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When Workforces Collide (Post, Mar. 5, 2003)
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The U.S. Economy
With Steven Pearlstein
Washington Post Financial Staff Writer

Wednesday, Mar. 5, 2003; 11 a.m. ET

The uncertainty surrounding a looming war with Iraq and mixed readings on the state of the economy has shaken the confidence of Americans. U.S. consumer confidence plunged to a nine-year low in February, reflecting the widespread anxiety. The proposed Bush tax plan, intended to give the economy a boost, has not done much to quell those worries. Instead, the proposal has stirred mixed feelings including lukewarm support from the Federal Reserve Chairman Alan Greenspan.

So, where does the economy stand? Despite a rise in personal income, consumer spending, which makes up two-thirds of the economy, has begun to ease. Housing prices continue to outpace inflation but at a slower rate. GDP, a barometer of the overall health of the economy, was upgraded to 1.4 percent for the fourth-quarter of 2002, double the original 0.7 percent that was previously reported, still not a stellar performance.

Join Post financial staff writer Steven Pearlstein online Wednesday, Mar. 5 at 11 a.m. ET to take a closer look at the nation’s economy and what lies ahead.

Below is the transcript.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.


Steven Pearlstein: So, just because I've been a writer and editor at the Post for 15 years doesn't mean I can't be nervous about the first day of a new column. Am anxious to get notices from the only reviewers who count, the readers. Fire away.

Washington, D.C.: Having covered businesses, and working for one yourself, do you think private sector bureaucracy is really more efficient than public sector bureaucracy? Do government workers get a bad rap merely because government operations are so much more open to scrutiny than most businesses are?

Steven Pearlstein: In addition to being a reporter covering business and owning my own for a brief time, I also worked on Capitol Hill for a couple of years. Through all those experiences, I can't draw any broad conclusions about the efficiency of government versus business. As you and other writers this morning point out, there are good and bad examples of both. I'd say that its unreasonable to expect government workers to perform as efficiently as private workers when they and their managers are hamstrung in all sorts of ways, from inflexibile and bureaucratic civil service rules to inflexible and nonsensical pay scales to all the little rigidities and blindspots that go with government (lack of consistent, predictable training programs, budget hassles, etc.). In places like Social Security, the studies show government workers can be every bit as productive in processing claims, for example, as private insurers. And then there are all sorts of government functions where cost and efficiency are not the only criteria. In short, I guess I do think government workers get a bad rap but I blame their employees unions in some small part for preventing reasonable steps to allow government workers to be as good as they can be.

Columbia, Md.: Do you think the corruption scandals we had lately have a big impact on the economy or they are just one "small" factor.
As an investor corruption is my biggest worry because I can not trust the companies I am investing in, also I lost trust in stock brokers and analyst.


Steven Pearlstein: General distrust of Wall Street and their corporate bretheren is a big factor in retreat of individual investors in the stock market. Obviously, if there had been corruption and stocks were still trading at an all time high, the impact would not have been so great. But the decline, plus the fact that many see corruption as a cause of the decline in prices, has been a real blow to market confidence among individual investors. Many now think it a rigged game.

Washington, D.C.: Hello,
How do you think a war with Iraq will affect the U.S. economy? The automakers have already said that they are going to cut production for the second-quarter, will other industries follow suit?

Steven Pearlstein: The channels through which war with Iraq can affect the economy are three, as I see it. One, if it keeps oil prices above $30 a barrel for a long time, it is a real short term depressant on economic growth. Two, the war could affect the flow of investment capital around the world, to the detriment of both developing countries and the U.S. The dollar could fall and money could flow from riskier stocks to safer government bonds, with implications for the stock market. None of that would be particularly helpful. Third, it is likely to make the federal budget deficit worse, which could provide soom oomph to the ecoomy in the short term but turn negative after a year.

Bethesda, Md.: First, I must commend you on "Cutting to the Chase" in your first foray into the abyss of the federal bureaucracy. As someone who has worked in government and as a contractor and also having been involved in "government marketing", I am both appalled and ashamed that the level of waste, fraud and abuse is what it is and that I've spent a lifetime ranting against it and exploiting it. Have you ever thought that this degree of insidious, entrenched, pervasive, ongoing government system of favoritism and special privelege (as exemplified in the Civil Service System) can be the undoing of America in the long run?

Steven Pearlstein: I wouldn't quite go that far. Have you ever experienced the Italian civil service? My own fantasy is that we move toward a slightly smaller but much more elite civil service that is widely respected by people who interact with it, taxpayers, and political appointees who nurture and cherish it. That would take a president and cabinet who spend some personal time and capital on the issue and begin to rely on civil servants more for policy making and implementation, rather than holing up with each other and treating the civil servants like the enemy.

