Commentary: Sharing the Pain

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citycatIt is somewhat remarkable to see the Davis Enterprise editorial this morning, exclaim that the “Public employees must do their part.”  They look at the Davis city and school budget budgets and argue that the employee unions must take concessions if they want to save jobs.

Last year, the teachers did not do this, and of course 57 teachers, administrators, and staffers ended up losing their jobs.  So now that we know that the district is looking to close another $3.5 million deficit in the coming year and that the current plan is based on $2.5 million in cuts, 33 additional jobs cut including teachers, administrators, and eight support positions and there will be an additional $1 million realized in employee concessions that are still to be determined.

Last year the teachers balked at the idea of concessions.  This year, there is an indication that the teachers may be more open to it.

However, in a way, it is not fair to lump the teachers in with city budgets.  We can argue about the wisdom of the teachers taking a pay raise several years ago, but each year that becomes less and less a factor.  The bottom line is that the teachers are not overpaid at this school district.  If anything, they are not paid nearly enough.  They do not exemplary benefits, again, if anything they deserve better benefits.  And at this point, the problems faced by the school district are not self-inflicted.

All of this is rather remarkable given where the district was back in 2006 when their finance director left in a cloud of scandal and uncertainty.  The problems that the Davis School district face is because the state economy and state budget are in shambles.  If the teachers took some short-term furloughs, they could weather this storm, but it would be very painful.  However, I suspect the 50-plus teachers and staffers who lost their job last year would argue it is more painful to be out of work.

Education in California as we have mentioned many times is in trouble, but not through its own doing.  We can argue on the margins about efficiency and waste, but cutting $15 billion from schools is going way beyond that.  There is no doubt that the districts have been forced to become more efficient, but there is also very little doubt in addition to cutting pork we’ve cut bone and muscle.  The people who are hurt the most in this are not just those teachers out of work, but the children who will have to make do with fewer classes and larger class sizes and who have lost a good generation of the young and energetic teachers and we might not get those back any time soon.

It is a different story for our city and I really wish the Enterprise had not put these stories together because despite the fact that both share the need to cut costs, there is no true parallel.

The Enterprise editorial writes:

“OVER AT DAVIS City Hall, the City Council was able to close its $3.4 million budget gap by assuming $1.25 million in savings from personnel givebacks. However, those concessions have not been realized yet, for the most part, because the employee unions and the city are still negotiating terms of new contracts.

Until those new contracts take effect, our city is paying its employees under the old wage-and-benefit structures. Day by day, we’re falling deeper into our gaping budget hole.”

It is actually worse than that.  Each day we are not only falling deeper into our budget hole, but each day we will have to find additional money to cut from the budget because the employee concessions will occur over less and less of the fiscal year’s budget.

The City’s finance director has already announced they could fall $350,000 short of that $1.25 million and that will require $700,000 in cuts because they would be, if signed tomorrow, realized only over half the fiscal year.

The editorial continues:

“We don’t know precisely what’s been going on in the negotiations behind closed doors, but the council’s ‘guiding principles’ foresaw lower salaries for highly paid employees, reduced contributions from the taxpayers for lucrative pensions and modifications to the health packages given to employees and retirees.”

From what we know, it appears that the workers who make the most are those most protected in this process.  The people who are going to bite the biggest bullet are those at the bottom end.

Will we see changes to the pensions and retiree health packages?  Indications suggest we will not.

“As a show of good faith, employees represented by two unions – the Davis Management Employees and the Program, Administrative and Support Employees Association – agreed to take five furlough days to help the city achieve some savings during the ongoing labor negotiations. We applaud them for stepping up, but we wonder why their colleagues have remained so silent.”

We are less applauding than the Enterprise on this matter.  Furlough days are not the answer here, they are the problem.  Furloughs mean that the structure of the salaries remains.  Furloughs mean that we have not addressed the issue of pensions or the unfunded liability of retiree health benefits.

The Enterprise concludes:

“Taxpayers need – indeed, we expect – our leaders to look out for our best interests.”

Instead what we saw this week was our leaders on the City side looking out for their own best interests and the best interests of special interest groups.  A 3-2 council majority voted inexplicably to pay $400,000 in additional money to the fire department.  While that money is on paper off-set by other cuts that were already planned for the fire department, it means that $400,000 will have to be cut from somewhere else.

The Enterprise writes:

“DURING GOOD TIMES, public employee unions found their requests for higher salaries and generous retirement benefits easily granted by elected officials they helped put in office. Actually, no one noticed just how much these increases cost the taxpayers because times were so good.”

This is a good statement, but it is too vague.  They make reference to the fact that the increases were tremendous, they made reference to the fact that they helped put these elected officials in office.  The Enterprise however has never laid out the whole causal chain of events, the tremendous amount in campaign contributions from one single union, the disproportionate amount of salary increases that union has received compared to counterparts, and now the large increase in spending for their department compared to others.  Until the Enterprise reports on this, they are not telling the public the full story.

And while the Enterprise alluding to pensions and retiree health benefits, they never put numbers on those figures.  The public needs the full and plain truth.  And while the Enterprise can be applauded for raising the issue, calling for sacrifice and concessions, they are still not delivering the truth. 

The truth is as Vanguard reads know, that the city faces a crisis of unfunded liability for retiree health benefits of between $42 and $65 million.  The truth is that next year the city will be paying nearly $8 million in contributions to employee retirement funds, in 2000, that number was less than $1 million.  And that number figures to go up due to the losses that CalPERS took last year.  The result will be either a dramatic increase in employer contributions or another unfunded liability.

The fact is that while both the city and school employees need to make concessions, the need is different for both.  The school is being hurt primarily due to external factors that are way beyond its control.  The city is being hurt by policy decisions over the past decade that has seen employee salaries and benefits skyrocket to 71% of the city budget.  And if we do not get a handle on this, we will share the fate of Vallejo.  The first step starts with the city bargaining units and the city’s negotiators.  All indications at this point show this will be a false-start and we will have to go back and fix this at a later date when the problem is far worse.

