The media’s “Fail” mark on Wisconsin

A huge political drama is playing out in the state of Wisconsin, where 70,000 protesters filled the streets on Saturday to oppose Governor Scott Walker’s plan to end collective bargaining rights for public employees.

A day earlier, Republicans in the lower house had voted to virtually eliminate the right to collective bargaining. Meanwhile, the 14 Democrats in the Senate have left the state of Wisconsin and are in exile in Illinois, preventing the state Senate from having the three-fifths quorum required to take a vote on the budget. The senators have vowed to stay in Illinois until Walker agrees to negotiate on his budget bill.

How did we get to such a farcical situation?

If you read most mainstream media accounts of the showdown in Wisconsin, the story goes something like this: Wisconsin has a huge budget deficit, mainly because of unsustainable promises made to state government employees, including the pension and health care obligations of public servants and teachers. These public servants are overpaid and enjoy better benefits than their counterparts in the private sector. Walker is trying to get the budget back on track by taking on the unions and bringing these costs back into line.

This Wall Street Journal report is a typical account:

Mr. Walker’s proposals are hardly revolutionary. Facing a $137 million budget deficit, he has decided to try to avoid laying off 5,500 state workers by proposing that they contribute 5.8% of their income towards their pensions and 12.6% towards health insurance.

That’s roughly the national average for public pension payments, and it is less than half the national average of what government workers contribute to health care. Mr. Walker also wants to limit the power of public-employee unions to negotiate contracts and work rules—something that 24 states already limit or ban.

Now, this may all sound very reasonable, and unions are an easy target. In any kind of solution to the states’ fiscal problems, the pain is going to have to be shared. But this is an extremely one-sided portrayal of what is really happening.

The reality is that Governor Walker’s first priority upon assuming office was to cut business taxes. He did this even though there is already a massive hole in the state budget. As a result, Wisconsin’s tax revenues are forecast to fall by $55 million in 2011/12.

And that’s not all. Walker also passed a law that made it very difficult for legislators to raise taxes to cut the deficit in the future. Lee Shephard of Forbes explains:

Walker just won legislative approval for the centerpiece of his tax cut plan, a supermajority requirement for sales or income tax rate increases…This is a dangerous restriction on legislative action in the long run, if for no other reason than it would be difficult to repeal…

Walker’s enacted tax cut plan is punching Swiss cheese holes in the state budget for the benefit smaller businesses in terms of gross receipts… Although the true cost of the tax rate supermajority requirement is unknowable, the Walker-instituted changes that can be priced add up to $100 million over two years already.

So the first point to make is that the big effective wage cuts for public servants that Walker is proposing are not inevitable, they are partly a result of the Republican obsession with cutting taxes.

And now we come to the topic of the “fat cat” teachers and public servants that are supposedly bankrupting the state.

Here is a typical piece of hyperbole in the mainstream media,  this time from the New York Times. In a column titled “Make Everybody Hurt”, David Brooks wrote this week:

Walker’s critics are amusingly Orwellian … Still, let’s try to put aside the hyperventilation. Everybody now seems to agree that Governor Walker was right to ask state workers to pay more for their benefits. Even if he gets everything he asks for, Wisconsin state workers would still be contributing less to their benefits than the average state worker nationwide and would be contributing far, far less than private sector workers.

But this is nonsense. As David Cay Johnston at Tax.com says:

Economic nonsense is being reported as fact in most of the news reports on the Wisconsin dispute, the product of a breakdown of skepticism among journalists multiplied by their lack of understanding of basic economic principles.

Gov. Scott Walker says he wants state workers covered by collective bargaining agreements to “contribute more” to their pension and health insurance plans.

Accepting Gov. Walker’ s assertions as fact, and failing to check, created the impression that somehow the workers are getting something extra, a gift from taxpayers. They are not.

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 table below from a recent study shows that Wisconsin public servants make less than their private sector counterparts. They may have slightly more generous benefits, but the point is, they pay for this through lower wages.

I found this data in 30 seconds with a Google search. Is it too much to ask that reporters in the mainstream media, who are actually paid to write about this stuff, do a bit of research themselves instead of merely regurgitating politicians’ talking points?

Finally, apart from some local media in Wisconsin, the big media outlets have totally ignored some very troubling elements of Walker’s plan.

The bill allows the Walker administration, without approval of the Public Service Commission and without a competitive bidding process, to sell off or lease the state’s several dozen energy plants to private companies.

The state can sell the energy plants “with or without the solicitation of bids, for any amount that the department determines to be in the best interest of the state,” according to the rather circular wording of this clause, which then concludes that “any such purchase is considered to be in the public interest.”…

Two of Walker’s biggest backers are the secretive conservative billionaire brothers Charles and David Koch, owners of Koch Industries, the largest privately owned company in the U.S. with 70,000 employees and annual sales of $100 billion in the fiscal year 2008. Among their holdings in Wisconsin are significant lumber and coal interests, a network of gasoline supply terminals, and a toilet paper factory.

So Walker comes in, slashes business taxes, claims that because of the fiscal emergency that he is partly responsible for causing, the unions need to be crushed and state workers have to pay; he then passes a law that allows him to sell off state assets without competitive bidding, state assets which, by the way, might be of interest to Koch Industries, which, by the way, happened to fund Walker’s political campaign.

Wall Street Journal? CNN? The Economist?

Anyone? Anyone?

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Comments

  1. You’ve got to be kidding.

    Wisconsin teachers are way overpaid, and only contribute 1% towards their pension plans.

