Unions and the American Worker

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A great irony of American politics is that the agenda of the left, especially big labor, causes more economic harm than good to the average American worker. Explaining this irony is not easy, but a contributor to the Washington Times, Doug Ross, did a pretty good job yesterday in his guest column entitled “Union members should know their leaders are betraying them.”

Ross gets to the heart of the matter as he connects the money from union dues to support for big government bureaucracies whose current agenda is to curb economic growth while flooding the nation with cheap labor:

“When you get your next paycheck, take a minute to calculate how much money is going to union dues (say, for example, $90). Multiply that by the number of pay periods per year (say, 26). The total (in this example, nearly $2,500) is going to line the pockets of the union bosses who will give your money exclusively to one political party, Democrats.

Your money — the product of your labor, of your finite time on Earth spent working — is being stolen and funneled to the same political party bent on destroying you. The EPA is destroying jobs. The Department of the Interior is destroying jobs. The Department of Labor’s open borders advocacy is destroying jobs.

All of these immense bureaucracies, which you pay for with your taxes (more money stolen from you) are targeting union workers, America’s backbone. And these gigantic government regulatory bodies are doing so with the full knowledge and assistance of the union bosses who support Democrats.”

Not every premise Ross advances is necessarily correct. After all, Republicans have long demonstrated their willingness to be co-equals with Democrats in their subservience to big government, big labor, and big business. And open immigration would not be nearly so problematic if immigrants today weren’t entering a welfare state, where unionized public school teachers brainwash their children to embrace socialist ideology.

Ultimately what Ross is getting at is a corporatist collusion at the heart of union power. Despite common perceptions, big labor doesn’t hurt big business nearly as much as they hurt entrepreneurs who are the emerging competitors to big business. Big business often benefits when companies unionize, because their smaller competitors can’t handle the extra costs. Similarly, big business generally benefits from government regulations, such as new environmental regulations that are often overkill, because smaller competitors can’t afford to comply.

Perhaps the biggest irony of all is how unions now urge Americans to blame “Wall Street” for the economic hardships affecting working families. Because the relationship of big labor to big finance exemplifies the most corrupt example of corporatist collusion of all. At a time when the U.S. Federal Government is borrowing money at a composite rate of well under 1.0%, public employee pension funds pour hundreds of billions of taxpayer dollars each year into Wall Street brokerages, under the fiction that these trillion dollar funds can earn 7.75%. This is a con job of epic proportions, and until the axis of big labor and big finance is broken by abolishing taxpayer-funded, high-risk, multi-trillion dollar Wall Street administered pension funds that promise high returns and high payments in perpetuity to unionized government workers, taxpayers will be on the hook to cover an awful spread.

The last stronghold of labor unions is the public sector, where unions have indeed helped workers, but only public sector workers. The average total compensation for a unionized public sector worker – including costs for current and future benefits – is now twice that of the average private sector worker. The projected total retirement pension payments per year to public sector workers, who comprise less than 20% of the American workforce, are now projected to be more than the total projected social security payments to the other 80% of Americans.

With an agenda that only empowers monopolistic forces, big labor, big government, big business and big finance, the politics of labor unions essentially favor the same sort of political economy that was strangling competition and hurting the American worker back during the era of “trusts” in the 1890’s. The rise of the Tea Parties, which now has mushroomed into a generalized revulsion of the self-serving, taxpayer-funded power of public sector unions, is part of a seismic shift in American politics that will hopefully carry the same transformative force as the trust-busting movement of a century ago.

Calculating Public Worker Pension Payments

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A realistic way to gauge the fairness and financial sustainability of retirement benefits for government workers is to compare how much per year in pensions we will be paying our retired population of government workers compared to how much per year we will be paying in social security to our retired population of private sector workers. Using California as an example, here’s where such an analysis takes us.

Pensions and social security are both tied to how much workers earn prior to retirement. The average California state or local government worker earns $68,500 per year, based on data from U.S. Census Bureau data which can be found on the following tables “U.S. Census Bureau 2008 Public Employment Data Local Governments California,” and “U.S. Census Bureau 2008 Public Employment Data State Government California.” The average California private sector worker earns $46,500 per year, based on data from the U.S. Bureau of Labor Statistics “May 2009 California Occupational Employment and Wage Estimates.” The average social security benefit for an average wage earner can be found on the “U.S. Social Security Estimated Retirement Payments Chart.” It shows that a person earning $46,500 per year can expect to receive a social security benefit of about $15,000 per year starting at age 66.

Retirement pension benefits for state and local non-safety public employees in California typically range between 2.0% and 2.5% times years worked, times their final salary. Based on this formula, people employed by the University of California, for example, as can be seen on the “University Retirement Plan” (ref. page 13), will receive between 60% (30 years, age 55) and 75% (30 years, age 60) of the average of their final three years salary in retirement. For public safety employees, who comprise approximately 15% of the state and local public sector workforce in California, pension benefits typically are calculated based on 3.0%, times years worked, times their final salary. Overall, it is typical for California’s state and local government workers currently retiring after 30 years to receive about two-thirds of their final salary in pension benefits, or $45,600 per year.

To calculate the cost to Californians of paying government workers, on average, a pension that is literally triple what the average private sector worker collects from social security, one must also take into account the differing projections of worker to retiree ratios. The ratio of government workers to government retirees is on-track to be 1-1, i.e., one worker for each retiree, whereas the ratio of active private sector workers to retired social security recipients is unlikely to ever dip below 2-1. This is because government workers typically work from ages 25 to 55, then retire for 30 years, and private sector workers typically work from ages 25 to 65, then retire for 20 years. An examination of projected age distributions in America for 2030, as documented on the U.S. Census Bureau’s International Database, indicates the United States is destined to have an even streamed age distribution, i.e., about 20 million citizens in each five year age group, which makes these calculations much easier.

Notwithstanding investment returns, if there is only one active government worker – working 30 years – for every retired government worker – retired for 30 years, and if the average government pensioner receives a pension equivalent to two-thirds of what they made when they worked, then funding government worker pensions would require each government worker to contribute an amount equal to 66% of their salary towards supporting the retirees. By contrast, if at least two private sector workers – who work for 40 years and are retired for half that time – are employed for each one who is retired, and if the average private sector retiree receives a social security benefit equal to one-third of what they made when they worked, then adequately funding social security would require each private sector worker to contribute an amount equal to only 16% of their salary towards supporting the retirees. This reasoning holds enormous implications when assessing the relative long-term viability of government worker pensions vs. social security.

So how much will California’s taxpayers be spending, in aggregate, to make pension payments to their retired government workers, compared to how much they will spend to make social security payments to their private sector retirees?

