Out of Control?

Have we lost the ability to self-regulate?  It appears that the current culture built on expectations of instant gratification will lead to a new tragedy of the commons.  Compensation commitments may exceed capacity.

Michael Lewis (Beware of Greeks Bearing Bonds, Moneyball, Liar’s Poker) has done it again…. His newest article, California and Bust, captures the current economic crisis and identifies the next one forthcoming, now predicted to be at the U.S. municipal level.  His statements about what I call “the ratchet effect” at the bottom of page 4 are key.  At the top of page 6, he offers diagnoses and introduces prescriptions.  Pretty light on solutions, but both entertaining and very interesting.

When the engine that has reliably powered and enabled ever-increasing public sector reward expansions sputters and falters, decisions that were easy no-brainers in flush times may come back to haunt those who made them.  Long-term commitments (like progressionary promotions, labor contracts, automatic step-increases or municipal pay programs enshrined in city ordinances) made with the assumption of uninterrupted positive income gains in the future cannot be met when the new reality suffers from far less prosperity than anticipated.  Despite TV advertising slogans, political sound-bite phrases and recurrent movie themes to the contrary, bold dreams, confident hopes and optimistic projections are not self-fulfilling prophesies.  The Pollyannas who cut the employee-friendly deals of yesterday are frequently not around today to suffer the consequences of their short-sighted assumptions.

As a behavioral economist with much experience dealing with labor relations, payroll budgeting and organizational design at that municipal level, I can’t disagree with anything Michael Lewis said.  Bargaining groups will continue to push for higher compensation.  No union negotiator ever lost an election campaign to be on the bargaining committee because they were too tough on management.   But elected public servants are vulnerable to the kind of strong lobbying unions can bring to elections; they are likely to cave in rather than offer strong resistance to wage demands from powerful special interest groups.   Generous actions taken in the past to placate workers (organized or not) can become millstones around the necks of states, provinces, counties or cities confronted with declining tax revenues that are now proving insufficient to cover the expenses they have committed to incur.  Our Western system of adversarial process (head-butting) by which each side ignores what is best in the single-minded pursuit of partisan advantage, counting on the other side to respond accordingly (equally strident from the opposite narrow perspective) until they hash out a mutually agreeable synthesis compromise somewhere between the two extremes, doesn’t fare well when one side is able to effectively dominate the negotiation and dictate terms.  Unbalanced power permits reckless results.  The effect can be hidden for a while, when money keeps pouring in, but when the flow of cash slows or stops, it can have the same effect on a municipality as sudden drops in blood flow have on human hearts.

Rewards professionals should realize that the next decade may feature service level insolvency among states, counties and municipalities.  Imagine the problems when a city trims personnel and reduces activity.  Streets go without repairs.  Police patrols are cut back.  Fire houses are shut down.  Emergency services are less available.  Not to be an alarmist, but this is real, folks.  These things are not likely to happen.  They are guaranteed to occur unless unforeseen events intervene in ways no one can envision at present.  The law of unintended consequences will continue to punish those who ignore it and act upon unwarranted assumptions.

You know what they say about “assume!”

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.) and will express his opinion on almost anything.

Creative Commons Image: Comedy & Tragedy Part 2 by richardgardner69

Comments

[Jacque Vilet]

Great article Jim. I agree with you. Civil servants should never had the richest compensation/benefits to begin with.

But one thing troubles me. Remember why unions were formed in the first place. If they are dissolved now ---- what will happend. The greedy will run amok --- just like they are in the private sector.

I don't think we should throw the baby out with the bathwater. Rachet back progression pay, revise defined pension to defined contributions/401(k), etc. But I'm not in agreement with those that want to banish unions.

I know what the unionized employees were told at American Airlines --- hang in there and you will get pay in ___. Has never happened. Of course they still had their jobs.

I am not pro-union. But with the private sector running amok I don't think the answer is to dissolve unions and put even more people at the mercy of corporations.

Sorry Jim --- can't agree with you on this one.

[E. James (Jim) Brennan]

Who is arguing to end unions? Certainly not me. I have been a union member and have represented union positions in many situations. My point is simply that public sector unions (fire and police, for example) tend to hold disproportunately inordinate power which enables them to threaten any group of voters who do not grant them extraordinary pay and frequently unaffordable benefits. Every elected public servant knows what I mean.

Deals cut in good times based on expectations of permanently inceasing tax revenues can come back to bite you. Workers don't have to be organized to be powerful; but negotiators on both sides must be prudent and responsible. Unfortunately, we have inherited the wind, stuck with deals made by greedy and short-sighted people who disregarded the common good in favor of partisan advantage.

[Jim P]

I've been a management rep. in public sector negotiations for 36 years, and everything in this article is true. The "corruption" usually occurrs w/ elected officials who are beholden to union dues money for election or re-election. However, I have also seen Public officials who were afarid to make waves and say no to unions. Jim

[E. James (Jim) Brennan]

Thanks for the confirmation, Jim P. Agree that "it's just politics" more than deliberate malevolence, when bad things result from any side in a dispute.

Nevertheless, few politicians can survive an issue where the paramedics bus voters from the retirement communities, for example. Search the phrase "public sector pay compression" for this old article http://www.erieri.com/index.cfm?FuseAction=NewsRoom.Dsp_Release&PressReleaseID=112 and correct me, if appropriate. I've failed to find any disagreements so far. Sad to say...