The Once & Future Governor Jerry Brown

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Yesterday the 71 year old Jerry Brown made his formal entry into the California Governor’s race. In a three minute announcement posted on www.jerrybrown.org, he highlighted his experience as well as took some indirect shots at his opponents. What kind of a Governor Jerry Brown was, and what kind of a Governor he would make, are an interesting topic for discussion.

Jerry Brown first served as Governor of California in the years 1975 to 1983. Elected when he was only 36 years old, Brown inherited a State that was experiencing one of the best economies in its history. The first efflorescence of the high-tech boom happened during Brown’s years as Governor, it was also the heyday of the west-coast aerospace boom. Other sectors of the State’s economy, from housing to agriculture, and everything in between, had not yet fallen prey to the plague of over-regulation and environmentalist gridlock that has since diminished opportunities in the Golden State. Brown presided over some very good years for California.

Brown is still criticized by mainstream journalists for being Governor when Proposition 13 was passed. This is guilt by association at most, he campaigned hard against the initiative. But when Prop. 13 passed, something happened that is instructive about Jerry Brown – he implemented it with a vengeance. He respected the will of the voters. Something the critics ignore, however, is that Prop. 13 didn’t hinder California’s ability to balance its budget, it was something else Jerry Brown did that caused our current fiscal crisis – his decision in 1977 to sign legislation allowing public sector employees to unionize.

The consequences of Prop. 13, which dramatically lowered property tax rates, have not led to insufficient tax revenue to California’s state and local governments. The culprit is public sector unionization, which has created an over-sized public sector workforce where, on average, workers cost about twice what people doing similar work requiring similar skills might cost employers in the private sector (when normalizing for current benefits and the funding requirements for future health and pension benefits). While this point is open to debate, it is relevant to note that Jerry Brown himself, in a very recent private appearance before a group of California business leaders, admitted the single greatest mistake he made as Governor back in the 1970’s was his decision to sign legislation allowing public sector workers to unionize. This fact – that Jerry Brown understands how the government bureaucrats, through their unions, have themselves taken over California’s the government, buying our elections, controlling legislation, determining their own compensation – is perhaps the most encouraging thing about Jerry Brown. At age 71, Brown isn’t thinking about his next career move. He may decide to take these guys on, and fix what he helped break so many years ago – our democracy.

Brown is rightly praised for having been a tight-fisted Governor, reining in spending even before Prop. 13 was enacted. He is also proven to be tough on crime, not only as Governor but also as Mayor of Oakland. These are formidable credentials for any Democrat running for office against moderate Republicans. But it should be noted that one of the reasons Governor Jerry Brown was able to rein in spending was because he canceled many infrastructure projects that California now desperately needs. California has a system of freeways, dams, aqueducts and power plants that is designed for a state with 20 million people, as the population edges towards twice that. If you are wondering why you are stuck in traffic, enjoying gridlock five days a week, Jerry Brown is part of the reason why.

This brings us to the biggest potential problem with Jerry Brown. Like his contemporary in high California office these days, Governor Schwarzenegger, Brown has bought the entire package of environmentalist extremism. In the name of fighting global warming, along with all the assorted environmentalist imperatives, Jerry Brown is one of the architects of artificial scarcity. This, too, is an assertion that invites in-depth debate, but Jerry Brown has aggressively and consistently supported environmentalist legislation. Here’s the problem with environmentalism when it gets out of balance and goes too far, as it has: It should be the goal of regulated public utilities, and public policy in general, to make resources cheaper, not more expensive. Contrived scarcity is an invention of misguided environmentalists, and it is championed by the rest of the Democratic machine because the funds that are gathered through taxation for “mitigation,” and additionally saved through deferred investment (since every infrastructure improvement is a crime against the planet), flow instead into the pockets of overpaid unionized public sector and public utility employees, who control our government. This connectivity eludes Jerry Brown, at least for now, and for this reason, he is potentially a very dangerous man.

What makes Jerry Brown intriguing is he is a wild card. He is independent-minded, he is intelligent, he is flexible, he is courageous, and he knows the system backwards and forwards. Journalists used to make fun of Jerry Brown for once recommending California start up its own space program. What is so bad about that? It would be a spectacularly better use of funds than overpaying public sector bureaucrats, or continuing self-perpetuating, corrosive entitlement programs. And it would yield spectacular technological spin-offs. Jerry Brown’s willingness to go out on a limb like this makes him a quintessential Californian, and the kind of visionary who could bring California back from the brink.

If Jerry Brown is elected Governor, the real question is not can he do the job, but who will show up? Will Jerry Brown accede to the reality of public sector union power and quasi-fascist environmentalist extremism – the power centers who currently are breaking California to their will, bankrupting us to line their pockets and salve their ideologies, and turning us, basically, into an occupied State? Or will Jerry Brown empathize with the seismic wave of populist sentiment that knows something is wrong, but can’t find coherent expression or clear solutions? Will Jerry Brown provide these answers – by reforming public sector unions, and developing infrastructure designed to reduce the price of resources instead of raising them? Jerry Brown has the capacity to make either of these scenarios our future. How he campaigns may provide clues to how he may govern, or not.

Pension Rhetoric vs. Pension Reality

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As  California’s public employee retirement system teeters on the verge of complete financial collapse, defenders of the current system continue to deny this, often accusing reformers of being “public servant bashers.” But politically motivated rhetoric will not change financial reality – or the pursuit of reforms so private workers don’t endure punitive taxation to sustain a privileged class of government employees. Last week the Sacramento Bee published a guest viewpoint written by Bruce Blanning, the Executive Director of the Professional Engineers in California Government. His commentary, entitled “State retirement benefits make an easy – and unfair – target,” invites a rebuttal.

The “real truth” about CalPERS, and other public employee pension funds, is they have consistently overestimated their long-term rates of return, adjusted for inflation. Currently CalPERS official rate of return, used for projecting the funds they will have available in the future, is 4.75%. This rate exceeds key long-term indicators that should govern these projections. For example, the inflation adjusted rate of return for the Dow Jones stock index for the period 1925 through 2008 averaged 2.8% per year. Similarly, the real rate of global economic growth for the period 1950 through 2000 averaged barely 4.0% per year, and this rate was skewed upwards by debt-fueled, unsustainable growth during the 1990’s. Even at a rate of 4.75% per year, CalPERS and the other pension funds are in a precarious state, because their asset values have been hammered in the last few years and will have to bounce back at rates in well in excess of 4.75% per year if they are to remain solvent (for more on these calculations, ref. Maintaining Pension Solvency).

Another “real truth” about public employee pensions is they currently collect benefits in retirement far in excess of what private sector workers can expect from social security. Public sector workers accrue retirement benefits according to a formula that grants them between 2% and 3% of their final year’s salary, times the number of years they worked. The 3% formula, for example, means that a public sector worker who spent 25 years in the workforce would receive a pension equivalent to 75% (3% times 25 years) of their final salary when they retire – with annual adjustments upwards for inflation. This benefit often begins when public sector workers retire in their early 50’s. An apples-to-apples comparison with social security provides for about 0.7% per year in retirement “pension” for private sector workers, which is at best one-third what a public sector worker receives – even though the private sector worker retires 15 years later! And social security doesn’t begin until one reaches their mid-sixties. When defenders of California’s public sector pensions – such as Blanning – reference an “average” pension for public sector workers of only $2,100 per month, they are not mentioning the fact that this number includes pensions for workers who were only in the public workforce a few years – and these workers would therefore also be receiving social security.

