Global Macro Monitor

After the defeat of Governor Scott Walker’s recall tonight, we thought we’d post this piece from January 2011.   Big pension reform ballot measures won big in San Jose and San Diego.   This gives us our children hope.

Interestingly,  Europe is dealing with very similar issues, but on a cross-country basis and without political union.

Smells like a  prairie fire to us and the President is caught offside.   Expect markets to start flirting with and sniffing out that Romney rally.

P.S.  We were way wrong about Governor Brown.

State and Local Governments, Man Your Battle Stations!

Posted on January 6, 2011

Take a look at the new cover of the Economist. We have been all over the coming “battle royal” between the state and local governments and their public sector unions, but not as much as Mike Shedlock over at the Global Economic Trend Analysis blog.    We love teachers, fighter fighters, policemen, and all productive public servants, but think they are being led over the cliff by their unions.

You should hear the conversations in our golf foursomes.  On one side, our plumber and contractor buddies, who’ve seen their 401Ks go to 201Ks and back 301Ks.  On the other, retired at 55 public sector buddies, who are living on annual pensions equivalent to 80-90 percent of the salary of their last year worked.  We’re not making this up and it gets nasty as the debate always ends up about fairness.   In the end, it’s really a contrast between defined contribution pensions versus defined benefit pensions.

The November election results were not just about another hard learned lesson by Democrats and reality check that the majority of the country lives, not on the Michael Moore left, but in the political center, but it was also about anger.   Anger from those who feel that they do the right thing, work hard, pay their taxes,  pay their mortgage, and accept the consequences of their actions and fume while they watch others receive preferential treatment by their government for doing the wrong thing.

Whether it’s Wall Street bailouts or seeing their neighbors continue to live, in some cases, for  years in their homes without making a mortgage payment, while they continue to pay in full and receive the cold shoulder when trying to modify their own underwater mortgages.   It is our bet “burden sharing” will become a big part of 2011 political lexicon.

The Economist writes,

LOOK around the world and the forces are massing. On one side are Californian prison guards, British policemen, French railworkers, Greek civil servants, and teachers just about everywhere. On the other stand the cash-strapped governments of the rich world. Even the mere mention of cuts has brought public-sector workers onto the streets across Europe. When those plans are put into action, expect much worse.

“Industrial relations” are back at the heart of politics—not as an old-fashioned clash between capital and labour, fought out so brutally in the Thatcherite 1980s, but as one between taxpayers and what William Cobbett, one of the great British liberals, used to refer to as “tax eaters”. People in the private sector are only just beginning to understand how much of a banquet public-sector unions have been having at everybody else’s expense (see article). In many rich countries wages are on average higher in the state sector, pensions hugely better and jobs far more secure. Even if many individual state workers do magnificent jobs, their unions have blocked reform at every turn. In both America and Europe it is almost as hard to reward an outstanding teacher as it is to sack a useless one.

Governor Brown just appointed a California Teachers Association union lobbyist to the Board of Education, in a state where education consumes over 50 percent of the general fund (see chart below).  This could be, and we sure hope it is, a very shrewd political move.   President Lyndon Johnson said it best when reappointing someone who may have been more damaging outside his administration,   It’s probably better to have him inside the tent pissing out, than outside the tent pissing in.

(click here if charts are not observable)