—David M. Greenwald reporting

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About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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47 thoughts on “Commentary: Sharing the Pain”

  1. wdf1

    A couple of contextual comments on the DJUSD side:

    DJUSD employees did get laid off last year, but ultimately it was much less than 50. A number of employees resigned voluntarily, retired, or took a leave of absence.

    Although DJUSD is planning for $3.5 million in cuts, it is likely that there will be far more cuts required, given recent state budget news.

  2. David M. Greenwald

    I’m not really accusing you of anything but:

    ” A number of employees resigned voluntarily, retired, or took a leave of absence.”

    We’re really talking about semantics. People are not working who would have been–and this is due not to educational considerations but rather budgetary ones.

  3. Rich Rifkin

    While I agree with the gist of today’s Enterprise editorial, I think David’s critique of it is correct.

    [i]”If anything, they are not paid nearly enough. They do not (get) exemplary benefits; again, if anything they deserve better benefits.”[/i]

    I agree that teachers are not overpaid. I was very critical of the DTA position to refuse to take a small paycut (4%) to avoid layoffs. But even had the pay for our best teachers been increased 10 percent, they would still be underpaid compared with most civil servants.

    Just consider this one nice perk of working for the City of Davis: Say you are a perfectly healthy 20-year-old male; you get with your entry level job as a building maintenance worker, which pays $44,000/year in salary plus a pension contribution of $9,000 plus a cafeteria* benefit worth about $18,200 (and rising fast). But you don’t take that benefit; instead, you opt to take that money in cash. So your total cash income is about $62,000 and with your pension about $71,000. That’s more than almost all teachers in Davis make, including those who have reached the highest step (#20) in their contract. (See Schedule B-1 ([url]http://www.djusd.net/district/hr/dtaagreemt2009[/url]).)

    ———-

    *Medical, dental and vision. In addition, employees get a life insurance benefit and a long-term disability insurance benefit, but these latter two cannot be cashed out.

  4. Greg Kuperberg

    [i]The bottom line is that the teachers are not overpaid at this school district. If anything, they are not paid nearly enough.[/i]

    Off-market theories of how much to pay workers are just as expensive and unworkable as off-market schemes for affordable housing. I agree that California’s public school teachers are not particularly overpaid, because I compared them to other states in the BLS wage tables. But “not paid nearly enough”? Where did that come from? California’s prison guards are the highest paid in the nation. It would not help the state at all to grant that privilege to several more public employee categories.

    Moreover, Prop 98 has forced the state into a lopsided education policy that favors K12 over university education. California’s high schools are in much better shape in this economic crisis than Cal State and UC. The high schools are hurting some, but it’s not the same thing at all. Go to high school for free and do okay. Compete to get admitted to college, pay fees, and get dumped into a rabbit warren. UC will eventually free itself from the state’s travesty budget with other sources of revenue. I’m not sure what Cal State will do.

  5. David M. Greenwald

    The comment on the off-market is interesting. Using this theory, how do we explain the precipitous rise of firefighter (and other municipal employee) salaries since 2000? Here’s what I can figure: firefighters have donated large amounts of money to city council races, but teachers unions donate large amounts of money everywhere. The only thing I can surmise is that after 9/11 there was a great sympathy for firefighters and other first responders and the resistance to pay hikes went down. But even then, it doesn’t make a lot of sense and I see no clear and objective explanation.

    Do you since you point out the issue of market solutions in a government model?

  6. SODA

    The ability to cash out medical benefits is amazing to me and totally out of line. I have never seen anything like it in the private sector. That should be stopped NOW. Not only is it costing alot, it makes no sense.

    What really are the options for our city negotiations if a majority does not vote for impass direction? Will that discussion be in open forum where the CC will have to say in public they will do nothing in their power to get the $1.25M as they could if they took the impasse route?
    When can public comment address this to them?
    What can citizens do to pressure CC?

  7. Greg Kuperberg

    David, my point is about market realities, not market solutions. If you simply ignore what other people are willing to pay for something, then one way or another your policies will be very expensive. For instance, Venezuala has convinced itself, based on an off-market theory of social justice, that gasoline should be 17 cents a gallon. Because they have a lot of oil, they can do this, but they are still burning up a lot of money.

    There is a national market for firefighters and there is a California market for firefighters. It seems true that California firefighters have artificially boosted the demand for themselves by sitting on both sides of the negotiating table. You could either say that Davis pays an above-market price, or you could say that they have shifted the market in California. I suspect that some of both is true.

    So, I’m not saying that the market is a be-all of government policy. Market forces are like the force of gravity. If I believe in the force of gravity, that does not mean that I think that gravity is a universal virtue and that therefore we should all jump off of cliffs. What is true is that the law of gravity is always present and that it is irrational to pretend otherwise. The same is true of market forces.

  8. Gunrock

    sigh… the tards in city government simply don’t get it-

    this is not a negotiation. This is a statement of what they will work for or hit the bricks. Tell them exactly what the new contract will look like and they can either sign it or the city will have to make it without a diversity coordinator and a public yoga manager. The voters have indicated we are not too keen on development, so perhaps the planning staff could go too. Fire Department could go volunteer while you are at it. We could do with a LOT less that we have right now.

    Perhaps its time to simply unemploy our city manager.

  9. Sue Greenwald

    Greg–

    Fact: A couple of years ago, before the current recession and astronomically high unemployment rates, we had an opening for a firefighter position. We had 67 QUALIFIED applicants before noon on the first day the position was open.

  10. Greg Kuperberg

    [i]We had 67 QUALIFIED applicants before noon on the first day the position was open.[/i]

    Of course, “qualified” is a simplistic term. Whenever people don’t like the way that an institute hires, they are tempted to reduce qualifications to a simple yes/no, i.e., yes qualified or no, not qualified. In reality, more qualified people are better than less qualified people.

    That said, I can believe that enough of these applicants were fully as qualified as what the city wanted, and that they didn’t have many competing offers. If that’s all true, then yes, it exactly means that Davis pays above-market wages for firefighters.

