Congress Decides to Help Its Own

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WASHINGTON-Although private sector employment has declined by 7.8 million since December 2007, on Tuesday President Obama signed into law the Education Jobs and Medicaid Assistance Act, a bill that would spend $10 billion on state and local government workers and $16 billion on state Medicaid payments. Not a penny for the private sector.

The $26 billion will be funded primarily by higher taxes beginning in 2011 on multinational corporations ($10 billion over the next decade) and cuts to the Food Stamps program in 2014 ($12 billion). No one seriously thinks that the Food Stamps cuts will materialize, and Speaker Nancy Pelosi specifically stated in her description of the bill, "House Democrats will work to restore this funding before cuts are implemented."

With this new law, Congress is rewarding states that have been fiscally irresponsible. It should leave states alone to make needed budget cuts and get their finances in order - and repeal the section of the health care law that expands Medicaid, further burdening states.

Naturally, aided by lobbying from powerful institutions such as the American Federation of State, County, and Municipal Employees and the National Education Association, states threaten to lay off teachers and firefighters if Uncle Sam does not come to their rescue. These are their most visible expenditures.

States haven't broached the subject of cutting excessive pension payments and using those savings to pay teachers. Take California, whose California Public Employees Retirement System is facing shortfalls of half a trillion dollars. It's not attempting to trim pension benefits for over 9,000 government workers collecting over $100,000. Instead, it wants money to avoid layoffs.

A better use of revenue from higher taxes on multinational corporations would be to extend expiring tax provisions that would benefit a broader swathe of the economy, including the private sector. This would offer more incentives for employers to create jobs.

Congress could lower the alternative minimum tax, a parallel tax system set up to catch high-income tax avoiders that now traps middle-class families. It could extend current personal and corporate income and capital gains tax rates, set to rise next January.

American businesses already face one of the highest corporate tax rates in the developed world, and countries such as the United Kingdom are cutting corporate tax rates in order to attract globally mobile companies.

Meanwhile, rather than increasing our competitiveness, Congress specifies that the $10 billion Education Jobs Fund can only be used to support the salaries of current teachers or to hire new ones. Funds cannot be used to "establish, restore or supplement a rainy-day fund" or to "supplant State funds in a manner that has the effect of reducing or retiring debt obligations incurred by the State." Rather than reorganizing their expenditures, states have to spend more.

The bar to receiving the funds has been significantly lowered for a number of states whose tax receipts in 2009 are lower than in 2006. These states only have to maintain spending on education at 2006 levels to receive money, while other states have to meet 2009 levels to qualify.

Given that the recession didn't start until 2008, 2006 seems an arbitrary year to pick. Or not. About 70% of the states that have to spend at 2006 levels (covering over 100 million people) voted for President Obama in 2008, while the remaining 30% (covering around 30 million people) opted for Senator John McCain.

Meanwhile, Texas is singled out for special treatment. Under a Texas-specific provision, the state has to maintain education spending at current levels until 2013 in order to receive any funding-an honor accorded to no other state.

Under the Texas constitution, no "appropriation of money [can] be made for a longer term than two years." Lt. Governor David Dewhurst has asked the Texas attorney general to investigate options.

It's not as if state and local workers are doing worse than private-sector workers - they're actually doing better.

Compensation - wages and benefits, especially pensions - was higher for state and local government workers in 2009,according to the Commerce Department's Bureau of Economic Analysis. Average compensation for private sector workers was $61,000, of which 18% was benefits. State and local government workers on average earned $70,000, of which 24% was benefits.

The mix of occupations in the private sector and the government is different, making direct wage comparisons complex. But it cannot be denied that state and local government workers' pay has risen faster than that in the private firms - by 19% since 2000, compared with 9% for private sector workers.

These higher levels of compensation don't even include the biggest benefit of government service-job security. It's hard to get fired. Yes, some government workers have lost jobs, but nowhere near as many as the private sector. Between 2000 and 2009, private sector employment declined by three percent, whereas state and local government employment grew by nine percent.

During this recession, significant shares of stimulus funds have gone to state and local governments to stave off layoffs. This has arguably prolonged the recession, rather than making it shorter. If the funds had been used to stop taxes rising in 2011, providing more certainty to businesses, consumers, and investors, then private job creation would have risen - as it rose when Presidents Kennedy, Reagan, and George W. Bush cut taxes.

Last week Congress asked "whom should we help?" Should we help the hundreds of millions of workers in the private sector, or should we help government workers whose ranks have been swelling and whose compensation has been increasing?

Last week, Congress looked in the mirror and saw government employees, and that's whom they helped.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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