Posted by on December 30, 2012

Bloomberg has been running a series lately on the pay practices of the twelve most populous states in America.  For anyone who wants to know how America got into its current mess, it is shocking and required reading.

Bloomberg calculates aggregate compensation figures for each of the states, including salaries, pensions, benefits, overtime and payment for untaken vacations.  These figures are then divided by the number of state employees  to come up with an average compensation figure.  The winner by far in this dubious contest is California, with an average cost of $ 60,317 per employee, following by New York ($55,650), New Jersey ($54,064) and Illinois ($51,387).  Taking up the last places are Texas ($35,442), Florida ($34,481) and Georgia ($28,682).

Notice a pattern?  Let me make it clear: the first five states are true Blue states; the sixth through the ninth states are either Blue or swing states; and the last three are Red or swing states.

Let’s start with the obvious point about the hypocrisy of left-leaning politicians who routinely (and rightfully) denounce overcompensated businessmen but then take every opportunity to feather their own beds and the beds of their supporters.  When I look at these figures in the States, I am reminded of the recent expenses scandal in the UK Parliament where by far the worst offenders were from the Labour Party.

There is a further point that has greater significance and which ties to the general theme of this blog, which is that people, regardless of their political leanings, respond to the incentives placed in front of them and seek to optimize their position.  One of the great mistakes of the fans of government intervention is to assume that politicians and public servants are not driven by the same “selfish” motives as private sector actors.  Although there are some genuinely selfless public servants, usually ones with a private sector fortune, the vast majority are driven by the same motives as the rest of us.   As Milton Friedman used to rhetorically ask when criticizing some new plan for government intervention, “where are we going to get these angels” to run the program?   There was never an answer.

But this is not just a question of choosing between public and private sector devils.  There is a big difference between the two.  Although the private sector is far from perfect and “agency problems” certainly exist (often greatly abetted by poor legislation), the private sector operates in a competitive market that restrains the tendency to self-gratification.   The competition comes from both the product market, where inefficient producers lose out, and from the market for capital, where wasteful managements are (eventually) punished by the debt and stock markets.  The electoral process provides some constraints on politicians, but there is no question that it is far less direct, immediate and thorough.  Public sector actors can pursue their self-interests virtually without limit.

This brings us to the final point of this post.  Arguments for government intervention usually start by asserting that there is some “market failure” that needs to be corrected by legislation or regulation.  Leaving aside the point of whether the alleged failure actually exists, which is often not the case, this is obviously too low a standard to justify intervention.  The implicit assumption here is that an imperfect market needs to be corrected by a perfect government.  In other words, a government manned exclusively by the “angels” that Milton Friedman spent his career trying to find.  The right standard of intervention should be whether the market failure can be fixed by a government that is itself subject to multiple forms of systematic failure, with a very limited self-correcting ability.  Common sense and history tell us that these circumstances are rare and the hurdle to justify intervention should be set much higher.

Roger Barris, Cape Town, South Africa

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Posted in: Economics, Politics

Comments

  1. Robin Marriott
    January 3, 2013

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    Roger,
    Enjoying your posts a lot !
    If only you would start on about real estate as well.
    Rm

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