Don't ignore inefficiencies in private sector, either

There is a great deal of truth in the increasingly popular sentiment that the compensation levels for government employees have become distorted, more so during this Great Recession. But such distortions are prevalent in the private sector too.

I do not mean to deny the problem in the public sector. My graduate school professor, who has semi-retired now, often joked that he became a libertarian because of his experiences when working as a student intern with the Los Angeles County government — and this was 40-some summers ago.

In my own experience as a student intern and later as a full-timer with different government agencies in California, I did encounter employees who did not seem to be delivering service that was equivalent to their high salaries. In the decade since I returned to academia, one of my former employers has practically doubled the number of people on its payroll.

But such issues are not only a characteristic of the public sector; they plague the private sector as well. When it is a small business, like the one my neighbor owns, it is quite easy to maximize efficiency. But as organizations get larger (much to our displeasure as consumers and taxpayers), wastes do arise. Various forms of economic inefficiencies, of which compensation levels are one, are characteristic of large organizations — private, public and even nonprofits.

Academics and management experts have been studying these issues for a long time. A fellow graduate student — also from India — did his doctorate in "organizational behavior" and focused on such inefficiencies. The interesting irony was that until we met in Los Angeles as new graduate students, we didn't know that we had worked for the same employer in India, Indian Oxygen Limited, after which, naturally, we shared many jokes about the wasteful practices at the firm.

Perhaps it is easy to go after public sector compensation because it is the metaphorical fruit lying on the ground. But, while bending down to pick these up, are we overlooking far plumper fruits in the private sector?

A typical argument for ignoring the inefficiencies in the private sector is that options exist for us consumers, while as taxpayers we have no alternative but the government, which is a monopoly; i.e., if we do not like, for instance, a multinational company's wasteful approaches, then we can stop patronizing that business and move to somebody else. However, as we find with the oil companies, there is rarely a difference between large firms, which means that there isn't really a choice for us consumers — it is tweedledum or tweedledee.

Finally, looking at inefficient resource allocations within my own world of higher education, I would rather that we target first the ever-increasing expensive spending for athletics. It is not even news anymore that often college coaches earn far more than corporate CEOs.

But this is a losing battle. After all, even my left-leaning faculty colleagues love sports to the extent of organizing betting pools during "March Madness." I suppose we are stuck with inefficiencies that we don't like!

Published in the Statesman Journal, August 14, 2010

Update: In addition to the comments in the newspaper's page itself, the following is a verbatim copy/paste from a university email (I have "x"ed out the name) in response to my op-ed:

Dear Colleagues:  I invite you to read the latest editorical by Sriram Khe which appeared in the Statesman-Journal on Saturday (8/14/10).  It is in the Mid-Valley section as part of the regular editorial page.  It is about "inefficiencies" in the public and private sectors, although the term is never defined.  He refers to the inefficiencies in higher education particularly manifest in collegiate athletics.  Now we all know about excesses and corruption in intercollegiate sports, especially at the Division I level.  But the editorial gets better and the author makes an interesting claim.  Khe asserts that his "left-wing colleagues" who run "betting pools during March Madness" are somehow part of the inevitability of inefficiencies in higher education.  I presume that this means that if his colleagues are college basketball fans and participate in a division betting pool, then we either support or are oblivious to inefficiences in higher education.  There are many possible responses to this preposterous assertion.  Let me suggest just one.  My "left-wing" colleagues and I are all serious and at times even severe critics of excess and corruption in all levels of sports.  Most of this occurs at Division I and involves the intrusion of commercial capital, particularly in the form of television contracts.  This has nothing to do with intercollegiate sports at WOU, a Division II program.  At WOU, intercollegiate sports is used to recruit student-athletes and train teacher-coaches for mostly public school systems.  Does this sound inefficient to you?  Most student-athletes at WOU are not on scholarship and participate for the love of sport and as part of their future educational goals.  Does this sound inefficient to you?  So where is the "inefficiency" connection between sports at WOU and left-wing faculty participating in a ritual of March Madness??  You probably know that President Obama is also a college basketball fan and also participated in a "betting pool."  I wonder if Fox Television (Glenn Beck!?) will follow Khe and accuse President Obama of fostering inefficiences because he is like the "left-wing" faculty in Social Science. 

All the best, Comrade Bxxx  

The pension problem ...

First, here is what Nick Gillespie notes that the:

split between private and public-sector workers is one of the biggest issues in contemporary America. We are, as Matt Welch has noted again and again, broke. There's no money left anymore people. We need a fundamental re-do of public sector financing on every level, from entitlement spending to employee compensation. Most clearly, the public sector needs to shift to self-financing of its retirement, just like the private sector has done over the past generation. There are not enough private-sector workers to pay the taxes necessary to continue what's going on in Ohio and elsewhere.