To make this projection, multiply the average amount of the government worker pensions by the estimated number of retired government workers, and compare that to the average amount of the social security benefit multiplied by the estimated number of retired private sector workers. To estimate California’s projected population of retired government workers, simply use the same number as their working population, 2.4 million, since on average they work 30 years and are retired 30 years. To estimate California’s projected population of retired private sector workers, similarly, just take the population of active private sector workers, 12.2, and divide by two, since on average they work 40 years and are retired 20 years. Data for these working populations can be found from the California Employment Development Dept., Labor Market Trends 2009.

Using these assumptions, the projected number of retired social security recipients in California is 6.1 million, and the amount they will collect in aggregate in social security is $95 billion per year. The the projected number of retired government workers in California is 2.4 million, and the amount they will collect in aggregate in pensions is $110 billion per year. This is an astonishing projection. It indicates that the government will be spending more, in total dollars per year, to pay pensions to retired government workers, than it will be spending, in total dollars per year, to provide social security to retired private sector workers who are nearly three times as numerous. These facts speak for themselves. It is left to each voter and policymaker to determine for themselves whether or not this disparity in retirement security between government workers and private sector workers is either fair or financially sustainable.

The Cost of Government Pensions

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Earlier this week the Sacramento Bee hosted a chat on the topic “Should States Rethink Collective Bargaining.” In addition to journalists from the Bee, participants included Steve Greenhut, editor of CalWatchdog.org, and Art Pulaski, the chief officer of the California Labor Federation, AFL-CIO.

During the hour-long discussion, the topic of public sector pensions came up a few times, and Mr. Pulaski stated that the average pension collected by retired state workers in California are not much more than social security. Referencing the chat log, he said:

“ArtPulaskiCLF:
the average state worker gets a pension of $24,000 and often without social security. Not lavish by any means
Tuesday March 8, 2011 12:48 ArtPulaskiCLF”

This is a profoundly misleading statement. When Pulaski, and others who share his perspective on these issues, use numbers this low, they are reporting an average that includes everyone on the CalPERS retirement rolls, even people who have barely vested their retirement benefit by only working five years for the state. Furthermore, this average includes part-time workers, and it includes long-time retirees who left the workforce before base pay and pension formulas had been increased significantly – and unsustainably – as they have in the last 10-15 years during the economic bubbles.

A more realistic way to gauge the fairness and financial sustainability of state worker pensions is to reference the average pension for currently retiring state workers who have logged 30 years of full-time work for the government. Using data from CalPERS annual report for the fiscal year ended June 30th, 2010, entitled “Shaping our Future,” (ref. page 151) the average pension for a state employee enrolled in CalPERS who retired last year after 30 years of service is $66,828 per year.

This amount, far in excess of the “$24,000″ claim by Pulaski, is based on data provided by CalPERS, and is further evidenced by evaluating the typical pension benefit formulas currently granted government workers in California. People employed by the University of California, for example, as can be seen on the “University Retirement Plan” (ref. page 13), will receive between 60% (30 years, age 55) and 75% (30 years, age 60) of the average of their final three years salary in retirement. Benefits for state and local public employees in California typically range between 2.0% and 2.5% times years worked, times their final salary.

For public safety employees, who comprise approximately 15% of the state and local public sector workforce in California, pension benefits typically are calculated based on 3.0%, times years worked, times their final salary. The labor agreement between Sacramento County and their firefighter union provides a representative example. (Ref. “Agreement between Sacramento Fire Fighters Union and City of Sacramento,” page 55.) For information on all bargaining units and their pensions in the City of Sacramento, refer to the links on their “City of Sacramento Labor Agreements” page. You will see that in the city of Sacramento, whose worker benefits are quite typical of the cities and counties in California, it is typical for workers currently retiring after 30 years to receive about two-thirds of their final salary in pension benefits.

To really understand what this means, it is necessary to come up with two additional estimates, (1) the average base salary for a government worker in California – which allows one to estimate the average pension of a retired government worker – and (2) the number of retired government workers. This allows one to calculate how much money is disbursed each year to pay retirement pensions to retired government workers. This amount, in-turn, can be compared to how much is being disbursed each year to pay retired private sector workers who collect social security.

Using California as an example, and using conservative assumptions (because the CalPERS data already noted suggests the average career pension to be far higher than $46K per year), the following table illustrates how much the average government worker makes per year both while working and during retirement, and compares it to how much the average private sector worker makes both while working and during retirement. These figures dramatically illustrate the disparity between government worker compensation and private sector worker compensation. On average, government workers collect a base salary that is nearly 50% more than private sector workers during their active careers, then collect over three times as much through their pensions in retirement than retired private sector workers collect from social security. In fact, the average government worker’s retirement pension is equivalent to the average private sector worker’s base wages while still working!

The amounts presented in the above table are fairly easily calculated using core data that any reader is invited to verify for themselves. The average California state and local government worker wage of $68,500 per year is derived from U.S. Census Bureau data which can be found on the following tables “U.S. Census Bureau 2008 Public Employment Data Local Governments California,” and “U.S. Census Bureau 2008 Public Employment Data State Government California.” The average California private sector worker wage of $46,500 per year can be found from the U.S. Bureau of Labor Statistics “May 2009 California Occupational Employment and Wage Estimates.” The average social security benefit for an average wage earner can be found on the “U.S. Social Security Estimated Retirement Payments Chart.”

The cost to Californians of paying government workers, on average, a pension that is literally triple what the average private sector worker collects from social security is compounded by the fact that the ratio of government workers to government retirees is on-track to be 1-1, i.e., one worker for each retiree, whereas the ratio of active private sector workers to retired social security recipients is unlikely to ever dip below 2-1. This is because government workers typically work from ages 25 to 55, then retire for 30 years, and private sector workers typically work from ages 25 to 65, then retire for 20 years. An examination of projected age distributions in America for 2030, as documented on the U.S. Census Bureau’s International Database, indicates the United States is destined to have an even streamed age distribution, i.e., about 20 million citizens in each five year age group, which makes these calculations much easier. This disparity is illustrated in the table below:

What the above table demonstrates is the following: Notwithstanding investment returns, if there is only one active government worker – working 30 years – for every retired government worker – retired for 30 years, and if the average government pensioner receives a pension equivalent to two-thirds of what they made when they worked, then funding government worker pensions would require each government worker to contribute an amount equal to 66% of their salary towards supporting the retirees. By contrast, if at least two private sector workers – who work for 40 years and are retired for half that time – are employed for each one who is retired, and if the average private sector retiree receives a social security benefit equal to one-third of what they made when they worked, then adequately funding social security would require each private sector worker to contribute an amount equal to only 16% of their salary towards supporting the retirees. This reasoning holds enormous implications when assessing the relative long-term viability of government worker pensions vs. social security.