    But this post is about teachers, not firefighters. Do the crickets chirp when DJUSD has openings for teachers? Or are the applicants disappointing? If so, then market realities alone suggest that they should be paid more. But if the applicants are already as qualified as what the district wants (or should want), then paying the teachers more is expensive. Maybe the district still should pay them more, for a non-market reason, but this extra compensation would be an end and not a means to an end.

  11. wdf1

    “A number of employees resigned voluntarily, retired, or took a leave of absence.”

    We’re really talking about semantics. People are not working who would have been–and this is due not to educational considerations but rather budgetary ones.

    Jeff Hudson’s article in the Enterprise on Friday, Sept. 4, excerpted here. “French,” below, refers to Kevin French, Associate Superintendent for Human Resources:

    [quote]French said that in terms of attrition over the year among certificated employees, the district had experienced 11.4 retirements, and 13.25 resignations. The district also released 28.64 temporary employees in the certificated category. And the district had 21.26 certificated employees ask for unpaid leave for the 2009-10 school year. When the final layoff notices for 21.6 certificated employees are added to those numbers, it comes to a reduction of 96.15 certificated employees, French said.

    At the same time, the district had 19.35 certificated employees returning from unpaid leave. Another 19 certificated employees were rehired, replacing people who had retired or resigned. An additional 8.6 positions were filled by temporary certificated employees who were rehired. And the district also hired 23.80 new certificated employees. That made for a total of 70.75 certificated employees added to the district’s payroll, French said.

    With the district losing 96.15 certificated employees, and adding 70.75 certificated employees, the net reduction was 25.4 positions — accomplishing the budget reduction that the district aimed for when layoff notices were issued in the spring, French said.
    [/quote]

    The more nuanced point here is that some district employees had viable options not to work and were exercising them at that time. In this next round coming up, I don’t think as many employees are left who can afford to resign, retire, or take a leave of absence. The impact will probably be even greater on everyone — employees and students.

  12. rusty49

    On the day that Obama visits China GE starts a joint venture with China to build airplanes that will compete with Boeing, isn’t that great for American jobs. Isn’t it wonderful, GE who owns NBC and MSNBC is being rewarded for their total one-sided pro-Obama news coverage. If you cooperate with this White House you’ll be paid off nicely.

  13. Greg Kuperberg

    rusty, a quote from a news article from April 2008 ([url]http://www.chinaventurenews.com/50226711/ge_to_expand_in_china.php[/url]): “GE thinks it can make money in China – more money than the $4.4 billion it made in 2007.” Your equation GE = pro-Obama = jobs to China is totally out of step with the news. It’s also out of step with standard market economics. Overseas jobs can cause unemployment in specific industries; they don’t cause the total number of American jobs to go down. Overall unemployment comes from the financial crisis (at the moment), not from free trade.

    Anyway it has nothing to do with how anyone is paid in Davis.

  14. Rich Rifkin

    [quote]Of course, “qualified” is a simplistic term. Whenever people don’t like the way that an institute hires, they are tempted to reduce qualifications to a simple yes/no, i.e., yes qualified or no, not qualified. [/quote]Actually, Greg, you are wrong here, too. The qualifications in California for firefighter have gone up substantially over the last two decades. (You can guess which union lobby ([url]http://www.cpf.org/go/cpf/[/url]) pushed the changes through the state legislature.) It is for that reason that it is now nearly impossible to have a volunteer fire department. There are some old volunteer forces in California, and the CPF is doing everything it can to shut them down ([url]http://www.cato.org/pubs/regulation/regv27n4/v27n4-noted.pdf[/url]).

    Nonetheless, for thousands of high school graduates, the great amount of training it takes to be qualified is not proving a barrier if they think they have the shot at winning the lottery by getting one of these overpaid jobs.

    It’s absolute nonsense to think we are anywhere near “under market” offering even well trained firefighters with EMT skills a career which pays roughly $200,000 a year (including benefits and pension) for a job which, while potentially dangerous, offers more paid downtime than just about any other position in the American workforce. The truth of the matter (which eviscerates your entire argument) is that the qualified applicants who are not getting the available positions are taking other jobs (like an EMT for a private ambulance service) which pay less that 25% as much.

    It is also a fallacy that we have to pay what the highest paid departments in our region pay. (Never mind the fact that those cities are now cutting wages drastically, because those “comps” are even deeper in the hole than we are.) Just look at the few cities which pay a third less: they don’t have trouble attracting qualified recruits; and they have no trouble replacing anyone who would leave.

    What is a b.s. line is the idea that there is such a limited supply of people like, say Rose Conroy, to run our fire department. If she retires and we offer that job for $25,000 less a year, we will get plenty of good applicants. And if our selection process is sound, we will get someone better than we have now. In fact, one great advantage of “underpaying up front” is that it makes it easier to get rid of our dogs. If the new fire chief sucks, then let him or her move on without a problem. If the new person is good, give him a raise. What boggles me is that we have a very good police chief now, but he is paid no more than the far less talented folks running other departments for the city. So we are nearly* as likely to lose our best people as our worst in the scheme the city uses to pay its employees.

    *Presumably other cities could figure out who our best and worst were and would bid only for the best. But I suspect other cities doing that biddging are no smarter than we are.

  15. Rich Rifkin

    *[s]Presumably[/s] Theoretically other cities could figure out who our best and worst were and would bid only for the best. But I suspect other cities doing that biddging are no smarter than we are.

  16. Greg Kuperberg

    [i]Actually, Greg, you are wrong here, too.[/i]

    Wrong about what? All I said is that when people criticize hiring, they often oversimplify qualifications to yes qualified or no unqualified. That’s just true; I’ve heard that talk many times. I then went out of way to say that that counterargument might not work in the case of firefighters’ pay in Davis.

    Again, if it’s true that you get a great list of applicants and then some for firefighter positions, then the pay is above market. The applicants are the job market, of course. Market prices aren’t about “keeping up with the Joneses”, they are about buying what you want to buy.

  17. hpierce

    There are programs/positions in both the City & DJUSD that are not essential. Under the circumstances, those programs/positions should be eliminated. Public entities should not “protect” jobs that are not needed. Those in essential programs & positions should be paid in a manner to attract/retain quality employees.

