New York Explained (In One Chart)
We had a bunch of unemployed young adults hanging out in a park who were demonized by the press until they were cleared out by the police. We have a state budget that the Governor says is falling apart. We have a nexus of public employee unions and politicians, the political class, that starts yelling about Goldman Sachs any time anyone brings up the deals they have relative to other people. They desperately want to blame the ongoing collapse of public services on inadequate taxation of millionaires. You have an executive class that hates, Obama, the Dodd-Frank act, and Occupy Wall Street for raising the issue of executive pay, particularly on Wall Street, and calls anyone who wants to talk about it a “socialist” who doesn’t want to get a job, presumably including their own investors.
It’s getting nasty out there, and among the angriest people are those who have in fact become much better off over the past 20 years while most people have become worse off. Here in New York, I’ve found a way to show who’s who and what’s what in one chart, which is linked here (I hope). It shows trends over 20 years for three groups of people – the executive class, the political class and the serfs, along with a couple of causal indicators. I suggest printing it out before reading the rest of this post. You’ll see two lines that track each other almost exactly. One is payroll per worker in the Downstate New York financial sector, adjusted for inflation. The second is the total payouts from the public employee pension funds of the City of New York. Both have soared, relative to what most people earn, and for the same reason – self dealing by powerful insiders at the expense of everyone else.
The chart uses data from a variety of sources, adjusts it for inflation, and puts it into an index in which 1990 equals 100. I’m sorry you aren’t also getting the spreadsheet. The “attachment” function on Room Eight no longer works, and I guess the place the site owners stuck a previous spreadsheet is no longer available, so you’ll have to take my work for it. In the chart, an index score of 250 indicates that the data in question is 2 ½ times its level in 1990.
And that is exactly the peak level for mean pay per worker for those employed in the Finance, Insurance and Real Estate sectors in Downstate New York, according to QCEW data from the New York State Department of Labor. “Wall Street” pay, as it is abbreviated on the chart, soared along with the stock market from 1990 to 2000, with the increase in pay justified by all the “shareholder value” that was being created. Executive pay in general, in fact, soared based on a claim of “shareholder value,” which is one reason financial pay growth has far exceeded pay growth in other industries, and executive pay growth has far exceeded average worker growth in all industries.
Adjusted for inflation, the average pay in Downstate New York’s financial sector doubled from 1990 to 2000, while the average pay of everyone else working downstate put together increased by just 10.0% more than inflation. These trends are reflected by the black diamond and gray box lines in the chart. Meanwhile, the S&P 500 soared to a November peak of 338 percent of its 1990 level by 1999, more than tripling in price adjusted for inflation, as shown in green circles. Over the long run, in contrast, the value of stocks has been found to rise at between 0.5% and 1.0% more than the rate of inflation, which would have implied about at 10.0% gain during those years.
When the stock market collapsed after 2000, and its prior increase was exposed a the result of a bubble and not financial or executive genius, “Wall Street” pay fell moderately from 2000 to 2004 when adjusted for inflation, but never came close to approaching its former level. With wealth threatened, Alan Greenspan slashed U.S. interest rates to 1.0%, and though the pay of most American workers remained weak, the stock market did partially re-inflate from 2002 to 2007. A housing bubble also inflated. The median existing home price in the New York Metro area more than doubled after adjustment for inflation from 1996 to 2005, an increase far out of proportion to the growth of most people’s income in the metro area, as shown by the other green circles, those connected by a black line. And with asset prices soaring, “Wall Street” pay inflated to a new high of 250 percent of its 1990 level when adjusted for inflation, a level reached 2007. That was the peak.
With most savers having lost money on their investments, those in finance and the executive suite could no longer use “shareholder value” as a reason for ever-rising pay. Instead, the executives who sit on each other’s boards and set each other’s soaring pay levels used “peer benchmarking” as the excuse, as described in this expose. With the help of executive pay consultants, each board set executive pay at somewhat higher than the executives in a peer group of companies, who had been carefully selected to justify the higher pay. That increase in pay was then used to justify higher pay for the executives in other companies because “if every company tries to keep up with or exceed the median pay for executives, executive compensation will spiral upward, regardless of performance.”
Most outrageously, after falling in 2008 and 2009 during the height of a financial crisis that led to taxpayer bailouts and hardship for many Americans, “Wall Street” pay started rising again in 2010, recovering to about 220 percent of its 1990 level after adjustment for inflation. In exchange for what?
Meanwhile, how about everyone else in Downstate New York? In total, they appear to have done better than in most of the country, as mean payroll per employee increased about another 10 percent to 119 percent of its 1990 level by 2010. Nationally, most workers fell behind inflation from 2000 to 2010, but that is probably true in New York as well, because “everyone else” in this compilation includes plenty of non-financial members of the top 1 percent. Still, those in most of the country have fared worse, which shows why New York City remains an attractive destination for new college graduates.
