Meanwhile in California (an object lesson in sovereignty)

About two years ago I had lunch with one of the most eminent economic historians alive today. We were reflecting on how aggressive were the actions of governments to combat the global downturn. “Does the expansion of government spending put central banks at risk of being forced to pick up the tab?” we wondered. In the end, you have to conclude that government fiat trumps central bank independence, no matter how well the latter is “enshrined” in law. As my dining companion put it, “The state is sovereign.”

I am reminded of that now, in monitoring the progress of ‘de-leveraging’ unaffordable public-sector wages and benefits (a pet preoccupation of this blog). In the USA as elsewhere, municipalities — and states — are starting to get their way when it comes to re-negotiating public sector contracts. It might not be the case that a city is “sovereign”, but a similar principal applies: Governments that can’t pay won’t pay.

From For Calif. public workers, it’s more give than take (Reuters):

Savings from union concessions [in San Francisco], including for many city employees the equivalent of nearly 5 percent wage cuts for the next two fiscal years, will be considerable….

I can think of a Mediterranean country which recently pushed through a 5% wage cut…. But back to the article:

“Big city, small city, rich city, poor city, negotiations are occurring in ways they haven’t in 20, 30 years,” [Santa Monica city manager Rod] Gould said. “Cities are coming to the table with nothing to give or with little to give and asking for something back.”

And if the unions don’t budge, declare a fiscal emergency. And if that doesn’t work — declare bankruptcy:

In addition to forcing massive layoffs, obstinate unions could force local governments over the financial brink and into bankruptcy like Vallejo, California, which made headlines two years ago by taking that dramatic step, a stigma with municipal bond investors and credit rating agencies.

Bankruptcy, however, has helped Vallejo rein in compensation and benefits for its unionized employees, especially those in its public safety units, where paychecks were well above the state average.

Since Vallejo’s bankruptcy proceedings began, three of four city public employee unions have agreed to reduced compensation and benefits.

Anyone still interested in arguing that inflation is the major threat facing us today? On top of the austerity being meted out at the local and state level, now we have a super-charged US dollar. Just wait for the impact on prices — and heaven help you if you’ve got nominally contracted debt.

I’ve said it before, but this is too much like the Great Depression. Again quoting Barry Eichengreen, the pre-eminent scholar on the monetary dimensions of that story:

There is no little irony in the fact that inflation was the dominant fear in the depths of the Great Depression, when deflation was the real and present danger.

–Eichengreen, B., Golden Fetters (Oxford, 1992), page 24.

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One Response to Meanwhile in California (an object lesson in sovereignty)

  1. Scott says:

    I have received this query:

    “I don’t see the connection between union negotiations, municipal bankruptcy, etc. and inflation/deflation in your posting. I have been reading about various downside pressures on the prices of various things like commodities and homes in other articles. But it isn’t clear to me how unions salaries play a role in this.”

    And I have this response:

    Wages are generally inflexible in the downwards direction (even if prices are falling) because people tend to consider their wages nominally. This is especially true for the public sector, where union organization is much higher and labour has more ‘power’.
    One of the biggest forces in generalized inflation or deflation is the ‘wage-price linkage’, the idea that prices spiral upward when wages are moving upward, which causes prices to move upward, (repeat). It works in the other direction as well, but since wages are hard to push down, the ‘wage-price spiral’ is harder to trigger. It seems that might now be changing.
    Wages are a straw in the wind for broader prices. If the public sector workforce is acquiescing in wage cuts, the private sector workforce is surely not going to fare any better. To the extent that wages are falling, household income is falling, and prices will fall too because demand is so low. But if prices are falling, then employers will demand more wage cuts, (repeat).

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