  18. Frankly

    Today, the word “greed” is more closely associated with Wall Street and mortgage bankers and mortgage brokers. Yet, given the direct impacts caused by their behavior, public employee unions do a better job demonstrating the true meaning of the word.

    Teachers unions will fight for protection of seniority and their mandated pay and benefit increases while they allow their less senior coworkers to be let go and more students are allowed to dropout or graduate illiterate. Firefighters unions will bankrupt the cities for which they work rather than agree to concessions that by all considerations are reasonable and fair.

    With some exception (like Bernie Madoff) Wall Street investment bankers, and people working in the residential mortgage industry, did not see a connection with their actions damaging others. For example, even a stated-income “liar” loan allowed the borrower to own the property with the expectation that it would appreciate. Only when the bubble popped did most people then realize the damage caused by their bad business behavior.

    Contrast this to the public employees unions witnessing the state and city financial carnage directly attributable to years of their greedy behavior. And even now, they are unwilling to budge.

    Ford cannot get the UAW to accept a new pay package equal to what GM negotiated because Ford made a profit. The result will be Ford, the only American car maker to not get a government bailout, having higher ongoing labor costs.

    I am sick of unions. They do much more harm than good. If we are looking for culprits for this country’s financial woes – both public and private – unionized labor should be the poster child.

  19. wdf1

    I am sick of unions. They do much more harm than good. If we are looking for culprits for this country’s financial woes – both public and private – unionized labor should be the poster child.

    What remedy do you suggest?

  20. Rich Rifkin

    [quote]I am sick of unions. They do much more harm than good. [/quote] I don’t blame unions for trying to help their membership. That’s their job. Likewise, I don’t blame the business which prices its goods to make as large a profit as it can. I don’t blame the engineer who quits one job to take another which pays more. If Ford cannot afford a contract with the UAW, then don’t sign the damn contract. The problem with our automotive sector has not been with labor. It’s been with lousy, stinking management which has produced cars and trucks which consumers didn’t want. Twenty years ago the Big 3 should have had the foresight to get into the PHEV* business (the way Honda and Toyota did). But they were shortsighted idiots who thought the gas-guzzling SUV was the future. But for Obama’s bailout, the Big 3 would today be the Big 1.

    My view is — in the case of the City of Davis — the fire union is doing pretty much what it ought to be doing: trying to suck every last ounce of blood out of the stone. They are playing hardball. They are representing what they believe is in the best interests of their membership. I don’t blame them for their avarice. That should be expected out of each side in any negotiation.

    What I do blame — in the City of Davis — is the attitude of a majority of our City Council going back at least 10 years and likely many more years. Their attitude appears to be: “We want to be friends with city workers. We are afraid to play hardball. Whatever you ask for in negotiations is fine. Have it. Take everything. The future be damned. As long as you keep funding my campaign.”

    Our City Council is supposed to be the advocate for all the citizens, all the taxpayers. We are involved in (essentially) a lawsuit, and our advocate, our attorney is literally taking cash from the other party in the suit and doing the bidding for the other party. That is why our council refuses to hire professional negotiators. That is why our council just decided to award the fire department bosses another $400,000 a year in pay.

    In the end, we the people of Davis elect the council. So if the people of Davis understand that the majority we have elected is taking cash from the people they are supposed to be negotiating against**, the people ought to vote out those members of the council.

    ———–

    *The father of the PHEV is Andy Frank ([url]http://www.calcars.org/calcars-news/323.html[/url]), professor of engineering at UC Davis. Years ago I interviewed Andy and he told me flat out that the American car companies didn’t give a damn about the PHEV until it was too late and they were years behind the curve. They should have been incorporating the UCD technology, but they all stuck their heads in the mud. American engineers invented all the technology which went into the Prius, as well. Yet the Big 3 couldn’t understand that fuel economy was worth investing in.

    ** You may have heard this lie: That the workers for the city are stakeholders in the city and therefore anyone who says we should be negotiating “against” them is full of beans. But understand: it’s a lie. Yes, of course they are stakeholders. But they have representatives to negotiate on their behalf. When I hear members of the City Council talk about how they want the workers to have this goody and that, what I get out of it is that those members of the council misunderstand their role as advocates for the taxpayers. It’s not as if the workers have no representation of their own. My view is not that the only acceptable endpoint is to pay workers minimum wage with no benefits. But we will never reach middle ground unless we go into the negotiations with the understanding that the council’s role is to defend the best interests of the taxpayers, not the workers, and especially not the highest paid workers who contribute so much campaign cash.

  21. Greg Kuperberg

    [i]Today, the word “greed” is more closely associated with Wall Street and mortgage bankers and mortgage brokers. Yet, given the direct impacts caused by their behavior, public employee unions do a better job demonstrating the true meaning of the word.[/i]

    After US stock markets lost $10 trillion in valuation in the space of 18 months, what in the world are you talking about?

  22. Frankly

    What remedy do you suggest?

    Short-term there isn’t much that can be done except to raise the national awareness of the ongoing financial damage caused by unions by their greed and legalized extortion. Long-term we need to repeal the National Labor Relations Act or at least significantly increase the list of workers excluded from protection from the NRLA. Today, we have so many anti-discrimination laws and other labor-friendly laws on the books that workers do not need the protection of a union. In a robust market-based economy, supply and demand for workers will provide better job security for high performers. However, low performers will have to accept lower compensation unless or until they find or develop a career that better matches their wiring.

    After US stock markets lost $10 trillion in valuation in the space of 18 months, what in the world are you talking about?

    Greg, as a mathematician, I’m a bit surprised you would ask this question. First, the loss came after a run-up of stock market value fueled by the same people and institutions you demonized. Second, what economist or policy maker predicted this financial and credit tsunami? There is a saying “we are all Einstein in hindsight”. It is disingenuous for smart people to attack and demonize all of the people working in this industry when 99% of the population could not see the pending crash. Adding to this is the bigger picture of CRA first encouraging mortgage lending to people that could not afford it, and then the GSEs Freddie and Fannie buying up all the junk securities backing all the junk mortgages… thereby releasing the bank capital for the perpetual cycle of bad lending and caused the feeding frenzy.

