Context Counts

Let’s get a few things straight about the economy.

First, nothing is fine. Not in relative terms. Not in absolute terms. That things could be worse does not make them fine.

Second, the public sector is not separate from the private sector any more than your arm is separate from your leg.

Third, the public sector alone cannot revive the private sector. The growth of public-sector jobs cannot be and has never been the engine of sustained economic recovery. In the Great Depression and the first stage of this Great Recession, increased public spending prevented more dire economic consequences and provided a temporary lifeline.

Fourth, private-sector job growth feeds public-sector job growth. You need the tax revenue to pay for all those teachers and cops.

Fifth, all of these truths will soon be overshadowed by unfunded pension liabilities—the promises made to public employees that can’t be met unless more revenue is raised or more benefits are cut.

After telling the country on Friday that the “private sector is fine,” President Obama backtracked and his loyalists deconstructed the gaffe by saying it needed context. Compared to public-sector hiring, private-sector job creation has been more robust.

That’s true. In the 17 categories of employment the Bureau of Labor Statistics measures, only three saw an increase in unemployment rate from May 2011 to May 2012: “information” (7.3 percent to 7.8 percent), “agriculture and related private wage and salary workers”  (8.7 percent to 9.5 percent), and “government workers” (3.9 percent to 4.2 percent).

Mitt Romney suggested on Friday that the “message of Wisconsin” (meaning Republican Gov. Scott Walker’s rebuff of a recall) was that the nation doesn’t need more firefighters, police, and teachers. Or at least that’s the way Obama’s team has been characterizing it ever since, accusing Romney of wanting to lay off even more state and local government workers. Romney’s surrogates have also pleaded for context, arguing as Romney himself did on Tuesday that he meant the nation doesn’t need more federal funds invested in short-term state and municipal hiring schemes.

But both Romney and Obama haven’t adequately explained the problem. To his credit, Walker said the “message” of his pension reforms wasn’t that there should be fewer state employees. Just the opposite. Walker said his pension reforms allowed the state to keep more people on the payroll. “Our reforms allowed us to protect firefighters, police officers, and teachers,” Walker said on CBS’s Face the Nation. “That’s not what I think of when I think of big government.”

Context, context, my kingdom for some context! The essential question on the future of the state and local government workforce (87 percent of all government workers, by the way) isn’t the number of jobs. It’s their pensions. Walker saw that. Obama and Romney better figure this out: You can’t discuss economic growth and state and local payrolls (up or down) unless you discuss unfunded pension liabilities and the toxic effect they have.

According to the most recent data from Wilshire Consulting and Northwestern University’s Kellogg School of Management, unfunded liabilities for the nation’s 126 largest public pension plans range from $3.2 trillion to $7 trillion. Why the wide variance? The lower liability total reflects optimistic assumptions by state and local pension managers on rates of investment return. The higher estimate reflects more-cautious investment assumptions. Another grim statistic: The 126 plans currently fund only 74 percent of their liabilities. In 2001, they funded 95 percent.

To fund state and local pensions at their current rate (using the pessimistic number above and assuming no reductions in current or future benefits), each household would face a tax increase of $1,398 a year for the next 30 years. These higher taxes would not hire another teacher or build another fire station. And they would be on top of revenue generated by historic trends in state and local economic growth.

Why does this matter? Ask voters in San Jose and San Diego.

In San Jose, Calif., liabilities rose from $73 million in 2001 to $245 million this year, so Democratic Mayor Chuck Reed had to lay off 1,592 workers. In San Diego, pension costs grew from $137 million in 2006 to $231 million in 2012; this year alone, 1,500 teachers have been laid off.

Both cities overwhelmingly passed initiatives to reduce pension allocations. San Jose voted to trim current benefits. San Diego voted to cut back on future ones. Court fights naturally ensued. But the political winds are clear and unmistakable. The fight is on.

What happened in Wisconsin won’t stay in Wisconsin. It won’t stay in San Jose or San Diego, either.

That’s the real context of the future of the entire economy—public sector and private sector.

This article appears in the June 13, 2012, edition of National Journal Daily.

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