The Real Lesson from Wisconsin

Public unions have no one but themselves to blame for believing government promises

There is an abiding delusion that frustrates efforts to limit the size and scope of government: The government, unlike the private sector, shields people from economic risk. Government jobs are regarded as safer and government bonds securer. But the battle that public unions are fighting in Wisconsin shows that the government can no more offer guarantees in life than the tooth fairy. On the contrary, it shows that a government powerful enough to give you everything you want is also powerful enough to take away everything you've got.

The fundamental reason why ObamaCare passed and Social Security privatization stalled is the fear that individuals need government programs to protect them from the cruel vagaries of the market. Market critics played up these fears in the wake of the financial meltdown. Former Australian Prime Minister Kevin Rudd blamed "extreme capitalism and unrestrained greed for perverting the global financial system" and called on governments to take aggressive steps to protect victims facing job losses and melting retirement accounts.

But Wisconsin demonstrates that people who put their economic fate in the government's hands don't get safety; they get screwed. They simply trade the cruel vagaries of the market for the cruel vagaries of politics whose risks they have even less control over. Why? Because the government does not play by the same rules that apply to mere mortals in the private sector.

Wisconsin is just the first act in an unfolding tragedy in which states and municipalities across the country have promised $3.5 trillion—about a quarter of the national GDP—in pensions that they don't have the funds for. Unfunded health retirement costs are even greater. But how did we get to this point?

The reason, explained Orin Kramer, the chairman of the New Jersey Investment Council, in The New York Times, is that the government can use accounting methods and make assumptions about investment returns that private companies are simply not permitted. This diminishes its reserve requirements, freeing it to make lavish promises now and postpone the budgetary consequences into the future. Public unions go along with this subterfuge—something that private unions wouldn't do—because they count on the government's taxation powers to keep refilling the trough.

And, for a while, the government does just that. Reason Foundation, my employer, found that in 2009, state and local government employees earned 44 percent more total compensation than private industry workers. What's more, the Bureau of Labor Statistics estimates that private workers have a 20 percent chance of losing their job in a given year compared to 6 percent for government workers.

But the problem is that the government eventually either runs out of other people's money or it becomes politically untenable to keep raiding their pockets or both. And, at that point, the massive powers it had deployed against taxpayers get redirected towards thwarting those with claims against the government.

This is what is happening in Wisconsin right now. For years, its public unions have been living large. But now, facing a two-year $3.6 billion shortfall, Governor Scott Walker is asking the legislature to effectively rewrite the union contract, imposing compensation cuts on public employees—while paring back their collective bargaining rights. All of this might be totally justified and necessary. Still, it testifies to the awesome power of the state government to impose its will, regardless of any standing arrangement.

In many states, to be sure, public union contracts and government bonds are constitutionally protected. States can't declare bankruptcy and restructure these obligations when they are facing fiscal insolvency. But that just raises a worse specter: their default, especially right now when the federal government can't bail states out given its own massive debt and unfunded liabilities—not to mention public bailout fatigue.

Government defaults are hardly unprecedented, notes University of Pennsylvania bankruptcy professor David Skeel. About 2,020 government entities defaulted during the Great Depression because they were barred from going into bankruptcy. (Congress subsequently passed a law allowing municipal bankruptcies.) When that happens, no one with any claim against the state has any legal protection. Everyone—bondholders and employees alike—loses their shirt. Public employees might not even get back the pension money they have put into the system.

This is in sharp contrast to the private sector where a court can step in and force companies to liquidate their assets to at least pay off their secured debtors. But it can't force a state government to, say, sell public parks or golf courses or roads, to make good on its obligations. That's because the doctrine of sovereign immunity insulates government from lawsuits unless it has consented to be sued.

Competition and the rule of law check individual greed in the market. These mechanisms are not perfect, but at least they exist. Government, on the other hand, is an unregulated monopoly that sets its own rules and enforces them as and when it sees fit. Wisconsin's public unions can hardly complain if it changes the rules mid-game. After all, they are the ones who decided to play with it in the first place.

Shikha Dalmia is a senior analyst at Reason Foundation and a columnist for The Daily, America's first iPad newspaper. This column originally appeared at The Daily.