StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



This Is Neither Effective Deficit Reduction Nor Personnel Policy

04 Aug 2010
Posted by Andrew Samwick

I hate the idea of salary freezes.  In one sentence:

If you freeze salaries, then only the people who don't deserve a raise get the raise they deserve. 

Everyone else gets less, and the discrepancy is widest for the most productive people.  Who decided this was an effective personnel policy?  Why is it that when institutions are strapped for cash, they pay less attention to how they allocate their resources?  When cash is scarce, we should spend our money more intelligently.  What is intelligent about a compensation policy that fails to differentiate based on performance?  Reduce staff.  Set the baseline raise at a negative number.  Do something, but don't force those who merit additional compensation to subsidize those who don't.

Here's the relevance today.  The first two paragraph's of Scott Wilson's Washington Post article on the freeze on bonuses are these:

President Obama ordered a freeze Tuesday on all bonuses and other monetary awards to federal political appointees, saying: "Like households and businesses across the country, the federal government is tightening its belt."

Obama is under intense political pressure to close the federal budget deficit, and a presidential memo he issued Tuesday night is the latest in a series of personnel decisions designed to help do so.

If you make your way down to the fifth paragraph, you find this:

White House officials estimate that 2,900 employees will be affected by the order, which is projected to save the government $1.9 million a year.

So even if the savings were 1000 times as large, they would still not amount to substantial deficit reduction.  I can figure out why Obama says what he does -- he's a politician.  I cannot figure out why Wilson writes what he does.

Deficit Reduction Garbage

I really wish Obama would break out the Perot flip charts during a prime time address and tell everyone what the reality is with the budget. A few days ago on CNBC's website (I'm in the financial industry so I have their ticker on my desktop all day) they had an article titled something like "Ten ways to cut wasteful governement spending." It popped up like a slide show and included things like using more teleconfrences and not replacing the Federal auto fleet at the same pace.

Okay, fine everything seems like it might be wasteful - and the total cost savings of this brilliant plan, $238 Million dollars. This is the equivelent of a family charging $1,000 a month to credit cards deciding not to give the kids a quarter to put in the gumball machine at the supermarket. The general public is still under the impression that our deficit and debt is simply based on wasteful spending programs, high salaries for government workers, and foreign aid. Why are they convinced of that? Because cutting those items doesn't affect them. Medicare, Medicaid, Social Security and Defense all have to be significantly cut AND taxes raised or we're Prussia. Why can't anyone in a position of power just say that.


Why get upset about the small stuff?

"If you freeze salaries, then only the people who don't deserve a raise get the raise they deserve."

Of course. Although the exact same mismatch between reward and performance occurs whenever all workers get the exact same raise by seniority regardless of performance. Say "unionized government work force".

It accounts for -- among many other things -- the well-known phenomenon of the highest-qualified and most idealistic young teachers quickly fleeing from urban school systems, after getting stuck in the union lockstep that keeps them from ever advancing ahead of their least competent, least caring co-workers who barely show up.

When cash is scarce, we should spend our money more intelligently. What is intelligent about a compensation policy that fails to differentiate based on performance?

Well, yes..

But why get upset about the tiny issue of a few appointees and a freeze amounting to all of $1.9 million (government accounting still recognizes amounts so small?) when the entire government workforce is organized this way permanently?

"President Obama ordered a freeze Tuesday ... saying: 'Like households and businesses across the country, the federal government is tightening its belt.'"

Of course the federal government *is not at all* tightening its belt like the private sector, and neither are state or local governments.

After Obama explicitly promised 90% of stimulus spending would go to the private sector, it went hugely disproportionately to government.

And while private sector employment has plunged by 8 million jobs, state and local employment is stable (after rising for most of the recession) as it always is during recessions -- state employment is still up and federal employment is up too.

And, obviously, government employees are still getting their contractual raises -- sometimes more!

Here in NYC, the hugely politically powerful Transit Workers Union just got a new 11% raise (!) from arbitrators saying they could take it from federal stimulus money (!) allocated for subway construcion. (Since $400m of stimulus money went into construction account A, total construction was overfunded by $400m, so that much could be taken from construction account B for the pay raise. So said the arbitrators, one of whom was the ex-union head. Money is fungible.) This exactly while transit system is going broke, with fare increases hitting riders, services being cut, and new taxes being dropped across the citizenry just to keep the rest of the system moving.

So ... Obama being so disingenuous about the gov't "tightening its belt" by this entire $1.9 million is probably just your typical cynical political posing.

But if I wanted a rationale to think more highly of him, I'd imagine maybe he was sending a message to unionized government work forces: "If you'd agree to follow this example and give up your contractual raises for a year or two, we could avoid layoffs of govt workers without a running up the deficit and debt even further with yet another mega-dollar stimulus bill".

Although he's not so foolish as to think that will ever happen.

When faced with a funding shortage, unions near always follow the will of the majority of their members to keep their wage hikes by insisting instead on the lay off of the minority with the least seniority in their great lock-step march.

Then we find ourselves in a situation where: "We must have a big new federal stimulus to prevent layoffs of state employees!"

An argument that here in NYC is being made by the Transit Workers Union right now, as the MTA tries to close a small part of its huge funding gap with a small number of layoffs.

So really, as to ...

Why is it that when institutions are strapped for cash, they pay less attention to how they allocate their resources? When cash is scarce, we should spend our money more intelligently. What is intelligent about a compensation policy that fails to differentiate based on performance?

... I completely agree -- but focusing on this ant hill of a wage freeze as an offending example while ingoring a whole range of mountains seems odd to me.


Salary Freezes

They're stupid, but in this case relatively harmless. If the only frozen salaries are those of the political appointees, you are freezing the salaries of people who--almost invariably--did not take the job for the money. (There may have been a few exceptions in the Bush administration.)

The much bigger problem in the Federal government is that the general schedule is capped by the political schedule is capped by Congressional pay. Unlike political appointees, who can crawl back to law firms, businesses, and the palmier parts of academia, many senior government employees must live their entire lives on government pay. This makes it harder to recruit and much harder to retain at the GS-15 and SES levels. A few agencies have slithered out of this--mostly financial services agencies such as the FDIC and techie agencies such as the NIH. But most are stuck with it.


Why should there be a raise

Why should there be a raise every year? And not every two years or half year? So, if they freeze the salary but for deserving candidates who will leave otherwise, they make exceptions and keep them, that would be fine with me.




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