One cheer for Fareed Zakaria
posted at 1:07 pm on June 17, 2012 by Karl
At the very least, Zakaria has recognized the necessity of reforming government benefit schemes — and identified those most responsible for these fiscal time bombs:
[H]ow to explain the landslide victories in San Jose and San Diego of ballot measures meant to cut public-sector retirees’ benefits? What should concern [Democrats] is that on the central issue of the [Wisconsin] recall–the costs of public-sector employees–the Democratic Party is wrong on the substance, clinging to its constituents rather than doing the right thing.
The accounting at the heart of government pension plans is fraudulent, so much so that it should be illegal. ***
Why has this happened? It’s democracy at its worst. Public-sector unions, powerful forces in states and localities, ask for regular pay increases. Governors and mayors can dole out only so much in salary hikes because of requirements for balanced budgets or other constraints. So instead, they hand out generous increases to pension benefits, since those costs will hit the budget many years later, when current officials are themselves comfortably in retirement.
However, Zakaria concludes that the “real credit for courage should go to those few Democrats who are taking on these issues, even at the cost of losing support from one of their key constituencies[, like Governors] Andrew Cuomo and Pat Quinn.”
First, a year and a half of partisan political warfare in Wisconsin and a bruising referendum in Ohio ought to instruct Zakaria that taking on public sector unionism is not easy for Republicans.
Second, Zakaria ought to look at the records of those he’s congratulating. As the WSJ’s Allysia Finley noted, NY Gov. Cuomo has done less on this score than his predecessor, David Paterson:
The new law raises the retirement age for new workers to 63 from 62 and reduces their annuities by about 8%. It also increases retirement contributions for workers earning more than $100,000 to 6% from 3% of their pay. That’s about it.
By way of comparison, the state’s 2009 reforms raised the retirement age to 62 from 55 and forced all new workers to contribute 3% of their salaries to their pensions. Neither law applies to firefighters, police officers or workers who were hired before the changes were made — which happens to be where the most savings can be realized. As state Comptroller Thomas DiNapoli acknowledged, the law won’t save much money in the near future. So taxpayers are likely to see more service cuts and fee or tax hikes.
As for IL Gov. Quinn, the New York Times reported in February:
Despite an income tax increase in Illinois last year, Gov. Pat Quinn delivered more grim news about the state’s fiscal crisis ***, calling in an annual budget address for spending cuts that include the closing of state prisons and social service offices.
But while the governor spoke about the need for cuts in the Medicaid and pension systems, some critics said his proposals did not go far enough or provide specific steps to reduce the state’s unfinanced liabilities.
Even with cuts in discretionary spending, Mr. Quinn’s $33.8 billion proposed budget is still larger than the budget passed the last fiscal year, and would require pension and Medicaid changes to ease the state’s financial woes, which grew again this year to total about $8 billion in unpaid bills.
The required pension changes — such as they were — failed to materialize, primarily because Democrats inserted a poison pill on school funding into the measure.
In fairness, I understand why Zakaria would want to praise and encourage the few Democrats who are taking even marginal steps to address a problem for which Democrats are primarily responsible. However, Zakaria needs to recognize just how marginal those steps are for reasons going far beyond state and local government pensions.
After all, the general problem of overpromising retiree pension and health benefits is also a primary driver of the federal government’s unfunded liabilities, estimates of which range anywhere from $61.6 trillion to $106 trillion. As bad as the state and local problems are, the federal problem is an order of magnitude worse.
Similar to Gov. Quinn, Zakaria continues to believe that this problem can be solved by higher taxes. He continues to believe that the Simpson-Bowles approach “is a superb framework for deficit reduction.” Measured against a current-policy baseline, the Simpson-Bowles approach is the classic “balanced approach” to deficit reduction, with an almost 1:1 ratio of tax increases to spending “reductions” (the first being real, the second being historically illusory). This is, as previously noted, the center-left’s establishment’s false solution to public debt:
The establishment continues to ignore that a history of fiscal consolidations in 21 countries of the Organization for Economic Cooperation and Development over 37 years shows successful attempts to balance budgets rely almost entirely on reduced government expenditures, while unsuccessful ones rely heavily on tax increases. They continue to ignore that the Tea Party extremists at the International Monetary Fund advise that a prolonged period of weak growth and high unemployment be addressed by spending cuts and temporary tax cuts, not tax increases. They ignore successful examples including New Zealand, Canada, and the post-WWII United States. They ignore that the “balanced approach” is failing where tried in Europe. In comparison, Estonia, Lithuania and Latvia have bounced back strongly after adopting strict austerity measures and vastly reducing government indebtedness. Indeed, Estonia is just starting to get good coverage in America, causing Paul Krugman to mislead his readers about it.
We need only compare Wisconsin to Illinois for confirmation of this point. But Zakaria had it in his own face this morning on CNN. London Mayor Boris Johnson told Zakaria the UK’s coalition government has not “savagely” cut spending. I suspect Johnson picked up that term from a Daily Mail piece detailing the failure of the coalition:
[E]vidence of particular cuts, and of individual hardship, do not amount to proof that overall expenditure has been savagely reduced. It hasn’t been.
The reason so many people readily believe the ‘cuts lie’ is almost certainly because there has been an unprecedentedly tight squeeze on living standards as a result of higher taxes and falling or stagnating incomes, and rising inflation.
If Zakaria absorbs that lesson, he will deserve a full three cheers.