Morici: Is President Obama Out of Step with History?

Wisconsin is ground zero in the struggle to restore fiscal sanity to government.

Budgets are spinning out of control, thanks to union contracts providing overly generous retirement and healthcare benefits and skyrocketing Medicaid costs. President Obama, instead of focusing on systemic problems, seeks political advantage and multiplies the difficulties confronting state governments.

Wisconsin Governor Scott Walker faces a $3.6 billion dollar shortfall over the biennium beginning July 1. He is asking state workers, who currently contribute little or nothing to pensions, to kick in 5.8 percent of wages, and to pay 12.6 percent of the cost of health insurance. In return, he promises no layoffs—compared to private sector workers, those are great terms.

Protesters fill the courtyard and steps outside the State Capitol building on February 16, 2010 in Madison, Wisconsin. Protesters were demonstrating against Wisconsin Gov. Scott Walker's proposal to eliminate collective bargaining rights for many state workers.
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Protesters fill the courtyard and steps outside the State Capitol building on February 16, 2010 in Madison, Wisconsin. Protesters were demonstrating against Wisconsin Gov. Scott Walker's proposal to eliminate collective bargaining rights for many state workers.

The rub—he wants to curtail, but not eliminate, collective bargaining rights. President Obama, mindful of who provides foot soldiers for Democratic campaigns, oversimplifies the issue by calling Walker’s budget an attack on unions.

Worse, the President is interfering with the outcome of an election. By using his political machine to flood Madison with demonstrators, he encourages Democratic Senators in the minority to flee the capital to deny the upper chamber a quorum and shut down the legislative branch of government.

Apparently, President Obama believes elections have consequences only when his side wins. The people of Wisconsin elected Scott Walker and a Republican Senate to reform state finances and curb union power; the President doesn’t like their methods, so it’s OK for Democrats to shut a branch of government.

Similarly, Americans elected a Republican House to curb spending in Washington, which jumped from $2.7 to $3.8 trillion in four years with Nancy Pelosi as Speaker. The President threatens to veto a 2011 spending bill that imposes $60 billion in cuts, and then portray Republicans as shutting down the government and denying the elderly their social security checks.

In the private sector, unions represent less than 8 percent of workers, because an increasingly educated and professional labor force finds them irrelevant, and simply won’t vote yes for unions in representation elections. Hence, the President backs “Card Check,” a proposal by the AFL-CIO to deny workers of union elections and permit organizers to strong arm workers in restrooms and parking lots to sign cards.

Public sector unions enjoy a superior relevance to their members. If a private union negotiates wages and benefits that make its employer uncompetitive, the business fails and workers lose their benefits. Government workers and their employers face no similar competitive constraints, and they can organize politically to ensure their bosses—governors and key legislators—share Barack Obama’s peculiar pro-union bent, however out of step with popular sentiment.

Now that political strategy has backfired. In Wisconsin and several other states, voters have chosen governments that would rebalance the relationship between public employers and organized labor. The reforms proffered by Governor Walker are not as radical as the law limiting collective bargaining in Virginia.

On health care, the President rammed through an unpopular health care reform law that subsidizes a broken system too much and reforms too little.

Germany, with private insurance and health care systems similar to ours and comparable or better standards of care, spends 12 percent of GDP on health care, while the United States spends 18 percent. Simply, Germans pay less for drugs, hospital stays, administrative costs, and malpractice than do Americans. The President’s health reforms do little to address these issues and instead are driving up costs—witness the numbers of small businesses dropping health benefits for employees, and states and unions seeking waivers from the more onerous requirements of the new legislation.

Bond markets are beginning to treat U.S. federal, state and municipal governments like bonds issued by Athens and Dublin. Rating agencies are downgrading state and municipal governments and considering the same for the federal debt. Investors are demanding higher risk premiums on long-term U.S. Treasuries

Protecting unions and spending too much on a broken health care system may prove shrewd politics for the media savvy and rhetorically gifted President Obama seeking reelection, but it is lousy economics. It goes a long way toward explaining why the federal deficit has jumped from $161 billion to $1.6 trillion in four years, state governments are teetering on fiscal ruin, and investors around the world are increasingly nervous about Washington’s ability to pay its bills. ______________________
Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.