    Now, back to unions… how can anyone, with the exception of a union boss or a union employee with a fat pension and benefits package, defend the existence of unions today? What social benefits do they serve that exceeds the damage they cause? How have the NEA and CTA helped improve the education quality of our kids? Why does Nugget have a top-level store with top-level customer service with non-union labor? Please tell me of a unionized grocery store that does as well. Please explain to me why a $200k firefighter working 3 days on and 4 days off is reasonable and in the public’s best interest.

  23. Frankly

    The problem with our automotive sector has not been with labor. It’s been with lousy, stinking management which has produced cars and trucks which consumers didn’t want.

    Not quite. Actually US auto makers did make many of the cars that most people wanted, but they failed to make cars that most people would want later. For US automakers, it takes about 8-10 years for a new car to go from concept to production. The Japanese do it in about 5 years. US automakers should have been more strategic and more nimble.

    The lack of strategy is a management problem, and so you and I agree there. However, one of the big reasons they were/are less nimble is because of the control of the unions over worker-rights and the cost of labor. Higher labor costs (the largest expense item for almost all companies) means less profit and less retained earnings to fund R&D and new projects. Workers that can demand constraints on their assignments and workloads, create additional hurdles for these new things. Unions tend to stifle innovation by their very existence. They level the field with rules that defend for job security, equality and fairness; and prevent the best and brightest from rising or being recognized, and the low-performers from being disciplined or fired. By their very existence, they establish a “labor versus management” structure that corrupts the relationship and negates all the best-practices used by companies to survive and thrive in a hyper-competitive global marketplace.

    Unions survived for so long because the strength of our economy was able to absorb the inefficiencies and damage caused. Today we are in a competitive slugfest with a number of emerging economies and we can no longer afford it… both in private industry and in the public sector.

  24. Greg Kuperberg

    [i]Greg, as a mathematician, I’m a bit surprised you would ask this question. First, the loss came after a run-up of stock market value fueled by the same people and institutions you demonized.[/i]

    Sure, after they took their cut. In fact, that’s the whole problem. What financiers sell isn’t supposed to just be what [b]they[/b] pumped up. If that’s all that it is, then the price will inevitably fall back, after the insiders take their cut. Financiers are supposed to sell fundamental value, maybe not to each other but certainly to ordinary investors.

    [i]Second, what economist or policy maker predicted this financial and credit tsunami?[/i]

    From Paul Krugman ([url]http://www.nytimes.com/2005/08/08/opinion/08krugman.html[/url]) in 2005: “Now we’re starting to hear a hissing sound, as the air begins to leak out of the bubble. And everyone – not just those who own Zoned Zone real estate – should be worried.” I’m not sure what Krugman said when about the second stage of the financial crisis, the collapse of the credit markets. But he repeatedly warned his readers about the first stage, the housing bubble and the developing mortgage crisis, years before the President believed that there was much of a problem.

  25. Rich Rifkin

    [b]JB:[/b] [quote]Please explain to me why a $200k firefighter working 3 days on and 4 days off is reasonable and in the public’s best interest..[/quote]After you account for the built-in overtime, vacation time, holiday time and you are generous and give each firefighter credit for working 13 hours in his 24-hour shift (their contract says they work 11.2 hours per 24, what you will find is that they are not 3 on, 4 off, but rather 1 on, 3 off.

    One interesting thing to know is that overtime hours are guaranteed to all firefighters. The contract reads: [i]”It is agreed that the Firefighter I, Firefighter II and Fire Captain classifications shall be on duty nine 24-hour tours of duty during a 27-day work cycle.”[/i]

    Here is how the guarantee works. Multiply 9 x 24 and you get 216 duty hours. Then read the part of the contract which says, [i]”hours worked in excess of 204 in any 27-day duty cycle shall be considered overtime.”[/i]

    So every firefighter who is scheduled to work 9 days automatically gets 12 hours of scheduled OT. 9 days on the job equals approximately 117 working hours (13/day). 105 of those are at regular time and 12 hours are OT.

    In a year a firefighter gets scheduled for 2,912.0 total hours. Of those, work accounts for 1,577.3 hours (if you are very generous and credit him for working 13 hours out of 24). 161.8 of those hours are automatically OT. After you subtract holiday time (156.8 hours) and vacation time (224.0 hours*), the work hours drops to 1,034.8 hours per year.

    In a 27-day span (of 648.0 hours), Davis firefighters spend 76.8 hours working, 72.0 hours sleeping at work, 18.0 hours eating at work, 9.0 hours at work not working, and 472.2 hours off.

    So instead of a firefighter working 9 on, 18 off or 1:2, the actual ratio is 5.9 on, 21.1 off, or roughly 1:3. Not bad for $200,000 a year.

    *This is about average. It is less for newer firefighters.

  26. Rich Rifkin

    [quote]But he repeatedly warned his readers about the first stage, the housing bubble and the developing mortgage crisis, years before the President believed that there was much of a problem. [/quote] Krugman must have read my 2004 column ([url]http://2.bp.blogspot.com/_-iCrgpX1jNM/SwHT9xcDaqI/AAAAAAAAAPQ/J3TbpRoVxYE/s1600/Housing+bubble.jpg[/url]) in which I said we were then in a housing bubble. I should note here that credit ought to go to Lee Bartholomew, who is a real estate appraiser in Davis who was the only person in Davis real estate I could find who shared my view back then. Also, I should note that I never predicted the economic calamity which followed the bursting of the bubble; and I never really had a sense for why demand was as overprimed as it was through overly loose credit. (I thought the problem then was interest rates were too low.)

  27. Gunrock

    Rich, after reading your response I have only one very serious question:

    Is there any chance you would consider being a city councilman?

    Firefighters are great guys and all, but I am so sick of them being treated like some sort of sacred cow in red suspenders. It is a job that stands out as a poster child for everything that is wrong with public employees.

    I wonder if the city would consider a bid from a private company to provide fire protection service for substantially less than their current (honest) costs. That private company wouldn’t have to deal with Calpers and would keep the city out of that pit. The firm could also use a lot of volunteers as well. Not quite a VFD, but a lot less expensive than the mess we have.

