Monday, May 16, 2011

Some Observations on the budget problem

Everyone is pointing the finger at everyone else these days concerning budget cuts.  Republicans often want to just cut everything in sight (other than defense of course).  I am generally a guy who believes that Government does a lot of good things, but Republican notions are getting a lot of traction because of Democrats lack of desire to start addressing some serious problems with the way we have allowed Government to be infected by private sector thinking over the decades.


Here are a couple observations after some quick online searches.


When legislators directly accountable to voters set pay:
The Chairman of the Joint Chiefs of Staff probably makes somewhere between $230,000 and $250,000 a year - its difficult to tell exactly because military pay structures follow a formula that is very complex.
The President of the United States makes $400,000 a year.


Yet - In California (for example) where State employees or Commissions unaccountable to voters usually set pay:


The President of the University of California made $591,000 a year in 2010.


About 10 State Employees in the Dept of Corrections made over $500,000 a year in 2010 - twice as much as the Chairman of the Joint Chiefs of Staff.


399 State employees made more than $400,000 a year in 2010 - more than the President of the United States.


The employee salary boards and commissions unaccountable to the voters have two big problems:
1.  Their primary comparison is with equivalent private sector salaries, yet the market mechanism that control the private sector are absent in the public sector.  
2.  The Boards and Commissions are mostly comprised of ambitious people who are setting precedents they think might apply to them at some point.


The justification for rapidly escalating salaries is that paying the most insures you get the best people.  In my experience the notion high pay produces the best public servants is hogwash.  When you use that as the criteria what you get is the people who are most interested in making money for themselves crowding out the applicants who are more interested in public service than building a resume.  


Think of the University of California as an example.  It was, 30 or 40 years ago, a model of an affordable State University.  Over the last couple decades the increase in tuition and fees associated with going to college has consistently run far above inflation, to the point that now many students cannot afford to attend without taking on an enormous debt burden.   Even with the tuition increases 31% of the new students at UC Berkeley will not be from California.  They will be from out of the State or out of the Country because the University needs the much higher tuition paid by out of state students.  


Sure the University has suffered major budget cuts over the course of nearly a decade.  But for decades what gets cut consistently seems to be on the the public services side of the equation.  


I am seeing a perfect example of the way it works here in Berkeley where I live.  The adult school ESL program is figuring out how to deal with major funding cuts.  A close friend who teaches at the adult school was concerned about what sounded like major program cuts that would undermine the mission of the program.  She attended a meeting to discuss the budget cuts.  She was astounded to learn that the administrators had requested the teachers union come up with a plan for teachers to make major changes in the way the program was run (and as the teachers are mostly hourly employee's - cuts in their compensation).  But no similar request was made to the administrators union, the clerical union or the custodial union.  In other words, only the actual teaching services were being asked to figure out how to do it cheaper.  In response to a question, the administrators at one point said simply no cuts were being considered for administrative staff.   As one speaker drolly observed, they may not have any money for classes for students on Fridays, but the administrators, clerical people and janitor's would all still be working.


If money buys competence how did the United States Military become the most professional and competent military in the world?  They have managed to achieve that distinction with pay schedules that pay people peanuts compared to private sector salary's.  The Chairman of the Joint Chiefs of Staff, a position one would think is certainly as challenging as any job in the world, makes less than hundreds, or thousands of other government employee's, and less than 1/2 of what many California Prison Officials or University administrators make.


We need pay schedules for all government employee's that divorce government salaries from comparison with the private sector so the people who want to be public servants can serve the public and the people who love money will take their ambitions into the private sector. 



Friday, May 13, 2011

Public Sector / Private Sector Firewall needed

One of the reasons we are in the financial mess we are in is that we have continuously grafted policies that work in the private sector onto the public sector, despite the fact the two sectors are fundamentally different.


The private sector harnesses our selfish instincts to generate economic growth and development.  Those selfish instincts are controlled by the market - if we get overly selfish, people don't buy our product or service, or someone else starts offering it a a lower price.  The private sector thrives on people who are motivated primarily by selfish interests, money, power, status.


