Wage Deflation: An Interesting Response From a Reader

By: J.D. Rosendahl | Thu, Mar 4, 2010
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About 18 months ago, I was encouraged to start blogging and sending my work into www.safehaven.com. The person responsible for that was another blogger (and friend) on Safehaven. One of the things I absolutely love from this experience is the feedback I get in emails. And, I love it all, including those who appreciate my work, those who disagree, and even the ones I can't repeat. It's that right to freedom to speech that is great about our country.

I recently wrote: The Deflationary Cycle Full Monty: A Closer Look at Wage Deflation. In that, I touched on the coming wage deflation move within the public union sector of society, and referred to their current compensation levels as the issue why so many municipalities are broke.

One of the emails I received is below, and I respect the individuals take on life, his opinion, but most importantly, I thank him immensely for sending me this email. I believe one of the most important issues facing us today is the budgetary deficits at municipalities around the country, and for 2 reasons.

First, the size and scope of the problem is overwhelming to say the least. Second, the timing is so intense. Budget short falls going into fiscal year ending 6/30/2010 are staggering and that's a mere 4 months away. Few public entities have a handle on their current deficits, not to mention the projected short falls for the year starting 7/1/2010.

This email below showcases what I feel is an important topic and the question everyone should be asking themselves, "how do I feel about this", because one way or another, it will impact us all.

I've enclosed the entire email and kept the name anonymous for privacy:

Agree with most of your assumptions. I do however must correct you on the idea that unions are to blame for municipalities budget deficits. The idea that socialism (i.e. unions) are to blame is ludicrous. First off they provide protection against such outrageous corporate practices like today. The productivity level is so extreme today due to one reason, cutting to the bone workers and demanding 5 times more out of them with the same pay or less. The boom bust cycle always result in Corporate America taking control to the extreme. Secondly the salary levels are NOT competitive with the private sector. Thirdly they are compensated somewhat with pensions and 403 programs. Greed and complacency by all are to blame for this mess. Why municipalities don't place in reserve the pension payout assumptions is beyond me.

The correlation between economic disaster and unions are glaring. During peak economic activity Unions are bashed and their membership hit a low. During economic depressions Unions are in demand by the public. Its not the socialist agenda that's at fault it's the disregard for workers rights and as a result corporate control that causes economic distress. Imagine getting rid of the Glass Steagall act at a time when it was needed most. Imagine the FED Chairman saying "I am confident companies can police themselves". Imagine this whole debt situation caused by greed by Corporate America and lack of control (checks and balances).

The disparity between rich and poor always come at a time when power imbalance is at its greatest. You suggest its Unions that are at fault? I suggest we should have more Unions in more corporate economic segments, and not just government jobs.

It reminds me of the time during the Civil War that we had riots in New York. The rich could pay their way of serving. The poor decided to blame the easiest target available instead of the real culprits. Imagine the Irish at the time considered a second class citizen attacking the absolute bottom of the economic structure, the blacks.

Here we go again! History and human nature is a constant. Bash away!

BTW I am not in any Union. In my situation as a computer programmer, my company had an across the board 10 percent salary cut. They then proceeded to fire all the well compensated individuals and reduced the work force by over 30 percent. I now work 12 hour days, am on call weekends, and have no other individual to back me up. Oh yeah I forgot. During my 1 week vacation I spend 2 days fixing problems.

Yeah I would LOVE to be in a UNION. Empathy is not your game. I guess if YOU experienced the real world your notions would be more in line with what most Americans have to go through.

  1. The emailer refers to more private unions within corporate America than public unions, and whether that is true or not is for the most part irrelevant. The business dealings of a privately held or publicly traded company are for the executives, directors, and shareholders to deal with. It impacts their profitability or lack thereof. In the case of GM, where management failed to play hard ball with unions, the government had to step in when they should have let capitalism take its normal course. Now, compare the corporate unions to public unions. A public union is serving not a group of shareholders but a group of tax payers, hence the right of the voter to complain all day about the situation and call for a change. Given the circumstances, I find little to justify comparing private and public unions under the same light, except both seem to have crippled both private corporations and municipalities because they fail to realize it's almost impossible to maintain salary and benefit packages when the economy has taken this big of a decline and revenue sources have dried up.

  2. Under the current circumstances there are only 3 choices the municipalities have to solve this issue:

    1. Reduce or eliminate other services, like closing libraries, scaling back worker hours, reducing college programs, and reduce other non essential services. We can do this all we want and in most cases it will not bridge the budgetary short fall, not even close.

    2. Raise taxes: In some states where the problem is so bad like Illinois and California, we'd have to almost double the state tax rate to cure the issue. And, that would happen right before the federal government raises federal tax rates. It would motivate people to move away from these high tax states for lower tax havens, and then gross tax revenues from income, real estate, and consumer spending in the big problem states would take another dive, and the budgetary problem would explode again, and we would be right back in the same problem.

    3. A reduction in employee costs: The largest expenditure for most companies and municipalities is the cost of employee salaries and benefits. The problem at hand is an expense management issue. Most large publically traded companies understand this and have made the tough decisions to protect shareholders through cost cuts. Why shouldn't we expect politicians to do the very same to protect tax payers and remain within a level of justifiable financial prudence?

