Southern Bread

At a time when the economy is literally hanging in the balance, we get this story from USA Today:

At a time when workers’ pay and benefits have stagnated, federal employees’ average compensation has grown to more than double what private sector workers earn, a USA TODAY analysis finds.

Federal workers have been awarded bigger average pay and benefit increases than private employees for nine years in a row. The compensation gap between federal and private workers has doubled in the past decade.

Federal civil servants earned average pay and benefits of $123,049 in 2009 while private workers made $61,051 in total compensation, according to the Bureau of Economic Analysis. The data are the latest available.

The federal compensation advantage has grown from $30,415 in 2000 to $61,998 last year.

…

What the data show:

• Benefits. Federal workers received average benefits worth $41,791 in 2009. Most of this was the government’s contribution to pensions. Employees contributed an additional $10,569.

• Pay. The average federal salary has grown 33% faster than inflation since 2000. USA TODAY reported in March that the federal government pays an average of 20% more than private firms for comparable occupations. The analysis did not consider differences in experience and education.

• Total compensation. Federal compensation has grown 36.9% since 2000 after adjusting for inflation, compared with 8.8% for private workers.

–Dennis Cauchon, USA Today

While it’s understandable that stats like this will make your blood boil, it’s more important to understand what’s going on with these numbers. Specifically, why is this “wrong.” It’s not enough to just get mad that somebody is making more money than you are. And, while legitimate, it’s also not enough to get mad that so many public workers appear to be such lazy freeloaders. You have to give reasoned arguments as to why it isn’t right for government employees compensation to be that high. And, that argument happens to be an economic one.

Why is it not ok for a mid-level beauracrat to make $100k, but it’s ok for a mid-level V.P. at Microsoft to make $100k? The principle reason is that Microsoft is actually giving you something that you have determined is valuable to you in exchange for your money. Remember rule number one in market economics: value is subjective. When you make a transaction with a private institution, it’s because you think that the good or service you’re getting in exchange benefits you more than the potential goods and services you are foregoing by giving them your money. Another way of saying it is that, at a particular moment in time, you’d decided that the particular good or service you are purchasing is more valuable than the exchange potential of the money in your pocket.

Because of this, a privately employed individual’s salary is based on how well he satisfies the consumers of his goods and services. That means that, all things being equal (i.e. in a truly free market), private employment wages are linked directly to consumer satisfaction. Obviously, this isn’t the case with public employees. Government wages aren’t reliant upon satisfying the consumer. Instead, government entities increase their budgets, and thus their salaries, through lobbying and political entrepreneurship – drawing their funds from taxation and inflation(i.e. theft). There is no connection to consumer satisfaction whatsoever. Indeed, many times when a government office or department does a horrible job, the call goes out to increase that department’s budget. They will say it’s the lack of funds that’s causing them to do a poor job.

I think all of this is probably pretty obvious, but it helps to keep a proper perspective. The problem with government salaries in general is not how much they are(obviously the lower the better), but the fundamental lack of connection to how they produce anything of value.

A perfect example of all of this is my wife’s recent license plate payment. We bought a van a couple of weeks ago for about $6000. It’s an older van with a lot of miles, but it meets our needs. Essentially, we decided that, at this time, having a van was more valuable to us than any other potential purchases we could make with $6000 dollars. Now, fast forward to two weeks later. My wife takes the van down to the DMV. They inform her that she must pay them $400. That’s $58 for the license plate, $240 for sales tax, and some other fee crap. Could she have told them, “You know, $400 seems a bit steep when there are potholes all over the road on the way over here. I think I’ll just go down the street to your competitor and see if they can give me a better deal?” Of course she couldn’t say that, because the DMV is a monopoly. There is no competition by fiat. If we didn’t pay them the $400 I would eventually wind up in jail.

In this way, government wages are completely devoid of any job performance evaluation, because there’s nothing to evaluate. You’re job consists of showing up, demanding people give you their money and then going home. Government wages aren’t just bad because they are high. They’re bad because they exist at all.