Friday, June 8, 2012

"I'm altering the deal. Pray I don't alter it any further."

The quote in the title, of course, comes from The Empire Strikes Back. Lando Calrissian had made a deal with Darth Vader -- he'd allow Han Solo to be taken in exchange for protecting Princess Leia and Chewbacca. But when the event actually came, Vader ordered everyone taken into captivity. When Lando argued that they had a deal, Vader said this line. Here's a quick clip to refresh your memory.

This line has been ringing in my head since the election on Tuesday. Not only did Scott Walker survive his recall vote, but in California, San Diego and San Jose both passed citizen initiatives to reduce pensions for city workers. The Wisconsin legislature stripped public workers of collective bargaining rights last year. The citizens of San Diego and San Jose say that public workers will not have to pay up to 16% of their own salaries to support their pension plans. Comments on the Wall Street Journal's page Tuesday night were ripe with anti-union sentiment, gleeful in their victory.

There is no denying that the costs of those pension plans have risen dramatically in recent decades. This is a function of early retirement ages in demanding jobs followed by increased longevity. The first attempts to control this were done by reducing pension plans for new hires but grandfathering the other employees. But that was not sufficient to support the plans put together by previous administrations.

Michael Lewis' Boomerang examines the bursting of financial bubbles in Iceland, Ireland, Greece, and California. His last chapter includes details on the pension problems of San Jose and nearby Vallejo, both of whom have seen their police and fire departments decimated, their libraries cut back, and their roads in disrepair.

Critics will suggest that these pensions were the result of the ties between public sector unions and Democratic mayors. There is little evidence that this is a complete explanation. The more realistic explanation is that cities struggled to pay workers what they thought was a fair wage in light of their service. So they offered improved payout over the long haul to avoid layoffs and service cuts without increasing tax revenue.

Today, public sentiment has turned against those workers. They are readily vilified for being greedy. Why, people ask, should they receive more money that those working in the private sector? The first answer is that they don't. No one is arguing that we should have some kind of maximum salary allocation (ask Jamie Dimon, who seems sure of his salary in spite of a loss of over $2 BILLION at J.P. Morgan). How did we turn on police, fire, city, and education workers? (As Colbert said the other night, "suck it, people who teach our kids!") The second answer is that we did this because we recognized that the work could be dangerous (for fire and police workers, just as it was for coal miners and meatpackers) and that we needed to provide more pay due to the risk of disability (which is why NFL players make so much).

Michael Lewis quotes the San Jose mayor, who argues that cities thought that money would continue to flow -- that the internet boom in Northern California would run forever. But money dried up. People moved away. Property values dropped. And new revenue was politically unwelcome.

Those in power then did what those in power do, which is where Vader comes in. The negotiation that took place was what we call an asymmetric negotiation. Power was not evenly distributed. It's true that an agreement existed between the parties, but it was not balanced. There is nothing holding the powerful figure (Vader or the citizens of San Diego) from changing the deal. When challenged, the response is "pray we don't alter it further".

An April report from the Economic Policy Institute summarizes the impact. Since June of 2009, private sector jobs are up by a net 2.8 million jobs. In contrast, public sector jobs are DOWN by 584,000. My conservative friends worry about our government "picking winners and losers". But we have clearly done so. And this is a new trend. The EPI piece includes the following chart showing how previous recessions dealt with the public sector.

I'm not suggesting that we don't have financial issues that need attention. I'm just saying that people entered into agreements in good faith and now they're being rescinded. And the workers are left in exactly the same place as Lando Calrissian. Which wasn't quite as bad as Han Solo's predicament. But what kind of heroic move will restore the relationship that we have so badly damaged?

Lewis reports that the city of Vallejo now has 67 firefighters for a city of 120,000 people. The mayor of San Jose estimated that by 2014 the city of a million people will be served by 1,600 people. The thing that troubles me is that these remaining folks will still be blamed as greedy and self-interested.

I just pray we don't alter the deal further.

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