THE BLOG
03/11/2011 03:45 pm ET Updated May 25, 2011

Two Sides to the Public Employee Contract Issue

These days it's hard to find a general circulation newspaper that doesn't emphasize coverage of the state public employee labor situation, including pay and retirement/medical benefits, as it impacts state finances and taxes. This is a good thing as they are inextricably linked and voters and taxpayers can use education about the connections. However, what is not as helpful are the extreme positions which are taken by proponents of both positions.

Either public employee unions are the primary bulwark of the middle class, saving the U.S. from another Great Depression and social unrest, or they are disgustingly parasitic and shamelessly bleeding the taxpayers dry with bloated pay and benefit packages, based upon a complete disconnect from reality. The subhead to William McGurn's column of March 1 refers to the situation as "What happens when a political party disconnects from the economy's productive sector," and McGurn, with uncharacteristically exaggerated rhetoric, refers to the unions' "increasing contempt for the realities of the marketplace and the democratic process." Neither position does much to advance our analysis of the situation.

As we can see from the red ink at state levels, which is prompting tax increases, bond rating downgrades, service cuts and consternation, expenses are too high for current and realistic future revenue levels. Whatever justification there may be for a given package, if the state can not afford it, it must be pared back to the extent possible. Some would say that the solution for unaffordable packages is to soak the rich through tax increases. Once taxes get to even moderate levels, this is self defeating as it drives out of the state the most productive taxpayers and reduces revenues. McGurn makes this important point amidst his otherwise overblown rhetoric. No matter who benefits from these compensation packages, in too many cases, they are beyond the ability of states to support now or in the future. For example, too many states still provide defined benefit pension arrangements which involve huge commitments unrelated to economic conditions, investment performance or other major variables, and have been largely abandoned by the private sector in favor of much more flexible 401k and cash balance structures.

However, while the cold, hard financial analysis may dictate many cuts in pay and benefits, and perhaps even limitations of collective bargaining, this should not prompt the demonization of public employee unions. Like private sector unions, public unions came into being in response to documented abuses of working men and women. While the notion seems quaint today, empirical analysis and the personal experience of many of us indicate that during the 50's and 60's many public employees worked for compensation which was far below what comparable positions paid in the private sector, augmented by benefit packages which were nowhere near today's standards and with largely illusory 'civil service'-based job security. Unionization and collective bargaining was an inevitable and appropriate response to such circumstances. It has been over the last few decades that the increasing overlap of the Democratic Party with public unions such as SEIU and teachers unions and their campaign cash that the situation morphed from a fairly balanced one into the extremes of today which are prompting action in Wisconsin, Michigan, etc.

As one commentator summarizes: "But with the public-employee unions, the balance has been off for decades."

When governors and legislatures grapple with the numbers reflecting the undeniable need to prospectively pare back so many of today's unrealistic practices -- e.g. retirement at 50 or 55, zero employee contribution to their medical/retirement packages, and for that matter, the idea of defined benefit pensions themselves -- they need to do with an understanding of the historical context in which these practices came to be. Rationalizing public employee remuneration, however necessary it may be, should not and must not, for the stability of society and quality of public services, dictate pushing public employees into servitude.