The Pernicious Income Inequality of Federal Employees

In an article from CNS News dated December 16, 2016, we have the new but predictable Census Bureau statistics on median income for households in counties of the United States.  The first four richest counties are, …, you guessed it, all in the Washington, DC area, and range from about $99,000 per year to $122, 000 per year (see http://www.census.gov/did/www/saipe/data/highlights/2015.html).  That is more that twice the United States Average of around $55,000.  Nine of the top twenty counties are in the DC area.  Those are the hard facts.  How do we interpret these and what are the implications?

The first and most obvious explanation for the facts is that the level of income is increased by the presence of so many Federal employees or jobs related to the federal government (for example, lobbyists).  However we also know from the same set of statistics that 31% of employees in these four counties are Federal workers, we might say bureaucrats.  So the high incomes are likely “caused” by Federal salaries, while much of the rest of the high incomes can be accounted for by employment related to the Federal government.

Some might say, so what?  And in fact I have made arguments on this blog that inequality of income is in itself not an issue.  The issue is basic sustenance or capacity to flourish, not the gap between the highest and lowest paid group of individuals.  However, I was speaking to a context in which I assumed that the higher incomes were NOT created artificially.  And here is the difference between economic demand and political demand.

Labor costs, that is, salaries and benefits, are generally determined in market settings by the willingness and ability to pay workers some compensation as well as the supply of appropriately trained workers for some type or range of work.  The level of that compensation is based in turn on some anticipation by the prospective employer that the potential employee will add a certain value to the employer, that the worker will be productive in other words, and at an acceptable level or above.  In addition, the workers themselves have some “power” to determine their salaries, based on their own skills and abilities, as well as the supply of their numbers in some given market.  There is some bargaining going on.  I am aware that some do not believe that workers have any bargaining ability, but market studies as well as common experience disprove that in most labor markets (though not all).  So supply and demand determine incomes, for the most part.  This is economic demand at work, along with supply.

However, government can skew this process.  Let’s first consider supply of Federal employees in terms of their specific skills.  In general, they possess no set of specific skills that would make them much more valuable than the same kind of skills employed in the private sector.  There are exceptions, for example, in the defense area (not uniformly) or some kinds of work like economist, engineer, etc.  But in general the Federal workers are bureaucrats in the sense that they are either clerks or managers in a chain of command that can be very large but whose positions do not require skills very different from private firms.  In the private sector some of these people would be nicely compensated, but not at the level we see in DC.  By the way, studies have shown these kinds of differences are real.  Some years ago, E. S. Savas, conducted a comparative study between private garbage workers and public trash haulers.  He found that the public haulers, whose work was exactly the same as the private workers, made 50-100% greater income in the same region (all potentially skewing factors were controlled for).

On the demand side, Federal workers are hired based not solely but largely on the basis of political demand.  How much of this or that Federal good or service is demanded by some sector of the population and then by legislators and then by agency heads themselves–and finally by the Federal employees (at times through their public sector unions)?  Those and not market demand determine both how many will be hired and how much they are paid.  William Niskanen was a pioneer in showing that bureaucracies tend to want to maximize their budgets, not profit, since they cannot make profit as such.  But they can get more funding from Congress, which often defers to them.  This extra funding can go to better headquarters, nicer offices, more employees and higher salaries.  And if the heads of agencies see their own bureaucracy as their clientele, over the public, they are only too happy to advocate for higher salaries.  Congress and the President have little incentive to stand in the way.  Federal employees themselves have every incentive to demand higher compensation, and since competition for the service they provide is virtually non-existent, they are in a position to effectively attain their demand for higher pay.

But in the end, who pays for this relative opulence?  The taxpayers of the United States.  But their individual (and coerced) tax contribution to these salaries is small relative to the benefit to the concentrated group of employees–who themselves will also advocate for higher salaries.  Thus it is difficult to gather sufficient opposition that is effective enough to stop the artificially high compensation.  In addition, it is difficult to measure the output of a good or service provided by Federal government.  Consumers are not in a good position to see immediately how well or poorly their “public servants” are performing, since they neither can see their actual work nor easily see the output.  The process will then tend to continue, as it has in the past and has especially in the last 20 years or so.

There is also the question of the actual marginal productivity of the Federal bureaucrats.  Do we the taxpayer attain benefits as the income of the bureaucrats increases?  Is what these bureaucrats do even desirable-would people pay for it in a market?  Would their output even be demanded in a market?  Now I fully understand the concept of public goods.  These goods, defined correctly (see James M. Buchanan, The Demand and Supply of Public Goods, 1968) may well require some governmental action.  But even so, much of what the Federal government does is arguably not public in any technical sense, but has arisen due to that political demand mentioned earlier.  Moreover, even for those goods that are really public, are we producing them in the appropriate quantities and spending the right amount on them?  It may well be the the Federal bureaucracies are not concerned much with such questions, but rather with expanding their “empires” and the reach of those empires (mission creep). In the process, income for those working in those bureaucracies is raised artificially and coercively.

This kind of inequality is unjust.  It is also the kind of inequality that will cause citizens in “flyover” country to want to “blow it all up.”  They may have had some vision of that in this last election.  They may perceive the elites as living high at their expense while those same elites seem to care nothing for the their own trials.  Even if the voters could not make much connection between the high Federal incomes and their own plight, the problem remains.  This contributes to the phenomenon of “coming apart,” the growing rift between the elites of the East and West Coasts, and the perception that these elites care nothing for nor care to understand the plight of those in the rest of the nation.

“Draining the swamp” involves more than just eliminating a few regulations here and firing a few top employees there.  A fundamental re-thinking of what the Federal government ought and ought not to do is required.  And Congress must take back its oversight power and begin to rein in agencies.  And Congress itself needs some formal limits to keep it honest, as it has little incentive to reduce spending.  There is more I could say, but I have gone too long already.