    I think the city council needs to realize that they need to either lead or get out.

  28. Frankly

    Sure, after they took their cut.

    Well, your PERS pension and my 401(k) also benefited until the crash, and many of these high-paid bankers and Wall Street brokers lost big time at the same time. The fact was that everybody thought the wild ride would continue. Targeting the money made and spent is a little bit like crying over spilled milk. Most of the wealth earned was lost.

    Paul Krugman tends to be broad and general in his opinions, so I don’t think I could give him credit. Peter Schiff certainly got it right… http://www.youtube.com/watch?v=2I0QN-FYkpw

    My point was that few got it right. Like climate, the economy is difficult to impossible to accurately model. You don’t get sparky badges for guessing and you certainly don’t get them for being smart after the event.

    My other point is that few of the currently demonized bankers and mortgage workers knew the trouble they were causing. Yes there was a feeding frenzy and too many were gorging on easy profit. You can blame it on too little regulation but this then assumes that regulators would have been smart enough to recognize, and powerful enough to stop, these bad business practices. That would be a fool’s expectation in my opinion.

    The government created the problem with under market rates, CRA and Freddie and Fannie. Starting with Carter, politicians started using home ownership as a way to engineer society to prevent growing economic class stratification. It worked, as more and more people that had no businesses owning a house got a mortgage. It crashed primarily because the accumulated loan portfolio risk caused by what the government encouraged, promoted and supported, grew too big for the system to absorb.

    Just think about what it would have meant or took to be a big financial company deciding to NOT participate in this lucrative line of business. Certainly there were a few like J.P Morgan that had a more diversified portfolio and did a better job managing risk. However, any CEO showing lower than market earnings after declining to participate in the lucrative securitization of mortgages, would likely have his or her head taken off by stockholders.

    If you want to prevent this type of thing from happening again, then tell your political reps to stop playing with the switches and levers of the free market. Tell them to stop trying to engineer society from the legislative bench, and hold them accountable for their damaging and destructive influence on the economy.

  29. rusty49

    $200,000/yr.?
    They’re just firefighters, it’s not like they’re doctors.
    It doesn’t take a whole lot of schooling either.
    I would think a fair and just salary for a firefighter would be in the $50,000 to $80,000 range with overtime included.

  30. Greg Kuperberg

    [i]Well, your PERS pension and my 401(k) also benefited until the crash,[/i]

    Sure, Jeff, my pension benefited until the crash. I didn’t. I paid into my pension at high prices for 10 years.

    [i]and many of these high-paid bankers and Wall Street brokers lost big time at the same time.[/i]

    They made a living from the churn. They made a living off of me. When I bought securities at higher prices than the current price, that money went somewhere. If they “also” lost money, that means that they expected to make even better money. Boo hoo for them, but the fact is that I drew a salary for productive labor while they played games with my stash.

    [i]My other point is that few of the currently demonized bankers and mortgage workers knew the trouble they were causing.[/i]

    Well, they were paid not to know.

    [i]If you want to prevent this type of thing from happening again, then tell your political reps to stop playing with the switches and levers of the free market.[/i]

    Every time these things happen, before they happen they tell us: Deregulation, good, good, a step in the right direction. Then when the crash comes, some instead say: There wasn’t enough deregulation; this happened because the government still meddled too much. If we need to leap to a perfect world of complete deregulation to avoid financial catastrophes, then we’ll never achieve it and we might as well not try.

  31. Rich Rifkin

    [quote]Is there any chance you would consider being a city councilman?[/quote] No, I really don’t want to do that job. I struggle paying attention for the one hour of the discussion at council meetings I have an interest in. Yet the council meetings are 6-8 hours very often. I don’t have the patience for that. Further, I don’t think I have the right temperament. And most importantly, I don’t want to spend every weekend for months on end raising money. Most winning campaigns these days spend at least $15,000. Guys like Don Saylor (and Dave Rosenberg before him) raise 2-3 times that much.

    I think the only candidates who could win with much less money are those who are very well connected within a solid base of voters. We have a large “progressive” bloc in Davis, and so they might be able to help push over an underfunded candidate (like a Julie Partansky). But surely the progressives in Davis understand that I am not one of them.

    I am, for example not nearly so concerned about stopping growth in Davis as they are. (That seems to be the unifying concern of most people who call themselves progressive.) Further, most progressives in Davis dislike me for other issues which have nothing to do with politics in Davis (such as the death penalty, foreign policy or free trade). I think the idea that our city council weighs in at all on issues outside of its purview is a load of horse***t, besides. I happen to be pro-choice on abortion; but I think the fact that Davis has pronounced itself a “pro-choice city” is total lunacy.

    (Speaking of lunacy, the fact that progressives get their underwear all bunched up if you use the wrong word — David Greenwald once wrote a column b!tching about my language in a column because I refered to mentally ill people by the wrong words — is another area where I part company with them. My feeling is you should get past PC language and figure out if the idea is reasonable or not. You should have seen the outpouring of hatred toward me after I called crazy people crazy. Yet not one of those nutty letters ever challenged my main point — that by presuming seriously mentally ill people can handle their own affairs we are damaging the interests of the mentally ill and their families. Look up Greenwald’s commentary on my piece: no mention of that. It’s all about PC language.)

    So even if I agree with the progressive bloc on the council (Lamar and Sue) on the most important issue before the city — how to spend its money wisely — no one would ever mistake me for a progressive. (I am not a conservative, either, by the way. I like to think I am a pragmatist, but arguably that’s just a cop-out because I don’t fit into either the left or right camp.)

    If you think, well, how about fitting into the pro-developer, non-progressive group in town and splitting with them on the budget? The answer comes back to my views on fundraising: I find the idea of taking developer money almost as abhorent as taking firefighter money. If it has the appearance of a conflict of interest, to me it is a conflict of interest.

