US states: Frontline of debt crisis has European echoes

By Chris Cermak Mar 3, 2011, 12:21 GMT

Washington - Demonstrators in the US state of Wisconsin have likened their cause to the pro-democracy movements in the Middle East: What began two weeks ago as a protest against cuts to public worker benefits is gaining momentum and spreading to other states.

Yet a better comparison might be the ongoing debt crisis in Europe, where the threat of government default has sparked bailouts and drastic budget cuts. Protesters have taken to the streets in Ireland, while demonstrations have become violent in Greece.

Most economists agree the United States is not yet in the same dire straights as the euro zone. Despite a budget deficit forecast at 1.65 trillion dollars this year - nearly 11 per cent of economic output - the US has the luxury of being a safe haven for reserves, giving it more leeway to run a deficit than most other countries.

Yet there is a much different story at the regional level. US states are legally required to balance their budgets, and many state governors face severe budget crunches that are forcing them to ponder drastic cutbacks in social services, public workers and salaries.

Wisconsin, the heartland of the mid-west, has become the central battleground. Its Republican Governer Scott Walker this week laid out major austerity measures, including what amounts to an 8-per-cent pay cut for the average public worker, to close a 3.5-billion-dollar budget gap.

But Walker has gone one step further, using the budget crisis to seek legislation that would strip most public workers of their right to bargain collectively for health benefits, pensions and salary increases that go beyond inflation.

Thousands of angry workers have staged a sit-in over the last two weeks in the Capitol building in Madison, the state's capital. Democratic lawmakers have literally fled the state in order to prevent the Republican-controlled legislature from passing the bill.

Obama has said the Wisconsin bill smacks of an 'assault' on labour unions, which have long been aligned with his left-leaning Democratic Party. But Walker says limiting bargaining rights is the only way to enact the kinds of cuts in public worker compensation that will bring his state's fiscal house in order.

'The facts are clear: Wisconsin is broke,' Walker said Tuesday night.

The stand-off has provoked a national debate over the role of labour unions, the pay of public workers, and how to deal with crushing state budget deficits. It is a debate that is even more immediate than Obama's budget battles on the federal level.

'The states right now are where the biggest conflagrations are,' said Daniel DiSalvo, a professor at City College of New York. He said many states faced massive structural shortfalls from the cost of rising retirement and health benefits for their public workers amidst falling revenues.

Walker has also played to public sentiment that government workers have things too good, enjoying generous and guaranteed pension and health benefits. Wages have also risen about twice as fast for public workers as for private counterparts over the last decade.

This comes as the fortunes of public and private unions have shifted. About one-third of public employees are now union members, up from about 10 per cent in 1960. Private-sector union membership has gone in the opposite direction, falling to just 7 per cent.

Yet whether public workers really have the better lot is a point that is hotly debated among economists, and essentially depends on which numbers you use.

A study by Jeffrey Keefe of Rutgers University found that public workers on average received slightly more in total compensation than their counterparts in the private sector. Yet public workers are often better educated, and Keefe found that workers with a high school degree or more earned a better living in the private sector.

Other states are watching the Wisconsin budget battle closely. Protests have spread to nearby Ohio and Indiana, where Republican lawmakers are considering similar legislation to limit the bargaining rights of public workers.

But, as in the eurozone, DiSalvo says the real concern lies with budget shortfalls in the country's largest states, where the threat of a debt default - or the need for a federal bailout - could have major consequences for the United States' overall economy.

'Wisconsin and Ohio are bad in the sense that they're like Greece and Ireland,' DiSalvo said in an interview. 'But the big economies like New York and California, that would be like France and England.'

Yet DiSalvo said that the fight over union rights may provide 'cover' for states like California and New York to tackle public wages. He points out that Wisconsin unions have offered to accept wage cuts in a bid to avoid the curb on bargaining rights.