Thursday, April 8, 2010

A simple Irish solution to cutting deficits

Alex Pollock, writing in yesterday's WSJ, has a neat solution to cutting state, local, and federal government deficits. Cut government salaries. As Glen Reynolds notes, "if government workers know that proliferating deficits threaten their salaries, you turn them into a lobby for responsible spending." And as Mark Perry noted last month, this isn't a very draconian solution, since public sector workers already make a lot more than their private sector counterparts: "Total compensation costs for state and local government workers averaged $39.60 per hour worked in December 2009 (including benefits of $13.50 per hour), which was 44.5% higher than compensation for private industry workers."

Having had a long run of high growth and success, Ireland has now had a severe bust, the deflation of a housing bubble, and a financial crisis. Plus, its government is running big deficits. Sound familiar?

In response, the current Irish government budget takes these steps (translating from euros to dollars and rounding):

• Government employees' salaries up to $40,000 will be reduced by 5%.

• The next $54,000 of salary will be reduced by 7.5%.

• The next $74,000 of salary will be reduced by 10%.

When these tranches are added together, this gets you up to salaries of $168,000. Government salaries over this amount may be subject to marginal reductions of as much as 15%.

This looks like a very sensible plan for nonmilitary government employees.

Ireland has already worked out the plan. All the U.S. has to do is implement it.

12 comments:

John said...

Boy o boy. Good luck with that.

Benjamin said...

The other bomb is publis sector pensions.

The aura built up around public safety employees is invincible. Pensions, and fat ones, after 20 or 25 years of service is the norm. Often, obligations to younger surviving spouses can extend decades and decades into the horizon.

U.S. military also can take lifelong pensions after 20 years. A guy can be 38, full of vim and vigor, and taxpayers have to pay him one-half pay of his recent grade for the next what--40 years? 50 years? Plus medical (VA).

We are bankrupting ourselves.

I think the federal government should be pared to 16-17 percent of GDP and told if they can't do it for that price, we are looking a serious alternatives.

randy said...

Wow, what an elegant solution in it's simplicity. The corollary with health care and any other government benefits, if there is no sharing of the burden, even if at a small level, then there is no incentive to participate in controlling costs. Simply, every one should pay some taxes - everyone.

Since you mentioned Mark Perry twice in one day, I wanted to explore the background of the American Enterprise Institute. I frequently look up the histories of publishers, and as an aside, it is stunning how much influence the jewish community has. Anyway, it was interesting to read about publisher Arthur Brooks (Catholic btw), and how his original liberal leanings were nudged aside as a result of his own research into social issues for his books.

"These are not the sort of conclusions I ever thought I would reach when I started looking at charitable giving in graduate school, 10 years ago. I have to admit I probably would have hated what I have to say in this book."

Randy

Scott Grannis said...

I am convinced that the more a person looks at how markets and economies work, and how politics can interfere with things, the more likely he or she is to become an economic conservative.

Benjamin said...

I refer the phrase "classic economist."

People in the USA who say there are "economic conservatives" are prone to overlook government excesses that are allied with political conservatives.

I say a subsidy is a subsidy, a pension is a pension (military or civilian or public safety), a deficit dollar is a deficit dollar.

And Milton Friedman thought 1) militaries of the world are parasites, and 2) if you fund a military it should be through the least destructive tax possible, the progressive consumption tax.

BTW, people who truly understand classic economics know that free market fail when it comes to poluution.

Oddly enough, people who pollute public air and water are practicing communism--they are pushing part of the cost of production (the pollution) onto the population as a whole, without compensation. The price signal does not capture this cost.

Adam Smith's work is absolutely brilliant, but of course, who wrote it before the age of dangerous man-made carcinogens and widescale pollution.

I have never heard an American economic conservative properly articulate the free market failure that occurs, when it comes to pollution.

Very, very few political conservatives are willing to grasp these concepts.

I won't even mention the homeowner's mortgage tax deduction or the USDA.

I think there must be about, oh, 23 or 45 true economic conservatives, or what I call "classic economists," in the entire country. We won't swing any elections, that is for sure.

Jeff said...

Our country has way to many people now dependent on the government (i.e. us the folks who are paying taxes - there are only about 52% of us left....soon will be 50% or below) to ever be able to make cuts such as these. The more of an entitlement/hand out society we become, the worse it continues to get. Uggh...just amazing what our President is leading us towards..he couldn't be happier.

Paul said...

"I have never heard an American economic conservative properly articulate the free market failure that occurs, when it comes to pollution."

Not surprising.


"I think there must be about, oh, 23 or 45 true economic conservatives, or what I call "classic economists," in the entire country. We won't swing any elections, that is for sure.

Loved the "we" coming from a guy who advocates single-payer healthcare, wants to raise taxes on the rich, and, of course, voted for Barack Obama.

Benji the True Economic Conservative!!

Paul said...

Great post, Scott.

Government unions should be outlawed, and pay should be on a military scale. There's no reason why some chair moistener should be making more than an 11 Bravo off fighting the Taliban.

Benjamin said...

Paul-

But please, no more military-style pensions. A guy can work at a stateside supply depot for 20 years, and retire. Let's say at age 40. Very likely, we end paying his pension for 40 years--two years for every one in service. Plus VA benefits. plus spousal benefits--could extend the benefit more decades into the future.

I know of no private sector company that offers pensions and health benefits like this to retain talented employees. If they diid, they would be run out of business by more-lean operations. Crushed.

I suspect every federal agency could take a 50 percent whack.

Paul said...

Depends on the MOS and the ribbons on their chest. A pogue, a REMF, doesn't deserve the same benefits as a dangerous specialty.

Scott Grannis said...

Paul: love the chair moistener story. It's outrageous. I'm sure most civil servants are hard working and well-intentioned, but even they should cringe at such stories.

Paul said...

Scott,

I think that story drives home the fantasy world the public sector lives in. That guy's supervisor thought an effective punishment would be...don't give him any work and make him stay home. No thought about firing him, because public employees are almost impossible to get rid of, and no apparent concern for the taxpayers getting ripped off. The mind reels...