In the past, public sector workers received a pension that exceeded social security because they made less during the years they worked. But this has changed completely, and today, public sector workers, on average, make more than private sector workers. They also enjoy far more paid time off – they often get 26 paid days ala the “9/80” program (where they work 9 hours per day for 9 days, then get a paid day off, i.e., 26 paid days off per year), 12 “personal days,” anywhere between 10 and 20 vacation days, plus between 14 and 17 paid holidays. Find a private sector job that provides 75 paid days off per year. California is already one of the most heavily taxed states in the U.S., yet while roads and aqueducts crumble, taxpayer-funded public employees enjoy lives of inordinate privilege and security. And if public employees earned market rates of pay and benefits, like the rest of us, there would be no deficits (ref. California’s Personnel Costs).

Perhaps the most questionable of Blanning’s arguments was this one: “Of that $2,100 [the “average” monthly benefit of a retired public servant in CalPERS], only $1 of every $8 is paid by the employer, which means the taxpayer. The rest is paid through employee contributions and earnings on the investments.” If you dissect this, it is hard to follow exactly what Blanning is trying to say. Because if this means the state (on behalf of the taxpayers) is only paying 1/8th of the funding growth required by CalPERS for each worker for their portion of the retirement fund, this suggests the other 7/8ths is being covered either by the workers themselves through withholding from their paychecks, or by fund growth through investment returns. This, in-turn, suggests Blanning is saying that CalPERS expects virtually all of its funding to come from return on investments, since most public sector workers don’t even have half their retirement fund inputs withheld from their paychecks – which is what private workers contribute to social security via withholdings. Many public pension recipients don’t have anything withheld from their paycheck to go towards their pension fund.

If California’s public employee pension benefits are not dramatically reduced, hopeful rhetoric aside, the California taxpayer is liable. Pension fund managers were over-optimistic in their projections, and using more conservative scenarios their pension funds are already insolvent. Under the current arrangement, public employees, who pay very little of the costs of their future benefits in the form of withholding from their paychecks, are expecting to receive defined retirement benefits that dwarf anything a private sector worker can reasonably expect in their own retirement. And under the current arrangement, these taxpayers are supposedly going to pay – through even higher taxes (and fees) – the difference between what public employee pension funds expect to earn in the market, and what they actually earn in the market. Until the whole system is reformed, that is the reality in California today.

To suggest that the pay and retirement benefits that public employees currently enjoy is guaranteed by the California constitution or by “contract” is to ignore reality. California’s constitution can be amended by a citizen’s initiative. And the “contracts” that created these grossly inequitable and financially disastrous public employee benefits were the product of public sector labor unions exercising inordinate and unjustified influence over state and local politicians. This is the crux of the problem, and must be reformed along with reforms to reduce public sector pay and benefits. Public employees, through their unions, pour millions of dollars into political campaigns every year in California. They currently exercise nearly absolute control over California’s state and local governments. When the people collecting the benefits are controlling the politicians who grant the benefits, no contract should be considered inviolable – particularly when the alternative is bankruptcy.

California’s Union Ballot Initiatives

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It isn’t fair to criticize California’s conservatives for failing to back public sector union reform initiatives (ref. “The Conspiricy of Cowardice“) without acknowledging the power of the opposition. Earlier this year, commentator George Will called California a “unionocracy,” in an attempt to describe the power wielded by public sector unions over California’s government. Republican lawmakers in California, off the record, have stated the public sector unions exercise “absolute power” over California’s legislators. And why wouldn’t they? Every month, well over a million unionized public sector workers in California have a portion of their paycheck automatically deducted for union dues, and significant portions of these funds are used for political lobbying and independent expenditure campaigns. In aggregate, the amount of money available to these unions, who don’t have to ask anyone for a cent, overwhelms any candidate who won’t play ball.

There are far reaching consequences to politicians not standing up to California’s public sector unions because they will lose access to their campaign donations or become targeted by them. By controlling the politicians, public sector unions control legislation and they control the agencies. Businesses who do business with California’s state and local governments are understandably wary of antagonizing the public sector unions, since they make or break the politicians who supposedly oversee the agencies. Would anyone risk angering officials are all members of these powerful unions, people who can shut down their business or deny them a contract? One businessperson told me that the unions “were his clients.” When I asked him if he meant the agency, who his company had a contract with, was his client, he responded “who do you think runs the agency?”

With respect to initiatives that would begin to correct this abuse, this virtual take-over of our state and local governments by unions, there is yet another weapon the unions can wield, which is to launch initiatives of their own. Often all the public sector unions have to do is threaten to launch an initiative – imagine the chilling effect this can have on efforts to get union reform initiatives onto the ballot.

Want to support a Voluntary Political Contributions Initiative, a reform that would require public sector unions to acquire permission from each unionized public employee before confiscating a portion of their wages to use for political activity, or a Pension Reform Initiative, a reform that would scale back the totally unsustainable and unwarranted retirement benefits currently granted to public employees? Then don’t be surprised by what happens next.

It is important to note that unions do not necessarily file their own initiatives in direct retaliation to pending reform initiatives. That is merely the reason businesspeople and Republican lawmakers are afraid to back reform initiatives – because they hope these counter-initiatives won’t end up on the ballot in retaliation. The reality is worse – these union-sponsored initiatives are quite likely to be filed and qualified for the ballot no matter what the business community does. Apparently all California’s conservative leadership and business community wish to do is play defense.

Here are three proposed initiatives that have the support of one of California’s most powerful public sector unions, the California Teacher’s Association (CTA):

1438. (09-0088) –  The complete title and summary for all initiatives qualified for circulation to-date can be found on the California Secretary of State’s website on the page “ballot measures cleared for circulation.”

Imposes Political Contribution and Expenditure Restrictions on Corporations. Initiative Statute (full text):
Prohibits corporations or other business entities as defined from making contributions or expenditures related to any elective office, ballot measure, or for issue advocacy, unless approved by resolution of the shareholders. Requires that authorizing resolutions specify the recipient, amount, and purpose of the contribution or expenditure, and time period the authorization is valid. Prohibits corporate officers and directors from consenting to prohibited contributions. Prohibits candidates, political committees, and persons from knowingly receiving prohibited contributions or expenditures...

This initiative, supported by the CTA as documented in a press release of February 5th, is truly diabolical, because to the average voter, this would appear a reasonable counter to the Paycheck Protection Initiative. After all, if the unions have to ask their members for permission to donate to political activity, why shouldn’t corporations ask their shareholders for similar permission? Try to construct a soundbite that will refute that logic. Then go out and raise $20M to promote it on the airwaves – remember, you’ll have to ask for every penny.

The idea that corporations are ready and willing to make any political contributions is the first fallacy in this supposed symmetry. Many large corporations are in détente with public sector unions, working with them to secure more public (taxpayer) subsidies or drive out emerging smaller non-union competitors, and those who aren’t yet corrupted in this manner are scared witless of the unions. Convincing corporate management to donate to political causes is already difficult, let alone if they then have to go to their shareholders and ask them.

The non-symmetry goes well beyond this. The CTA’s initiative requires every single corporate political contribution to first secure a shareholder resolution – recipient, amount, purpose, and time period. Acquiring shareholder resolutions, particularly in public companies, is never a trivial task. Compare this to the mechanics of securing a consent from a public sector worker under the Paycheck Protection Initiative – they sign an annual consent, distributed efficiently in the workplace, specifying how much they are willing to pay to a union-controlled PAC, and this PAC may use the money however and whenever they please.

