Money Makes Us Crazy

With the world watching and waiting for Wall Street to pay out record bonuses and the populists and free market forces waging an unending war of words over banker compensation, it’s time to think about how government pays itself. Pretty, pretty, pretty good, I’d say, echoing Larry David, pretty, pretty, pretty good! But first let me say I thought surely I would never say a word about the banker compensation controversy. Stigmatized by having worked on Wall Street all those years, I thought anything I could say would be discounted up front. For one thing, I don’t expect main-streeters to appreciate that research and females tended to be a ways down on the food chain, or that adjusted for the cost of living in NYC, the absence of company retirement benefits and the extreme variability possible from one year to the next, total comp for worker bees wasn’t all that plush. They just see the sensationalized bonus numbers in the press and go ballistic. And for another, having had a birds’ eye view of two subprime market collapses (the first, in 1998, was largely the consequence of the liquidity crisis) and the manufacturing- housing-loan-securities crash (that dress rehearsal for the recent neutrino bomb subprime cataclysm was the outcome of greedy sloppy underwriting plain and simple), I am not shy about telling people that performance bonuses to “producers” (the guys at the top of the food chain) reinforced the behavior that generated the disaster. If you pay people more to sell trash than to sell sturdy, new stuff, they will sell more trash. And the more you pay them, the more they will sell. The next thing you know you’re paying people enough to buy a new Porsche every year (and junior producers to buy the used ones), to stock their ponds with trout, and build new extra houses both in Park City and the Hamptons. And they’re making trash loans faster than the Chinese can add value to plastic, wood or metal. As you see, compensation is something I can only annoy someone talking about. But last Christmas eve my financial advisor tipped me to a post on government pay at Bill Bonner’s Daily Reckoning (his other Christmas gift was a little more bad news about what I had once called “my portfolio.”). Quoting data from the Cato Institute, the site complained that average federal pay and benefits are double those of employees in the private sector. This is “why Washington and suburbs are the highest priced housing in the country.” (If you were wondering, there’s the real estate tie in! And there might be another reason for metro D.C. home prices and sprawl: the armies of lobbyists earning even more than the government can pay them, all requiring domicile. But I digress!) (Lest you think I am covertly tea-bagging, let me explain that I express my patriotism in simple acts of citizenship like obeying traffic and litter laws, voting and paying taxes. Pretty sure my advisor feels similarly. There are things government can do for us.) Let’s give DR’s numbers fresh internet exposure: the gap between average total compensation between the government and private sectors grew rapidly over the last decade, from 66% more at the start of the decade to 100% more. (And I checked on the website of the Bureau of Economic Analysis, the government agency that collects this data: the numbers of federal, state and local workers has increased as well!) In addition to Cato numbers, DR quoted USA Today analysis that “the number of Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recessions’ first eighteen months.” That does included overtime pay and, yes, bonuses! Best paid – the Department of Defense civilian employees. The number earning $150,000 or more went from 1,868 in 2007 to 10,100 in June 2009. When the recession started just one person in the Transportation Department earned $170,000 or more, but eighteen months later, 1,690 employees earned more than $170,000. I couldn’t find the post my advisor sent me, but I did find the apparent source of the federal data on Cato’s site. Go there for easy-on-the-brain graphics of average wages and average total comp, see with your own eyes the growing gap between government and private. Says Chris Edwards, author of the Cato post, “The George W. Bush years were very lucrative for federal workers.” How could it happen? Edwards explains, Members of Congress who have large numbers of federal workers in their districts relentlessly push pay raises for them. Interestingly, Edwards provides links to several updates to the original posts as well as BEA and other data, and websites with furious comments from federal employees. To which he responds to claims that he distorted the data somehow, Edwards responded that it comes straight from BEA, and the most he does is divide total compensation by the number of employees receiving it. However, he notes that this data “is usually overlooked by the media because I don’t think the BEA puts out a press release on it.” (Think dear readers how much of what you receive as “news” is simply press releases hashed by dead-line harried reporters.) Critics complained that federal employees are highly educated, doing more sophisticated tasks than the average private sector employee. True, responds Edwards, but that’s why he focuses on the long term trend. Did the composition of the federal workforce change enough between 2000 and 2008 to justify such a big gain in compensation relative to the private sector? Plus, the “voluntary quit rate” in the federal government is a third or less that in the private sector. That says Cato’s Edwards, is a “market test” of how attractive government compensation is. In other words, if federal employment did line up – apples to apples – with private sector, the quit rates should be more or less equal. Edwards took another stab at the complaint “federal workers aren’t burger flippers” in a subsequent post. First of all, some do perform highly professional work and should be more highly paid. But consider the U.S. Department of Agriculture, with about 100,000 workers, whose main work is to administer farm aid, food stamps and other subsidy programs. Check Edward’s retort. It has a great chart of average compensation, 2008, by industry. Workers in 6 categories did better than federal civilian employees: securities and investment, funds, trusts and investments, oil and gas extraction, pipelines transportation and management of companies. The rest – including those in utilities, the military, computers and IT, legal services, performing arts and pro sports, etc etc, on average received less for their labor. Can we hold a hearing and call Congress to task for inflating the federal payroll? (And to go rogue relevant, can we summon the testimony of lawmakers who enabled the deregulation all the way back to the Clinton Administration?) NOTE: Linda Lowell writes a regular column, called Kitchen Sink, for HousingWire magazine. Editor’s note: Linda Lowell is a 20-year-plus veteran of MBS and ABS research at a handful of Wall Street firms. She is currently principal of OffStreet Research LLC.