The purpose of the public sector is to provide a stable environment in which the private sector can operate.  The public sector thrives when it relies on people who find reward in public service, who don't need a new car to impress their neighbors, or three vacation homes.


When we adopt concepts that work in the private sector as public sector solutions we end up with big problems.


In the housing sector Fannie Mae and Freddie Mac have cost taxpayers billions and played a major part in the 2008 financial meltdown.  It didn't have to be that way.  California ran a home loan program for veterans for years that worked well and cost the taxpayers little.  It was entirely a government program.  But when Congress created Fannie Mae and Freddie Mac instead of going with a purely government program it made it a public/private partnership.  So instead of providing stability when the private banking sector blew itself up with greed, Fannie Mae and Freddie Mac aggravated the problems.


A big part of the current financial problem for government at all levels is the unsustainable levels of pay and benefits for public employee's.  Public employee's have used private sector salaries to argue they should be paid the same amount as a similar position in the private sector.   But public employee salaries and benefits are not subject to the same controls as private sector salaries and benefits.  


In the private sector the employee is bargaining with a company that lives and dies by their bottom line.  Salaries are coming out of the pockets of the owners of the company in a very direct way.  Measuring success by the bottom line is relatively easy - if someone doesn't pull their weight it is relatively easy to spot.   So private sector salary ranges tend to be really broad - the most productive make lots more money than the less productive.   And if the private company really gets in over their head they can turn to bankruptcy court and get labor agreements set aside.


In the public sector the employee is bargaining with other public employee's, whose own salaries are probably going to be influenced by the decisions they make.  The deep pockets providing the money, taxpayers, are so far removed from the process they are virtually a non-factor.  The balance of motivations have proven to consistently align with continually increasing salary and benefits, with little understanding of the long term consequences.  That is aggravated by the fact there is no bottom line in the public sector.  Measuring productivity in public jobs is fiendishly difficult.  It makes no sense to import the broad salary ranges of the private sector into the public sector.  It is supposed to be about public service, not making money.


Public policy should build a firewall to prevent adopting policies that work in the private sector from being grafted onto the public sector.  Government should take salary bargaining out of the hands of other employees in the agency by developing salary ranges applicable to public sector salaries and benefits that are explicitly tied to the average private sector salary and benefits.  The salary ranges should not try to match specific private sector salaries for similar jobs and should contain limitations on maximum salary as a percentage of the average private sector earnings.  If you want to make lots of money as a bureaucrat, or a chemist, or a lawyer or whatever, go to the private sector.  Public service should be for those motivated by helping people, not by those for whom more money is a significant motivation.

Sunday, May 1, 2011

Fuzzy DOMA thinking

A columnist with the San Francisco Chronicle, Debra J. Saunders, in the Sunday May 1, 2011 editorial section, wrote a column titled "Intolerant left strikes again".   The column concerned her complaints about a Washington law firm's decision to pull out of representating those defending the Defense of Marriage Act (DOMA).


The thrust of her argument seemed to be that regardless of their personal feelings, the lawyers had some obligation to defend the act, or that someone should have an obligation to defend the act regardless of their personal feelings.


The column is textbook fuzzy thinking.  We do have a tradition (enforced by sanctions through licensing agencies) in this country of requiring lawyers to defend all persons who need representation.  The reason for this tradition is because we see it as an important democratic value to protect people from the unbridled power of the state. 


It stands the reason for the rule on its head and is an offense to freedom and democracy to suggest anyone has an obligation to defend a law enacted by government that they do not believe is wise or valid.  


If Ms. Saunders, or anyone else, thinks DOMA is worth protecting they are free to seek representation willing to represent their views.    If they cherish "freedom" they should realize they have no grounds to criticize those who chose not to defend the law.

In a way the title of her column inadvertently encapsulates the irony of modern politics.  Democrats are proud of being intolerant of intolerance while the mainstream of the Republican party has moved into the odd position of being proud of being tolerant of intolerance, but are intolerant of almost anything that smacks of actual tolerance.

