Our fiscal paradox: Governments too costly to function

By Michael Gerson
Tuesday, February 22, 2011

In readjusting the size and role of government, there is a natural progression of pain. Cuts tend to begin with the poor and vulnerable, who have limited political clout. There is barely a peep of protest. But it quickly becomes obvious that most public benefits don't go to the poor and vulnerable. They go to people in the broad middle class, who are more prone and prepared to defend their interests. Thus, the Madison showdown.

Along the continuum of pain, states are now touching people who vote, organize and protest. The Great Recession has torn large holes in state budgets, only barely patched by federal stimulus spending. Over the past few years, governors have made cuts in welfare programs, services for the elderly and disabled, legal aid and medical benefits for the poor. It has not been nearly enough. "The cost," says Daniel DiSalvo of the City College of New York, "of public-sector pay and benefits (which in many cases far exceed what comparable workers earn in the private sector), combined with hundreds of billions of dollars in unfunded pension liabilities for retired government workers, are weighing down state and city budgets. And staggering as these burdens seem now, they are actually poised to grow exponentially in the years ahead."

It is the paradox of the state fiscal crisis. The cost of maintaining government structures is making it impossible to maintain government functions. To fund commitments made to the providers of services, services must be cut. So piles of money go to government pensions and benefits instead of roads, education or mental health services. This is one of the primary reasons the public resists tax increases. A tax increase used to provide an actual public service might have a shot at support. But a tax increase to prop up a system that consumes endless resources while cutting services is a harder sell.

Many governors face more than a spending crisis. They preside over failed systems that have discouraged fiscal restraint and sometimes preferred the interests of state employees to the interests of taxpayers. "The most important changes," says John Hood of the John Locke Foundation, "will be structural reforms . . . that eliminate the perverse incentives that got the states into this mess in the first place."

This is the theory of Gov. Scott Walker in Wisconsin. His critics, including President Obama, argue: Spending cuts may be necessary, but let's not take away the collective bargaining rights of public employees on benefits. Walker's supporters counter: Spending cuts are important, but they do not change the system that has turned an upward ratchet on public employee benefits for decades - helping produce more than $1 trillion in unfunded state liabilities across America. The real problem, in this view, is not merely government spending but massive, unsustainable government obligations.

Walker does not have an easy political case to make. There is a natural and appropriate sympathy for teachers and other public servants. But precisely because many public employees provide essential services, they can have disproportionate leverage in collective bargaining. "A strike of public employees," said President Franklin Roosevelt, "manifests nothing less than an intent on their part to prevent or obstruct the operations of government until their demands are satisfied. Such action looking toward the paralysis of government by those who have sworn to support it is unthinkable and intolerable." In addition, public employee unions have the unique power to help pick pliant negotiating partners - by using compulsory dues to elect friendly politicians. This influence has been used to protect public employees from the hard realities of the current labor market, which has increased public resentment. In this environment, a closer alignment of public and private benefits is reasonable.

The outcome of the Wisconsin struggle will be a signal to other states. But events in Madison are also a preview of the federal debt debate. On the continuum of pain, Obama has targeted home heating oil subsidies for the poor and Teach for America. House Republicans' reductions have been broader but included foreign aid and low-income housing. Few protesters have emerged to scream and chant. But these cuts are distractions from the problem of unsustainable entitlement obligations to the middle class and the wealthy, which threaten to eventually consume the other functions of the federal government. Structural change is required - reforming benefits to reduce costs while focusing benefits on those in the greatest need.

If this happens, as it must, the protests may move from Madison to the Mall.

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