Originally published May 10, 2010 at www.cliffkule.com.

Government workers are paid much better than workers are paid on "Main Street". It is hard to justify higher government wages even if Main Street is healthy and vibrant. It will be impossible while Main Street is suffering, especially when that suffering is to pay for government that is deeply in debt. How can conflict be avoided when the workers who do the paying earn less than the workers they pay?

"Capitalism means free enterprise, sovereignty of the consumers in economic matters, and sovereignty of the voters in political matters. Socialism means full government control of every sphere of the individual's life and the unrestricted supremacy of the government in its capacity as central board of production management."

Ludwig von Mises (1881-1973)

The credit crisis is forcing consumers to cut back spending and pay back debts. See the chart below courtesy of David Rosenberg of Gluskin Sheff. The chart suggests that this process of "de-leveraging" has only just begun. Governments have moved debts from the private sector to the public sector, escalating the levels of public debt (public debt: a euphemism for the public's burden). The debt has not disappeared. It has simply been moved from one "ledger" to another "ledger". Banks and other special interests that are "too big to fail" have been saved from disaster by being "bailed-out" by governments. Who, in turn, will bail-out" the governments? Martians?

Unsustainable Public Sector Fiscal Path

"Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary..." This quote sounds like it came from an alarmist writer. In fact it is from a recent study from the Bank of International Settlements (BIS) - the central bankers' central bank. The study[1] looks at public sector fiscal policy and public debt in a number of developed countries. The conclusion: "Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability... It follows that the fiscal problems currently faced by industrial countries need to be tackled relatively soon and resolutely. Failure to do so will raise the chance of an unexpected and abrupt rise in government bond yields at medium and long maturities, which would put the nascent economic recovery at risk. It will also complicate the task of central banks in controlling inflation in the immediate future and might ultimately threaten the credibility of present monetary policy arrangements."

The paper presents the following charts showing the unsustainable growth in public debt in these countries:

This Time is Different?

A recent study called "This Time is Different" analyzes the relationships of debt, GDP and inflation with data covering eight centuries. Written by economics professors Ken Rogoff and Carmen Reinhart, a key conclusion is that the more indebted a country is, the more GDP growth drops. More specifically, a government debt/GDP ratio of 0.9 or more, and an external debt/GDP of 0.6 or more are like "points of no return". At these points, growing out of debt burden becomes unlikely. We are very close to this threshold.

The following chart shows quite clearly that when total debt reaches past 90% of GDP, inflation rises and growth goes negative.

Putting this study together with the BIS' study paints a dire picture.... an unsustainable growing public (government) debt... slowing economic growth... and a private sector consumer that is trying to pay down his or her own personal debts, putting a fragile economic recovery in jeopardy,...all putting increased pressure on the public sector (government) to cut spending.

On top of this dire picture is a fall in the level of trust in government. Check out this chart below and click on http://people-press.org/trust/ to see an interactive view of how low trust and confidence in the government has dropped.

http://people-press.org/trust/

Cut Spending or Cut Services?

With such drastic warnings from the central banker's central bank (Bank of International Settlement); with a comprehensive study of eight centuries of government finances saying that the situation is dire; with trust in government so low, it is extremely likely there will be pressure on the public sector (governments) to cut spending. Could these cuts come in government worker's salaries? Would that pacify the private sector that is not paid as much? Would voters rather have their services cut or have government workers take a pay cut?

Government Workers Paid Much Better

With all of this as backdrop, we present to you: Government workers are paid much better than workers in the private sector. This fact is likely to add pressure to cut government spending, especially on wages and salaries paid from the pockets of highly-indebted private sector workers.

In a recent Welling@weeden interview[2], Gary Shilling makes this point: "On average, public (government) employee's wages are 34% higher than in the private sector and their benefits... are 70% higher. They have very lush pensions and retiree benefits, which don't exist at all for many private sector employees." At the same time, the private sector does not want their services cut - police safety, garbage pickups, schools, etc.

How can government keep providing services, but cut costs at the same time?

