Obama Wants Federal Pay Capped

Yesterday, President Obama asked Congress to cap the annual cost-of-living pay increases that federal employees receive at 2%. That's a pretty bold move, considering it would be the lowest increase since 1988, according to USA Today. I'm actually pretty impressed by this move, as it makes sense on many levels.

The most obvious goal of curbing federal pay is budget control. The President has come under significant fire over the past few months for soaring deficit expectations. This move serves as an effort to surgically reduce spending related to federal salary growth. The White House says that this move would save about $20 billion next year. A drop in the bucket, given this year's estimated $1.6 trillion deficit, but some cost savings is better than nothing.

While the federal government generally doesn't resemble anything close to a private business, limiting employee pay increases makes sense from a business standpoint. It's no secret that many people in private industry are being asked to take salary cuts this year, given the economic turmoil. Still more will fail to get a raise they might have expected under better circumstances. Private sector wages are only up by around 1.5% for the 12 months ending in June, according to the Bureau of Labor Statistics. Shouldn't federal employees also feel the pinch? Obama must think so.

The move also makes economic sense. In the 12 months ending in July, consumer prices have fallen 2.1%, according to BLS. That means that, on some level, that 2% cap is really more like a 4.1% cap, since that raise will go further than it would have without deflation. In fact, with the usual level of low inflation, the regularly scheduled raise would have been smaller in real terms. As a result, economically speaking, many of these workers will be better off than the mere 2% raise suggests.

Of course, that will serve as little consolation to any federal workers who hoped for a lofty raise this year.* But this is a time in economic history where government workers probably have few options if they want to move into the private sector. With unemployment at 9.4% in July, most companies aren't doing much hiring. Private sector jobs are also a lot riskier at a time like this than government jobs. As a result, the Obama administration might realize that few government workers will have the ability or risk-adversity level to leave, despite limiting their pay increase.

Of course, this proposal could end up going nowhere: Congress must agree to it. USA Today explains:

Presidents Bill Clinton and George W. Bush proposed lesser increases three times. Congress, which must approve the plan, has not granted less than 2% since 1988.

But for the reasons I explained above, I certainly hope Congress complies. The only legitimate reason I could see for their not agreeing is if they didn't think the cap was low enough. Even a 1% or 1.5% cap might be seen as reasonable given private sector salary growth, and would save the government more money. I just hope Congress will realize that limiting federal pay increases is utterly sensible. The President should be praised for taking the initiative to try to do so.

*For more color on why federal employees are angry about this change, check out this piece over at governmentexecutive.com.