you take five minutes every day to realize how lucky you are and what you are denying to the less fortunate. If you have positive ideas for providing health care to the approximately 47 million un- or underinsured, please share those ideas with Mark Schauer. I would gladly pay more taxes so that every man, woman and child in our great country would have adequate health care.

Jan Parson
Adrian

Review of Burns' book: Packing the Court

James MacGregor Burns' newest book, Packing the Court: The Rise of Judicial Power and the Coming Crisis of the Supreme Court, will not increase his reputation.

The basic premise of the book is that the Supreme Court invented the power of judicial review out of whole cloth back in 1803, in Marbury v. Madison, without any grounding in the actual Constitution.

It is true that the Constitution does not explicitly grant the courts the power to strike down laws which violate its rules. But it does provide that “This Constitution, and the laws of the United States which shall be made in pursuance thereof . . . shall be the supreme law of the land . . . .” (Article VI.) Note that it only refers to laws which have been made “in pursuance” of the Constitution.

A contemporaneous analysis by Alexander Hamilton, a member of the Constitutional Convention which drafted the present document, can be found in The Federalist Papers, #78:

“The complete independence of the courts of justice is peculiarly essential in a limited Constitution. By a limited Constitution, I understand one which contains certain specified exceptions to the legislative authority; such, for instance, as that it shall pass no bills of attainder, no ex-post-facto laws, and the like. Limitations of this kind can be preserved in practice no other way than through the medium of the courts of justice, whose duty it must be to declare all acts contrary to the manifest tenor of the Constitution void. Without this, all the reservations of particular rights or privileges would amount to nothing.”

The Federalist Papers were written by Madison, Hamilton, and Jay and published under the penname “Publius” in the newspapers of New York, attempting to convince New Yorkers to ratify the proposed new Constitution. They are considered a very authoritative indication of the intentions of those who drafted the Constitution.

The very first Congress elected under the new Constitution proposed what became the Bill of Rights as the first 10 amendments to the new document. They did this to satisfy critics who opposed ratification because the original document did not have a bill of rights. And the very first Amendment, which set the tone for the whole set of amendments, states that “Congress shall make no law ….” doing a whole lot of things.

What possible purpose would have been served by adding this language to the Constitution if the courts were required to enforce anything enacted by Congress no matter how flagrantly it came into conflict with the Bill of Rights?

Judicial review is so firmly established in the clear language and intent of the Constitution and in over two centuries of precedent that Burns is reduced to a desperate recommendation for how to put an end to it. He wants President Obama to defy the Court the next time it makes a decision he doesn’t like and announce (in effect) that “John Roberts has made his decision; now let us see him enforce it.” (My wording, modeled on President Jackson’s famous fight with Chief Justice John Marshall, not Burns’.) The president would say that he would respect judicial review only if its supporters formally amend the Constitution to explicitly provide for it. Of course this would take years to do.

Obama, who knows a lot more about constitutional law than Burns does, is highly unlikely to follow this recommendation. But I am not sure that Burns himself would care for the uses to which his own logic could be put if we elect a right-wing president sometime.

Such a president could, with much more grounding in the language and history of the Constitution than Burns has, proclaim that Roe v. Wade, the original abortion rights decision, did not have a legal leg to stand on. Our right-winger would announce that Roe v. Wade would no longer be enforced unless abortion advocates formally amend the Constitution to explicitly provide for it. Again, this could not be done overnight, if at all.

Burns needs to remember that we need to be cautious when we articulate principles, since they have a way of coming back to haunt us.