Why Wisconsin matters to global financial markets

Monday, February 28, 2011
By Paul Martin

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.

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