Perhaps the most dramatic illustration of the inequity of California’s government worker pensions averaging literally the same amount as what the average private sector worker earns while actively working is illustrated in the next table. The calculations are based on multiplying the average amount of the government worker pensions by the estimated number of retired government workers, and comparing that to the average amount of the social security benefit multiplied by the estimated number of retired private sector workers. To estimate California’s projected population of retired government workers, simply use the same number as their working population, 2.4 million, since on average they work 30 years and are retired 30 years. To estimate California’s projected population of retired private sector workers, similarly, just take the population of active private sector workers, 12.2, and divide by two, since on average they work 40 years and are retired 20 years. Data for these working populations can be found from the California Employment Development Dept., Labor Market Trends 2009.

On the above table, the green columns represent the projected number of retired social security recipients in California, 6.1 million, and the amount they will collect in aggregate in social security, $95 billion per year. The blue columns represent the projected number of retired government workers in California, 2.4 million, and the amount they will collect in aggregate in pensions, $110 billion per year. This is an astonishing projection. It indicates that the government will be spending more, in total dollars per year, to pay pensions to retired government workers, than it will be spending, in total dollars per year, to provide social security to retired private sector workers who are nearly three times as numerous.

To the extent these extravagant benefits have been approved by compliant politicians on behalf of government workers in other states, what these figures illuminate for California can be extrapolated to apply across the United States. To suggest that Wall Street pension fund investments are going to be able to make up for this disparity, and therefore somehow mitigate the burden this disparity places on taxpayers, is not only extremely debatable – because the high returns that pension funds delivered over the past 30+ years were driven by an unsustainable expansion of debt – but also specious. Because if Wall Street investments are the panacea, set to rescue taxpayers from the burden of supporting retired government workers, why are spokespersons for government worker unions blaming Wall Street at the same time as they fail to recognize that their pension funds are Wall Street?

If government worker pensions, whose solvency is currently guaranteed by taxpayers, are to be gambled on Wall Street, why isn’t the social security fund also gambled on Wall Street? Why do taxpayers bear the downside of the Wall Street manipulated economic meltdown not only for themselves and their own individual investments, but also take the hit and make up the difference for the government workers and their pension funds? Anyone representing government worker unions who claims Wall Street is both the problem and the answer should seriously examine their premises. And anyone who suggests government worker pensions are not extravagant, or do not place a crippling burden on taxpayers and government budgets, is not confronting the facts.

Trumka’s False Choice

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Imitation is the sincerest form of flattery. But when the imitator inverts the meaning of the phrase they’re imitating, clarification is called for. Such is the case with the esteemed Richard Trumka, president of the AFL-CIO, who has penned an essay in today’s Wall Street Journal entitled “Scott Walker’s False Choice.”

According to Trumka, Wisconsin’s embattled governor Scott Walker has presented the following false choice to the unionized public employees in that state, “if you want to keep your job, give up your rights, if you want to keep your rights, you’re going to get laid off.” But what if it isn’t Governor Walker, but Richard Trumka, who is presenting a false choice to America?

Back in 2009, a courageous reformer in San Diego, California, councilmember Carl DeMaio, was already talking about the false choice that powerful labor unions in that city were presenting to voters. In an April 2009 press release from DeMaio’s office entitled “City Makes Progress with Labor Contracts,” DeMaio had this to say about the choices facing voters:

“City taxpayers have long been presented with the false choice that we must either raise taxes or suffer severe cuts in citizen services.  Today’s action reflects my long-held belief that the better path to solving the city’s financial problems is to make our city government more efficient by reducing labor costs to sustainable levels in line with our local labor market.”

By extension, the false choice that public sector unions were presenting voters in San Diego is the same false choice public sector unions across the United States are presenting voters and politicians who are coming to terms with crippling government deficits.

Trumka, echoing the refrain heard from labor leaders across America these days, claims that “when adjusted for education, experience and training, the data show that public-sector workers are paid less than their private-sector counterparts.” There may be a few places left in America where Trumka’s statement is true, but not in California.

When a U.C. Berkeley study was released in October 2010 entitled “The Truth about Public Employees in California: They are Neither Overpaid nor Overcompensated,” they didn’t disclose anywhere in their report how much the average state or local government employee actually makes in California. If the “normalizing factors” such as education, experience and training are so significant, why hide the number? When our institute went ahead and looked at the same data, in our report last month entitled “What Percent of California’s State AND Local Budgets Are Employee Compensation?” we found that the average state or local government worker in California collects annual total compensation of $106,000 per year. By contrast, using Bureau of Labor Statistics (ref. May 2009 State Occupational Employment and Wage Estimates California) the average private sector worker in California earns total compensation of $57,000 per year – at most, since the BLS data excludes part-time and self-employed workers. Mr. Trumka is invited to check these statistics for himself, and explain why public sector workers are entitled to collect nearly twice as much from their government employers as the taxpayers who must cover those costs.

When labor leaders point out the reality of wage stagnation and the formation of a super-rich elite, they have a point, but they are tragically incorrect as to the cause and the cure for these realities. Tragic, because their arguments carry powerful emotional weight, which, combined with their unparalleled ability to launch taxpayer funded, union purchased media campaigns, has allowed them to dominate elections by presenting their version of the “false choice” for the last several decades. Incorrect, because it is the unions themselves who have exempted public sector workers from the inevitability of globalization, which imposed the burden of higher taxes on the rest of America’s workers who still had to adapt, and because it is public sector union pension funds who have been Wall Street’s willing accomplices, pouring hundreds of billions of dollars per year of taxpayer’s money into Wall Street brokerages so they could gamble with the economic future of the world.

To the extent America’s super-rich made their money on Wall Street, perhaps Trumka is right to criticize them. But the solution is to stop using government unions as Wall Street’s collection agent, and instead put government pensions onto a sustainable, pay-as-you-go footing, where returns on investment are limited to the rate one might earn from a U.S. treasury bill. This, in-turn, will necessitate lowering government employee pension benefits to something somewhat better than social security, but nothing more. And the solution to government deficits is to lower government employee salaries and benefits, which constitute about 80% of most government budgets.

This is the real choice facing American voters. End the partnership of government unions and Wall Street and stop paying government workers nearly twice as much as private sector workers, or continue to engage in deficit spending until the American economy implodes. If American’s make the right choice, it will require refuting the agenda of government unions. But the upside will be fewer Wall Street billionaires to serve as bogeymen for labor leaders, and lower taxes – and hence a higher standard of living – for all American workers.

Redefining Environmentalism

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The “Breakthrough Institute,” was founded in 2003 by Ted Nordhaus and Michael Shellenberger, authors of “The Death of Environmentalism” and Break Through, and aspires to be “a paradigm-shifting think tank committed to modernizing liberal thought for the 21st Century.” Last week Nordhaus and Shellenberger delivered a lecture at Yale University that provided myth-shattering explanations for recent failures of the environmental movement. Equally significant, and very encouraging, is that in their lecture, Shellenberger and Nordhaus also set forth principles for redefining and revitalizing environmentalism that are realistic and thoughtful. The full text of their remarks, entitled “The Long Death of Environmentalism” are posted on their website.

