The Agenda

David Cay Johnston Has Written an Interesting Post

My sense is that David Cay Johnston thinks that he has made a powerful argument on behalf of public workers and their political allies, but I suspect he has it backwards:

Out of every dollar that funds Wisconsin’ s pension and health insurance plans for state workers, 100 cents comes from the state workers.

How can that be? Because the “contributions” consist of money that employees chose to take as deferred wages – as pensions when they retire – rather than take immediately in cash. The same is true with the health care plan. If this were not so a serious crime would be taking place, the gift of public funds rather than payment for services.

Thus, state workers are not being asked to simply “contribute more” to Wisconsin’ s retirement system (or as the argument goes, “pay their fair share” of retirement costs as do employees in Wisconsin’ s private sector who still have pensions and health insurance). They are being asked to accept a cut in their salaries so that the state of Wisconsin can use the money to fill the hole left by tax cuts and reduced audits of corporations in Wisconsin. 

The labor agreements show that the pension plan money is part of the total negotiated compensation. The key phrase, in those agreements I read (emphasis added), is: “The Employer shall contribute on behalf of the employee.” This shows that this is just divvying up the total compensation package, so much for cash wages, so much for paid vacations, so much for retirement, etc.

Indeed! This is why we should presumably factor in retiree health benefits in assessing total compensation, as well as the guaranteed pension returns rather than the amount state and local governments actually pay into pension funds in any given year. DCJ continues:

The fact is that all of the money going into these plans belongs to the workers because it is part of the compensation of the state workers. The fact is that the state workers negotiate their total compensation, which they then divvy up between cash wages, paid vacations, health insurance and, yes, pensions. Since the Wisconsin government workers collectively bargained for their compensation, all of the compensation they have bargained for is part of their pay and thus only the workers contribute to the pension plan. This is an indisputable fact. 

And so:

One correct way to describe this is that the governor “wants to further reduce the cash wages that state workers currently take home in their paychecks.” Most state workers already divert 5 percent of their cash wages to the pension plan, an official state website shows

Yes, that sounds about right. What at least some of us are arguing is that total compensation for at least some public workers should be reduced while the public sector should have the flexibility to raise compensation for others.

Here is where DCJ goes wrong:

America has roughly the same number of food preparers, who can be high school dropouts, as registered nurses, who require a college education. But the nurses make on average $66,500, compared to just $18,100 for the food service workers. The food service workers collectively made less than $50 billion, while the registered nurses made almost $172 billion in 2009, my analysis of the official data shows.

Business and government hire both food service workers and registered nurses, but you are much more likely to work for the government as a registered nurse than as a food preparation worker.

When you control for the education required to be a prosecutor or nurse, government workers get total compensation that is less than those in the corporate sector. This may reflect the fact that fewer and fewer private sector workers are in unions, about 7 percent at last count. As economic theory predicts, as fewer workers can bargain collectively the overall wage level falls. Effectively wiping out public employee unions would only add to downward pressure on wages, standard economic theory shows.

Biggs’s follow-up analysis to the CWED and EPI studies suggest that DCJ is wrong about the gap, once we take a fuller account of total compensation. Given that EPI failed to account for, to name one example, retiree health benefits, it’s not clear that DCJ made up for this oversight. And why is DCJ using data for wages (follow the link to the official data) to stand in for compensation when the point of his post is that compensation is the relevant factor?

To his great credit, DCJ writes:

On the other hand, unionized state workers run a much smaller risk of going through bouts of joblessness, an economic benefit. Numerous studies indicate that public workers, including those in Wisconsin, make about 5 percent less than private sector workers when you control for education. But what is the lifetime cost, and risk, of episodic joblessness among comparable private sector workers? Is that cost equal to 5 percent or so of lifetime earnings, which would even out the differential? I have yet to read an analysis of that issue by an academic economist, much less a journalist, so I do not know the truth of that question.

We would be much better off if more journalists did acknowledge this divide.

DCJ ends with the argument that defined benefit plans are superior to defined contribution plans:

Traditional or defined benefit pension plans, properly administered, increase economic efficiency, while the newer defined contribution plans have high costs whether done one at a time through Individual Retirement Accounts or in group plans like 401(k)s. 

Efficiency means that more of the money workers contribute to their pensions – – money that could have been taken as cash wages today – – ends up in the pockets of retirees,not securities dealers, trustees and others who administer and invest the money. Compared to defined benefit pension plans, 401(k) plans are vastly more expensive in investing, administration and other costs.

Individually managed accounts like 401(k)s violate a basic tenet of economics – specialization increases economic gains. That is why the average investor makes much less than the market return, studies by Morningstar show.

DCJ seems to think that defined contribution plans are managed by individual workers rather than by large specialized firms, which workers can choose or not choose. And the “properly administered” line seems pretty important.

Overall, if DCJ is telling us that a true accounting of total compensation, including deferred compensation, is the right way to look at public workers, I heartily agree. If he is suggesting that reducing the influence of unions would exert downward pressure on the wages of public workers — that is, it would allow taxpayers to get a better deal — I can’t say it’s obvious that this is bad news for taxpayers. Where he goes wrong is on not making his assumptions regarding the gap between the government and the corporate sector — and incidentally, I wonder if there’s a difference between the corporate and the private sector in his analysis (is he excluding small firms, non-profits, etc.?) — very transparent. He links to a BLS data source that gives us hourly mean wages and annual mean wages, which presumably doesn’t capture deferred compensation.

All in all, a thought-provoking effort by DCJ.

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