    POST SCRIPT: I don’t know much about Joe Krovoza, who is now running for council. The only thing I know about him is that he is a part of Davis Bicycles, the group which has advocated for the road diet on 5th Street. Maybe that means he is a progressive and will get the support of the voters who agree with Lamar and Sue on most issues? If so, he might not have to raise as much money to win.

  32. Frankly

    Rich, after reading your last post, you have my vote. I agree that you don’t fit into either camp (you can be equally annoying to both!)

    If you don’t see yourself running (and I completely understand your reluctance to do so), maybe you can help find and encourage someone else that shares your views and surfs the middle ground. I think a cerebral, independent-minded libertarian candidate would have a lot to run on this next election, and I suspect that voters are a bit fed up with the status quo.

  33. Frankly

    Every time these things happen, before they happen they tell us: Deregulation, good, good, a step in the right direction. Then when the crash comes, some instead say: There wasn’t enough deregulation; this happened because the government still meddled too much. If we need to leap to a perfect world of complete deregulation to avoid financial catastrophes, then we’ll never achieve it and we might as well not try.

    I don’t have a problem with regulation as long as it is used only to ensure a level playing field for competition and not used to manipulate or influence outcomes. Think what the Tour De France or the Olympic regulatory bodies do. That is not what we get from our government.

    The Community Reinvestment Act hatched regulatory muscle that was used to coerce banks to lend to minorities. Remember the left-wing claims of racism levied at banks during the Carter Admin? Because fewer minorities had good credit, it caused the banks to lower credit standards and invent new riskier loan products. The Federal Reserve Bank of Boston advised mortgage lenders to disregard financial common sense. “Lack of credit history should not be seen as a negative factor,” the Fed’s guidelines instructed.

    The Fed keeping interest rates artificially low for decades was also too much government meddling with monetary policy. Fine when it was only to prevent inflation, but it went way beyond that with the mortgage, banking and construction industries lobbying for continued low rates.

    Then we have Barney Frank’s love affair with Freddie Mac and Fannie Mae contributing the biggest coup de grace. These two government-chartered mortgage finance firms encouraged “subprime” lending by authorizing ever more “flexible” criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued. When the Bush administration proposed much tighter regulation of the two companies, Frank was adamant that “these two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis.”

  34. Greg Kuperberg

    [i]I don’t have a problem with regulation as long as it is used only to ensure a level playing field for competition and not used to manipulate or influence outcomes.[/i]

    The SEC under Bush gave the quasi-banks a level playing field: They could all leverage their assets recklessly. It also engaged in no manipulation and exerted no influence to prevent a catastrophic outcome. So there you have it.

  35. Frankly

    The SEC under Bush gave the quasi-banks a level playing field: They could all leverage their assets recklessly. It also engaged in no manipulation and exerted no influence to prevent a catastrophic outcome.

    In 1999 then President Clinton signend the Financial Services Modernization Act which effectively repealed Glass Steagall and the Bank Holding act of 1956 which prohibited financial companies from owning banks and insurance companies. The Glass Steagall Act passed during the depression era, tightly regulated the u.s. banking system. it stood the country in good stead for about 70 years –until Clinton signed the bill in 1999

    Both Nancy Pelosi and Joe Biden voted yes on repealling Glass Stegall. Barack Obama was in the state senate at the time, so his hands are clean. John McCain abstained from voting.

    So there you have it.

  36. Rich Rifkin

    [quote]The SEC under Bush gave the quasi-banks a level playing field: They could all leverage their assets recklessly. [/quote] There was a very readable book about the collapse of Bear Stearns published earlier this year called, “The House of Cards,” by William Cohan. One of the main points Cohan makes is that publicly held investment banks are impossible to regulate effectively. The problem isn’t the regulators or the regulatory laws. The problem is the divorce between the owners and managers of risk capital. He points out that almost all of the investment banks which got into trouble in the current crisis were not too long ago (back to the mid-1980s) private banks run as partnerships. They made good money over many decades but always understood how to manage their risks. However, once they became publicly held equity firms all of the managers had perverse (short-run) incentives to take on undue risk and not worry about that [i]because it was not their money[/i]. Although the book is almost entirely about Bear Stearns — which was a private partnership which went public against the wishes of its CEO in 1985 — he points out the numbers regarding the investment banks on Wall Street which remained private. Almost none of them bet the house on mortgage-backed securities. Meanwhile, most of the publicly traded investment banks (or mixed banks like AIG) did. The point is ultimately not to say that our regulators did not fail or our regulations were insufficient. Probably both of those points are true. But the larger point is that the risks of investment banking are generally better managed when the risk takers are putting their own money on the line.

  37. Rich Rifkin

    Let me fix that: [i]The problem isn’t [b]MOSTLY[/b] the regulators or the regulatory laws. The problem is [b]MOSTLY[/b] the divorce between the owners and managers of risk capital.”[/i]

  38. Greg Kuperberg

    Jeff, it is true that the Democrats also deserve a lot of blame for repealing Glass-Steagall, or at best for making a disastrous choice for what to replace it with. But consider the way that you’re arguing this: Deregulation is incredibly important, we gotta do; and when it does lead to disaster, remember that the Democrats signed off on it.

    The idea at the time was that Glass-Steagall would be replaced with a new regulatory framework within the SEC for the new quasi-banking practices. That never materialized, because the new SEC under Bush felt that the regulators are the ones who regulate the least. Bush’s SEC guy actually apologized for his anti-regulatory philosophy after the crisis hit. Now, William Cohan, as Rich cites him, could be right that you can’t effectively regulate quasi-banks. But it makes it worse to not even try.

    It also makes it worse to not even believe you’re in the middle of a storm. That was the way that Bush talked about both the mortgage crisis and the credit crisis until the last possible minute. For instance his way of discussing the mortgage crisis was, it’s great that we have this home ownership boom, we just have a little trouble on the side with foreclosures. He completely missed that home construction, prices, and mortgages all flew way past where they should have gone.

  39. Frankly

    Let me fix that: The problem isn’t MOSTLY the regulators or the regulatory laws. The problem is MOSTLY the divorce between the owners and managers of risk capital.”

