Federal pay freeze: why Obama is following path trod by states, businesses now

Obama's proposed federal pay freeze is an idea whose time has come to a sector whose turn has come. It's also a nod to the GOP and recognition that deficit-cutting is a priority for the public.

President Obama's proposed pay freeze for federal workers underlines a message that was already signaled in national elections this month: Leaner times are coming to Washington.

In a way, federal workers are the last to be hit by the aftershocks of America's deepest recession since the 1930s. Private-sector companies took emergency cost-control measures during the recession. State and local governments have been similarly cutting costs – including with freezes on hiring and pay raises.

IN PICTURES: Inside President Obama's White House

Why is Mr. Obama calling for pay restraint now?

The president's proposed two-year freeze, which would require congressional approval and would not affect the military, reflects a shift in political and economic conditions:

• A changed public mood. When Obama took office, the obvious imperative was to stop a freefall in the economy, and economists were widely calling for federal stimulus spending at a time when the private sector was spending less. By this fall, as congressional elections rolled around, the public mood had shifted considerably, with curbing deficits outweiging stimulus as a priority.

• A natural cycle. It's not unusual for private-sector employers and consumers to feel the pinch of a recession first, while the impact on the federal government is delayed. Congress sets budgets on a slower timetable, and the Treasury's ability to borrow cushions Washington from the impact of falling tax revenues.

• Fiscal reality. Even before the election drubbing, with Republicans taking control of the US House of Representatives, Obama said a fiscal reckoning was drawing near. Earlier this year, he set up a bipartisan commission to define ways to reduce federal deficits and stabilize the nation's public debt as a share of gross domestic product over the next few years.

At best, restraint on federal-employee pay is just a small part of any long-term budget fix. And a two-year freeze is just a temporary step. (Obama said the move would save $28 billion over five years.)

Obama cast his announcement Monday as part of a broader effort to put the federal budget on sounder footing.

"Small businesses and families are tightening their belts. Their government should, too," Obama said. He said the pay freeze represents an imperative that deficit reduction involve "sacrifice ... shared by the employees of the federal government."

Politically, the proposal also represents a willingness to reach out to Republicans, by embracing an idea that they support and that liberals oppose.

In the private sector, many companies instituted wage freezes or outright cuts in pay benefits during the recession, says John Challenger, a labor-market expert at the outplacement firm Challenger, Gray & Christmas in Chicago.

"The government is now facing the same kind of crisis" that many firms in the private sector faced a couple of years ago, he says.

While some private employers still face severe financial stress, the typical firm this year is raising pay by about 2.5 percent, Mr. Challenger says.

Many US workers have experienced stagnant or declining wages in recent years, relative to inflation, in part because of global competition. Now the public sector may be entering a period when pay will be under pressure in new ways – as federal or local governments struggle to finance debts and cover expenses.

Consider what states have already been doing: Raising eligibility ages for pensions, instituting "furlough Fridays," putting hiring on hold, or laying off employees.

Pay freezes have been another common strategy for states since the recession began to bite. Florida's current budget (for the 2011 fiscal year) includes no pay raises for state employees. Similarly, Arkansas has put cost-of-living increases on hold. Arizona has moved further still, cutting pay by 2.75 percent for most state workers.

"No one area of the country has been immune" from budget pressures, says Todd Haggerty, a policy analyst at the National Conference of State Legislatures in Denver.

A year or more ago, the big problem for states was plunging tax revenue, due to the recession. Now, although revenues are starting to recover, states are squeezed by the disappearance of federal stimulus funds, and because they've run out of options like tapping their rainy-day funds.

Economists say that, like states, the federal government has a long-term fiscal challenge that will require tough choices on many fronts. A pay freeze, they say, would be just a temporary and largely symbolic step. Obama has asked his deficit commission to report on proposed fixes on Dec. 1.

IN PICTURES: Inside President Obama's White House