Why is compensation lower for the private sector than for the public sector? Dr. Shilling shares some insight: "what has happened in the last couple decades is that the private sector has gotten globalized because of fierce international competition and the moving of operations offshore - given global labor arbitrage pushing pricing and wages lower, the private sector has seen virtually no growth in real wages over the last decade".

Have a good look at the following two charts that make the problem clear. One shows "Employer Costs Per Hour" and the other shows the percentage of workers who have lost jobs since 2007:

A few points from a USA Today article[3] mentioned numerous things that could upset the public. A few examples:

1) Federal employees making salaries of $100,000 or more jumped from 14% to 19% during the recession's first 18 months-that's before overtime and bonuses are counted

2) Federal workers are experiencing a boom in pay and hiring during a recession that has cost 7.3 million jobs in the private sector.

3) The Transportation Department had only one person earning $170,000 or more when the recession started. Eighteen months later, 1690 employees had salaries above $170,000

4) The growth in six-figure salaries has pushed the average federal workers pay to $71,206 compared with $40,331 in the private sector.

Consequences - Austerity or Money Printing or some combination of both?

Here is the picture:

1) government workers being paid much more than workers in the private sector

2) rising government debt

3) slowing economy

4) the public trying to pay down their own personal debts

There is likely to be pressure to cut government worker compensation. This will be particularly true in places that can't print their own money (such as the states of New Jersey and California and in countries such as Greece and Ireland). The U.S. federal government and other governments that can print money at will, may be able to delay the pressure.

Necessity is the Mother of Invention - Finding New Sources of Revenue

Governments find creative ways to increase revenues when they need to. Our website has documented some of these - increased user fees for government services, increased police traffic and parking violation fines, increased minor petty property code violation fines, increased government regulation and penalty fees, a new consumption sales VAT tax, and many more.

For example, the state of Virginia issued 7000 traffic tickets in one recent weekend! (just kidding...it was only 6996). With a $2.2 billion budget deficit, Virginia is desperate to raise revenue. A quote from The Economic Collapse: "In the old days, police officers wrote traffic tickets primarily to keep people safe and to prevent citizens from breaking the traffic laws. But in the new Amerika, all of that has changed. Now traffic tickets are primarily viewed as a revenue raising tool for state & local government."[4]

In just that one weekend, the State of Virginia convinced 7000 people that they would like to see the State Police have their salaries cut. The problem (deficits) lead to solutions (raise revenue with more fines) that cause more problems (an angry public) ...and the circle spins in the wrong direction.

Surpluses have a way of making good and peaceful things happen...while deficits have a way of leading to conflicts. Governments and The Public are heading toward conflict.

Alternatives?

We, at Cliff Küle, insist that the way out of the "debt trap" is not to go further into it. Unfortunately, governments are getting us deeper into the trap. Our favorite quote that describes the logic of more debt to solve the problem of too much debt---Jim Rogers said: "That is like telling Tiger Woods that he can solve his problems if he can find 5 more girlfriends".

The founding fathers of the United States admonished us not to go down this path. Thomas Jefferson, author of our Declaration of Independence, warned that to keep our freedom, we must not let our Rulers load us with debt. There were rules written in the Constitution to prevent us from getting into a debt trap. Unfortunately, those rules were subverted. How and why? That will be discussed further in future essays and in some of the postings at www.cliffkule.com .

The purpose of this essay is simply to warn that a war is coming. "Bad blood" is brewing between government workers and the public who are forced to pay them.

[1] Stephen G. Cecchetti, M. S. Mohanty, and Fabrizio Zampolli. http://www.bis.org/publ/work300.pdf?noframes=1
[2] 12 March 2010 Welling@weeden
[3] http://www.usatoday.com/news/washington/2009-12-10-federal-pay-salaries_N.htm
[4] http://theeconomiccollapseblog.com/archives/virginia-hands-out-6996-traffic-tickets-in-one-weekend-in-an-effort-to-raise-revenue-for-the-state-government