Arlington, Va.: Thank you for pointing out in your column today that the administration's plan is NOT to privatize 850,000 federal employee jobs as their union is claiming. The administration is merely trying to increase efficiency and save taxpayer dollars by infusing competition into the process. federal employees have the opportunity to win these competitions - it is not guaranteed that this work will be doled out to the private sector.

washingtonpost.com: When Workforces Collide (Post, Mar. 5, 2003)

Steven Pearlstein: I don't know the details of this well enough but one thing that would be important is that when federal workers are asked to compete, they have access to some of the same tools that the private sector does in preparing their bids, like management time and expertise (including that contracted from the outside!). But you're right, its not a foregone conclusion that all or even most of this work will be outsourced, nor should it be.

Oakton, Va.: In your column today on privatizing federal jobs you say civil service is "so bad that NASA had to outsource the management of the shuttle program because it couldn't do it efficiently and effectively in-house."

That seems like a bad example at the moment, since reports in your paper suggest that the privatization of many NASA activities under a huge $12B contract to a Lockheed-Boeing partnership contributed to growing safety problems in the shuttle program.

If privatization and competition work so well, how come Congress rushed so quickly to federalize airport security after 9/11?

washingtonpost.com: When Workforces Collide (Post, Mar. 5, 2003)

Steven Pearlstein: I want to be careful about the NASA thing: I don't want to even hint at the fact that somehow outsourcing was the cause of the recent shuttle disaster. But it does strike me as important that NASA had to hire two large government contractors to do the work of essentially managing a large team of government contractors, including some of their own divisions. Was this done because there is something about this work that is inherently private sector in nature? Or was it done because the government was so dysfunctional in this area that the private sector option won by default? If the latter, then we better best fix the fundamental problem.
As for airport security, it seems clear to me that the public had negative feelings about the old model of the rent-a-cops hired by the airports and airlines. Perhaps private contractors could have upgraded to meet higher federal standards if given a chance. But in the game of security, perceptions were important and the voters clearly wanted "feds" protecting them rather than private firms with whom they had previously had bad experience. The private contractors complain bitterly about how unfair that is but this isn't about fairness. Its about what makes people feel comfortable enough to travel again. And in the current circumstances, that is what matters most.

Somewhere, USA: An awful lot (I'm tempted to say almost all) of the rest of the world is annoyed at the US lately. And many Americans are annoyed at the people who are annoyed at us.

Is this going to have economic consequences? I'm not thinking especially about boycotts, etc., but rather about negotiating trade agreements and such things.

Steven Pearlstein: If it persists, it surely won't help, but let's see how everyone feels in a couple of months. Alot can change between now and then.

Washington, D.C.: Are you discussing contracting out of the federal government?

Steven Pearlstein: Yes, trying to.

Laurel, Md.: How much of the savings in privatization is going to come from replacing American citizens with foreigners who don't demand the wages and benefits a native expects.

I hate to sound like a nativist or racist, which I'm not, but competition from immigrants legal and illegal has reduced the economic bargaining power of Americans at the lower end of the economic spectrum to demand things like health care.

Are there any safeguards that the contract employees aren't just low-balling the US citizens they're replacing?

Steven Pearlstein: Labor markets don't really distinguish between citizens and non-citizens very well. If they are working, markets do distinguish between high cost and low cost labor, and high quality and low quality. So if there are people born elsewhere and working here legally who can perform the job as well or better than government employees at lower cost, "competitive sourcing" should mean they get the work. Your beef, it seems to me, should be with the immigration laws or the enforcement of them. I'm not sure I share your concern on that front, however. Generally speaking, immigration has been very, very good for our economy.

Arlington, Va.: Is there any macroeconomic logic behind the assertions of the Bush administration that their proposed budget deficits don't matter? If, as they say, $400 billion is no big deal, what about $500 billion? $750 billion? $1 trillion deficit? At what point would even the true believers in cutting inheritance taxes and dividend taxes say the deficit is too high?

Steven Pearlstein: You put your question just right. I'll be writing about this subject before too long. Perhaps an even better question is: What is the connection between cutting taxes and economic growth? And the answer there is that there is NO correlation. There are times and instances where tax cuts do lead to greater growth, and times when it can have just the opposite effect. The idea that a tax cut plan is automatically a growth plan is voodoo economics and should be treated as the nonsense it really is.

Vienna, Va.: After 9/11 the stock of Lockheed Martin (LMT) went from 30 something up to 70 something. It is now back down to 40 something. I don't understand this. With talk of war I would think Lockheed stock would at least stay the same if not go up. Financial analysts tell me that there is no LMT corporate financial reason that they can see for this.

What do you think is sending the price down?