Here is the problem with environmentalism according to Nordhaus and Shellenberger:

“Today, environmental efforts to address climate change and build a green economy lie in ruins. The United States Congress this summer once again rejected climate legislation that even had it succeeded would have had virtually no impact upon U.S. carbon emissions over the coming decade. The magnitude and consequence of this defeat are poorly understood outside of Washington. Greens had the best opportunity in a generation — a Democratic White House and large Democratic majorities in Congress. But they banked everything on a single bill and walked away with nothing — or rather worse than nothing, since today environmental credibility with lawmakers of both parties is today at an all-time low. Meanwhile, green stimulus investments ended up creating very few jobs. Those that it did create were low-wage and temporary custodial jobs — not the high-wage manufacturing jobs that created the black middle-class after World War II. And today, the clean tech sector– the darling of high tech VC’s at the height of the green bubble– is in a state of collapse as stimulus funds expire, large public deficits threaten clean energy subsidies both here and abroad, and Wall Street firms short clean tech stocks.”

Whether or not you agree with all of Nordhaus and Shellenberger’s premises – such as the big one, that anthropogenic CO2 is truly destined to cause catastrophic climate change, their take on what has happened to environmentalism is not only accurate, but a refreshing burst of candor and clarity coming from the heart of the environmentalist community. For example, they acknowledge that the overwhelming preponderance of media spending came from the climate change alarmists, and not from the climate change deniers:

“In the wake of the crash, environmentalists pointed their finger at the usual bogeymen. They claimed that the problem has been that fossil fuel interests have massively outspent underdog environmental groups, funding skeptics to mislead the public and duping the media into giving too much credence to skeptical views about climate change. In reality, the environmental lobby massively outspent its opponents. In just the last two years, by our rough estimate environmental organizations and philanthropies spent somewhere north of $1 billion dollars advocating for climate action. In contrast, the U.S. Chamber of Commerce, Exxon-Mobil, the Koch Brothers, Big Coal, and the various other well publicized opponents of environmental action might have spent, when all was said and done, a small fraction of that. Indeed, much of the U.S. energy industry, including the largest utilities, helped write and lobbied for U.S. climate legislation.”

Equally refreshing is the admission by Nordhaus and Shellenberger that “green jobs” and “clean technology” are typically drains on economic productivity, not engines of economic growth:

“Many greens concluded was that they needed to reframe global warming as an economic opportunity, not an ecological crisis. And so carbon caps and the soft energy path were repackaged as economic and jobs policy despite little evidence those policies would, on balance, create jobs. In fact, most credible economic models of proposed cap and trade policies, including those produced by government agencies, predicted the opposite.”

Nordhaus and Shellenberger go on to basically accuse environmentalists, climate alarmists in particular, of discrediting not only the broader environmental movement, but the entire clean technology movement, because they oversold clean technology as the panacea for both environmental and economic challenges – when in fact, certainly in the short run, it was neither:

“Efforts to reframe climate policy as economic policy ended up discrediting what had been a broadly popular agenda to invest in developing new energy technologies by rendering it indistinguishable from the profoundly polarizing climate debate. ”

What makes Nordhaus and Shellenberger’s perspective very interesting and potentially very important is the fact they are arguing these points as individuals with impeccable environmentalist and liberal credentials. The fact they recognize these sobering realities that constrain both environmentalism and clean technology make their conclusions worthy of a careful read. Here is a summary of the twelve points Nordhaus and Shellenberger believe should inform a revitalized, reinvented environmentalism:

Twelve Theses for a Post-Environmental Movement – by Ted Nordhaus and Michael Shellenberger
(the text here is abbreviated by the editor, and the reader is encouraged to read the complete version on the Breakthrough Institute’s website)

“(1) More, better or louder climate science will not drive the transformation of the global energy economy. The resources necessary to make such a transformation will not be forthcoming in pursuit of climate benefits that are uncertain and far off in the future… our understanding of how that warming impacts the climate system at regional and local scales will become harder to characterize, not easier.

(2) Stop trying to scare the American public.

(3) The most successful actions will not be justified for environmental reasons [they will be justified for reasons of national security or for economic reasons]. We should put shared solutions at the center of our politics, not our view of the science.

(4) We will not solve global warming through behavior changes… much of the world already lives in dense cities – more and more of us every day… and as they do they will use vastly more energy and resources, not less.

(5) Stop treating climate change as if it were a traditional pollution problem.

(6) We will not regulate or price our way to a clean energy economy. Regulatory and pricing solutions tend to succeed when we have good, low cost alternatives to the activities which we are attempting to discourage or eliminate.

(7) The so-called ‘soft energy path’ is a dead end. For centuries, the global economy has used ever more energy, even as it has used energy ever more efficiently and renewable energy. Renewables still cost vastly more than fossil based energy.

(8) We will not internalize the full costs of fossil fuels, even if we are able to agree upon what they actually are [the calculations are too subjective]. The degree that we do internalize the cost of carbon will be determined by the tolerance within specific political economies for policies that increase energy costs.

(9) We need to make clean energy technologies much cheaper in order to decarbonize the global energy economy.

(10) We have to get over our suspicion of technology, especially nuclear power.

(11) We need to embrace again the role of the state as a direct provider of public goods. Think of a transformative technologies developed over the past century is the result of government investing in those technologies at a scale that private firms simply cannot replicate.”

(12) Big is beautiful. The rising economies of the developing world will continue to develop whether we want them to or not. The solution to the ecological crises wrought by modernity, technology, and progress will be more modernity, technology, and progress. The solutions to the ecological challenges faced by a planet of 6 billion going on 9 billion will be large central station power technologies that can meet the energy needs of billions of people increasingly living in dense mega-cities, industrial scale agriculture, desalinization and other technologies for gardening planet Earth that might allow us not only to pull back from forests and other threatened ecosystems but also to create new ones.”

For a libertarian leaning fiscal conservative who is 99% convinced anthropogenic CO2 will not cause catastrophic climate change, yet embraces good government, energy security, and reasonable environmental policies, these twelve theses from Nordhaus and Shellenberger are most encouraging. They provide a basis for a genuine dialog between Republicans and Democrats, one that might yield genuine progress towards environmental sustainability combined with sustainable economics.

The Democratic Party War

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While attention focuses on the battle in Wisconsin between a Republican Governor and public employee unions who overwhelmingly support Democrats, it is in California where the future role of public sector unions in politics is being most severely tested. Because in California, Democrats exercise nearly absolute control over the state’s political agenda, and as a result, Democrats are forced to confront the unsustainable and counterproductive public sector union agenda all by themselves.