Monday, March 14, 2011

Why Unions exist

Wisconsin's recent vote to remove collective bargaining rights from State workers presents a classic example of ideologically driven politics moving society backwards instead of forwards.  Unions were a response to basic, undesirable characteristics of large enterprises.  Unions are an imperfect solution to the problems of large enterprises, but instead of trying to perfect the existing solution, or proposing an alternative solution, Wisconsin, full of righteous ideological indignation simply turned back time so they can now experience the tedious process of learning why we need to control big enterprises all over again.


Here is a simple truth.  In terms of efficiency in any enterprise, if the enterprise goal is the only purpose we consider, slavery (using the labor and efforts of powerless people) produces the greatest achievement at the lowest cost.  


In business slaves (or very low wage workers) can produce the cheapest goods.  Slavery existed in the South for so many years because in a totally unfettered free market it was a highly profitable way to produce and export cotton.


In Government, the more tasks can be done by slaves, the more benefits the government can provide to the Governor's at the lowest cost.  Think Libya or any other African dictatorship.  


Here is a second simple truth.  In any enterprise the managers, at any level of  management, are going to look out for themselves first.  


They will protect their compensation.  Top level management, when difficult financial times hit, are going to protect their own position, and seek to save money at the expense of the people with the least power and influence.   The Governor of Wisconsin makes about $137,000 a year plus I suspect very generous benefits.  He asked for State employees to take a cut in pay, and pay more for benefits, which they have agreed to.  Yet I never heard anything to suggest the Governor thinks he and other bigwigs in the state should also tighten their belts in these hard times. 


Management will seek to protect and enhance their power.  Ambitious managers at all levels of an enterprise are often going to seek to consolidate their power, eliminate rivals, and get as much work out of their subordinates as possible in their quest for advancement with little regard to long term productivity or employee morale.  The statement "Power corrupts, absolute power corrupts absolutely" is so often quoted because history has demonstrated it's truth.  Unions provide a reality check on managements exercise of power. 


If all people were capable getting beyond their own selfish interests, we wouldn't need unions.  Management would balance their personal goals and the goals of the enterprise against the legitimate goals and needs of the less powerful people in the enterprise.  But that is not reality.   Selfish people thrive in big complex organizations, in business or in Government.  Unions were created because people without power need to band together to protect themselves in a situation where management is under few constraints on their conduct. .


Unions are far from a perfect solution, particularly with Government enterprises.  In private enterprise the owners have a direct stake in negotiations with unions as they battle over splitting the profits, so bottom line profitability provides a yardstick for measuring success.  In government no such yardstick exists.  The government negotiators are paid employees whose wages are unaffected by the outcome of the negotiation, and whose job security may be enhanced more by taking good care of the unions than by protecting taxpayers.   Providing some kind of yardstick to measure public salaries against private salaries would be a big improvement over the current system that gives the least power to the taxpayers who support public enterprises.


But the Governor of Wisconsin doesn't seem interested in a system that balances power.  He wants to deprive the Unions of power.  Certainly that will protect the taxpayers, but at the expense of empowering the selfish and petty tyrants that sometimes people big enterprises and history suggests in the long term Wisconsin will have a less efficient and productive government and a poorer state.

Thursday, March 10, 2011

The Politics of the National Debt

One of the most ironic aspects of politics of the last couple decades is how politicians whose policies are responsible for big increases in the national debt often then turn around and use the national debt as an issue to get re-elected. 


I like to approach policy issues in a non-partisan manner but it is hard on this issue.  In my lifetime consistently when Republicans run the show for awhile the National debt skyrockets, then a few years later they create a big stink about the National Debt to get reelected.  In the 1980's it was the Reagan administrations supply side economics that caused the National debt to climb rapidly.  Then, immediately after Bill Clinton and the democrats got elected in 1992 the Republicans seized on the issue to grab control of the House in 1994.  Six years later, at the end of the Clinton administration our budget was balanced and then George Bush Jr. arrived to inflate the debt again with his version of supply side - tax cuts and spend. No need to mention the state of the the economy and the debt in 2008 when Mr. Bush walked out of the White House for the last time.  Of course almost immediately Republicans started beating on the debt as an issue and have now grabbed control of the House again.


It is aggravating to have to listen to people like the Tea Party, folks that you know were fervent supporters of Reagan and both Bushes, haranguing others about the National debt. 


