Report: Housing bubble, not workers caused state budget shortfalls

When politicians are facing a crisis, it’s often advantageous for them to find a scapegoat to blame. If that scapegoat happens to be an adversary that can be demonize, so much the better. When state leaders were facing very real budget shortfalls earlier this year, some chose to blame the shortfalls on overpaid public sector workers and their greedy unions and attempted to turn the general public against the people who provide public services.

But a recent report entitled The Wrong Target: Public Sector Unions and State Budget Deficits by researchers at the University of California at Berkeley concludes that public sector workers aren’t overpaid and that neither their compensation nor public sector unions are responsible for state and local government shortfalls; the real culprit, according to the report, is the bursting of the housing bubble, which caused the Great Recession and slackened business activity, which, in turn, reduced local and state government revenue.

After the speculation on home mortgages collapsed in 2008, the Great Recession set in and state budget deficits reached all-time highs.  In 2009 state budget deficits climbed to $110 billion, $30 billion higher than the previous high. That record was shattered in 2010 when state budget deficits reached $191 billion.

Politicians like Wisconsin Gov. Scott Walker concluded that the state’s budget crisis was the fault of public sector workers and told voters, “we can no longer live in a society where the public employees are the haves and taxpayers who foot the bills are the have-nots.” He subsequently cut public sector wages and benefits and eliminated their right to collective bargaining.

If Gov. Walker were correct that public sector worker compensation was the cause of states’ budget deficits then public sector compensation should be an increasing share of state budgets. But according to the authors, “public sector compensation as a share of state budget has actually declined.” Between 1992 and 2002, state worker compensation as a share of state budgets declined from 23 percent to 19 percent. Since 2002 compensation as a share of budget has remained at 19 percent.

The trend held true in states with higher concentrations of union members. Over a 30-year period, the average share of public worker compensation of budgets for the ten states with the highest union density was 19.6 percent; the average share for the ten states with the lowest share was 18.7 percent.

In 2009, the gap narrowed to just 0.5 percent. Compensation in the states with the highest union density was 19.8 percent of budget compared to 19.3 percent for states with the lowest union density.

The report also finds little support for Gov. Walker’s assertion that public sector workers are the “haves” and private sector workers are the “have nots.”  The authors refer to a growing body of work that shows that wages of public sector workers lag behind those in the private sector who do comparable work and have comparable education and skills. Even when health care and benefits are included in the comparison, public sector compensation is not better than private sector compensation.

If anything, private sector and public sector workers are both the “have nots” in our society.

The real “haves” in this society, and those protected by Gov. Walker’s rhetoric, are those who engaged in speculative trades based on the questionable value of numerous home markets that set off the trillion-dollar housing bubble. When the bubble burst, housing values fell, housing construction plummeted, which affected other parts of the economy, and a lot of people lost their jobs.

As property values declined, so did tax revenue based on property value. As more people were laid off, business activity declined, which also dried up tax revenue. The result was the record budget deficits of 2009 and 2010.

For politicians like Gov. Walker it will always be more useful to blame a scapegoat than to face up to the structural causes of our state deficits. Our economy produces more than we consume, and speculative activity such as the housing bubble are needed to soak up the excess. Speculative activities are capable of creating great wealth but are prone to crashes that reverberate throughout society resulting in numerous crises including soaring state budget deficits.


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