An interesting article in the March 2011 issue of Reason Magazine by Tim Cavanaugh, entitled “Farewell, My Lovely – How public pensions killed progressive California,” opens with a statement that clearly expresses the political reality in California today, “In November, bucking the national trend, Democrats in California won not just the governorship but 51 Assembly seats to Republicans’ 29, 24 state Senate seats to Republicans’ 14, and every statewide office. With the passage of a referendum lowering the number of legislative votes required to approve a state budget (from a two-thirds majority to a simple majority), California is that rarest of land masses for the 2011 Democratic Party: conquered territory.”

Cavanaugh goes on to describe the slow realization by California’s Democratic lawmakers that their visions for California’s future “are being derailed by a labor movement nobody can harness.” Referring to California’s unsustainable pension benefits package granted unionized state and local government employees, Cavanaugh observes “…the most aggressive lobbying for pension reform is coming not from fiscal conservatives but from progressives, who see the logarithmic cascade of pension liability as a threat to public parks, environmental programs, and rail transit.”

The looming schism between progressive Democrats and union Democrats in California affects all government programs, but the insolvency of public employee pension benefits and the failing system of public education are two of the most visible. In San Francisco, Supervisor Jeff Adachi, a Democrat, sponsored a pension reform bill in November 2010 that would have imposed very modest increases to pension contributions by city workers. He was bitterly opposed by public employee unions, and the measure was defeated. Quoting from Cavanaugh’s article, here are some of the people who backed Adachi on the bill:

“Adachi’s allies on Prop. B included Willie Brown, a Democrat who was mayor of San Francisco from 1996 to 2004 and speaker of the California State Assembly from 1981 to 1995, and the Green Party’s Matt Gonzalez, former president of the San Francisco Board of Supervisors and Ralph Nader’s 2008 vice presidential candidate.”

As noted in SF Weekly on Feb. 16th, “Jeff Adachi Already Crafting ‘New Prop. B’,” Adachi is going to try again. And this time the spotlight will shine even brighter on a phenomenon that has started in California and will sweep across the blue states of America – Democrats vs. Democrats fighting for the agenda of their party.

Turning to California’s troubled system of public education, a Sacramento Bee story published today entitled “Democratic schism opens on fixing schools,” by Laurel Rosenhall offers an impressive list of Democrats who have decided a primary obstacle to improving public education is the teacher’s union. Here are excerpts from Rosenhall’s report:

“Gloria Romero, the former [Democratic] state senator from Los Angeles who lost her bid this year to become the state superintendent of schools, is heading the new California chapter of Democrats for Education Reform, a PAC that operates in 10 states… ‘It’s a donkey in the room,’ Romero said. ‘It’s Democrats who have been tightly aligned with education’s special interests year after year, decade after decade, and we haven’t progressed. So we have to examine our conscience, our party, and really forge a new path forward.’ ”

“In a speech earlier this month, Los Angeles Mayor Antonio Villaraigosa, a Democrat who got his start as a union organizer, blasted the L.A. teachers union for blocking changes in the schools.”

“Michelle Rhee, the former Washington, D.C., [Democratic] schools chancellor who fought the teachers union there over tenure and merit pay, is launching a national advocacy group to back politicians who can’t get union support because of their views on education.”

” ‘It’s a people’s movement, in a way, from groups like NAACP saying ‘enough is enough,’ ‘ said Alice Huffman, president of the California NAACP, which supported Romero’s bills. Taking a position against the unions was a switch for Huffman, a Democratic Party activist who worked for the CTA for 12 years and describes herself as a strong believer in labor rights. ‘I’m not trying to destroy the union,’ Huffman said. ‘But sometimes you have to make a choice in life and right now, the education of our young people is more important than protecting the union.’ ”

There are two types of Democrats – union democrats, who want to retain over-market pay and inefficient practices for their powerful union constituencies, and government services Democrats, who want infrastructure projects and social programs. In California, where these Democrats wield monopoly control over the political process, the hard reality is that they will have to choose between the union agenda vs. the government services agenda. This hard reality will expose the agenda of the unions more explicitly than events in Wisconsin ever will, because in California there is no Republican opposition to scapegoat in order to hide the true issues of solvency and sustainability.

In California, Democrats of conscience, loyal to their ideal of government as an investor in infrastructure and provider of services, are rejecting major elements of the union agenda, and as a party, they will have to weather the ensuing turmoil and impoverishment. This will force realistic assessments of what is politically and financially feasible by Democrats, transforming their party. This process has already begun in the Golden State.

Unions and America’s Ills

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On February 9th, 2011, the Detroit News, as part of its “Labor Voices” series, published a guest editorial by the President of the International Brotherhood of Teamsters, James Hoffa, entitled “American ills not caused by unions.” In this editorial Hoffa made many statements that require a rebuttal, starting with this: “Across the country, new governors and new legislatures are demanding cuts to jobs, pensions and concessions from public employee unions. Their demands are nothing more than payback for the billions of dollars that the ultra-rich have poured into political campaigns.”

What Hoffa ignores is the political fundraising reality in America, which is that corporations are split relatively evenly between those who will back union reformers – usually Republicans, and union protectors – usually Democrats. Corporations hedge their bets. Very few large corporations openly challenge the union agenda, or even have reason to, since unionization drives off emerging competitors.

Similarly, wealthy individuals are split relatively evenly in their political affiliations in America. For every billionaire who backs Republicans, there is a billionaire who backs Democrats – for every Koch, there is a Soros.

At the grassroots, however, something very different occurs. Because labor unions, which still command over 16 million members in the United States (ref. U.S. Census, Bureau of Labor Statistics), nearly always give money to union-friendly Democratic candidates and issues. If you estimate the average annual dues of a union member at $500 per year, this means unions in America have over $8.0 billion per year that they can spend any way they please. There is simply no source of grassroots political fundraising that comes anywhere close to the financial power of unions, and unlike every other grassroots political fundraising entity in America, unions compel their members to pay union fees, which in effect means they compel their members to support their political activity. In the analysis, Public Sector Unions and Political Spending, it is estimated that public sector unions in California spend over $250 million per year on political activity. The idea that any competing interest comes even close to that is absurd.

Hoffa goes on to suggest that “government employees did not blow a hole in any state budget…” He points out as an example that “the typical public employee’s pension is only $19,000 per year.” This is all simply inaccurate. Using California as an example, here is the true figure for pensions as reported by Daniel Borenstein in his February 5th column in the Contra Costa Times entitled “Public employee pensions much higher than advertised:”

“In fact, CalPERS data shows the average career public employee, who put in at least 30 years of service and retired in the 2008-09 fiscal year, collected a starting pension of $67,000 a year, or 2.5 times the advertised figure. The higher number is buried deep in the retirement system’s financial statement and never makes it to the promotional material CalPERS hands out.”

