Egalitarianism Looks Good in the Showroom

One of the rewards from working hard and making a commitment to your family is that you can provide your children with a wide range of opportunities. Everyone benefits from this: your children, obviouisly, but also your neighbors who do not have to pay higher taxes to take care of your kids. You also set a good example for others who see that hard work and personal responsibility pay off.

Not everyone likes this direct relationship between individual choice and decisions on the one hand, and outcomes on the other. Take this group of Republicans in the South Carolina legislature, e.g., who according to an article in The State in Columbia, SC want to remove one of the strongest incentives a family bread winner has for climbing the income ladder:

A group of lawmakers say they’re working to level the playing field for the state’s school children in a new bill that would create a uniform tax rate at both the local and state level. Under the bill, a uniform tax rate at both the state level and local level would be created to ensure funding parity among the state’s public school students enrolled in its 85 school districts. Currently, local funding varies, depending on where a student lives. Under the bill, certain groups of students, including those who live in poverty, those who are gifted and those who are disabled, would receive a set amount of additional money toward their education. Research shows these students cost more to educate. “It’s about having a student in Marlboro County have the same educational opportunities as students in Richland County,” said Rep. Mia Butler Garrick, D-Richland.

How are these egalitarians going to guarantee that the educational standard will be set by wealthy counties like Richland and not by poor counties like Marlboro? Just because you introduce a uniform funding code for every school in the state, does not mean that the funding level will remain, or even begin, at the top. There is a reason why poor counties have poor school funding: they cannot afford to spend more on schools. Therefore, in order to implement egalitarianism in funding the state is going to have to couple this uniform tax rate law with an elaborate redistribution scheme where high-income counties feed low-income counties.

Because poorer counties are supposed to be elevated in terms of funding, this will by necessity mean that the higher-income counties must pay higher taxes. They will now not only have to fund themselves at their current high level, but also provide enough funding to elevate everyone else to their level.

These higher taxes on the highest earners in South Carolina will inevitably have a negative effect on the state economy. On the margin, there will be job losses and a marginal erosion of the tax base off which goverment pays for its egalitarian school funding scheme. Add to this a future recession, and the recipe is written for downward adjustments of the uniform funding standard.

In plain English: as this egalitarian funding project goes into effect, the state is slowly but steadily putting the rich counties, with the best schools, on a track toward mediocrity – without guaranteeing in any way, shape or form that there will be an elevation of funding, let alone education standards, in lower-funded, lower-performing schools.

None of these arguments seem to have made their way into the public arena in South Carolina. The aforementioned news article in The State makes a very brief mention of any sort of criticism of the egalitarian funding idea:

But critics say it’s unfair use local dollars from local taxpayers in one part of the state to pay for the education of students in another part of the state.

The fairness argument is of course a valid one. As the state dictates school funding, it deprives people of one of their incentives to work their way up and make more money. Over time, the cumulative effect of such incentives deprivation is fewer people aspiring for higher incomes, lower earnings on average  – and a weakened tax base. Interestingly, this will also mean that fewer counties will stay above the “redistribution rim”: there will be fewer counties that feed the redistribution scheme and more counties that become takers from the system. This increases the cost of redistribution. If the state wishes to maintain the high standard it has promised everyone, it will have to start raising taxes just to keep school funding afloat. This in turn leads to further depression of the state’s economy without yielding any new, positive results. Taxes will go up just to maintain status quo in the schools.

Egalitarianism looks good in the showroom. If you are not willing to do the research, you won’t realize its maintenance costs until you are out on the road and stuck with it.

No Shortage of Money to Pay State Workers in South Carolina

For those of us who work in the private sector the question of compensation always comes down to how the market values our work. If we produce a better product than last year, we have earned the right to a raise. If we slack off and fall behind competition, we deserve a compensation cut, or at least no raise. This way we always get the best possible evaluation of our work, and we always know what we have to do to earn more money: sharpen our skills, get better at what we do and make more money for our employers.

It does not work quite the same way with government workers. There, compensation is so standardized that it becomes a matter of legislation. In South Carolina, e.g., there is a bill floating around the state legislature to raise compensation for state workers by four percent. The reason has nothing to do with their performance on the job: it is merely to compensate them for not having received a raise for four years. From Columbia-based The State:

House lawmakers voted 113-0 to approve the state’s $23 billion budget Thursday — and Senators are already planning to change it. Sen. Darrell Jackson, D-Richland, is proposing to give state workers a 4 percent raise — 1 percent for every year they have not received a raise. It would cost about $60 million for state workers. The House budget includes a 2 percent raise for state employees. Jackson said his plan would also include a 4 percent raise for teachers. It’s unclear how much that would cost. House lawmakers set aside an extra $152 million to give teachers and school district employees a 2 percent raise, only to find out it wasn’t enough. They added another $8 million this week to teacher and school district employee salaries.

One has to wonder how much actually is enough. As the following little table shows, the total cost of state worker compensation has not exactly been falling behind the private sector. From 1990 to 2010 the total compensation of private employees in South Carolina increased by an average of 4.3 percent per year. State worker compensation grew by 4.1 percent per year. However, data for the past decade and even more so the past five years (2010 is the latest year with BEA data) clearly shows that state workers have been doing fairly well:

  1990 to 2010 2000 to 2010 2005 to 2010
Private workers 4.3% 2.9% 1.9%
State workers 4.1% 3.2% 3.5%

It is important to keep in mind that this is total compensation, in other words, per-employee compensation multiplied by the number of state and private workers, respectively. Nevertheless, it shows that if the state of South Carolina has a problem giving raises to its employees, it is not for lack of money. More likely, it has to do with the fact that they have kept on hiring people through the recession.

To find out whether or not this is true we head over to the Bureau of Labor Statistics. Their numbers tell us that the state of South Carolina has indeed cut its number of employees during the recession – kudos for that – but the 4.7 percent cut from 2007 to 2011 was way smaller than the eight-percent decline in private sector jobs. The burden of state workers on the shoulders of the private sector has therefore increased: in 2007 there were 61.7 state employeer per 1,000 private employees in South Carolina; in 2011 that ratio had increased to 63.9.

To put this another way, let us measure per-employee compensation in state government vs. per-employee compensation in the private sector (using again BEA data). In 2000 a state worker was compensated at $1.35 for every $1.00 that a private-sector employee made. In 2005 that ratio was $1.45 to $1.00 and in 2010 it had risen to $1.59:

  Excess state compensation
2000  $   1.35
2001  $   1.34
2002  $   1.39
2003  $   1.37
2004  $   1.42
2005  $   1.45
2006  $   1.46
2007  $   1.54
2008  $   1.58
2009  $   1.59
2010  $   1.59

The bottom line is that there has been no shortage of money in the South Carolina state coffers to dole out generous compensation to state workers.

A better way than legislating about the compensation of state workers is to tie their compensation increases to growth in the state GDP. Since government stifles growth, excessive growth in government will boomerang back to state workers. By contrast, workers in a small, lean state government that does not get in the way of the private sector can look forward to generous compensation increases.

Something to consider for Governor Nikki Haley?