  3. The issue at hand has nothing to due with the work being done by public union members, the service they provide or the risk they take in the case of policemen or firemen. No, it's simply an equation of math. It's the kind of equation a 5th grader could understand. We take in so much money and that's all we have to spend, and we are spending 10-40% more than that. It doesn't add up. The real problem in this nightmare is local and state government officials looked at all forms of tax revenues during the bubble days as recurring cash flow. And, none of the bobble heads took the time to understand a great deal of tax revenues were really one time revenues source such as: Taxes from capital gains and developer fees on real estate for local governments. And, a portion of real estate and consumer spending taxes were also one time, as some portion was related to bubble economies. During this period, governments spent every penny and set budgets according to their take on revenue sources. Public unions who financially support politicians in an enormous manner stepped in and leveraged their influence to obtain higher compensation levels for union members. We can't have big political donors setting compensation packages essentially for themselves, it's a disaster. Let's take an example of California Policemen. Many in the state can retire between the ages of 50-55 at 90% of their income level at retirement. That's ludicrous and unaffordable. This doesn't even get into the other benefits at retirement. Also, many policemen have the right to "sell" back their sick days accumulated with no cap on accumulation of sick days. That can be a large dollar amount and a home run at the tax payer's expense. Lastly, I know of some high ranking policemen who retire and collect retirement compensation and then go back to work for a different police department as a consultant and make just as much on top of their retirement income, thereby making twice as much in retirement as they did working before retirement. When you can make up your own compensation rules and no one is watching the hen house it's the major reason why the budget short falls are so intense. I'm not picking on policeman, but just using it as an example.

  4. What's wildly entertaining about this mess is that no union to date I know of is willing to vote for across the board cuts for all members in salary and benefit package, which would allow them to "not" have to lay off anyone while providing the same service levels to tax payers. In fact, senior union members know if they support layoffs, it will only impact the junior members because of seniority rules, so the unions that should be supporting all members collectively, are cannibalizing their own younger members to support the senior members. That sounds like the same greed that's penetrated our society everywhere. The issue will be resolved by salary reduction or layoffs, and either voluntarily by unions or through the insolvency/bankruptcy process because the math dictates its.

  5. The reader suggests he would like to be part of a union, as I guess many unemployed and under employed would love to do. And why is that? In part because for the past 10-20 years it's been a safe and high paying job, which only goes to cement the issue of budget short falls laying at the feet of public unions. I imagine local and state governments could find highly qualified people within the ranks of the unemployed who would love to be employed and do so at a fraction of the cost of current public union members, which only goes to solidify they are over paid. We all like to think we provide overwhelming value, but frankly, in this environment just about everyone everywhere is replaceable at a lower cost. Again, it's just math.

I feel for the reader immensely because his personal situation is nothing short of difficult, emotionally, mentally and financially. I hope the best for him, and anyone in similar circumstances, and that's why I end my blogs with the phrase "Hope all is well". However, his circumstances are exactly what I'm seeing inside my clients who have cut staff, reduced salaries, reduced hours, and cut benefits to stay financially solvent, again it's just math. It's this very trend that will spread to just about everyone over time. It will spread unevenly through time depending on the industry, which in turn makes people feel signaled out. I wrote the wage deflation blog so people can foresee the problem I see at hand, and hopefully prepare for it, by saving if possible.

The reader suggests, "I guess if you experienced the real world your notions would be more in line with what most Americans have to go through". In my blog, I specifically indentify that my industry could be next, so I expect wage deflation in some form to impact my world if not me directly. And since, I foresaw the nightmare we have today back in 2003, I've been managing my family's money accordingly in a little old lady (no disrespect to little old ladies, in fact, my mother is one, and I love her immensely) strategy. It's really been a deflationary hedge fund. My parents love the outcome, as it has protected their independence. We took the time to tell their clients and my clients in 2003 through 2007, and repeatedly. They all thought we were crazy. We made the tough decisions back in 2003 to avoid the real estate market, over spending, debt and protected their wealth.

Their net worth has increased modestly since 2003 and we have avoided all the bubble (risks) melt downs, and their net worth increased in 2008. I've structured my family's net worth like a financial bunker to protect the family as deflation and wage deflation continues. If I'm impacted by wage deflation, I can always pack up my life and spend my time with family, and not have to work for many years. I'm prepared for it.

What's far more important is the outcome of the various solutions for budgetary short falls, as they will negatively impact us all. It will mean higher taxes for all, which compounds the very problems we have today of lower consumer spending and lower real estate values, thereby exacerbating the budgetary short falls through continually declining tax revenues. Or, we will experience more services being cut to all of us via state and local program eliminations. Or, we will experience layoffs and compensation reductions by public union members, which is also bad for the economy because it means more layoffs or income reductions, which also compound the very issues we have today.

There is no easy viable solution. Te only positive way out is if unemployment falls to 6%, the real estate market increases by 50%, and the stock market returns to prior highs. If I was a betting man, I would take the severe under on that bet. The problem, "is what it is", we can only impact the outcome hence forth.

Whether you feel the same as me, or more like the reader, or have a different opinion all together, I hope you are seriously thinking about this issue and willing to tell your politician how you feel through the right of free speech. You will be impacted by one of the solutions above or a combination thereof. Your voice can make a difference on the outcome.

As always, hope all is well.



Author: J.D. Rosendahl

J.D. Rosendahl

J.D. Rosendahl is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

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