As for compensation, as estimated in the post “How Much of California’s Budget is Personnel Costs?” the average total compensation for a worker employed by the state of California is $106,000 per year, before increasing their pension contribution to reflect the higher contributions necessary to keep those funds solvent under the current benefit formulas. At least two-thirds of California’s state budget is to cover personnel costs.

In his editorial, Hoffa apparently believes the real culprit in America’s current ills is Wall Street. Well there certainly is blame to go around, and Wall Street shouldn’t be spared. As Hoffa puts it:

“Public employees didn’t create a huge housing bubble. Wall Street did that. And public employees didn’t cause the Great Recession through reckless speculation. Wall Street did that, too. State governments didn’t get $3 trillion dollars in loans from the Federal Reserve and profit from those loans by relending them. Again, that was Wall Street.”

Taking Hoffa’s three points about Wall Street one at a time: (1) Failure to regulate mortgage lending was indeed the primary reason for the housing bubble – but public agencies, thirsting for the income tax and property tax revenue, had no incentive to pull the plug, and they didn’t. They did, however, use the unsustainable increase in tax revenues as their pretext for unprecedented, ridiculous increases in their public employee compensation packages. (2) As for “reckless speculation,” who does Mr. Hoffa think provides the backbone of funding to Wall Street for their gambling escapades? There is no source of new money pouring into Wall Street that begins to match the monies coming from public employee pension funds. These funds, which in aggregate manage trillions in assets, are under severe and unrelenting pressure to deliver higher returns than are possible over the long-term. “Reckless speculation” is largely driven by Wall Street’s incestuous, unhealthy partnership with public sector unions. (3) And as for those “trillions in loans from the federal reserve,” most of that borrowed money went to preserve public sector jobs at their inflated rates of compensation.

Here’s what’s really happening, Mr. Hoffa:  For over 20 years, with increasing influence and with worsening effect, public employee unions have used taxpayer’s money, confiscated from public worker paychecks, to buy our politicians and control our elections. They have used this power to “negotiate” grossly over-market rates of compensation and benefits to unionized government workers, especially at the entry and mid-level jobs, and because employee compensation is by far the largest category of government expenditures, it is breaking budgets, leading to tax increases and service cuts. Meanwhile, public employee unions, in their insatiable demand both for more revenues to pay their over-paid members, as well as to expand their memberships, are prevailing upon politicians to expand government and expand regulations – increasing the cost of living for everyone. This translates into cost-of-living increases for the unionized government workers, and a lower standard of living for the rest of us whose taxes support the entire corrupt mess. At the same time, Mr. Hoffa, your public sector union pension funds are the collection agent for the overbuilt Wall Street machine you claim to abhor.

American ills today may not be entirely attributable to unions, but to suggest that the drive to reform unions, public sector unions in particular, is nothing but “payback” to special interests who oppose unions is to ignore where the money is spent in politics, where the money is spent in the public sector, and how union control of public policy is distorting our financial markets and bankrupting our government.

California’s State AND Local Government Personnel Costs

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Last week CIV FI posted an analysis, “How Much of California’s Budget is Personnel Costs?” that estimated about two-thirds of California’s state budget covers state employee compensation expenses. This was in response to a widely quoted estimate that the number was only about 12%. Due to the huge disparity in these claims, and the implications having the correct number may have on the debate over public employee compensation, I decided to dig a little deeper.

For expert information, I talked with two individuals at the California Office of Legislative Analyst, Jason Sisney, the Director of State Finance, and Nick Schroeder, Public Employment and Fiscal Oversight. Both of them confirmed that state government employees compensation consumes about 12% of the state general fund budget. But the devil is in the details.

Probably the best source for information on state expenditures in California is available at “California Budget Information,” produced by the state Dept. of Finance. Using this data, and corroborating this data with other sources, this post will produce another, more in-depth estimate of what percentage of the state budget is consumed by personnel expense, as well as what percentage of state and local budgets combined are consumed by personnel expenses. Both Sisney and Schroeder, who ought to know, stated that arriving at a meaningful figure is “nearly impossible,” but they agreed with the rough percentages that will be arrived at in this analysis.

Beginning with how much state employees make in average salary; sources of information include the following:

State Finance Department: Personnel Years and Salary Cost Estimates, 2009-2010, which shows 345,777 full-time state employees in that year, collectively paid $23,104,763,000 in that year, which averages $66,820 each. This does not include benefits.

U.S. Census Bureau: California State Government Employment Data, March 2008, which shows 338,725 full-time employees who were collectively paid in that month $2,002,723,495, which averages $70,950 per year each, not including benefits. This page includes important additional information, the “full-time equivalent” number of part-time employees, 48,212, collectively making an additional $2,798,685,61, which averages $58,050 each. Using this data, the composite average of full-time plus full-time equivalent employees working directly for the state of California is $68,102 per year for 393,989 employees, which costs $26.8 billion per year. What about benefits?

To reprise the data presented in our last post, the overhead rate we used came from a 2010 study entitled “The Truth about Public Employees in California: They are Neither Overpaid nor Overcompensated,” from the Institute for Research on Labor and Employment at the University of California, Berkeley. In this study, the authors found “Public employers underwrite 35.7% of employee compensation in benefits.” If 35.7% of compensation is in the form of benefits, this means 64.3% of compensation is in the form of wages. To develop an overhead rate, you would determine what percentage 35.7 is of 64.3, i.e., the value of state employee benefits is equal to 55.5% of their compensation. This means total state worker compensation is $26.8 billion plus 55.5% of that number ($14.9 billion), which equals $41.7 billion.

What percentage of the total state budget does this represent? Here the numbers become even more subjective, because the state budget includes vast categories of “pass throughs” which are monies not used by the state, but passed on to local governments and agencies. A breakdown of the major categories of state revenues can be found at the Dept. of Finance’s “Chart B, Historical Data, Budget Expenditures,” where for the 2009-2010 year they report total revenue of $206.1 billion, breaking down into $87.2 billion into the General Fund, $23.5 billion into “Special Funds,” $6.3 in Bond Funds, and 89.1 of Federal Funds.

When speaking with Jason Sisney at the California Dept. of Finance, he claimed that virtually 100% of the Bond Funds and Federal Funds were pass-throughs to local governments and agencies, and that about 70% of the General Fund are passed through to local governments and agencies. This leaves between 30% of the General Fund and 100% of the Special Funds to pay for state employees, i.e., $49.7 billion. Using these numbers, state employee compensation consumes 84% of the state revenues that are retained by the state and not passed through to local governments.

