Message: The Blue Men Group
The Blue Men Group
Can Democrats reform New York, Illinois and California?
Republicans return to power in the U.S. House and many statehouses this week, but in three of our largest and most troubled states the voters in their wisdom have kept Democrats in charge. In California, Illinois and New York, we are about to learn if Democrats can adapt to new fiscal realities or will merely continue their slide toward welfare state decline.
For the sake of the country, we hope they can turn things around. These blue state bastions were once engines of American growth and opportunity, and in total they still represent more than 15% of the U.S. economy. But in recent years they have all shed businesses, jobs and people. Their budgets are a disaster, with huge deficits and unfunded pension liabilities.
It's no accident that all three are also the very model of modern welfare and regulatory states. Their capitals have been dominated by a triumvirate of government-employee unions, trial lawyers and well-to-do environmentalists pushing an agenda of regulation and income redistribution.
The nearby table, based on the annual survey by the Tax Foundation, shows the result in business tax climate overall and by various tax categories. New York and California are ranked 50th and 49th, respectively. Illinois fares better overall thanks mainly to its relatively low individual income tax rate, which has long been a flat tax of 3%. Rather than preserve that advantage, however, Governor Pat Quinn wants to raise the rate to 4%, and other Democrats want to take it to 5%. Reviving these liberal states means addressing these tax and other barriers to growth.
What are the prospects for genuine reform? They are probably the worst in Illinois, where Mr. Quinn and the Springfield Democrats were returned to power despite the national GOP wave and are intent on having their way. They are now in a lame duck legislative session pushing the tax increase to close a $13 billion deficit out of a $30 billion or so general fund budget.
The Governor has sold this as a "surcharge for education"—the better to con the middle class—but it's clear the proceeds will be used for general revenue too. Mr. Quinn's plan would cost the average middle class family about $800 a year more in taxes, on top of sky-high property tax levies.
Mr. Quinn is also proposing to raise $15 billion in new revenue bonds, though the state already has some $100 billion in unfunded pension and health-care liabilities. Government workers pay nothing for health-care benefits and many can retire as early as 50 or 55 with a pension that pays 80% of the average salary of their final four working years.
Many of these "retirees" could receive pensions for more years than they worked, even as they are young enough to take another job. The new bond plan requires a supermajority vote of the legislature, and Republicans should at least insist that the plan not pass in a lame duck and include major pension reforms.
Reform prospects are marginally better in California and New York, if only because they have new Governors—or sort of new. California's Jerry Brown is on his second tour after serving from 1975 to 1983, when he gave state workers the collective bargaining rights that have made them so powerful. New York's Andrew Cuomo is the son of three-term Governor Mario Cuomo, the liberal's liberal. The success of both new Governors will depend on how much they are willing to challenge this liberal legacy, especially the interest groups that built the unaffordable state governments.
Mr. Cuomo is off to a good rhetorical start, saying in his Saturday inaugural address that "The words 'government in Albany' have become a national punch line. And the joke is on us." He added that "the state government has grown too large" and "we can't afford it" and "this state has no future if it is going to be the tax capital of the nation."
Following New Jersey's Chris Christie, Mr. Cuomo has proposed an annual cap on property tax increases. This is making him the right media enemies, though his cap is still more porous than it should be. Mr. Cuomo will have to close an $8 billion deficit, and he may benefit from having a Republican state senate, assuming the Albany GOP has also learned something from November's elections.
As ever, Mr. Brown is the Sphinx, a smart liberal who understands that the demands of government unions are leaving little money for such traditional liberal purposes as higher education. He also knows California's highly progressive tax code has led to revenue booms and busts. At age 72, he may figure he's got nothing left to lose and so will challenge the entrenched Sacramento legislature.
But the liberals who dominate that legislature are unrepentant and want Mr. Brown to help them avoid serious cuts to close a $28 billion budget hole over the next 18 months. Instead, they want more tax increases. The expectation in Sacramento is that Democrats will portray a tax increase as the only way to avoid a financial meltdown and cuts in parks, schools and public safety. Mr. Brown will then honor his campaign promise to take a tax increase for voter approval in a June referendum. Only if the tax measure fails will Mr. Brown pursue more serious reductions in the size and scope of state government.