There’s more. Public sector workers are not being paid with money earned through profits, which are earned through selling goods to willing, voluntary consumers in the free market. Public sector workers collect wages that are confiscated from taxpayers whether they want to pay or not, under threat of imprisonment, and this money is then used to fund political campaigns to manipulate the very same voters who paid the taxes. This closed loop, where the employee unions elect the politicians who control their compensation is the primary reason California’s state and local governments are bloated and nearly bankrupt.

Here’s another gem, an initiative to “Close Corporate Loopholes,” also supported by the CTA:

1412. (09-0058, #1NS)
Repeals Recent Legislation That Would Allow Businesses to Carry Back Losses, Share Tax Credits, and Use a Sales-Based Income Calculation to Lower Taxable Income. Initiative Statute (full text):
Repeals recent legislation that would allow businesses to shift operating losses to prior tax years and that would extend the period permitted to shift operating losses to future tax years. Repeals recent legislation that would allow corporations to share tax credits with affiliated corporations. Repeals recent legislation that would allow multistate businesses to use a sales-based income calculation, rather than a combination property-, payroll- and sales-based income calculation…

This initiative, also supported by the CTA (ref. the same press release), is supposedly to ensure that “in these tough times everybody must be paying their fair share,” and because “lawmakers approved the $2.0 billion in tax cuts for large corporations and oil companies without any requirements for these companies to create new jobs.” Notwithstanding the fact that comments like this reveal a world view diametrically opposed to free-market capitalism – i.e., the government can’t “require” companies to “create jobs,” this press release ignores facts that, again, defy easy packaging into sound-bites. These “loopholes” were actually reforms, designed to stop California-based corporations who do business outside of California from enduring double-taxation, since companies selling goods in other states were already paying taxes in those states, yet had their in-state taxes calculated on factors partially unrelated to in-state sales. Other reforms provided for in this “loophole” legislation were designed to move California closer to corporate taxation law that applies in other states – why shouldn’t a corporation be able to allocate a tax credit to an affiliated company, isn’t it their credit? Why shouldn’t a corporation allocate operating losses to future years? Corporations don’t get money back from the government in years they lose money. It is unfair to tax one year of profits when those profits aren’t normalized for the losses of prior years. But the rhetoric of the CTA reveals their true intentions – they don’t like corporations, they don’t like the private sector, and they don’t like profits or private wealth – despite the fact that without profits there would be no tax revenue. The irony is profound.

Equally disappointing, if not outright sinister, is the fact that the corporate tax reforms that the CTA wants to roll back via this initiative were negotiated in exchange for a state budget deal. But unlike the budget, which is sealed and final, the reforms (“loopholes”) that were enacted as part of the budget package can be rescinded.

To complete our trio of initiatives that will further consolidate the power of public sector unions and expand government beyond its unsustainable present size – probably coming no matter what – and apparently also courtesy of the CTA (ref. “Will CTA Put A Split-Roll Initiative on the 2010 Ballot?“), is this nugget:

1424. (09-0077)
Requires Assessment of Most Commercial Property at Least Once Every Three Years and Increases Homeowners’ Tax Exemption. Initiative Constitutional Amendment and Statute (full text).
Changes existing law to require that commercial property be assessed at fair market value at least once every three years. Excludes residential and agricultural property. Doubles homeowners’ tax exemption from $7,000 to $14,000 on residential property. Creates small business tax exemption for first $1,000,000 in personal property. Permits county governments to offset reassessment costs; transfers ninety percent of remaining revenues to state’s General Fund to support all General Fund programs, including education, public safety, and health care…

What on earth is the CTA thinking? What do they think is going to happen if these three initiatives actually pass? Everything these bills accomplish will harm ordinary people, not help them, because ultimately, businesses don’t pay taxes, ordinary people do. If a business is to remain in business, they have to pass tax increases on to their customers in the form of higher prices. These hidden taxes are crippling California as much as overt taxation. And why should any corporation stay in California, already one of the most business-unfriendly states in the nation, if on top of all that, they are excluded completely from the political process, remain subject to double-taxation and unable to allocate tax credits or carry forward losses, and lose protection from confiscatory property tax rates? Can’t the CTA – and the other public sector union leaders – understand that a healthy private sector is an inviolable prerequisite to robust tax revenues? Once they kill the private sector, they also die. It’s that simple.

California’s Republican leadership, movement conservatives, and uncorrupted business leaders need to understand something very clearly: They are in a war with public sector unions whether they want to be or not, whether they practice appeasement or not. They can make deals that delay their own demise at the expense of others. They can descend into the fascistic mire of corporatism, and enter into joint ventures with government unions, to their own gain, but at the expense of competitive markets, property rights, and optimal economic growth. Or they can defend their principles and do what they know is the right thing to do. The irony is that by fighting this tyranny, they will actually be doing the membership of public sector unions a favor as well, because restoring fiscal solvency to California’s governments and renewing economic growth depends on rolling back the wages and benefits paid to public employees, and restoring the agenda of California’s state and local governments to the people. This requires fighting the public sector unions without reservations.

Ayn Rand’s Atlas Shrugged

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The thought of actually reading Rand’s gargantuan tome, Atlas Shrugged, a book you could use as a cornerstone, filled me with apprehension. And while the novel resonated with me far more than expected, it is fair to wonder if someone who didn’t agree with anything Rand was trying to say – she is not subtle – might find it tough to get past the first couple of hundred pages. But by that point I was hooked on the story, which chronicles the final decade of the descent of the United States from capitalism to communism. To discuss everything noteworthy about Rand’s novel would go well beyond the scope of any brief review. For example, Rand exposes the hypocrisy and futility of communist ideology quite well, but doesn’t bother to dilute the purity of her alternative vision by explaining that its consequences are genuinely altruistic. Rand never explicitly acknowledges that encouraging people to pursue their individual self-interest, through lower taxes and limited government, enables more wealth creation and hence more prosperity for everyone. One key admonition Rand makes is of concern here, however, because it has immediate and urgent relevance to California’s citizen’s initiative political season, a fight being waged right now, that hangs in the balance.

The biggest sin of Rand’s good guys in Atlas Shrugged – the businessmen – was that these businessmen never defended themselves, much less took the offense. They practiced appeasement with the “peoples” interests, and acceded to big government regulations, apparently hoping they would be the last to be eaten.  A central point in Atlas Shrugged is that society cannot be based on rules wherein people give according to their ability, and receive according to their needs. Such a society, imagined by Karl Marx as a communist utopia, and envisioned very differently by Ayn Rand in Atlas Shrugged, collapses because people of ability either withdraw from the system or are corrupted by it. In such as society, all of the extra creative and unique value created by people of ability, if indeed the people of ability still bother to work, is confiscated by government agents, at the point of a gun, and redistributed to everyone according to their needs.

If communism adheres to Marx’s maxim, “from each according to his ability, to each according to his needs,” then the countervailing libertarian maxim might be “from each according to his needs, to each according to his ability.” The more you explore this inversion, the more you may come to like it. In Marx’s communist utopia, ability is secondary to need, since simply declaring a “need” will be sufficient to receive whatever anyone wants. Only when these essential needs are not automatically forthcoming simply because someone “needs” them, will someone work to the best of their ability, objectively exchanging value, to fulfill their needs. From each according to their needs is a premise of libertarian society, because need is the incentive that impels people to work and innovate.

Similarly, in a libertarian society, one should receive, not according to their needs, but according to their ability. When one wants to ensure they secure the essentials, much less the extras in life, they choose to work, and when they work, they receive whatever they can earn according to their ability. And their ability is measured by the contributions of their mind, their unfettered reason, their inventiveness, their innovation, applied through hard work, then offered and purchased voluntarily in the free market.

