Tuesday, January 8, 2013

How to make it worse

One of the local cities is in a bit of a deadlock with its employees. The employees are underpaid, and the city claims it's broke. An independent arbitrator recommended the city shut up and give its employees a 12.5% raise. Twelve and a half percent annual increase. That's, frankly, unheard-of; but it might actually increase the wages' purchasing power to what it used to be.

See, the official measure of inflation leaves out a lot of things that have gone up a lot faster. Stuff like medical care (a lion I don't care to poke with a stick right now) and the price of housing. So while there may have been so-called "cost of living" increases (although that's by no means certain), they won't have kept pace with the actual cost of living, based as they are on a bogus measure. So the purchasing power of the city employees' wages has declined.

And what do people do when they have less purchasing power? Even in the days of doing everything on credit and hang the future, they buy less stuff. This means less sales tax for the city, which puts a hole in the budget, leading to no pay increases, and so reduced purchasing power and oh look, we have a vicious cycle because people are scared of shared deficits (personal deficits, they're fine with, but try sharing them and people will scream bloody murder) and so the public sector employees are acting as a drag on the economy.

Now, if you increase a typical working stiff's take-home, what's he going to do? Dollars to donuts he'll buy a huge television, and boy howdy does that carry some sales tax. Then he'll buy a blu-ray player, some games consoles, a whole bunch of movies in HD, and he'll re-up his cable which also feeds revenue to the city. And suddenly, by increasing your workers' wages, you've made a massive increase in your revenue, and you can afford the increased wages. It is impossible to cut your way to prosperity. It's been tried, over and over, and it has completely failed on every occasion.

So while 12.5% may be taking the piss, a pay freeze is one of the worst ideas around for recessions. It makes the recession last longer, because the economy is driven by consumer demand. And when there's no slack in the consumers' budgets, they don't provide that demand, and we have a stagnant economy. All of this is simple logic...


  1. This comment has been removed by the author.

  2. A very easy mistake to make, and a very dangerous one.

    Like the eigthteenth-century chemist who weighs a substance, sets it on fire, weighs the ash, and concludes that burning creates or destroys mass because he didn't think to weigh the air, you see a value that doesn't exist because you leave out part of the equation.

    Approximation to the first order: every dollar the city pays its employees is a dollar the city doesn't spend elsewhere. In exchange for raising the workers' pay, you cancel a road-maintenance project, and take away the same amount of money from manufacturers and construction workers. Net economic benefit: nil, or more likely negative. People drive on worse roads, Chinese TV manufacturers get richer, and no one is more prosperous than before. And maybe 2% of that money comes back to the city treasury as taxes.

    Approximation to the second order: instead of canceling the road maintenance, you create public debt and pay for both. For a *very* short period of time, this is an adequate way to smooth out cash flow. But in the longer term, borrowing is simply taking from your future selves (or your children), and the future always pays in greater measure than you receive, because interest isn't simply a fee that banks charge, or a number for the Fed to manipulate as it pleases; it's an expression of the very real fact that a dollar you give me today is more useful to me than a dollar you give me next year.

    Approximation to the third order: you decide simply to not repay your debt, and keep spending more than your revenue forever. This works until people decide that your credit is worthless, and suddenly you can't pay for anything. People are notoriously stupid and slow to make such a decision, but eventually they do.

    Approximation to the fourth order: instead of repudiating your debt, you repay your loans by printing money. Not an option available to most cities in the modern world, but perhaps some national government has decided to "bail them out". The result, of course, is to devalue the money. Those employees whose pay was raised will see the benefit (or at least most of it), but everyone else finds themselves proportionately poorer as the prices of bread and milk and LCD TVs increase. As this actually benefits the intended beneficiaries, it's an easy one to get people to vote for ­— but if it's applied everywhere equitably, the result is Zimbabwe.

  3. Let's retry that again with all the text and none of the spelling errors...

    I don't think the math adds up, there. Let's say for the sake of argument that the employee is making $50,000 a year (which is a nice living wage where I live. It's also a really nice, round number that's easy to calculate with!) His 12.5% raise adds up to $6250 (per year) in gross pay. Before Mr. City Worker (Mr. Ciwo) can do anything, the federal government takes its cuts of that. For the sake of argument, let's say that's 20%, because I'm not a tax accountant and a lot of tax brackets are around there someplace. Once the feds take it, the city effectively loses the ability to tax it - it's not in their local economy any more.

    So now he has $5000 left of his raise (or, effectively, his 12.5% raise is now 10%) now he chops that up into 12 months. Mr. Ciwo gets about $417 of extra income every month. Let's say he goes out and spends ALL of that money on stuff the city can tax, and furthermore, let's say the city gets a 10% cut of what he spends. That's ~$42 of extra revenue out of him. Even if that money moves nine more times (which is exceedingly generous by any economic standard) before coming to rest somewhere out of the city's reach (like Amazon's coffers, for example) the city is still out a lot of money from those pay raises.

    Why? Every time the money moves, it's 10% less because the city takes its 10% out of every movement, which means it keeps shrinking; there's no special monetary force that refills the money back up to its initial level once it's been taxed into the city coffers - in fact, they'll get $271.61 of their $417 using that extremely generous math. That means that with the $6250 pay raise, the city is only recouping $3259.32. Put another way, they have a $2990.68 annual shortfall per employee, even under these deliberately-favorable numbers.

    Obviously, the city can't print money, so they have to make it up somewhere else. That usually means more taxes on the local populace.

    You can argue that the city workers deserve raises for any number of other reasons, and perhaps they do - I'm not trying to judge that, but the math of their pay raises stimulating the economy and coming back to the city with interest doesn't work.

    Cities are kind of over a barrel in times like this and it's hard to see what WOULD work, but I don't think public sector workers getting pay raises is going to do much for the local economy. It's just going to make the workers themselves more comfortable.


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