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Rehearsing all of this reveals how high the obstacles to reform are in these blue states. Once government unions become politically dominant, only persistent taxpayer attention can overcome it. Unions and the political class will make as few changes as possible while hoping that a national economic recovery will ease their budget woes—and public scrutiny. Perhaps they will be right.
In the meantime, Republicans in Washington will be doing these states—and Governors like Mr. Cuomo—a favor by denying them any new Washington aid. Democrats and the voters who elected them deserve to confront the consequences of liberal governance.
McGurn: Labor's Coming Class War - WSJ.com
Labor's Coming Class War
Private-sector union workers begin to notice that their job prospects are at risk from public-employee union contracts.
Jeffrey Brown of PBS's "NewsHour" recently summed up the year's economic performance by invoking the most overworked chestnut of modern American punditry: "the disconnect . . . between Main Street and Wall Street."
The notion that Wall Street and Main Street are fundamentally at odds with one another remains a popular orthodoxy. So much so that we may be missing the first stirrings of a true American class war: between workers in government unions and their union counterparts in the private sector.
In theory, of course, organized labor is all about fraternal solidarity. For many years, it is true, private-sector unions supported collective-bargaining rights and better benefits for government workers, while public-employee unions supported the private-sector unions in their opposition to legislation such as the North American Free Trade Agreement in the 1990s.
Suddenly, it's a different world. In this recession, for example, construction workers are suffering from unemployment levels roughly double the national rate, according to a recent analysis of federal jobs data by the Associated General Contractors of America. They are relearning, the hard way, that without a growing economy, all the labor-friendly laws and regulations in the world won't keep them working.
What's more, "blue-collar union workers are beginning to appreciate that the generous pensions and health benefits going to their counterparts in state and local government are coming out of their pockets," says Steven Malanga, a senior fellow at the Manhattan Institute. "Not only that, they are beginning to understand the dysfunctional relationship between collective bargaining for government employees and their own job prospects."
The signs of this new awakening are gathering. In New Jersey, Gov. Chris Christie rightly becomes a YouTube sensation for taking on his state's obstinate public-sector unions. The more interesting story, however, may be the president of the New Jersey Senate, Steve Sweeney—who also happens to be an organizer for the International Association of Ironworkers.
In the days of Democratic Gov. Jon Corzine, Mr. Sweeney angered state-employee unions by opposing their push to balance the budget with an increase in the sales tax. In the Christie days, he continues to anger them by pushing for reform of state-employee pay and benefits. Another way of putting it is that Mr. Sweeney knows that 40% of his fellow iron workers in New Jersey are out of work—and that unless his high-tax state gets its fiscal house in order, the only work they'll find will be in Texas.
Over in New York, meanwhile, newly inaugurated Gov. Andrew Cuomo faces a similar battle. Mr. Cuomo campaigned on a cap on property taxes and a freeze on state salaries, both anathema to the powerful state-employee unions. As the New York Times reported last month, however, in this showdown Mr. Cuomo may have found a surprising ally in the 100,000- member Building and Construction Trades Council of Greater New York. Maybe not so surprising: The Times says unemployment for these workers is running at 20%.
Elsewhere, in 2005 Republican Govs. Mitch Daniels and Matt Blunt used executive orders to end collective bargaining with state employees in Indiana and Missouri, respectively. Now the incoming Republican governors of Ohio and Wisconsin—John Kasich and Scott Walker—are targeting collective bargaining for government workers in their states.
In some ways, this new appreciation for the private sector is simply back to the future. FDR, for example, warned in 1937 that collective bargaining "cannot be transplanted into the public service." In the old days, unions understood economic growth. Mr. Malanga points to AFL-CIO President George Meany's strong support for the JFK tax cuts as an example.
These days the two types of worker inhabit two very different worlds. In the private sector, union workers increasingly pay for more of their own health care, and they have defined contribution pension plans such as 401(k)s. In this they have something fundamental in common even with the fat cats on Wall Street: Both need their companies to succeed.
By contrast, government unions use their political clout to elect those who set their pay: the politicians. In exchange, these unions are rewarded with contracts whose pension and health-care provisions now threaten many municipalities and states with bankruptcy. In response to the crisis, government unions demand more and higher taxes. Which of course makes people who have money less inclined to look to those states to make the investments that create jobs for, say, iron workers, electricians and construction workers.
Some of these folks are beginning to notice.
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