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Wednesday, September 19, 2012

The usual suspects, part 1

“I do not believe that the solution to our problem is simply to elect the right people. The important thing is to establish a political climate of opinion which will make it politically profitable for the wrong people to do the right thing. Unless it is politically profitable for the wrong people to do the right thing, the right people will not do the right thing either, or if they try, they will shortly be out of office.”
      Milton Friedman, Nobel Prize-winning economist
For public employee unions seeking to find someone to blame for the public pension crisis, there are always the standard issue villains: Wall Street and politicians. For advocates of small government, the villains are public employee unions and politicians.  At least both sides have one villain they can both agree upon.  David Crane in his editorial on September 15, 2012 (Pension problems not the fault of employees) lays blame for the public pension crisis squarely on politicians.  He takes politicians to task for promising benefits but failing to adequately fund them.

Based on his background, Mr. Crane is obviously no naif when it comes to government or California politics.  However, he is missing the most fundamental problems with politicians: they deal in immediate benefits but deferred and diffused costs.  Politicians can immediately reward constituencies or special interest groups through laws and regulations but hide the true cost by deferring it to the future or diffusing it over a large number of taxpayers.  One group can receive something now while those that have to pay for it are unaware of the true cost because it will not hit until the future.  This cost can also be spread out over a large enough number of taxpayers that it is not readily apparent, but the small costs will accumulate over time and steadily increase the taxpayers' burden.

Those who receive the immediate benefits have a very strong incentive to get politicians to take their side and will use whatever resources they have to accomplish this.  Taxpayers, unfortunately, are given a misleading picture of what this is doing to the long-term financial health of the government and its ability to provide necessary services.

Mr. Crane may be correct that politicians are at fault. He writes that pensions and retiree health benefits are simply forms of deferred compensation that were promised by California's politicians but not adequately funded.  But this is just another product of the system in which politicians exist, and the system usually works fine until all those deferred and diffused costs become so great that they can not and will not be paid.  Then it breaks down and you have a situation like the public pension crisis.

Milton Friedman had a better understanding of the situation and why politicians themselves are not the real problem.

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