    Agreed. Both Democrat and Republican administrations are culpable for doing too much of the wrong thing or not enough of the right thing. Risk transparency and accountability should be primary targets for financial industry regulation. Investment bankers are nothing more than high-stakes gamblers, and like all gamblers, they can be irrational about risk. I also support higher reserve requirements for larger portfolios to mitigate the too big to fail problem. This will have some negative consequences for US banks competing with foreign banks not constrained, but then most countries will probably be happy to follow the US lead on this for similar reasons.

    The problems with regulation are three:

    one – Its political use to manipulate outcomes. On the Republican side, it may be to increase wealth or to encourage economic growth beyond what would occur naturally. On the Democrat side it may be to limit or redistribute wealth, or to engineer social outcomes.

    two – Its tendency to overreach and unnecessarily damage the natural winner-loser cycle of the free market. In global competition this can be the tipping point for whole industries.

    three – Its tendency to give us artificial sense of control when the reality is that the speed and complexities of business combined with incentives for business managers to win will always put regulations and regulators behind and at disadvantage.

    The Democrats cannot be trusted with too much increased regulation because of their aggressive social agenda, their record of speaking out against free-market capitalism and their piss poor performance dealing with the current financial crisis. The Republicans are also guilty of having a history of piss poor regulatory performance, but our primary need right now is to incentivize and encourage economic growth through private enterprise. This is done with less regulation that is more focused on setting a framework for fair and safe competition, and lower taxes.

  40. rusty49

    “our primary need right now is to incentivize and encourage economic growth through private enterprise. This is done with less regulation that is more focused on setting a framework for fair and safe competition, and lower taxes.”

    Exactly, and the Democrats just don’t get it.

  41. Rich Rifkin

    [quote]Investment bankers are nothing more than high-stakes gamblers, and like all gamblers, they can be irrational about risk.[/quote] If Cohan is correct, then it’s fairer to say, “Investment bankers [i]who run investment banks owned by remote shareholders[/i] are nothing more than high-stakes gamblers, and like all gamblers, they can be irrational about risk.”

    Except, I wouldn’t even say that.

    The investment bankers themselves profited greatly from the investments they made with other people’s money. The problem seems to have been that the risks were all borne by others. Hence, they were not irrational in the least.

  42. Rich Rifkin

    So who was irrational?

    Again, if Cohan is right, the irrational actors were the stockholders who failed to understand what it was they were investing in and failed to hire a board of directors which managed its managers properly. A reason why the stockholders would have been irrational was likely a lack of information. And that lack of information perhaps was due to fraud — for example, I’ve heard anecdotally that some were told “these are Grade A investments” by people who were secretly selling them because they believed the market in them was about to collapse. Some of that lack of information could also be due to poor regulation by the SEC and by the private bond-rating services and by the private auditing companies. And some of that lack of information could be blamed on irrational investors who didn’t understand what the companies they were investing in were doing because they never did their own due diligence.

  43. Frankly

    Rich, I read somewhere that all the large investment banks have been shedding analyst jobs over the last decade or two. That was about the same time that the profession of institutional investment banking started to morph into high-stakes gambling looking for the short-term pay day.

    What was/is irrational is the disconnect from risk and return… a fundamental metric for anyone in the business of banking. Bear Stearns was one of many taking on copious short-term debt to play a game where the odds of winning were very high, but the risk of complete and utter destruction compounded every day. That is the mindset of a gambler… going for the win with little consideration for the risk of complete financial ruin. It is an irrational mindset to everyone except the gambler. Or, if not irrational, it is certainly an unprecedented mindset for a banker of any kind.

    I get Cohan’s point about the conflict of interest for managers of publically-traded investment houses maximizing stockholder value versus making prudent business decisions to benefit and protect the client. However, even this thinking is convoluted since managers know they have to attract clients with assets before they can churn for earnings that would pay dividends or equity to stockholders. It was the mass exodus of clients that killed Bear because Bear needed the inflows to pay off the short-term leverage they used to gamble with. The stockholders of Bear got wiped out from the $10 per share price eventually paid by JP Morgan. Clients lost money as account holders, but the primary loss to Bear investors was due to the stock market crashing.

    My company does commercial mortgage loans, and our portfolio is relatively strong because of a history of rational credit decisions. Some of my competitors that went hog wild over the last decade are not doing so well. They were plagued with an irrational exuberance for the win with little care about the mounting risk. For a banker this is irrational behavior since risk and return should be his/her entire game. Maybe a more accurate label is “irrational exuberance” (BTW, this is a great book by John Kenneth Galbraith which everyone interested in this topic should read).

    The term “conservative” used to be synonymous with “banker”. What happened?

  44. Moravecglobal

    University of California President Yudof Approves $3,000,000 to Outsource UCB Chancellor’s Job
    The UC President has a UCB Chancellor that should do the high paid job he is paid for instead of hiring an East Coast consulting firm to fulfill his responsibilities. ‘World class’ smart executives like Chancellor Birgeneau need to do the analysis, hard work and make the difficult decisions of their executive job!
    Where do consulting firms like Bain ($3,000,000 consultants) get their recommendations?
    From interviewing the senior management that hired them and will be approving their monthly consultant fees and expense reports. Remember the nationally known auditing firm who said the right things and submitted recommendations that senior management wanted to hear and fooled government oversight agencies and the public?
    Mr. Birgeneau’s executive officer performance management responsibilities include “inspiring innovation and leading change.” This involves “defining outcomes, energizing others at all levels and ensuring continuing commitment.” Instead of demonstrating his capacity to fulfill his executive accountabilities, Mr. Birgeneau outsourced them. Doesn’t he engage University of California and University of California Berkeley (UCB) people at all levels to help examine the budget and recommend the necessary trims? Hasn’t he talked to Cornell and the University of North Carolina – which also hired Bain — about best practices and recommendations that might apply to UCB cuts?
    No wonder the faculty and staff are angry and suspicious. Three million dollars is a high price for Californians to pay when a knowledgeable ‘world-class’ Chancellor is not doing his job.
    Please help save $3,000,000 for teaching our students and request that the UC President motivate the UCB Chancellor to fulfill his executive job accountabilities!

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