Now, you might dismiss this because Gillespie is, after all, a staunch libertarian with Reason.
But, then here is a report from our capital city's newspaper, the Statesman Journal:

PERS has to increase the contributions to make up for investment losses that occurred during the stock market free-fall of 2008.
"The market downturn dug a huge hole in PERS that needs to be made up," said Brenda Wilson, the city of Eugene's intergovernmental relations manager and PERS consultant to the Oregon League of Cities. "Even though there were positive earnings last year, the hole is bigger than that. Not every single employer will see a rate increase, but the vast majority of them will."
The increase will cost Oregon governments participating in PERS a total of more than $1 billion in additional employer pension contributions, according to information provided by PERS after public-records requests from the Statesman Journal. To cover that expense, cuts to classrooms, parks, libraries and myriad other community services will have to be considered. Some local governments might lay off workers.

Oh well, .... this will be another one to add to the earlier posts related to pensions.  I bet this will not be the last one either.

The cost of providing public services

Germany is an outlier in one regard at least: it runs a trade surplus:

Germany’s trade surplus is by far the largest in Europe, reaching 135.8 billion euros ($184.9 billion) in 2009, according to Eurostat, the European Union’s statistics office. Germany’s surplus was more than triple that of the Netherlands, which was in second place.

Thanks to the high-value items that it continues to manufacture and sell all around the world.  Many of these are low-volume catering to a niche demand, like:

Glasbau Hahn is a miniature multinational company, generating more than 60 percent of its sales abroad and dominating its narrow but lucrative niche: the global market for museum display cases. Even King Tut’s mummy lies in a climate-controlled vitrine made in Glasbau Hahn’s workshop, which sits next to a railyard and across the street from a Fiat showroom.
As Glasbau Hahn and thousands of other small German exporters rebound from a dreadful 2009, they give the European Union a much-needed shot of growth.

Here in the US we have been accumulating trade deficits, budget deficits, .... Will it be geographically not appropriate to write in this context "there is something rotten in the state of Denmark" :)

The continuing economic woes at home will, finally, begin to wake us up the various realities.  We have recognized the excess compensation, particularly at companies that are failing.  We don't do anything about that is a different issue of political impotence incompetence.  Perhaps that is because we taxpayers struggle to figure out how much non-shareholders can have a say in the affairs of the private sector.  And now with the Supreme Court affirming the rights of corporations, we might as well bid adieu forever to gaining a shareholder bill of rights!

But, almost all the taxpayers will soon start reacting to cost inefficiencies in the public sector.  And there are plenty of them.  As Matt Welch notes while summarizing Steven Greenhut's essay (yes, they are libertarians) on how public servants became our masters:

public-sector unions are not just growing the pie of government on all levels; they are brazenly gobbling up two, three, and even 20 times the amount that they were taking just a few years ago—on guaranteed contributions to their pension plans alone. Wherever you see a politician or public servant warning about “draconian” cuts to public services, you almost certainly are witnessing an agency whose employees have negotiated a sweetheart pension deal within the last decade. It’s awfully hard to balance a budget, let alone improve public services, when you’re tripling a major line item.

And from another report--this is from California Watch:

Amid a crippling fiscal crisis, managers throughout California's government have routinely allowed their employees to amass unused vacation time, enabling hundreds of workers to end their public-service careers with payouts topping $100,000, a California Watch investigation has found.
One worker combined vacation and compensatory time to walk away with more than $800,000, records show.

Ouch!
The same report also points out the hidden cost of employee furloughs:

Gov. Arnold Schwarzenegger has instituted mandatory furlough days that most state workers must use before their vacation days. The result, according to several large departments, is that workers are banking more time off than ever, offsetting short-term savings with long-term liabilities.

We are doing furloughs in Oregon, too, and sometimes the number of furlough days is as much as the vacation time in the private sector--two weeks.  So, yes, we too are merely postponing the payment date on the costs.

Finally, the cost of the pension obligations that I have blogged about before.

So, back to Germany: how come they are able to pull it off despite significant public sector involvement in the economy?

Next disaster: Pensions

A few months ago I blogged about reports that were quite forceful with arguments that underfunded pension systems will be the next disaster to hit us.  We might have made promises that might just become too difficult to keep.

This report in Reason is the latest to expand on that argument.  

 State, local, and private pension plans covering millions of government employees and union workers with “defined benefit” accounts are teetering on the brink of implosion, victims of both a sinking stock market and investment strategies influenced by political considerations.

From January to October 2008, defined benefit funds—those promising a predetermined amount of retirement money to the payee—averaged losses of 26 percent, according to Northern Trust Investment Risk and Analytical Services, making it the worst year on record for corporate and public pension funds. The largest public pension fund in the United States, the California Public Employees Retirement Security System (CalPERS), lost a staggering 20 percent of its value in just three months last year. In May 2008, Vallejo, California, became the largest city in the state ever to file for Chapter 9 bankruptcy, thanks largely to unmanageable pension obligations. The situation in San Diego looks worryingly similar.