I have no doubt that California’s public employees are overpaid.  Their combination of salary, retirement, work rules, and health-care benefit is among the best in the world, and a contributor to California’s fiscal crisis.  It is also true that some of the package has been gained by holding essentially holding California citizens hostage.

Still, their methods do not justify unethical behavior by California.  If we have trouble with public employees’ their negotiating methods and pay package, we change the rules and renegotiate their salary.

We have plenty of economic pain in California, and public employees should share that pain, but holding them hostage is not the way to do it.

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The first alternative is based on the reasonable assumption that Congress does what it normally does, follow the path of least resistance.  The second scenario is based on the administration’s budget proposal.  It is an easy, but grim, read.  The takeaway is that the CBO budget forecast is the best possible outcome.  The money charts are on pages 20, 21, and 22.

One possible criticism comes from evidence that tax rates may be irrelevant to federal tax receipts.  The Wall Street Journal recently ran a very interesting chart indicating that federal receipts are 20 percent of gross product, no matter what the tax rate.  If that is true, the scenario with higher tax rates would generate the lowest gross product and hence lower tax receipts.

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I believe the probability of at least one sovereign default is disturbingly high, and the financial sector will be hard hit if one or more sovereign defaults materialize.  Bailouts will only postpone the day of reckoning, and a delayed reckoning will be more difficult.

We’ll be lucky if that is all we see. Multiple defaults are not out of the question, and the riots in Greece show how difficult it is to cut government spending.  Any social disturbances will only increase the economic pain and delay the ultimate recovery.  Multiple defaults too will exacerbate the economic problems.

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There is a long history of these types of stories. When faced with budget cuts, governments usually seem to react by cutting services. So, you see libraries closing, police forces cut back, road maintenance deferred and the like. I used to suspect that this was a way of threatening citizens, in order to get them to approve higher taxes, and that could be true in some situations, I don’t think it explains the frequency of service cutbacks that we observe.

I think of governments as having three options: They could reduce transfers. They could cut public employee salaries. They could cut services.

There are a few problems with reducing transfers. One is that demand for transfer payments actually go up at the very time that governments are most likely to be financially challenged. It is also easy to believe that people working in government, elected or not, may be particularly altruistic and believe deeply that government has a responsibility to reduce inequality. Even if we take the cynical view that people in government are in it only for power, that power would be threatened by, say, videos of someone’s grandmother eating cat food, because some transfer was reduced or eliminated. All this makes it unlikely that transfer payments will be cut, or if they are cut, they are cut from programs that impact non-voters and don’t generate videos, something like mental healthcare for children.

There has been a bit of press lately about how well paid government employees are relative to private workers. It seems to be true that—even after adjustment for education, experience, and the like—public employees earn more in both salaries and benefits than comparable private-sector workers, although individual workers I meet vehemently deny this. If it is true that government employees earn more than their private-sector counterparts, it would seem easy to cut the salary, but we don’t see this. That seems to be because public unions are well funded and they use that funding for political power. No elected official is anxious to take on the public workers’ unions.

So, we’re left with cutting government services. This is unfortunate because it is very difficult to imagine an economic model that would give us the result that any optimizing entity, when faced with a contracting budget constraint, would move to a corner solution, or cut only one of the three options. Most optimizing models would result in cutting each, probably by different amounts.

It is also unfortunate that they are cutting K-12 education. Our system is already a failure, and cutting funds will make it worse. There is strong evidence that differences in education explain much of the recent increase in income inequality. Reducing the quality of K-12 education will increase income inequality. It seems unfair to add this burden to a generation that we are leaving so financially burdened.

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