To not actively challenge government redistribution based on needs, and defend market redistribution based on abilities, is to simply try to be the last to be eaten. Because the arbitrary redistribution that ensues when government bureaucrats confiscate the wealth produced by people of extraordinary ability, and allocate it based on wherever they identify “needs,” takes away the incentive to work hard from both the givers and the recipients – it is a recipe for economic stagnation. Unchecked, it is a recipe for economic collapse. If America slides into the nightmare Rand imagines in Atlas Shrugged, it will be because businessmen didn’t stand up for these principles of capitalism that have made America the wealthiest, most creative nation in the world.

Which brings us back to California’s 2010 election season, where there are at least four initiatives attempting to gather enough signatures to make it onto the November ballot, that deserve the unqualified, unabashed, if not unlimited support of California’s business community. All of them, if enacted, would decisively shrink the size of California’s government and revitalize California’s economy. But instead of fighting for these initiatives – which ultimately, will help ensure their survival as free enterprises – California’s businesses are running for the hills. Among these worthy but spurned initiatives are two public sector union reform measures, one an Initiative Constitutional Amendment that would prohibit public sector unions from automatically deducting dues that would be used for political activities, and would curtail their ability to use money for any political activity, and another one, a statute, the Public Employee Paycheck Protection Act, that would require public sector unions to obtain a signed authorization, renewed every year, in order for them to be able to use member dues for political activity. These two initiatives are proceeding fitfully towards oblivion, thanks to virtually no support from California’s business community. Another initiative, the New Public Employees Benefits Reform Act, will right-size public sector worker pensions, where currently, many government workers retire in their early 50’s with a salary often set at 90% or more of their final year’s pay – and this initiative as well, is going nowhere. Public sector union reform and public employee pension reform, key solutions to California’s economic malaise, are not supported by businessmen or property owners.

Equally uninteresting to California’s business community is the California Jobs Initiative,” that will defer implementation of California’s 2006 “Global Warming Act.” Set to become law in 2012, California’s Global Warming Act will constitute arguably the most dramatic encroachment on private property rights and expansion of government in history. In the name of fighting “global warming,” and in a dubious and convoluted attempt to curtail anthropogenic CO2 emissions, this law will regulate where you live, the size of your yard, how far you can drive, what you can eat, how you can build your home, use energy, water, land – your entire life.  It is understandable, if not excusable, that California’s entertainment and high-tech industries endorse California’s Global Warming Act – for the most part, these industries produce nothing tangible, so they escape the impact of draconian environmental regulation. There is no similar justification for the inexplicable silence of California’s agricultural and timber and energy industries, however. Also quiescent in the face of environmentalist dictated economic stagnation are California’s private sector construction unions, who ought to have had enough with environmental extremism by now.

Ayn Rand didn’t anticipate environmental extremism, but as an excuse for confiscatory, socialist measures in the name of not only the “people,” but now the planet as well, it defines the mentality Rand decries and warns us about in Atlas Shrugged. With respect to the obvious abuse of power that ensues when labor unions take over government bureaucracies, Rand may not have explicitly anticipated our current predicament, but her examples of how government becomes its own special interest were clear enough. And once again, nothing could have been more clear in Atlas Shrugged than Rand’s indictment of the businessmen and property owners who, facing communist ideology, practiced cowardly appeasement, instead of articulating the moral worth of their lives, their work, and their ability.

The Conspiracy of Cowardice

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One may search for the answer to the Republican riddle across America – how to attract all those suddenly disaffected independents and moderate Democrats. After all, the political pendulum only seems to be impelled by repellent forces, never by attractive ones. And what might attract anyone to the Republicans, simply because the Democrats have become repellent?

Closer to home, in lovely California, a state so beautiful that even native sons who ought to know better can’t seem to leave, the Republican failure is easy to grasp. Republicans, nationally and in California, never fought more than half the war – they did, at the least, a defensible job fighting taxes, but never effectively fought spending. The result is deficits – and borrowing is spending, as underwater homeowners along with bankrupt municipal governments are painfully discovering.

A tragic example of just how far from leadership, legitimate populism, or genuine convictions the conservative leadership in California has sunk is the plight of the public sector union reform initiative that still needs signatures to qualify for California’s November 2010 ballot.

There is not one conservative political insider who doesn’t believe the “Voluntary Political Contribution Initiative” is a long overdue reform to California’s political system. Nobody. This initiative will dramatically curtail the ability of California’s public sector unions to use member dues to engage in political activity. Currently California’s public sector unions collect nearly 1.0 billion dollars per year in member dues, and they use a significant percentage of these funds to back the politicians and initiatives they favor. And what do they favor? Higher wages for public employees, better benefits for public employees, bigger government, no matter what the cost, so the public employee payroll continues to grow. To fight government spending is to fight government unions. Period. There is no way around this fact.

You could spend hundreds of paragraphs and thousands of words describing the despicable abuse that union control of California’s government has spawned. Firefighters who make more than brain surgeons, yet barely work full-time. Former police officers in their early 50’s who make more in retirement than successful working businessmen who put in 70 hour weeks and have bet their fortunes and their lives on creating and maintaining jobs for hundreds of workers. City managers who make more than the President of the United States. As quoted in an earlier post, one of the kings of big government, Willie Brown, is now saying “The deal used to be that civil servants were paid less than private sector workers in exchange for an understanding that they had job security for life… but we politicians — pushed by our friends in labor — gradually expanded pay and benefits . . . while keeping the job protections and layering on incredibly generous retirement packages.”

You don’t have to rely on Willie Brown, or the anecdotes here. Go to the best source for information on public sector union abuse available online today, www.pensiontsunami.com, and read the links to the many stories they post every day on this topic. Make sure you bring a cast-iron stomach, because if you don’t, you’re going to puke.

The conspiracy of cowardice doesn’t begin with the failure of Republican leadership to fight (union) spending along with fighting taxes, however, it only begins there. Today’s pending ballot initiative that would begin to fix this obscene mess has a slim-to-zero chance of getting onto the ballot in November – because it is being sabotaged by the conservative leadership who ought to be supporting it.

The leadership representing California’s associations of business interests, who already play an impossible game of appeasement with union interests, are urging wealthy conservative individuals and organizations to refrain from supporting this public sector union reform initiative. It doesn’t end there – people who claim to speak for Republican aspirants for high office in California are doing the same thing – apparently they are afraid having a genuine union reform initiative on the ballot will bring out more union voters, and diminish their chances.

This reasoning is not only sacrificing what is right for what is pragmatic – which is reason enough to write off California’s Republican leadership – it also reflects an inaccurate assessment of where California’s voters really are today. Because California’s voters get it. Not just TEA party activists or hard-core conservative activists, but everyone. It is now obvious to everyone that our civic entities are bankrupt because we are paying unionized public employees roughly (when you include the annual costs of funding their current and future benefits) two to three times what the rest of us make for work requiring similar skills. But the professionals don’t understand this – or choose not to.

What fiscal conservative voters in California need to bring them to the voting booth in November is an opportunity to vote for genuine statewide reforms. The public sector union voters will already be turned out. Those who weren’t “assisted” by their union operatives into casting absentee ballots will show up on election day, because there are countless grassroots local reform initiatives that they will be urgently and relentlessly enjoined to vote against. But conservative voters still need a reason to show up on the first Tuesday.

A sure thing that will bring out fiscal conservative voters is the Voluntary Political Contribution Initiative, because it will save California’s failed finances by standing up to our insatiable public sector unions. While there, conservative voters would also vote for those candidates who displayed the courage and conviction to back this initiative with their reputation and their treasure. What we are seeing instead from California’s supposed fiscal conservative leadership is political opportunism, careerism, political calculation, and appeasement; yet another betrayal of everything they supposedly believe in. Is this failure a conspiracy of cowards? Perhaps not. But it might as well be.