Because of an industry classification change and the data that is readily available, I wasn’t able to compare public and private sector workers among everyone else from 1990 to 2000, but I was from 2001 to 2010. In the former year, the mean government payroll per worker in Downstate New York was $57,258 (in $2010), slightly above the $56,521 for all private sector workers outside the financial sectors. And in 2010, the mean government payroll per worker in Downstate New York was $59,639, again slightly above the $59,138 for all private sector workers outside the financial sectors. While I don’t have the data handy, moreover, from what I can remember the mean payroll per worker for government employees was about the same as for private sector workers outside finance back in the 1990s and late 1980s too.
So New York’s public employees are the 99 percent? Absolutely not! They are the increasingly rich too, but in a way that is more readily hidden and they’d just as soon not discuss while taxes are rising and services are being cut to pay for it.
Take a look at the red line with red triangles showing total inflation-adjusted payouts by New York City pension funds from 1990 to 2009 according to data from the Governments Division of the U.S. Census Bureau (the data was not collected in 2003 due to budget cuts). It follows the line for Wall Street pay almost exactly! By 2000, New York City’s pension payouts were approximately double their level of 1990, after a series of big leaps corresponding to retroactive pension enrichments passed by the state legislature in Albany. Just like Wall Street pay.
And once again, rising stock market values were used as a justification. Just assume the S&P 500 would continue to soar (even if the dividends paid on those stocks did not), the public employee unions argued, and they could grab more and more years in retirement on better and better terms (with an inflation adjustment, and pensions based on the last year’s pay rather than the last three to allow more pension spiking, approved in 2000), and devastating consequences would not fall on everyone else. In fact, even when the rules weren’t being changed to allow everyone to retire earlier or at higher payout levels, a series of one-time incentives was offered to allow older workers a “one-time” chance to retire earlier or with higher pensions. One was passed just about every year in the late 1990s, but the biggest was in 1995. These pension “incentives” were held to “save money,” but they caused the amount the pension plans had to pay out to soar.
Across the country, similar retroactive pension deals for public employees were enacted through the 1990s, even as most private sector workers were having their own retirement benefits ratcheted down in each and every downturn starting in the early 1980s (when most private sector firms that had pensions shifted to 401Ks). And across the country, the soaring cost of those pensions is destroying public services, with a propaganda machine in place to divert people from the cause. Take this article for example. “Unlike wages for teachers, CEO salaries have been soaring in recent years. Forty years ago, the average public school teacher earned $49,000, adjusted for inflation. That’s a raise of a whopping $150 a year for 40 years, or about one quarter of 1% annually… As it may have occurred to you, public school teachers are actually part of the 99%.” What isn’t mentioned in the article? Pensions!
Meanwhile, according to Census Bureau data, the total inflation-adjusted payroll for the public employees of the City of New York plus New York City Transit was 125% of its 1990 level in 2009, after adjustment for inflation. That’s a significant gain in real cash pay, and a greater gain in cash pay per worker, as the number of such workers actually lower now in New York City than it had been in 1990 (it is far higher in the rest of the state), so the pay per worker is up by more than 25% over those years.
New York is different than the rest of the country, in that like the pay of the top 1 percent, public employee pensions have continued to get richer and richer in the years since 2000. Some of that is automatic, as longer lifespans for those with expensive taxpayer-funded health insurance would be increasing the years public employees collected pensions even if they didn’t get to retire even earlier. But the New York State legislature has continued to pass additional pension enrichments every year, even after the stock market bubble burst. A massive one for New York City teachers passed in early 2008. A bill to allow NYC police officers found guilty of misconduct to collect their pensions if they have been on the force 20 or more years was signed this October.
And these additional retroactive pension deals are justified by…nothing. They are simply not discussed. And you want to have some nastiness directed your way, just bring up the soaring cost of those pensions and ongoing public service cutbacks at the same time. Basically, unionized public employees and aging public officials they control refuse to ever think about what they take out and what the rest of us are forced to pay in at the same time. They are a closed club, and compare themselves only with themselves when they aren’t comparing themselves with Goldman Sachs (what about those millionaires!) And like the executives who sit on each other’s boards, the state legislators and their friends and relatives benefit from many of the pension deals themselves.
And so the payouts of New York City’s public employee pension funds have continued to soar. They reached 250 percent of their 1990 level (in inflation-adjusted 2010 dollars) in 2009. The same peak level as Wall Street pay, relative to 1990. New York City budget documents show even greater gains in the years since. In exchange for what? In exchange for nothing.
To understand the disaster we are facing, take a look at the second line with red triangles, the ones connected by black lines. That line represents the amount of money New York City taxpayers put into the city’s public employee pension funds each year, adjusted for inflation. It was probably an adequate amount in 1990, when it was at 12.4% of payroll, based on the pensions most recently retired and soon to retire NYC public employees were promised at the time. That amount, increased each year for inflation, should have been put into the pension funds. And the retirement benefits should have been left as they were, as they were far richer than what most people get.