For those who are interested there are some very interesting, and even perhaps entertaining charts and graphs about the National debt out there.  Try this at wikipedia http://en.wikipedia.org/wiki/National_debt_by_U.S._presidential_terms

Or just do a search for National Debt and Presidents by parties.  Lots of good charts  What you will find is that since 1946 there is a 2 to 1 ratio of debt increase - the National debt goes up twice as much during Republican administrations as it does during democratic administrations.  The only way to make it even reasonably close is to start from 1940 so the entire increase attributable to  WW II (the single biggest increase in our National debt in history) lands in the Democrats column (FDR and Truman).  Start at 1946 and go forward and the 2 to 1 ratio holds up through 2009.


Not something Rush Limbaugh, Glenn Beck or Fox news is ever going to mention.  Probably not something they are even capable of hearing.  They believe in ideology and have no time for facts that don't fit their ideology.  So pass this on.  Suggest that folks interested in the debt do a little research on who actually causes the debt to increase.  Help people build up their immunity to political BS.

Friday, February 25, 2011

How to regulate the financial industry?

Historically the path Congress has chosen for regulating the financial industry has been based on creating a Government agency to set rules and make sure the industry obeys the rules.  History also demonstrates this method works for awhile, but eventually either the industry finds ways around the rules, or we the public (and our representatives) forget why the rules were created and allow special interests to water them down, or eliminate them.


Part of the problem is the rules are aimed at corporations.  People with money put their money in corporations because government created a special rule for corporations 150 years ago or so.  If you put your money in a corporation you are protected from losing any more than what you put in, so you are willing to take more risks.  Historically that has usually been a good thing.  The possibility of losing their investment is enough to make investors strike a balance between risk/reward and disaster/loss.   


But financial corporations have become so large, and markets so efficient, that this balance has repeatedly failed to prevent disaster.  The ownership of big financial corporations is so diversified the investors lose touch, and influence.  If you don't like the company you sell and move on.  As a result management now effectively controls the corporation.  The diverse and uninvolved ownership base cares only about how much money you make right now, and are willing to pay buckets of money to management who produce.  If management does not have an ownership interest in the company, the disaster/loss side of the equation is minimized, the risk/reward part of the equation is emphasized.


Sure some CEO's lost their jobs after the 2008 meltdown.  But they just lost a paycheck, they walked away with millions of dollars in pay and bonuses they realized from the excessive risks they were taking.  


I think regulation that will work for the financial section should focus on management, not on the company.  Set up a carrot and stick approach that aligns managements interest with the long term stability and health of the company instead of the short term profits.  Here is an idea:


Require management compensation that exceeds a certain threshold to be taken in corporate stock, and require that the stock be held in trust, with the corporation as the beneficiary, for some set number of years before it could be sold.  Management could spend any dividends that accumulate in the trust after the dividend was paid, but the principal would be held in trust and subject to return to the corporation in the event of financial disaster.


This would insure that management was a stakeholder in the long term health of the company, not a hired gun out to make as much money as possible before their good gig blows up in their face.  Make it in managements interest to focus on long term profitability and stability as much as risk/reward. 


This could be done with tax policy by setting very high marginal rates on compensation taken in cash over some threshold, or alternatively by creating an exception to the limited liability rules applicable to corporations which would require excess management compensation be placed in trust as an asset that could be reached by creditors.


Of course I am not betting anything other than business as usual will happen, but I can dream,  and I can warn the younger generation to be on the alert for the next big economic blow up as financial regulation predictably fails down the road.  



Wednesday, February 23, 2011

Questions for supporters and opponents of Public Employee Unions

Questions for the Governor's proposing to strip Unions of any power.  Do you remember why Unions were formed in the first place?  Does the phrase "power corrupts, absolute power corrupts absolutely" seem pertinent?  Or are government bureaucrats perfect people incapable of being selfish, inconsiderate, petty, petulant, conniving or tyrannical?

Questions for supporters of the Unions.  What do you say to the fact that the average public employee makes more money than the average private sector worker, has better working conditions and job security and receives way more benefits?

Surely there is room for some compromise that protects workers but also keeps public employee compensation on a par with the private sector that pays their wages.