To remain fair, the amount that employee overhead truly costs the state is debatable. One may argue it is overstated here, since it is applied to full-time equivalent figures for part-time employees. But typically part-time state employees accrue benefits at the rate they work; if they work 50% of the time, for example, their pension benefits accrue at half the rate they might accrue if they were working full time. One may also argue the Berkeley study was estimating an overhead rate of 37.5%, not that benefits consume 37.5% of compensation – which is what they said. But even if that is the case, realistic reductions to the estimated long-term returns on pension funds will pump that overhead rate right back up from 37.5% to 55.5%. More detailed analysis of overhead rates for California’s state and local employees can be found in the post “Calculating Public Employee Benefit Overhead.”

While this analysis attempts to estimate the percent of state spending consumed by employee compensation, the discussion would not be complete without at least considering what costs the state imposes on taxpayers by virtue of better-than-market benefits that are so-called soft costs. For example, if the state did away with the “9/80″ program, a benefit that is, after all, unheard of by the ordinary private sector worker, how many fewer bureaucrats (40% of the state workforce) could they hire? The 9/80 program essentially provides state bureaucrats with an extra 26 days off per year, which means if all of them got this benefit and it were eliminated, the state could eliminate 10% of their bureaucrats, or 4% of the entire state workforce. This is just one example of hidden costs of staggering magnitude.

Since such a high percentage of state revenues are passed directly through to the local governments and agencies in California, what percentage of their spending is to compensate local government employees? This is a very difficult question to answer, since there are over 400 incorporated cities, 58 counties, and countless administrative districts for, for example, K-12 schools and public utilities. But let’s try:

The average local government worker, using the Census Bureau as the source; Public Employment Data 2008, Local Governments, indicates 1,451,619 (full time equivalent) local government workers made on average $64,285 per year, which totals $93.3 billion. Add 55.5% benefits overhead to that amount and you have a total of $145.1 billion in local government employee compensation per year in California. How much did local governments spend?

For this data it is again necessary to rely on census data, referencing compilations put together by analyst Chris Cantrill on the website USGovernmentSpending.com. His chart (click the tab “Local”), Local Government Spending California, 2009 estimate, shows local government spending totaling $270 billion. This suggests that spending for employees in local governments in California, on average, consumes about 54% of the total local government budgets.

With respect to local government, however, a collective figure can be quite misleading. At the county level where social services agencies issue direct payments to needy citizens, or in the case of public utilities and construction projects where there is substantial allocations for capital investments, the percentage of funds allocated to employee compensation may be relatively minute. In smaller incorporated cities, on the other hand, the percentage of funds used for employee compensation may be 90% or more.

Readers are invited to review these calculations and the underlying assumptions. But given California’s state and local governments combined spend nearly $200 billion per year to compensate state and local workers, a discussion of whether or not their compensation might be reduced to market rates is not only relevant from the standpoint of fairness, but may also be a meaningful option towards reducing budget deficits.

How Much of California’s Budget is Personnel Costs?

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An influential blogger in Orange County, California, made the following claim on January 25, 2011 in a post “Busting The Myths About Public Employee Pension Costs,” “For California’s budget, salaries represent 7.5 percent of the total state budget. The costs for healthcare and pension benefits are another 3.7 percent.” If only this were true.

Because this claim is being repeated as if it were fact, such as by guest columnist Nick Berardino in the Orange County Register, who on February 4th, 2011 in a “Reader Rebuttal” accused that newspaper of having “continued its misleading and irresponsible assault on public employees,” it is important to take a closer look. Using core data, as well as some studies funded by union-friendly think-tanks (hopefully to avoid accusations of bias), here are some numbers:

As a baseline, the California Governor’s Budget Summary for fiscal 2011 shows projected revenues and expenditures balanced at $89.6 billion. Using straightforward multiplication, if salaries and benefits only consume slightly more than 10% of California’s state budget, this means salaries, healthcare and pensions should cost (.075 + .037) x $89.6 = $10.4 billion. So how much does California’s state government actually spend on total employee compensation?

According to California’s own state government payroll records, in March of 2008 there were 393,989 full-time workers employed by the state of California, and their payroll for that month was $2,235,947,296 (ref. http://www2.census.gov/govs/apes/08stca.txt). This equates to an average of $5,675 per employee per month, or $68,102 per year. So by using data that is nearly three years old and assumes zero increases to compensation since then, in aggregate, just payment of salaries to workers employed directly by the state of California totals $26.8 billion per year.

In percentage terms, this figure would suggest that just wages for California’s state workers consume $26.8 / $89.6 = 30% per year. But there’s much more – benefits. If you read the definitions section of the U.S. Census Bureau Data, “gross payroll” is defined as “all salaries, wages, fees, commissions, and overtime paid to employees before withholding for taxes, insurance, etc. It also includes incentive payments that are paid at regular pay intervals. It excludes employer share of fringe benefits like retirement, Social Security, health and life insurance, lump sum payments, and so forth.” How much do benefits cost the state?

To short-circuit a war of battling studies, let’s use a supposedly authoritative study recently produced by the U.C. Berkeley Center on Wage and Employment Dynamics, Institute for Research on Labor and Employment, entitled “The Truth about Public Employees in California: They are Neither Overpaid nor Overcompensated” where they calculate an average overhead cost for California’s state and local workers at 36% of total compensation. That is, they claim 36% of total compensation is benefits overhead, and 64% is actual pay. 36% of total compensation equates to a 56% overhead rate, i.e., [ 1 / (1 – .36) ] = .56. The Berkeley researchers, who did a very comprehensive study, had no motivation to overstate the benefits overhead paid to public employees. It is likely the actual overhead is probably much higher than 56%, because it is unlikely the Berkeley researchers included an amount any higher than the current official rates for the necessary pension fund contribution, because the conventional wisdom still adheres to higher rates of investment fund returns than are probably out there over the next 20-30 years. But when you apply a 56% overhead rate – which is probably on the low side – to an average base salary of $68,102, you arrive at a total compensation estimate for the average state government worker in California of $106,239 per year.

What this means is the total direct employee costs for California’s state government is not $26.8 billion per year, based on salary alone, but 393,989 x $106,239 = $41.9 billion per year, which is 47% of the total state budget. And yes, there’s more:

If you take a look at the data from the U.S. Census bureau, referenced earlier, you can see the many job descriptions where salary expenditures are tabulated do not include K-12 education employees. This is because the state doesn’t pay these employees directly, but helps fund them through transfer payments to the local school districts. Returning to the California Governor’s Budget Summary for fiscal 2011, page 11, $36.2 billion is proposed for K-12 education expenditures. The skeptical reader is invited to study the details of this line item, but barring such analysis, it is a reasonable assumption that half of that money is going to be spent on compensation for K-12 education employees – another $18.1 billion.