Sustainable Pension Fund Returns

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Crucial to any analysis of pension fund solvency is determining what rate of return a pension fund can earn. And in any such analysis, the “real” rate of return is what matters. It doesn’t matter, for example, if a pension fund investment yields double-digit annual returns, if the fund is returning these impressive numbers in an economy in the grips of double-digit inflation. The real rate of return for any investment is calculated by taking the actual return, or nominal return, and subtracting from that the rate of inflation. For example, CalPERS currently uses a nominal rate of return of 7.75% for their fund’s earning projections, and they assume a 3.0% rate of inflation. Therefore CalPERS currently projects their fund to earn a 4.75% real rate of return.

In several previous analyses we have examined the implications of these rates of return on the ability of pension fund investments to remain solvent. Basically, the higher the real rate of return on pension investments, the lower the required annual payments necessary to adequately fund the same level of future retirement pension benefits. By the same logic, if pension investments earn higher than anticipated real rates of return, it is possible to increase future benefit commitments without increasing the annual funding payments. This second case is what happened back in 1999, during the height of the internet boom, and continued right up until the financial crisis that began in 2007. Even after these bubble booms went bust, some public employee unions continue to push for higher retirement benefits. But in order to consider what may be an equitable and affordable pension, one must decide what rate they believe, ultimately, constitutes a sustainable pension fund return.

We have already looked at this in-depth. In the post “Real Rates of Return,” we estimate how many retirement years a public safety employee can enjoy a solvent pension based on inflation-adjusted fund returns of 3%, 4%, and 5%. We assume the employee works 25 years, and enjoys a 3.0% inflation-adjusted (real) per year increase in pay. We assume that their pension fund payment each year is equivalent to 23% of their salary in that year, which is a typical contribution percentage. We assume that based on 25 years work, times 3.0%, entitles the pensioner to receive 75% of their final year’s wages during their retirement years. Using these assumptions, if the pension fund earns a real rate of return of 3.0% per year, the fund will only have enough set aside to last 19 retirement years before going broke. At a rate of 4.0% per year, the fund will remain solvent for 27 retirement years, and at a rate of 5.0% per year, the fund will remain solvent for 51 years! This is a dramatic difference in scenarios, even though there is only a 2.0% difference between the low estimate of 3.0% and the high estimate of 5.0%. Can CalPERS earn a real rate of return of 4.75% per year? We’ll come back to that.

In the post “Maintaining Pension Solvency” we looked at this slightly differently. We assumed a 30 year working career, followed by a 30 year retirement. We then examined four cases, in all four cases solving for what the contribution percentage would have to be each year – as a percent of salary – in order for the pension fund to remain solvent. The results are interesting:

(1) At a real rate of return of 4.75% per year, a worker would need to set aside an additional 21% of their salary each year for 30 years, in order to enjoy a pension benefit during a 30 year retirement equivalent to 60% of their paycheck.

(2) At a real rate of return of 4.75% per year, a worker would need to set aside an additional 32% of their salary each year for 30 years, in order to enjoy a pension benefit during a 30 year retirement equivalent to 90% of their paycheck.

(3) At a real rate of return of 3.00% per year, a worker would need to set aside an additional 35% of their salary each year for 30 years, in order to enjoy a pension benefit during a 30 year retirement equivalent to 60% of their paycheck.

(4) At a real rate of return of 3.00% per year, a worker would need to set aside an additional 52% of their salary each year for 30 years, in order to enjoy a pension benefit during a 30 year retirement equivalent to 90% of their paycheck.

All of this is to make clear just how crucial it is to make a realistic assumption regarding pension fund returns. CalPERS makes a projection of 4.75%, which they believe to be a prudent number. I believe a real rate of return of 4.75% is not a prudent number, but a best-case number.

Rates of returns on passive investment funds that are measured in the trillions of dollars – which is what pension funds, in aggregate, constitute – cannot grow at rates that exceed the rates of growth of the economies in which they invest. This is because sustainable financial returns are tied to profits, which are, ultimately, tied to (after-tax) operating cash surpluses. These surpluses normalize over time, increasing, for example, when debt is accumulating and spending is stimulated, and decreasing during the inevitable periods when debt is being reduced. If the economy at large is expanding at a real rate of 4.75% per year, then it is reasonable to expect, in aggregate, passive investments can yield similar returns. But over the long-term, economic growth is not demonstrably this robust. In the post “Humanity’s Prosperous Destiny,” there is a chart that compiles data on global economic growth over the past several hundred years. The data indicates a rate of global economic growth of under 2.0% per year until the 50 year period beginning in 1850, when the industrial revolution began to spread around the world. Here’s the reported numbers, in 50 year increments:  1850-1900, 2.2%; 1900-1950, 2.6%; and 1950-2000, 4.6%. But digging deeper, about 1.0% of that 4.6% was the result of unsustainable economic expansion associated with the internet boom.

It’s hard to parse macroeconomic trends, but if you accept the premise that a trillion dollar passive investment cannot sustain growth rates greater than general economic growth, 4.75% definitely becomes a best-case real rate of return. I would argue that a 3.0% growth rate is a more prudent estimate, particularly taking into account the adjustments of the past ten years, and the adjustments ahead as we painfully wring debt out of the system.

Another example of why a real rate of return of 3.0% may be a much more prudent estimate for CalPERS and other pension funds to use in their projections is found by examining the inflation-adjusted performance of the Dow Jones stock index over the past 85 years. An excellent chart can be viewed on “Dogs of the Dow,” a website where the performance of the Dow is charted as it would appear if growth between 1925 and 2010 were adjusted for inflation. If you examine this chart, you will see that the Dow’s value increased roughly ten-fold over the past 85 years – after inflation. While that sounds pretty good, it equates to an inflation adjusted return of 2.8%.

Do you still want to bet your civic solvency on a real rate of return of 4.75%? And if you would prefer to prudently adopt a 3.0% rate of return for your projections, are you prepared to allocate to pension funding an amount each year equivalent to 50% of each of your employee’s annual salaries, in order to keep their retirement pensions solvent? As cities and counties and states stand already on the brink of financial catastrophe, the consequences of unwarranted optimism deferring painful negotiations are more dire than ever – ask anyone who holds municipal bonds, or is taxed enough already.

Assessing Immigration to America

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The economic and social consequences of America’s immigration policies – both deliberate and by default – are among the most hotly debated issues of our time. According to CarryingCapacity.org, the United States “now accepts over one million legal immigrants each year, which is more than all of the other industrialized nations in the world, combined.” Additionally, according to ImmigrationCounters.com, there are nearly 23 million illegal immigrants currently living in the U.S.

Attempting to quantify and project the costs and benefits of immigration into the U.S. is not easy. According to About.com, quoting the Federation for American Immigration Reform, “the costs of education, health care and incarceration of illegal aliens to Californians is $10.5 billion per year.” According to the Center for Immigration Studies, “households headed by illegal aliens imposed more than $26.3 billion in costs on the federal government in 2002 and paid only $16 billion in taxes, creating a net fiscal deficit of almost $10.4 billion.”

Statistics abound – and for every study suggesting that America’s immigration is creating a burden on the economy, there is another that concludes the opposite, that immigrants continue to provide a net economic benefit to the economy. So rather than provide yet another regurgitation of battling statistics, it is important to note some crucial qualitative differences between immigration trends in America today, compared with past centuries in America.

