Monday, February 21, 2011

Collective bargaining and budget deficits

So it was collective bargaing that caused the state budget crises circulating the United States, right?  I'm certainly not a union appologist- but let me offer a second solution.

A revenue bubble caused by housing policy caused the state budget crises.  It began with a new innovation in the mortgage industry- the mortgage backed security.  Back in the 1980's- savings and loans would take deposits from customers and then offer mortgages from those deposits.   However, this limited the number of loans that could be made (at least in theory).   Every loan required a proportional amount of money in reserve.   Securitization of loans changed this.  Through securitization, loans could be sold on a market.   Once loans were off the books- and into the hands of a 3rd party- lenders could issue more loans.  They quickly found out that they could make more money selling loans than they could holding them.   As these loans became more numerous- politicians were asked, then asked again, to regulate them.   Neither Republicans nor Democrats wanted any part of this- as to do so would limit home ownership rates.   Instead, they basked in the glory of an accelerating housing market.   More and more people were realizing the American dream. 

As the housing market accelerated, ratings agencies- who were tasked with rating the newly securitized debt.   However, these industries quickly succumbed to the allure of money- rather than the nitty gritty work of effectively analyzing this debt.  Banks came to ratings agencies expecting AAA ratings (the highest rating).   If Moody's would not give it to them, they went to S&P, and vice versa.  This quickly became a conflict of interest- for if ratings agencies wanted market share- the path was to keep the banks happy.   Before long, nearly every basket of loans was AAA, creating what was essentially a false demand for more mortgages.  A bubble.   Standards shot- the banks felt free to loosen their credit standards.  If every loan could be sold in a AAA basket-  it didn't matter who they gave a loan- no matter their credit worthiness.   The loans were easy to sell- and with a AAA rating- they sold at a premium price on the market.   The house of cards was stacked.

The housing market exploded- and nearly everyone benefitted.  Although the revenue bubble was not caused by public sector unions- they certainly benefited from it in the short term.   It's funny now that some people blame unions for bankrupting state coffers.   As if the money that went toward salaries of unionized employees would not have gone somewhere else.   Even my 3 year knows that no matter the size of the cookie- he had better eat it- lest someone else come along and take it from him (that would be me).   I do know of one state that put money aside for the recession- Montana.   Good for Montana.   Smart.

The point here is that collective bargaining was no more the cause of the state deficits than it was the cause of the state surpluses which preceded it.   To cast collective bargaining as the problem- as is currently being done in Wisconsin- is nothing more than politics.  The public sector will be forced to take less money now- just like they got more money when states were fiscally strong.   But to point the finger to the collective bargaining process- is scapegoating- not problem solving.   I think we all deserve much more of the latter.

And if we want to have a debate over collecting bargaining- or giving people choice when joining a union- let's have that argument.    But let's have that argument over the merits.    It could prove a much more useful dialogue than what is going on now.   And perhaps we could all be made better off- I nominate the governor from Montana to lead the discussion.

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