Alan Greenspan has been strangely missing from the fierce battle over the future of public sector unions in Wisconsin and other states. His absence is strange because he bears more responsibility for the current conflict than anyone else alive.
The reason is simple. Mr. Greenspan's incredible incompetence in allowing the $8 trillion housing bubble to grow unchecked created the fiscal crisis that is gripping Wisconsin and most other states.
To be clear, states always face financial stress in economic downturns. Most states had to struggle to balance their budgets in 2001-2002and earlier in the earlier 1990-1991 recession. During a recession tax revenues fall. Consumers buy less, which means less sales tax revenue. Workers earn less money, which means less income tax. And property values fall, leading to less property tax revenue.
At the same time the need for state programs increases. Unemployed and underemployed workers are more likely to need public benefits like unemployment insurance, Medicaid, Temporary Assistance for Needy Families (TANF) and other public support programs.
Recessions are part of capitalism and responsible leaders prepare for cyclical downturns. However this recession is no ordinary downturn. The recession officially began in December 2007, so it is now 37 months since the start of the downturn.
At this point following the 2001 recession, the economy was down 1.5 million jobs from the pre-recession level. Thirty-seven months after the start of the 1990-1991 recession, the economy had generated 1.1 million more jobs than the pre-recession level. At this point following the 1981-82 recession, the worst prior recession of the post-war period, the economy had 5.5 million more jobs than before the recession.
By comparison, the number of jobs now stands at 7,700,000 below its pre-recession level. Furthermore, no one is projecting that this gap is about to be closed in the next several years.
There should be zero doubt: this downturn is the reason that Wisconsin has a budget crisis. Perhaps Wisconsin's leaders can be blamed for not recognizing that the economy was being managed by complete incompetents – and planning accordingly – but this is the story of the state budget crisis.
According to the Congressional Budget Office, the economy is operating at more than 6.4 percentage points below its potential level of output. If Wisconsin's state economy was 6.4 percent larger, and its revenues increased accordingly, it would have more than $4 billion in additional revenue in its coffers over the next two years.
This increase in revenue would easily cover the projected deficit. This is even before we add in the savings from lower payouts for unemployment insurance and other benefits that would follow from a return to normal levels of unemployment. In short, there can be little dispute that Wisconsin's budget crisis is Alan Greenspan's work.
The allegations of the union bashers can easily be shown to be nonsense. Wisconsin's public sector workers are paid no more than their private sector counterparts. They tend to get somewhat better pensions and health care coverage, but this is offset by lower pay for comparably skilled workers.
Nor has there been an explosion of public sector employment under the period in which Democrats governed the state. The last budget prepared by former governor Jim Doyle projected 69,038 full-time equivalent (FTE) positions for the state in 2011, an increase of 1.4 percent from the 68,092 FTE number in 2003, the year when Doyle took office. It takes some very inventive arithmetic to make a 1.4 percent increase in employment over eight years into a bloated state workforce.
How does it change anything if we know that Greenspan (last seen being feted at the Brookings Institution) is the real villain in the Wisconsin budget crisis? First, it should turn the heat where it belongs: Washington.
The problem of the downturn is a lack of demand. A lack of demand is solved by spending money. We have to get our elected representatives to ignore the shrill whining of the Wall Street deficit hawks. We need sufficient stimulus from the public sector to overcome the falloff of more than $1.2 trillion in spending from the private sector that resulted from the collapse of the housing bubble.
If members of Congress are too intimidated to do what is needed to fix the economy, then Wisconsin's legislators should do what common sense dictates: follow the money. Rather than taking pay and benefits from schoolteachers and firefighters, it makes sense to take money from the people who have it. This means taxing Wisconsin's wealthy and its corporations. The tax increase only needs to be temporary, since the state budget should be fine once the economy recovers.
Of course the wealthy and the corporations will claim that they will leave the state and stop hiring, but these are not people who are known for their truthfulness. They are known for their money.
If these big winners in the downturn are forced to share more of their wealth until the economy recovers, then maybe they will put more pressure on Congress to support the sort of stimulus needed to get the economy back on track. This would be a real win-win for just about everyone.