WHY IMMIGRATION TO AMERICA IS DIFFERENT TODAY THAN IT WAS 50+ YEARS AGO:

(1)  Immigrants today are not coming from nations of equal or greater economic achievements to America. In the past, immigrants from Europe, for the most part, were emigrating from nations that were as advanced as the United States was, if not more so. Today the overwhelming volume of immigrants are coming from developing nations.

(2) Immigrants in the past came primarily from European nations which had cultural values – educational, religious, and political – that were, if not nearly identical to American cultural values, were on a shared trajectory towards achieving those values. Immigrants today come from nations that, relatively speaking, have far less cultural similarities to America than past waves of immigrants.

(3) Immigrants today, for the most part, are coming from nations that are rapidly increasing in population and, in aggregate, dwarf the United States in population. Related to this is the fact that in the past, the people already in America were themselves rapidly increasing in population, but this is no longer the case, except among populations of recently arrived immigrants.

(4) Immigrants in the past arrived in an America that had a voracious need for unskilled workers. Today the American economy is relentlessly automating jobs that used to require unskilled labor, and the American population already has a surplus of unskilled workers.

(5) Immigrants today are arriving in a welfare state, where they are assured of food, shelter and medical care that is, in general, orders of magnitude better than anything available to them in their native countries. This creates a completely different incentive to today’s immigrants. In past centuries, immigrants came to America to find freedom and to work. Today they are offered a smorgasbord of taxpayer-funded social services.

(6) Immigrant students today – especially in the coastal urban centers where most of them settle – enter a public education system that teaches them with a reverse-racist, anti-capitalist bias. They are taught in our public schools not to assimilate, but to celebrate diversity, not to earn opportunities through hard work, but through fighting discrimination. They are taught, often in their native language, that they have arrived in a nation dominated by racist and sexist white males, who exploit the world to amass evil profits.

(7) Immigrants today arrive via ten hour hops on an airliner, past waves of immigrants spent ten months traversing land and sea in a journey of staggering expense and significant dangers. While this isn’t universally true, particularly for those who risk America’s southern border, in general it is – coming to America today does not require the commitment it required in the past.

(8) Similarly, in the past, immigrants pretty much renounced the nations of their origin, they made a one-way trip, and they adopted the language and values of America. Today, retaining cultural unity with one’s country of origin is a few clicks on the internet, a cheap telephone call, an affordable airfare. Technology has greatly eroded the forces that used to impel immigrants to become Americans.

The impact of these eight differences between immigration to America today, compared to immigration to America in the past, are clearly social and cultural in nature. The reader is free to determine for themselves whether or not the social and cultural shifts that are occurring due to these eight factors is significant, or desirable. But it is fair to suggest there is also an economic fall-out from these eight factors, which by default constitute America’s immigration policy today.

Clearly an increasing population, all else held equal, does cause overall economic expansion. It isn’t clear at all, however, that this is the optimal way to create economic expansion. First of all, global human population is destined to level off by 2050 anyway, so rather than expanding the population through immigration, economic policy needs to search for the answer as to how to continue to experience economic growth despite a stable, aging population. In Japan, they have already made this policy decision – with zero net immigration and the oldest population on earth, Japan leads the world in the development of androids that will, presumably, become caregivers to the elderly. Economic growth oriented towards improving the quality of life for the elderly is one example of a sustainable growth sector – economic growth dependent on an immigrant-fueled population expansion is not sustainable.

In the short-term, immigration policy reformers might make it a priority to examine points (4) unskilled workers, (5) welfare state, and (6) reverse-racist culture. Immigration itself is not bad, and the other factors differentiating immigration today vs. immigration in the past, points 1-3, 7, and 8, are themselves not nearly as of concern, if the three points relating to job-skills, welfare, and cultural messaging are addressed.

To suggest Americans ought to resist competing with highly skilled immigrants, for example, is not only xenophobic, but it smacks of an entitlement mentality. Allowing immigrants into the United States who are qualified to join our ranks of scientists, engineers, researchers and doctors will only help our economy and overall standard of living. Allowing unskilled immigrants into this country, however, when we already have tens of millions of unskilled workers who are either in our prisons or collecting welfare – who themselves could perform this work – is much more likely to constitute a drain on our economy.

Similarly, allowing immigrants into an America where public school teachers crow about the evils of capitalism and the incorrigible racist, sexist core of our American culture is a recipe for disaster. This is particularly true when accompanying this siren song of corruption is easy access to social services of all kinds, including welfare. If new immigrants are taught the cards are stacked against them, and at the same time they are offered a free ride that provides a standard of living many times greater than what they knew in the countries they came from, why work?

A long time ago, when discussing the demographic trends of modern immigration with a friend of mine who worked in public policy, I asked him how the millions of immigrants arriving in America would assimilate. The question had an urgency then, and even more so now, based on these significant differences between immigration in the past compared to immigration today. His answer was illuminating, albeit cliche – “it depends on how they’re treated,” he said.

This is the crux of the issue – how immigrants are treated when they arrive in America – not who they are or where they come from. If immigrants today arrive in a nation that recovers the values that greeted immigrants in prior centuries, then they will adapt, they will work, they will be successful, they will contribute, and they will appreciate becoming an American. But if they continue to arrive in a nation undermined by leftist educators and self-serving welfare administrators, their increasing numbers will only become increasingly problematic.

California’s Personnel Costs

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Over the past twenty years, as wages in the private sector have remained pretty much flat – not even keeping up with inflation – wages in the public sector have risen relentlessly. A generation ago, a public sector worker would sacrifice current pay for job security and a pension that was somewhat better than social security, but today, not only are public employee pension benefits far more generous than they used to be, but public employees generally make more in current pay than their private sector counterparts. While this assertion remains hotly debated, one seeking the truth might consider this comment – made in a guest column in the San Francisco Chronicle earlier this month – by former California Assembly Speaker Willie Brown:

“The deal used to be that civil servants were paid less than private sector workers in exchange for an understanding that they had job security for life,” Brown asserted. “But we politicians — pushed by our friends in labor — gradually expanded pay and benefits . . . while keeping the job protections and layering on incredibly generous retirement packages. . . . This is politically unpopular and potentially even career suicide . . . but at some point, someone is going to have to get honest about the fact.”

If Willie Brown, a friend of big government and big labor if there ever was one, is on record with a comment like this, it’s time to move on. Personnel costs for government employees have grown out of proportion to private sector compensation, and California is perhaps the most extreme example. Another question that requires clarity is exactly what percentage of government budgets are consumed by personnel costs? Clearly this is a figure of vital importance, because if personnel costs represent an insignificant share of California’s budget, there is far less urgency to restore the historic trade-off that is supposed to apply when you join public service, i.e., you receive lower current pay in exchange for higher retirement security.

In the table below, California’s state and local personnel costs are calculated using the most recent data available from the U.S. Census Bureau, and compiled by USGovernmentSpending.com. The first thing that should be readily evident is most of California’s government spending is at the county and city level, since of the $516 billion reported for 2009, only $138 billion of that is state spending, and the other $321 billion is local spending. The implications of this fact are ominous – less than 1/3rd of California’s structural budget deficits are caused at the state level.

In order to determine the percentage of this half-trillion of state and local spending in California that is consumed by payroll, turn to the U.S. Census Bureau’s California statistics directly for 2008 Public Employment Data, Local, and 2008 Public Employment Data, State. These tables, updated in December 2009, yield both the number of state and local government employees in California and their total payroll, not including current benefits or pension funding. Assuming an average cost for current benefits of $5,000 per year per full-time employee (probably grossly understated), the total payroll of state and local governments in California is $188 billion per year, or 23% of total spending. What about pension funding?