    Walker proposes to raise this to 5.8%, which is less than half of what average workers contribute, and all hell breaks loose.

    Tax cuts are needed to stop businesses leaving the state, its a form of stimulus that actually works.

    Spending more money on union benefits, pensions and health care doesn’t stimulate the economy.

    • “Tax cuts are needed to stop businesses leaving the state, its a form of stimulus that actually works.”

      I hope you don’t really believe that.

  2. Good link Peter,
    I’m sick to death of these socialist liars referring to “collective bargaining rights” like they are some kind of basic liberty or freedom that Scott Walker wants to remove.

    These so called collective bargaining “rights” simply force every state to deal only with unions for basic services – teaching, police, firefighting.

    This makes it virtually impossible for politicians to cut costs and balance their budgets in one of the worst recessions in history.

    As long as the states are forced to deal with special interests like the powerful union lobby, there are no real negotiations and the taxpayer is robbed as politicians and union bosses agree to inflate wages and reduce worker productivity so that more jobs and overly generous benefits exist.

    • oh yeah unions are “responsible” for this recession so let’s destroy them and at the same time give a bailout and tax breaks to the banks, insurance companies and other big business

      teachers are to “blame” for the recession and should be punished for that, while bankers should be awarded for “saving” us

  3. FYI…The tax.com guy is either intentionally spreading misinformation or he doesn’t know how the Wisconsin system works. It’s true that Wisconsin has a Deferred Compensation plan that workers contribute to, but it’s completely separate from the Wisconsin Retirement System which uses (you guessed it) taxpayer money to fund both the state (around 5 percent of salary) and employee (another 5 percent) contributions to their pensions.

    On the DC plan, there is actually a matching feature where taxpayers are on the hook for some of the contributions so I guess the tax.com guy was wrong in that regard as well.

    Also, I think it’s typically proper usage to precede any mention of the Koch Brothers with the word “evil.”

  4. Guys– You are missing the point about the pension contributions. There may or may not be an argument for cutting the wages of public sector employees.

    But the debate is not being reported correctly. It’s simply ridiculous to talk about taxpayers being on the hook for public servants’ pension contributions.

    What matters is their TOTAL compensation, which includes both salary and benefits. If one teacher makes $100,000 and the state contributes $5000 to his pension, while another makes $105,000, but has to contribute the entire $5000 himself, it’s the same thing.

    In both cases taxpayers are on the hook for $105,000. Why get all worked up about how many % the pension contribution is?

    • Don’t you think it’s a tad ironic to go after the (Evil TM) Koch Brothers on the political donations front when public Sector Unions donate heavily to the campaigns of “friendly” politicians, and then are often in the position of “negotiating” their contracts with those same politicians?

  5. Jono, Maybe we should abolish business/industry associations as well?

    Remember how miners banded together under Mineral Council of Australia banded for some $100 million of political ads and got a huge bargain of $100 billion off their taxes? If that isn’t collective bargaining, what is?

  6. “What matters is their TOTAL compensation, which includes both salary and benefits. If one teacher makes $100,000 and the state contributes $5000 to his pension, while another makes $105,000, but has to contribute the entire $5000 himself, it’s the same thing.
    In both cases taxpayers are on the hook for $105,000. Why get all worked up about how many % the pension contribution is?”

    And this is supposed to be an economics blog? What in gods name does that example have to do with the issue at hand?

    So here is the issue

    As public servants retire, their pensions are paid out of the pension find. If there is a shortfall in the fund (most funds are underfunded and will run dry within a few decades) then the rest of the pensions, heath care and other benefits will be paid out of general tax revenue.

    As each year goes by, a higher and higher percentage of general tax revenue is needed to cover these underfunded liabilities. Most states are insolvent and bankrupt.

    No amount of mental gymnastics can dispute the cold hard reality of overstretched public finances.

    You can either approach economics from a mathematical perspective, or turn it into a left wing/right wing issue ranting about unions or koch industries. Everything posted by Rotten Apple seems to be political left wing bias rubbish. He would be more at home writing for Crikey.

    • Well said Yohan, I have only been reading this blog for a few weeks and most contributers seen to stay out of La La land, but Rotten Apple has me worried !

    • Yohan — You’ve missed the point too. This is not a defense of unions and I am not saying that there isn’t a big problem with state finances and pension funding.

      But the benefits of public teachers are not the only thing that is sending Wisconsin bankrupt. I am simply saying that the reality is a bit more complicated than that, and that the media is not providing a balanced view. For example, I have provided figures that show Wisconsin public servants already make quite a bit less than workers in the private sector, and have noted that part of the current fiscal problem is caused by Walker’s business tax cuts.

      You may think this is “political left wing bias rubbish”, but I would suggest you might want to broaden your horizons a bit and realize the world is a more complicated place than you think.

  7. Rotten Apple – you missed the nice twist in the story – three public service unions including the police and firemen, were left out of the proposed cuts – was it because these groups may be better supporters of the GOP and/or you need them to be the thin red line?

    We need to understand the vices of wealthy people – Kerry P had his gambling and mistresses, Rupert just loves power and the Koch Brothers are modest little libertarians whose vice is to support the little guys like themselves (behind heavy curtains). Try this link for a laugh. http://motherjones.com/mojo/2011/02/scott-walker-koch-brother-crank-call-wisconsin

    • Ian — Yes, that’s a good point that I forgot to mention. The police and firemen unions were exempted from the cuts, presumably because unlike the teachers, many of their members tend to vote Republican.

      This alone illustrates that Walker’s agenda is mostly a political one rather than a serious effort to fix the deficit.