Wednesday, January 6, 2010

The problem with state and local budgets

There's been a lot of hand-wringing and angst over the deteriorating finances of many of our state and local governments. Commonly discussed solutions include budget cuts, tax increases or another "stimulus" package giving federal aid to states. What's missing is more discussion of why state and local budgets are in trouble. The recession has caused tax revenues to drop, of course, but spending and state and local payrolls just keep going up. The chart that follows shows how government employment is much more stable (and ever-rising) than private sector employment. The chart above, which comes from the Cato Institute, shows that state and local compensation policies are another major source of out-of-control spending; state and local employees on average make about 45% more than their private sector counterparts. Job security and fabulous pay and benefits, courtesy of taxpayers.


W.E. Heasley said...

The entire state government debt problem was predicted and published in an article in 2001 by The Economist: Red Ink Rising.

Red Ink Rising was later changed to: America's states go into the red. Link below.

Benjamin said...

While share concerns about the size of the public sector, I am not sure that firing lots of public sector workers in the depths of a recession is a good idea.
They are a counter-cyclical force.

Scott Grannis said...

As Milton Friedman said, it's not the deficit that matters, it's the level of spending. Government workers are far less efficient than private sector workers. The economy would be much better off if we could reduce the numbers of public sector workers. Simply privatizing some government functions would do wonders to improve efficiency and overall living standards.

alstry said...


If tax revenues are decreasing, especially sales taxes which are a coincident indicator, wouldn't that support that conditions are contracting on the margin?

I agree with the point, if the revenues are not there, niether should the salaries. It seems unconscionable that public sector employees get disproportionately higher pay than private sector counterparts.

Scott Grannis said...

what is the second derivative of sales taxes? that is the important change on the margin

RSC said...

There's no need to cut state and local jobs just reduce the pay the job reductions will naturally follow. If not the objective reducing costs is still achieved.
The egregious benefits must also be significantly reduced.

Cabodog said...

Without the ability to purge employees during recessions, government never gets the chance to clean-house of inept workers like the private sector does.

Goverment emerges from the recession in the same bloated manner it entered the recession, while the private sector emerges lean and with the cream of employees retained.

Public employee unions at their finest in defeating Darwin.

Benjamin said...

Public pensions have gotten way out of hand, although they do result in huge pools of investable capital.

One oddity: Public pensions for say, California public employees do result in huge pools of capital (CalPers, now $200 billion+) If I recall correctly, Grannis' former employer used to run money for LACERSA.

Pensions for federal workers, such as US military, do not. Soldiers can retire after 20 years, and get half pay. Roughly, a $1 million pension and liability.

It might be wise to require that federal employees and soldiers pay into pools and provide their own pensions. This would also create more pools of investable capital, and decrease taxpayer burdens.

j said...

See website , covers public pension crisis in Calif.