The Realignment

This is an idea I’ve been mulling over for a long time and it’s not completely fleshed out yet. I mentioned it in this week’s OTB Radio program but we didn’t really have the time to discuss it much. I’m beginning to wonder if we’re seeing a major permanent realignment in the country’s economy. Here are a couple of items to set the stage for what I’m thinking about:

City and local governments are having a hard time meeting their payrolls:

The problem is municipalities have little control over the markets, voters don’t want to raise taxes, and large expenditures – pension obligations, health care costs and collective bargaining agreements – limit a city’s options, he said.

“I’m surprised not every city is discussing (bankruptcy),” Levinson said. “It’s absolutely horrible out there.”


Vallejo spent an inordinate amount of its budget on public safety salaries and benefits; Isleton has had years of debt that added up; and Rio Vista has had problems with its sewer system for decades.

Here in Chicago and in other metropolitan areas police and firefighters are not low paid. The salary for police or firefighters including overtime can easily go into six figure and that puts them in the highest quintile of income earners.

The financial sector is taking quite an employment hit:

NEW YORK (MarketWatch) — Labor tracking firm Challenger Gray & Christmas said on Wednesday that the financial sector cut 91,356 jobs in November, the second-worst month for industry layoffs since September 2001. In September 2001 the financial sector lost 96,333 jobs. Citigroup’s announced plans to cut about 50,000 jobs made up the biggest portion of the job cuts disclosed in November, the firm said. For the year-to-date, Challenger said the financial industry has slashed 220,506 jobs, compared to 147,395 jobs cut at this time last year. “Obviously, the financial sector is still struggling,” Challenger chief executive John Challenger said in a prepared statement.

We have been heavily over-invested in the financial sector for years and it’s hard for me to see how a lot of those jobs will ever come back just as aerospace jobs were lost in the 1970’s and have never come back. And most of these people earned incomes in the top quintile.

Over the last thirty or more years we’ve seen a fairly steady process. First income prospects for unskilled workers, particularly those without high school educations, began to slow. By the Aughts that had progressed through blue collar workers to white collar workers with college educations—nearly everybody in the four lowest income quintiles. I think we’re seeing that same thing extended to people in the top income quintile and those with post-graduate degrees.

A remarkable proportion of those people work for the government or the handmaidens of government, education and health care. I can’t help but think that there will be an enormous battle as top income earners try to hold onto their wages while the rest of us wonder how to maintain any kind of fiscal sanity.

As I say, I haven’t thought this through completely yet and I’m sure there are many flaws in my reasoning. But it’s where the evidence seems to point to me.

1 comment… add one
  • Brett Link

    You could probably change some of that by breaking the back of the public sector unions, but that wouldn’t absolve you from the need to actually pay the salaries necessary to attract needed personnel, and you’d have to combine if with greater reforms to prevent the usual administrative tyranny that would break out (I’ve heard how the administration in school systems, for example, would treat their teachers before the advent of the teachers’ unions).

    Other than that, I’m not sure what to do – like I said, you can only cut your personnel costs so far, otherwise you get the dregs for your public servants (or worse, you start getting increased corruption as people supplement their salaries with extortion/bribes). I guess you’d ultimately have to say to people that if they want the quality of services they’ve come to expect, they need to pay higher taxes for them.

    We’ve all seen how that works out in reality, though. The next best thing would probably be to move some of the decision-making on certain types of local and state taxes out of the hands of representatives and into nonpartisan state boards and the like – sort of like how Congress has delegated authority to the Interstate Commerce Board and the like. Maybe you could create a board appointed by the state legislatures and city councils that could tweak sales tax and property tax to a certain extent.

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