When you add this all up, personnel costs for California’s state government are not somewhere barely above 10% of their total expenditures, as Prevatt asserts, but, doing the math, $41.9 (direct employees) + $18.1 (K-12 employees) = $59.96 / $89.6 = 67%. That is, using data taken directly from the state’s payroll records, combined with overhead calculations courtesy of an exhaustive study commissioned by an (arguably) sympathetic academic institute, along with very reasonable assumptions regarding transfer payments – not even considering transfer payments to localities for line items other than K-12 education – taxpayers are seeing at least 2/3rds of California’s state budget used to pay employee compensation.

Aside from overheated rhetoric and cherry-picked statistics, have those who still claim that public sector compensation isn’t a legitimate issue for civil discourse actually tried to run the numbers themselves? A final thought: When public entities are required to contribute into funds for retirement pensions and retirement health care at more realistic, lower rates of investment returns, the percentage of public sector budgets that are consumed by employee compensation will go up by 10-20% overnight. However comforting it may be for critics of these numbers to assert otherwise, it is hard reality, not wishful thinking, nor anti-public employee sentiment, that informs whatever bias may seep through this analysis.

Can Developing Nations Avoid Catastrophe?

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Advocates for free markets and free enterprise will assert that if political preconditions can be established to nurture these freedoms, prosperity and liberty will increase, and population growth rates will voluntarily decrease in favor of education and career aspirations. The so-called developed nations nearly all have embraced the fundamental principals of free markets and free enterprise and now confront new challenges – how to provide for aging populations, what environmental goals to prioritize, what investments to make in emerging technologies, and how to manage their floating currencies, freewheeling commodities markets, and burgeoning debt. It is important for members of the developed world to understand what a luxury it is to have such challenges.

Using Egypt as an example, this post will present data on their population trends and agricultural production, comparing that to how much of their household income is spent on food, global food prices, and their balance of trade. These hard numbers will underscore how daunting the task may be for many developing nations to emerge economically.

While everywhere in the world the rate of population increase is slowing, in nations like Egypt the projected slowdown in population growth lags well behind the rest of the world. Projections that place the global population maximum occurring sometime between 2030 and 2050, at a total of somewhere between 8.0 and 10.0 billion people, generally view large developing nations such as Egypt, Pakistan, India, Indonesia and Nigeria as the wild cards. How quickly they develop economically is considered the key to how soon their populations level off. Here is the current projections for Egypt from the U.S. Census Bureau International Data Base:

As the above chart indicates, Egypt’s population is projected to double between 1995 and 2025, a period of only 30 years. Currently there are 82 million people living in Egypt, and according to the best data we’ve got, their population increases at a rate of 2.0 million people per year. So how much food does Egypt produce and consume? According to IndexMundi, whose mission is “to turn raw data from all over the world into useful information for a global audience,” using data provided by the U.S. Dept. of Agriculture, in 2005 Egypt produced 5,860,000 metric tons of corn and consumed 10,300,000 metric tons of corn. Similarly, in 2005 Egypt produced 4,130,000 MT of rice and consumed 3,300,000 MT of rice, and they produced 8,184,000 MT of wheat and consumed 14,800,000 MT of wheat. (ref. IndexMundi/Egypt/Agriculture).

If you review the complete list of major agricultural commodities the Egyptians rely on for nourishment, you will see that corn, rice and wheat are by far the most significant. In 2005 Egypt imported 10,226,000 metric tons of critical grains, and in 2011 there are an additional 10 million more people living in Egypt. Have they expanded their agricultural production? How? Where? Egypt in 2005 was only producing 64% of its critical grains domestically, and it is unlikely that percentage has improved. So how does Egypt pay for this food?

According to Economy Watch’s “Egypt Trade, Exports and Imports” data compilation, “Egypt’s trade is characterized by huge trade deficits. The economy is highly dependent on oil exports. Since the 1990s, the government has pioneered several economic reforms through foreign donor aid. However, measurable benefits of these economic reforms are yet to be seen.” They go on to state that in 2009 Egypt’s exports were $29 billion and their imports were $56 billion, and that “Egypt has had a negative balance of trade since the 1980s.” Put another way, Egypt had a trade deficit in 2009 of $27 billion, which equates to $329 per capita. If that doesn’t sound like a lot, remember Egypt’s per capita income in 2009 was only about $5,700, and Egypt has been borrowing money every year for over 30 years. A rough calculation based on those variables would suggest that Egypt’s accumulated trade deficit over the past generation now totals more than twice the total annual income of the average Egyptian. Will investments make up the difference forever? And is foreign investment, hence foreign ownership, a desirable outcome for the Egyptian people?

What about food prices? Clearly if Egyptians import nearly 40% of their food, a change in global food prices is going to impact them severely, especially since they have low per capita incomes. The next chart, using data from the International Monetary Fund, shows what percentage of household income is spent on food in each nation in the world:

As the above chart indicates, in 2007, the average Egyptian was spending over 50% of their entire earnings just to buy food. This is unthinkable in nations like the United States, where only about 10% of the average income is used to pay for food. If the price of food doubles in the United States, the average household buys 10% less of something else. If the price of food doubles in Egypt, the average household spends 100% of their money on food. From the USDA, compiled by IndexMundi, here are price trends for corn, rice, and wheat for the last six months:

Summarizing these tables, in the last six months the global price for corn has increased from $166 to $253 per MT, rice has increased in price from $471 to $533 per MT, and wheat has increased in price from $197 to $308 per MT. Put another way, if all Egyptians ate were corn, rice and wheat, instead of spending 50% of the average household income on food, they would spend 100% of the average household income on food.

A deeper analysis of the Egyptian economy will undoubtedly uncover examples of resilience that ensure the apocalyptic scenarios that crude extrapolations may conjure are unlikely. Human adaptability even in repressive environments cannot be underestimated. But as more and more nations develop highly competitive advanced economies, nations left behind like Egypt risk ending up in a position where there is nothing they can export that other nations can’t also export at equal or more competitive prices. These nations risk being unable to secure additional investment because everything of value has already been collateralized or purchased outright. A nation like Egypt, who currently imports twice as much as it exports and has had massive trade deficits for 30+ years, and only grows 60% of the food it needs, is pretty close to that wall.

Once such a nation can no longer import more than it exports, it is forced to find the resources internally to support its population’s basic needs. At that point, one can imagine the horrors of Biafra, Cambodia, or Uganda, visiting these larger states. To avoid such catastrophe, is the only hope for these nations to become permanent wards of the world, failed welfare states that survive only on the perpetual brink of mass starvation? The most challenging question facing the developed world is how to humanely steer developing nations into self-sufficiency, when aid itself can defer or corrupt the process. To state the obvious, there are no simple answers.