In a previous post, Maintaining Pension Solvency, the amount necessary to fund a typical state worker pension is calculated using four sets of assumptions – based on a public safety pension plan (assuming 90% of final pay as the retirement pension) and based on a regular non-safety public employee pension plan (assuming 60% of final pay as the retirement pension), with each of these cases calculated based on an inflation adjusted rate of return on the pension fund investments of 4.75% (CalPERS official rate used for projections), and 3.00% per year (a more conservative rate). The table below uses a rate of return of 4.75% per year, and takes into account census data which indicates 13% of Calfornia’s state and local government employees are in public safety, and the other 87% are not, in order to calculate the percent of payroll that must be allocated to pensions. In this case, 23% of payroll, or 5.0% of total government spending, must be allocated to pension funding each year. In all, using these assumptions, 28% of of California’s total government spending is for personnel costs.

What if pension funds don’t return 4.75% per year, but only average 3.0%? Or what if they do average 4.75%, but since they are so underwater currently, a greater than usual contribution must be made each year from now on anyway? The next table shows the result of calculations using a 3.0% return on pension fund investments. In this case, 37% of payroll, or 8.4% of total government spending, must be allocated to pension funding each year. In all, using these assumptions, 31% of of California’s total government spending is for personnel costs.

There is a lot to chew on here. If you calculate personnel costs as a percent of revenue, instead of as a percent of spending, for example, eliminating the roughly $100 billion dollar annual deficits that state and local budgets combined easily exceed in California, and you use the 3.0% inflation-adjusted return on investment for your pension fund, personnel costs swell to 39% of total state and local budgets. If you also assume the costs of current benefits are not $5,000 per year on average, but $10,000 per year (a figure which may still be on the low side), personnel costs swell to 42% of total state and local budgets. What about the current year funding requirements for future retirement healthcare benefits – a line-item cost only rivaled by pension funding requirements – only beginning to be discussed in the context of total annual costs for government workers. And if you take into account the amount of remaining expenditures that are “pass-throughs” to quasi-governmental agencies and contractors, many of whom constitute the last entities outside of government to have enjoyed regular cost-of-living increases over the past 20 years along with pension plans that dwarf social security in their generosity, the percentage of state and local spending that is represented by personnel costs probably doubles – pick a number. Better yet, let’s hear from Willie Brown again – quote:

“Talking about this is politically unpopular and potentially even career suicide for most officeholders. But at some point, someone is going to have to get honest about the fact that 80 percent of the state, county and city budget deficits are due to employee costs.”

If 80% of California’s government expenditures go to personnel costs (probably accurate if you include pass-throughs to contractors who also enjoy swollen pay and benefit packages), and the combined annual state and local budget deficits in California are $100 billion, then basic algebra might suggest the following solution: Reduce the $400 billion that California’s state and local governments spend annually on compensation – including all government-funded project labor agreements for infrastructure, and, for that matter, as a prerequisite to any organization receiving state and local funds – by 25% across the board, and you balance the budgets without compromising programs or raising taxes. How many workers in the private sector would love to have a job that paid them 75% of what they made during the bubble booms?

No matter how you fine-tune an analysis like this, some conclusions are unavoidable. There is a tremendous consequence to the fact that California’s state and local government expenditures for employee compensation, per employee, have grown dramatically over the past twenty years at the same time as private sector compensation has remained relatively flat. When reform advocates suggest rolling back the pay, benefits, and pension packages for public employees in order to eliminate deficits and preserve worthy government programs, they are not making spurious arguments based on anti-government bias, or anti-government employee bias. They have simply run the numbers, and recognized reality.

Entrepreneurs or Predators?

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About five years ago the New Yorker magazine abandoned its official nonpartisanship and, for the first time in eighty years, endorsed a Presidential candidate. Their preferred candidate, John Kerry, didn’t win, but the partisanship continued. If you want to read about art, culture, literature, music, personalities, trends, and pretty much anything that isn’t political in nature, the New Yorker remains probably the best general interest magazine in the English language. But when it comes to politics, the New Yorker has become a high-brow version of your average left-wing alternative weekly free newspaper.

Now one of the New Yorker’s regular writers, Malcolm Gladwell, has issued a muddled dissertation on entrepreneurs (The Sure Thing, January 18th, 2010) that reads, if you skim the piece, as a blatant attack on entrepreneurship, and under closer scrutiny, comes across as simply muddled thinking. The premise of the article is that entrepreneurs are not risk takers, but in fact are risk averse. Quoting other authors, Gladwell then describes entrepreneurs as predators.

Gladwell’s primary example of an entrepreneur is Ted Turner, a spectacularly successful entrepreneur. Gladwell argues that Turner took far fewer risks than one might think. His first example is Turner’s purchase of a UHF television station in Atlanta. Gladwell points out how Turner bought the station in a stock swap, meaning “he didn’t have to put a penny down.” He explains how Turner was able to market the station by using unsold billboard space owned by his current company. He suggests that Turner “realized he could persuade the networks in New York to let him have whatever programming their affiliates weren’t running.” And Gladwell suggests this meant Turner was not taking any risks!

The reality is that without the benefit of hindsight, these were all extremely risky premises. A stock swap isn’t free money. Try thinking that and see what happens when your company goes under and the stockholders sue you. Try to navigate the terms and conditions of a stock swap and eliminate all the contingency risk – dilution, failure to complete milestones, options to convert to debt, to name a few pitfalls in the equity game. And what about these New York networks? What if they didn’t get persuaded? What if they decided they wanted into the UHF game, or wanted to pull the plug once Turner’s ratings started cannibalizing the audiences of their affiliates? What about the fact this UHF station in question was losing a half-million per year, had equipment “that was falling apart,” and had “incompetent” staff? No risk there?

Gladwell is correct to state Turner had an appreciation for the synergy created by the advertising that his billboard company could offer his new UHF TV station, but it is difficult to imagine how this justifies the suggestion he took minimal risk, and what’s more, knew it at the time.

In another example using Ted Turner as his foil, Gladwell suggests there was minimal risk to Turner when he purchased the Atlanta Braves baseball team, because “Turner had realized how important live sports programming could be in building a television brand.” But what about the fact the team was losing a million dollars a year, and wanted a ten million dollar asking price? The fact that Turner ended up talking the Braves into taking this money over an eight year time span is irrelevant. If he couldn’t turn the franchise around, he would have eaten a million per year in operating losses, and another million per year paying the former owners. It is fine to say Turner had vision, hindsight makes this quite clear, but to say he wasn’t taking a risk is unfair.

Gladwell builds on the idea that entrepreneurs are better described as predators, and they are not risk takers, but are risk averse. Paraphrasing the French scholars Michel Villette and Catherine Vuillermot,” he writes: “The truly successful businessman is anything but a risk taker. He is a predator, and predators seek to incur the least possible risk while hunting.” Later in the article, Gladwell conflates business entrepreneurship (or business predation) with financial entrepreneurship (or financial predation), an unfair comparison that invites additional criticism, but let’s stay on point.

There are two huge problems with describing entrepreneurs as predators. Most importantly, Gladwell gets the nature of entrepreneurship precisely wrong. Successful entrepreneurs are not predators, they are altruists. They identify a need, they invent a solution, and they invest their fortunes and their lives in bringing that solution to reality. If their altruistic vision is true to their time and place, and if they manage to navigate the many pitfalls of growing a new business, eventually they earn money, and society gains a new comfort or cure. The predator consumes. The entrepreneur creates.