Instead, in the years from 1991 to 2001, as the inflation adjusted payroll of the city’s public employees rose, and pensions were repeatedly retroactively enriched at an irrevocable, ever-repeating ever-growing cost of $billions, Mayor Giuliani cut the city’s inflation-adjusted contributions to its pension funds. If the city taxpayers had maintained their 1990 contribution levels adjusted for inflation, they would have paid in perhaps an additional $11 billion (in 2010 dollars) from 1991 to 2003. Basically, all those pension deals were described as “free” because they were not paid for. All that money must now be made up, with interest. All the formal bond debts run up during those years is in addition.
I have some good news and some bad news about this taxpayer pension debt. Pension contributions have soared so much in the years since 2003 that NYC taxpayers had already contributed an extra $14 billion, above what would have been their ongoing 1990 payment level, by 2009. If today’s taxpayers hadn’t paid back all the money Giuliani-era taxpayers shorted the pension funds by 2009, they certainly had by late 2011. That’s the good news. Unlike in other states, taxpayers have not shorted the pension funds in New York City. We had paid a terrible price to fund them – higher taxes, inferior public services. The public employee unions have no basis, none at all, to claim that what has happened, and will happen, is the people’s fault, and they will be getting what they deserve.
Now the bad news. We have not paid one dime, not one dime, to get out of the massive hole created by all those retroactive pension deals between the unions and state politicians over all those years. Not one cent. By 2009, the taxpayer pension contributions for New York City were at 250 percent of their 1990 level, after adjustment for inflation. That did no more than match the fact that pension fund payouts were also 250 percent of their 1990 level in 2009. In other words, what we are paying now is what we would have to pay if we had been vastly more each year all along, and the pension plans were 100 percent funded. And since all those retroactive pension deals continue to contribute to rising costs, the amount needed to break even goes up every year. In 2008 and 2009, city taxpayers were contributing just enough to break even given all the retroactive enrichments.
Meanwhile, the New York City pension funds are $billions and $billions in the hole. Because services were not slashed and taxes raised to the moon in the 1990s and 2000s as the pension enrichments were done. All that will have to be made up too, with interest. By whom, and how? By eliminating public services? Buy higher taxes? Does everyone understand that public employee pensions are exempt from New York’s state and local income taxes, no matter how high income is? Will anyone talk about how unfair that is?
New York City’s public services are being destroyed at the nation’s highest state and local burden as a share of income. And what do the city’s union leaders have to say to the rest of us? The resent the fact that they are not getting more, and we will be getting less unless they do get more.
Now I want Mayor Bloomberg and Governor Cuomo and all those evil parasites in the state legislature to ask themselves this question. Do those in the top 1 percent in general, and in the financial sector in particular, deserve all the extra pay they have been getting compared with everyone else over the past 20 years? Have they earned it, or just taken it? No, they have not earned it. New York’s tax base is now dependent on the overpaid, arrogant, entitled employees of a shrinking number of large financial companies that have ripped off both their customers and their investors for years and years, and have gotten government bailouts at the expense of the less well off. Does that remind you of anything? How about the big three in Detroit. What will happen to the New York City and New York State budgets if their pay is cut back to what they actually deserve? And isn’t it inevitable.
Note as well that the S&P 500 is still double its 1990 level after adjustment for inflation (or was last year, and is probably about the same now). But it isn’t worth it either. Not with a dividend yield of under 2 percent. What would happen to New York City’s pension funds if the S&P 500 were to fall back to what it is worth? In reality, that is irrelevant. Because since pension costs are ongoing, and ever rising, the city can’t sell off its stocks, net, to pay benefits. It has to pay benefits out of the income. So that 2 percent dividend is all the pension funds actually get. Meanwhile, those funds assume they will make an 8 percent return, which is a fraud.
The other 1 percent (or perhaps 4 percent) is taking more and more from us, in years spent not working on more favorable terms, and giving us less and less in return. What will they say about this after taxes are raised yet again? Tax the $millionaires again?
Much has been made about the declining middle class. The Executive Class has certainly contributed, but their business model of paying the serfs less but selling them more has just hit the wall, and is in ruins. Their wealth would be vanishing into thin air were it not being pumped up by increasingly broke governments. But even in the worst case, in terms of their personal standard of living, the “middle class” in this country would certainly be able to live the “middle class” lived in the 1950 and early 1960s, with better health care and better information technology. Small house or apartment. One car or none. Actually keeping the same clothes until they wear out. Using less energy. Etc.
But is something the middle class relied on, something that made the mass middle class possible, that will not be available in the future – decent public services in exchange for affordable taxes. Because taxes will be going to those who spend decades in “retirement” with no obligation to do anything for anyone else at all, because they have the political power to make other less well off people pay. (Or because they had it, and the deals they made with themselves are irrevocable).
The serfs need good public schools and public colleges and universities to move into and remain in the middle class. They rely on public parks, public libraries, public cultural events, public health, public sanitation, public streets and, in NYC, public transit. The Political Class has destroyed the future of these, I guess, because in its greed it just couldn’t help itself.
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