Public unions and public choice

About a week ago, I did a bad job trying to call some friends’ attention to some of the public choice problems that arise in public sector compensation. (They got mad at me.) A glutton for punishment, let me take another stab at it.

Imagine you want to sell your house. You put it on the market and, in short order, a nicely dressed buyer — let’s call him Sam — comes knocking. Your price is $90,000, but Sam makes you a counteroffer. “I’ll pay you $100,00,” he says, “as long as you are willing to take the money in installments.” He’ll pay you $10,000 every year for ten years, starting today. He seems like a trustworthy fellow and has the first payment of $10,000 on hand, so you take him up on his offer.

Unfortunately, over time, problems come up. In year five, Sam begins to have trouble making his payments. “It’s not that I don’t want to pay you,” he says, “I honestly don’t have the money in my bank account.” You ask a friend who runs the local bank if Sam is telling the truth and find out that he is — it seems Sam has been making promises he can’t keep all around town. You talk to a friend who is a psychiatrist and learn something else interesting. It seems that Sam has a rare mental disorder known as “temporal non-contiguity.” You see, Sam doesn’t see himself as a consistent person. In his twisted mind, his present self is at war with his future self. His present self is always trying to pass the buck on to his future self, never addressing today what he can put off until tomorrow.

Sam isn’t a bad person. Just ill. You even have some sympathy for him, despite his bilking you. But you’ll certainly be more careful in future negotiations with him, now that you know his nature. You still might strike a deal, but you’ll want to see payment up front.

Now think about the negotiation between public sector employees and the government. Sam is like Uncle Sam. Politicians have things they need and want, but some problems making commitments because the people in office today will not be in office tomorrow. In many respects, government has every incentive to kick the can down the road a few years if it solves a current problem. Some other dynamics make the situation even worse. For instance, unionization makes public sector employees sort of like a monopoly. (Think: Sam is homeless and you have the only house in town for sale.) For another, there are often strong political ties between unions and officeholders — union support is often necessary to get elected. (Think: while you and Sam are negotiating, you have a gun to his head.) Both of these factors are going to increase Sam’s proclivity to make promises he can’t keep.

Now step to New Jersey and see if this metaphor holds up. In a recent, very good NY Times profile, we learn the following:

• There is about a $1 trillion gap between what the states owe their workers and what they can pay. That’s a *lot* — more than 25% the annual federal budget.
• For precisely 17 of the last 17 years, (Republican governors; Democratic governors; you name it,) NJ failed to meet its obligatory payment to the state pension fund.
• The pension fund assumes an 8.25% annual rate of return. If a private investor got an average 8.25% return, he’d be very happy. The real average for the last ten years has been 2.6%.
• The state has set aside zero dollars to cover $3 billion in liabilities for health care premiums.

All smell like symptoms of temporal non-contiguity disorder.

The profile calls our attention to another vexing part of the problem. Consider this quote:

Leaders of the teachers’ union, meanwhile, are apoplectic about Christie’s proposed changes to their pension plan, which they say will penalize educators for the irresponsibility of politicians. After all, they point out, it wasn’t the unions who chose not to fund the pension year in and year out, and yet it’s their members who will have to recalibrate their retirements if the benefits are cut.

Yup! This is like saying it’s not fair for the teachers to bear the cost of Sam’s disorder. True enough. The problem is that Sam has been making promises he can’t keep all around town and one way or another, someone is going to feel some pain. For instance, I hear Sam also committed to make annual contributions to a hospital that helps adults and children with disabilities. The harsh question — one for which I do not have an answer — is, who is going to pay for Sam’s improvidence?

This brings me to why I think it is problematic to think of unions bargaining as a rights issue. At some future time, I’ll write about what I think are the problematic psychological roots of such moral language. But for now, I’ll just point out that, if collective bargaining is a right, there are probably others at play here. Do taxpayers have a right not to pay public sector employees more than they (the employees), as individuals, are willing to accept to do a job? (There are some zealots who would say that to do so is equivalent to making the taxpayer work for free.) Do the current and future beneficiaries of public programs such as the one linked above have a right to those funds? (Keep in mind that *something* has to give.)

A more pragmatic approach, in my humble opinion, is to think about the incentives at play and ask, “How are we going to structure things to help Sam with his problem?” Because Sam’s problem, unfortunately, is really our own.

Postscript

Notice that nothing above turns on an analysis of whether public workers are overcompensated relative to comparable private sector workers. My guess is that they are, but this appears to be a very muddy issue.

For more on this issue, an excellent analysis from National Affairs.