The other problem is Gladwell wants to have it both ways – if an entrepreneur is successful, he is a predator, and if he is unsuccessful, he is just an entrepreneur. Notwithstanding the cruelty of suggesting only losers can be entrepreneurs, this dichotomy depends on hindsight. You can’t predict in advance which entrepreneurs will be successful, if you could, no entrepreneur would ever fail. And Gladwell is at his worst when he shares his reasons why entrepreneurs fail. Apparently only entrepreneurs who take risks fail – and the risks, according to Gladwell, could be avoided if entrepreneurs simply follow “the established principles of new business formation,” such as adequate capitalization, acquiring an existing business instead of starting from scratch, and writing a business plan. This is naive. Wonderfully formulated business plans often yield nothing, most of the truly revolutionary innovations that make our lives better were ushered in by entrepreneurs who started from scratch, and often breakthrough ideas of staggering potential are way too far out of ordinary investor’s comfort zones to allow for adequate capitalization. Risk is endemic to entrepreneurship, and the greater the altruistic potential, the greater the risk.

Given the biases of writers like Malcolm Gladwell, it is no wonder left-wing commentators have little aversion to the government coming in and running more and more sectors of our economy. Apparently business failures are predicated on predictable shortcomings that good academic training and proper bureaucratic decision-making can avoid – and anyway, successful entrepreneurs are dangerous predators. This mentality informs the thinking of far too many people who have never been on the front lines of a small business; their influence is poisoning the minds of America’s youth, infesting our government, and, most tragically, corrupting industry after industry as they go galloping to government for hand-outs instead of earning the voluntary consent of the consumer – risking failure in the process.

Mr. Gladwell might try starting up a business of his own. To make his experience instructive, he should start a business that makes something tangible – developing land, extracting resources, producing energy, manufacturing a product – in a free market where the only value you can sell is the worth of your product to a willing customer. He might see things differently. He might know the nature of risk and reward in a completely different way. He might see the entrepreneur as an altruistic risk taker, betting everything on the chance to make the world a better place, and he might recognize the true predators – who inhabit the safe corridors of government, and the back rooms of union halls, where coercion is the currency of success, instead of inspiration and hard work.

Stopping Taxpayer Funded Unions

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When fiscal conservatives run for office, or fiscally conservative initiatives are put onto the ballot, the candidates and proponents have to go out and ask for money to finance their campaigns. But in the case of public sector unions, who overwhelmingly support fiscally liberal, big government programs, and consistently oppose attempts to shrink the size of government, this is not the case. In California, for example, every year these unions automatically collect literally hundreds of millions in dues from unionized state and city workers, which they can use to engage in partisan political activity. In California, ever since 1977, when legislation was enacted to permit collective bargaining by public sector employees, unions have become increasingly involved in influencing public issues and policy. It has now reached the point where public sector unions exercise nearly absolute control over California’s state government, and most of California’s local government entities.

One would think workers in the public sector would object to unions who purport to represent them using their money to pursue a big government agenda that has now put public entities into such a financial crisis that they face furloughs and layoffs. One would think government workers would question why their taxes and fees are automatically and involuntarily siphoned into the coffers of union leaders who use the money to control elections and set the agenda for government. And this is particularly true when these unions financially support – using their money – a liberal agenda that not all public employees necessarily support as individual voters.

Despite the fact that California’s electorate splits almost exactly three ways, with about 35% usually voting Democrat, 33% claiming they are independents, and 29% identifying themselves as Republican, public sector unions overwhelmingly pursue a big government agenda. In practice, this means public sector unions have backed Democratic candidates to the point where California’s legislature is on the verge of having a new tax-enabling 2/3rds Democratic majority – and the political survival of these big-government Democrats depends on receiving union money – taxpayer’s money – for their campaigns. Do you think you are taxed enough already? If so, you are of an opinion contrary to the public sector unions, who are using your taxes to advance a political agenda that requires even higher taxes, and who relentlessly and successfully back policies to further expand government.

The result of public sector unions taking control of California’s government are predictable – removed from the necessity to please customers and sell products and make profits, necessities that compel unions in the private sector to exercise restraint in their demands on management – public sector unions have pursued an agenda of government expansion that has now left every public entity in California teetering on the brink of bankruptcy. Ordinary taxpaying workers in the private sector have been left behind in this extravagant joy ride, as the costs to pay for needlessly expanded government programs and the costs to business to comply with over-reaching regulations have increased the cost of living at the same time as they have reduced the ability of private sector business to provide workers good jobs and regular raises.

Private sector workers in California have been slow to awaken to the financial disaster wrought by out of control unions, as has the press, because they were bamboozled and betrayed by politicians whose political survival depends on campaign funds supplied by public sector unions. The financial clout of public sector unions is unparalleled, with millions of members who are each required to pay several hundred dollars per year in union dues, these unions can make or break any politician they want in the state of California. During Schwarzenegger’s unsuccessful “year of reform,” in the fall of 2005, public sector unions spent over $50 million to defeat just one of Schwarzenegger’s reform initiatives, the one that would have required public sector unions to obtain employee consent before using their dues to conduct political activity.

In spite of the fact that public sector unions can usually outspend their opponents by margins of ten to one or more, however, recent polls indicate the level of understanding of the arrogance and overreach of public sector unions is much higher among voters today compared to 2005. Public employees as well realize the unfairness of seeing their dues diverted to agendas that clearly serve the agenda of the union leadership, instead of the broader interests of society, or their own values. A perfect example is the antics of California’s teachers union, who have imposed crippling constraints on the ability of administrators to reward excellent teachers and dismiss incompetent ones, and have consistently opposed efforts to establish charter schools despite the fact they deliver outstanding educational results. And what has happened to California’s public schools has happened throughout California’s government bureaucracies, thanks to public sector unions.

In November 2010 there will be several reform initiatives on California’s ballot, and one of them aims to begin to rein in the influence of public employee unions. The Citizen Power Initiative will limit the ability of public sector unions to collect a portion of worker’s tax payments, through mandatory union dues assessed on public employees, to pursue their big government political agenda. If this initiative qualifies for the November ballot, expect unions to spend whatever it takes to defeat its passage. But this time around, with workers barely able to pay the many taxes and fees they already suffer, it will be a harder for the unions to use their money to confuse the issues, and derail genuine reform at last.

The initiative has already been cleared for circulation by the California Secretary of State.

Here is the title and summary, which provides a pretty good description of what this initiative will accomplish, if passed:

1403. (09-0054)

Makes Illegal the Use of Public Employee Wage Deductions for Political Activities. Initiative Constitutional Amendment.

Summary Date: 12/04/09 | Circulation Deadline: 05/03/10 | Signatures Required: 694,354

Proponents: Mark W. Bucher, Dawn M. Wildman, Allan R. Mansoor, Lawrence D. Sand, and Mark J. Meckler (714) 573-2201

Amends the California Constitution to make it illegal to deduct from wages or earnings of a public employee any amount that will be used for political activities as defined. Prohibits any membership organization that receives public employee wage deductions from using those funds for any political activities, but does not apply to deductions for charitable organizations, health, life or disability insurance, or other purposes directly benefitting the public employee. Authorizes the Legislature and Fair Political Practices Commission to adopt related laws and regulations. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local government: Probably minor state and local government implementation costs, potentially offset in part by revenues from fines and/or fees. (09-0054.)

You can also read the title and summary (scroll down to #1403) here:

The full text can be found here:

The signature petition is here:

A one-page fact sheet on this initiative is here:

The website for the campaign promoting this initiative is here: