11/28/2012 05:36 pm ET Updated Jan 28, 2013

A False Dichotomy

William Baldwin recently posted a piece at Forbes entitled "Do You Live in a Death Spiral State?", in which he discussed investment strategies based on state fiscal policies. While his article makes some good points about the problems that an overextended public sector can create for investment in particular states and he provides some decent investment advice, Baldwin uses a simplistic and in many ways insulting method for determining whether a given state is in a "death spiral". As he puts it:

Two factors determine whether a state makes this elite list of fiscal hellholes. The first is whether it has more takers than makers. A taker is someone who draws money from the government, as an employee, pensioner or welfare recipient. A maker is someone gainfully employed in the private sector.

The first problem with Baldwin's argument is one of basic terminology. Describing the two types of people in America as makers and takers is frankly an exercise in bad faith. Let's put it this way, if one were to read a piece about race relations and one saw that the author of the article was using derogatory terms to describe a particular race of people, one would assume that the author wasn't exactly approaching the topic in a fair manner. I'll be kind and assume that Baldwin just has a tin ear regarding how he describes people and leave it at that.

The other problems with Baldwin's piece are more substantive, and I'll focus on the issue of public sector employees. Baldwin's argument assumes that anyone in the private sector is by definition far more productive in economic terms than anyone in the public sector. So, by this logic, a low-skilled and low-paid worker in a privately-owned warehouse or cubicle farm produces more value for the economy than a highly-skilled and highly-paid research scientist at a state university or a senior detective in one's local police force. This is absurd. Public sector employees can and do provide services to society that benefit the economy, both by providing services that businesses need to thrive (like basic scientific research that underlies more commercially-oriented research) and by providing services that the private sector can't or won't provide for society in general (like public safety and basic infrastructure). While obviously there is dead wood in any public bureaucracy, the same can be said for any large, or for that matter, not-so-large, private company.

For that matter, under Baldwin's theory, one quick way a state could improve its death spiral rating would be to fire all of its law enforcement and public infrastructure personnel, thus lowering the amount of "takers". Wait -- but wouldn't doing so also have negative results for that state because of the loss of benefits and services such workers provide? My point exactly.

Furthermore, public sector employees spend and invest their incomes just as private sector employees do. It is not as though the money paid to public sector employees disappears from the economy into some sort of black hole. No one disputes that an overly-large public sector can and does act as a burden on the economy. But public sector spending is not by definition a drain on the economy, despite the claims of people like William Baldwin and others we've heard from in recent years. If you don't believe me on that point, maybe you should consider reading the thoughts of people like Alexander Hamilton on such matters. As an aside on this note, it is interesting to see Baldwin use this example in his article:

Let's say you are a software entrepreneur with 100 on your payroll. If you stay in San Francisco, your crew will support 139 takers. In Texas, they would support only 82. Austin looks very attractive.

Austin is the capital of Texas and as such is the headquarters of the state government of Texas. It also is home to the gigantic and magnificent public research university called the University of Texas. In other words, it's a city in which there are a lot of public sector employees. And yet somehow it thrives and is cited as an example of an attractive city for investment. I guess all those public employees must be doing something right.

There are a lot of good criticisms that can be made regarding the need to overhaul a sclerotic public sector to improve economic prosperity and the need to reform public pensions. I don't argue against either concept in principle and these discussions are necessary. But starting such discussions with the assumption that one can neatly divide the populace between makers and takers is rank nonsense that says more about the person making the assumption than the topic being discussed. If we are going to talk about improving economic growth and making government more efficient, we need to start with the right assumptions.