Why Wisconsin matters to global financial markets
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Martin Hutchinson
WASHINGTON — It’s hard to see how a bucolic Midwestern lakeside college town can matter much to the global financial markets. Yet while Madison, Wisconsin is no Athens or Tripoli, it has become ground zero for a pitched battle between public sector unions and cash-strapped governments over collective bargaining. If the state’s governor can end the practice he may set a precedent for fiscal reform that spreads nationally — and to Washington.
Employee pensions and healthcare are the major long-term fiscal problem for most states and the federal government. Trouble is the traditional negotiation between public sector unions and politicians is fraught with moral hazard: Politicians who are often buoyed to public office through the support of the unions are only too happy to make short-term promises to them that create huge fiscal difficulties in future years.
Wisconsin, whose economy is nearly as big as Greece’s, faces a problem typical of U.S. states: a substantial budget shortfall and a long-term actuarial deficit in state employee pensions and healthcare. Republican Governor Scott Walker’s proposed legislation addresses both problems. He would make state employees pay half their pension costs and 12.6 percent of their medical costs, both below the percentages prevailing in the private sector. While painful, state employee unions appear willing to accept those terms.
The reason Walker’s budget proposals have sparked raucous street protests in Madison is his proposal limiting state employee collective bargaining to pay but not benefits. Whereas private sector wage negotiations involve two parties whose interests are clear and diametrically opposed, in public sector negotiations this is not the case. Indeed, state employee unions may form a substantial part of the governing coalition which elected the politicians with whom they are negotiating, leaving taxpayers out in the cold.
True, Walker’s proposals are imperfect; they don’t include police, fire and state patrolmen, who in principle should also be subject to the same disciplines as other public employees. He also proposes that pay rises above inflation should require a referendum; that’s draconian, as state employees should reasonably expect to share in their state’s prosperity. But as Walker’s proposal offers a solution to the state’s budget problems without endless tax increases, what happens in Wisconsin may not stay there.