The State of the Silver State
Tonight Governor Gibbons announced his new budget proposal would include a 6% pay cut for all state employees. Being just such an employee, I received an emailed letter alerting me to the eminent news as well as a phone call from my school district alerting me to the email.You might think I'd be a little frustrated about losing some pay, but if it means I'm more likely to keep my job, then it sounds great to me. That's exactly the justification that Gibbons gave for the proposal. Now it might be a bit selfish of me to wish for others to take a hit for me, so let's crunch some numbers and see where it takes us.
Let's say the average teacher salary is $50,000, for a nice round number. A 6% cut means a teacher loses $3,000 a year. There are about 20,000 teachers in Nevada, so that's a savings of $60,000,000 for the state or about 1,200 teachers (again using a $50,000 salary, but the average salary of a laid off teacher would be lower because the newer teachers go first, which means a larger number of teachers spared). That means you save 6%+ of you teachers from losing their jobs or 3 teachers at a school site with 50. If you go the layoff route, average class sizes would go up 6%, from about 20 to 21.2 in Nevada.
I don't know if a solid argument for either action came out of that analysis, so let's talk about lowering wages vs. laying off in general. As a company if I lower wages, I get the same work for less money, unless the employees are so disgruntled that they decrease their productivity. On the other hand if you lay people off, those who stay might not be disgruntled, but they'll likely fear losing their jobs. Assuming you lay off the less productive workers, you could still increase your productivity/cost ratio (there's probably some fancy business term for that).
When you are the government though, those you lay off could draw unemployment, so you end up paying them anyway. And the newer teachers who are being laid off aren't necessarily the least productive either. So I'll have to stick with my biased opinion that this was a good move by Gibbons. But feel free to enlighten me otherwise.
Comments
I hope everything works out for you especially now that you are vested in a new place and a new home.
Rhett
http://www.slate.com/blogs/blogs/kausfiles/archive/2008/12/31/kf-sees-seeds-of-recovery-in-its-own-suffering.aspx
http://www.becker-posner-blog.com/archives/2009/01/the_obama_stimu.html
Here is the post I was thinking about when I said, one theory explaining current depression is that the fed created the problem by letting inflation get out of hand, which, in turn, created a housing bubble:
http://www.volokh.com/archives/archive_2008_12_21-2008_12_27.shtml#1230074542
As for the sticky-prices, I always like it when I came up with some of same ideas as more informed people. They convinced me more thoroughly that lowering wages is a good approach, though the sound bites I've caught at work are anything but in agreement. My mom is the lone experienced teacher I've heard say that she has no problem taking a hit for the newer teachers. Greg also had an interesting point (he tried to comment but my blog was having some technical difficulties) that in CCSD they negotiated salaries for two years, so they are locked in to the same salaries for next year (someone on that union negotiating team was either in the know or was pretty bright to see this coming).
A couple of other thoughts on Posner: I'm not sure why he feels that the government spending program will increase demand to exceed previous levels (X+Z). And he talks of deflationary pressures making people wary to take loans that they will have to pay back with "more expensive dollars." While housing prices have fallen, inflation was actually higher in 2008 than in recent years.
Lastly, Posner discusses increased saving by consumers as a detriment to the economy. I agree with this line of reasoning, but something has always bothered me about the idea of fiscal responsibility of the part being detrimental to the whole. But an analogy to food storage has helped me come to grips with this one. If people store their food in times of plenty, then there is an obvious benefit when a crisis arrives. But if people try to create a food storage in the midst of a crisis, that leads to a run on the grocery store, and while benefiting the part, is surely detrimental to the whole. Same goes with savings. If people save during prosperous times, an economic slowdown doesn't get them so worried (not to mention it could help curtail some of the bubble formation), they don't decrease their spending as much, and their savings helps keep cushion the blow for the whole economy. Voila, timely personal savings can benefit the economy as a whole. I'm at peace now.
Remember, my original post objected to this language: "While capitalism likely got us into this mess, I also think that it's the vehicle that will get us out of it." That sentence, it seemed to me, blames the free market for the economic downturn. I was puzzled why you would accept the premise that capitalism was to blame for the downturn when there was considerable evidence that the government, not capitalism, was at fault. You argue for a free market solution, but it makes more sense to rely on a free market solution when the problem was not originally created by the market.
Your response to my post then acknowledged that you through the government (in the form of Freddie and Fannie) had a role to play in the downturn. Thus, you either reversed course or clarified what you originally meant. To the extent you agree that the government is, at least, partially to blame for the downturn, we are on the same page.
Let me then turn to the question of whether interest rates were "too low." I'm not sure I agree with what Berstein writes. I just thought it was interesting food for thought--another argument for how the government may be at fault for the economic crisis.
I think, however, your objection to the term "low" is a semantic argument. Bernstein says the recession is the result of "lax monetary policy." I said interest rates were too low. I think these mean pretty much the same thing. Your response is that 5% is a medium rate, not low. I however, would think that if the interest rate should be 10%, then 8% is "low", even if normally interest rates are lower than 8%. In other words, I'm I'm saying "low as compared to where they should be" instead of what you are saying which is "low as compared to historic rates." Don't you agree that the relevant question is: what is the correct level for interest rates? History gives us guidance on the correct level. But to compare historic average interest rates to the current interest rate does not tell you whether the current rate is appropriate.
In any event, I'm not necessarily endorsing Bernstein's argument. My only point was that there was more than one argument floating around for why the government is responsible for the current recession.
--rdh
I'll cede you the point on the relativism of the term "low" when describing interest rates. I'm just a little skeptical that monetary policy could have completely averted the problem.
Also, I never said that "I" contributed to the downturn in any way, in fact I feel quite the opposite. I reduced Freddie's mortgage holdings, rather than increasing them. I also didn't participate in a risky loan. And along the lines of my savings/spending reasoning, I've spent way more than I've saved since the recession hit.
LOL! Your last post is very funny. But, at the same time, I can't tell if you're joking or not about "you" causing the downturn.
If you're not joking, let me clarify. My post from yesterday has a mistake. I wrote "that you through the government (in the form of Freddie and Fannie) had a role to play in the downturn."
The word "through" should be read "thought." Sorry for the mistake.