Steven Pearlstein: The conventional wisdom on Wall Street is that defense stocks go up in anticipation of war but begin to decline as soon as the fighting begins. And now that everyone knows that, they try to get a jump on everyone else by selling a day, a week, now a month or two before the fighting. This is the work of traders, not investors. If you are an investor, look at the fundamentals and the management and the longterm prospects for defense spending and if you like what you see, buy. If not, sell. It's just that simple, and that hard at the same time.

Washington, D.C.: Contracting out of the federal government is a forgone conclusion for political reasons. The Bush Administration is intent on outsourcing as much as possible, even when no significant cost savings can be established. It is simply a way to reward political contributors and weaken labor unions in general. Civil servants are getting cheated.

Steven Pearlstein: I am not inclined to be that suspicious of their motives. The rules now require outsourcing to deliver at least a 10 percent reduction in cost, although there is no way to enforce that after the fact. And we in the press are around if any civil servant wants to drop us a dime on any particularly egregious example of outsourcing to political cronies. I actually know many of the guys who run these big contracting firms and they are not very intimate politically with the administration, so I doubt that is the motive here. Your rhetoric sounds very much like that of the union officials, who use it to dismiss any attempt to try to reform the way government does business.

Vienna, Va.: I rent in the DC area and was told that one reason rents are so high is because the Government has a Chart they use to pay rent for military personnel. I was told that military personnel get a rent allowance of $1,400 per month in the DC area. To me this really skews things for the non-military because some of our salaries are very low, but we don't get a housing allowance by our employer. Do you think that government programs like this should be reviewed in terms of how the effect the non-participants?

Steven Pearlstein: The military has had big problems in attracting and retaining its people, in part because its pay is pretty low and its housing is so lousy. The housing allowance was designed to try to meet that problem. Sounds like a good solution to me. If there is insufficient low cost housing in this area for the demand, then that is a housing market problem independent of the military's actions.

Washington, D.C.: Contracting out is aweful for the federal government. They can no longer recruit top talent because in addition to getting paid less than the private sector, now civil service employees have no job security. The federal government underperforms because it is not given the resources to perform.

Steven Pearlstein: In some cases, the government underperforms because it is not given the resources to perform. In other cases, there are other problems having to do with culture and management and flexibility to manage. But what ISN'T true is that the government can't attract people because of the lack of job security. There is much less job security in the private sector and I haven't noticed that they have problem attracting people lately. This is a union canard.

Laurel, Md.: Me again about Americans contracting out. Yes, this is largely an INS issue. But about your comment that "immigration is good for the economy."

Let's look at "the economy" two ways -- measure it in money vs. measuring it in people. In the last 20 years, the top 20% of earners have seen real incomes rise about 50% while the bottom 20% have barely moved. Let's analogize by saying we're going to "grow the economy" by taking $2 billion/year worth of health insurance from a bunch of poor people, which will increase the value of a bunch of rich people's stock dividends by $5 billion.

So the economy is $3 billion ahead by trading poor people's health care for rich people's income to buy bigger second homes with. Have we improved "the economy"?

Steven Pearlstein: There is reason to believe that trade and immigration of low-skilled workers has an impact on rising wage inequality, although it is certainly not the whole story or even the majority of that story. On the other side, however, the U.S. economy has benefited mightily from attracting the some of the most talented and most driven people from countries all around the world. It is our gain and their loss, trust me.

Washington, D.C.: According to your column you state that the government "overpays lowerskilled workers." Have you condsidered that it is perhaps the other way around, i.e. that private industry underpays such workers and that government recognizes that lowerskilled worker deserve at least a living wage?

Steven Pearlstein: I was not making a value judgement. In a market sense, if you can get a good or service at $10/hour but you persist in paying $20/hour you are "overpaying." That's what happens in capitalist economies. Other economies set much higher minimum wages or redistribute income more aggressively than we do. Maybe we should consider that. But that's another issue. Having the government pay above-market wages is not a very good idea.

Washington, DC: That's right, there is no way to enforce contractors to deliver at least a 10 percent reduction in cost after the fact. Earlier this month I read about a TSA contract to hire airport security screeners that ended up costing 7 times as much as anticipated. I am not against all contracting out, but when the Bush Aministration pushes for contracting out half the government on a two year timeline that directly coincides with the end of his term, I can not help but think his motives are politically driven. Plus there is no way to keep those contractors in check.

Steven Pearlstein: I suspect the 7X is hyprocrifal (or however you spell that). As for two year political timeline, even the administration now concedes the two year thing was a mistake. But there is really nothing inherently political about that. I think they simply felt that if they didn't set some deadlines, civil service managers would drag their feet because they really aren't enthusiastic about potentially losing their empires and having to lay off their colleagues, which is a very human reaction.

Steven Pearlstein: That about does it for today. Thanks.


That wraps up today's show. Thanks to everyone who joined the discussion.

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