Faith in the government declining - The Daily Reckoning

Faith in the government declining

Sep 13, 2010

Baltimore, Maryland

Zombies run wild!

Yesterday's market trends were nothing to talk about. Dow up 47. Gold down $4. No real landmark news. So let's go back to the zombies.

---------------------- Don't Miss ----------------------
Now even more investing power in your hands!
Your favourite columns and Portfolio Tracker... on the go!
But you must hurry... this opportunity ends at 5 pm on Thursday, 16th of September.
Click here for our new mobile website!

Yes, the zombies are taking over. But you knew that. They're everywhere, of course. In the big banks. In the big companies. In the universities. In the military. In line for food stamps. In line for bailouts. In line for promotions. And in line to be elected to high public office.

And the government? Heck, Washington is wall to wall zombies.

"Bill, aren't you going a little overboard...maybe even losing it a little?"
writes an earnest Dear Reader. "I mean, this zombie thing...don't you think you're taking it a little too far?"

Bill answers: No...zombies represent a major threat to the republic and everything for which it stands. Zombies are a much bigger menace then, say, terrorists. Much bigger than obesity or smoking. Much bigger than littering. Much bigger than music in public places or public education. You name it, zombies are a bigger danger. And we're not alone in this. Here's the publisher of US News and World Report, telling it like it is... in the Financial Times:

America's public servants are now its masters
By Mort Zuckerman
Published: September 9 2010 22:49 | Last updated: September 9 2010 22:49

There really are two Americas, but they are not captured by the standard class warfare speeches that dramatise the gulf between the rich and the poor. Of the new divisions, one is the gap between employed and unemployed that President Barack Obama seeks to close with yet another $50bn stimulus programme. Another is between workers in the private and public sectors. No guesses which are the more protected. A recent study by the Mayo Research Institute found that "private-sector workers were nearly three times more likely to be jobless than public-sector workers".

Political tension is bound to grow when jobs disappear faster in the private than the public sector, just as compensation in the former is squeezed more. There was a time when government work offered lower salaries than comparable jobs in the private sector, a difference for which the public sector compensated by providing more security and better benefits. No longer. These days, government employees are better off in almost every area: pay, benefits, time off and security, on top of working fewer hours. Public workers have become a privileged class - an elite who live better than their private-sector counterparts. Public servants have become the public's masters.

Take federal employees. For nine years in a row, they have been awarded bigger average pay and benefit increases than private-sector workers. In 2008, the average wage for 1.9m federal civilian workers was more than $79,000, against an average of about $50,000 for the nation's 108m private-sector workers, measured in full-time equivalents. Ninety per cent of government employees receive lifetime pension benefits versus 18 per cent of private employees. Public service employees continue to gain annual salary increases; they retire earlier with instant, guaranteed benefits paid for with the taxes of those very same private-sector workers.

More troubling still is the inherent political corruption. Elected officials tend to be accommodating when confronted by powerful constituencies such as the public service unions that agitate for plush benefits and often provide (or deny) a steady flow of cash to election campaign funds. Their successors will have to cope with the inherited debt burden - and ultimately the nation's taxpayers are stuck with the bill.

As Governor Arnold Schwarzenegger has pointed out, spending on retirement benefits for California's state employees is growing at three times the rate of state revenues, now exceeding $6bn annually and growing at the rate of 15 per cent a year. In other states, however, the politics of public pensions appear to be changing. In Michigan, Governor Jennifer Granholm, a Democrat, recently enacted a teacher pension reform that should save about $3bn over 10 years by increasing the amount workers must contribute. Illinois raised its retirement age for newly hired public workers from as low as 55 to 67. Chris Christie, the Republican governor of New Jersey, decided that even if it took bruising clashes with public worker unions, public service compensation reform was essential for the fiscal health of the state. His stance surprised many, but it made him a national figure.

There is no quick fix to deal with the billions in unfunded liabilities. Public service employees are almost impossible to fire, except after a long process and only for the most grievous offences. What is more, the courts have ruled in many states that pension increases granted by elected bodies are vested benefits that must be paid no matter what, precluding politicians from going back and changing past agreements.

A fundamental rethinking of the public workforce is necessary. Americans cannot maintain their essential faith in government if there are two Americas, in which the private sector subsidises the disproportionate benefits of this new public sector elite."

He's got that right. Faith in the government is on the wane. And as faith declines so should the dollar and the US government's debt .

But wait. You say US bonds are selling near record highs? You say yields are at record lows? You say there were never so many people so eager to trade their money for a promise from the feds?

Well, I guess we were wrong...

*** But hold on. What's this? Here's another news item: The capital of Pennsylvania has gone broke. Yes, it's official. The city fathers told their lenders not to bother going to the mail box. The check that doesn't show up is the one from them.

We have a suggestion for Governor Ed Rendell. Think Gerald Ford to New York City. Tell Harrisburg to drop dead.

Instead, poor Rendell is playing the part of Barack Obama. He's coming to the rescue. Bloomberg tells the story:

"They have a chance to dig themselves out of this without going into bankruptcy, and that's something I'd like to see," he said today. "Harrisburg has some assets they can sell."

Harrisburg Mayor Linda Thompson, who took office in January, yesterday proposed closing one of the city's four firehouses, furloughing senior staff members, raising parking fees and negotiating pay cuts with public employee unions to address a deficit in this year's $118 million city budget. Tax revenue is coming in about $9 million below projections, a June 30 report from Thompson shows.

City Council members balked at tax increases and the sale of parking garages and other assets that Thompson proposed in January. Bankruptcy is a "real option" for the city of 47,000, Council Vice President Patty Kim said Sept. 1, after the city notified the trustee of its 1997 D and 1997 F zero-coupon bonds that it wouldn't make the Sept. 15 payments.

The city also has skipped $8 million in payments it guaranteed this year on bonds issued by the Harrisburg Authority for a trash-to-energy incinerator built in the 1960s. Rendell said the debt the city faces from that project makes Harrisburg's situation "an aberration."

There, we suspect the poor governor is delusional. Debt is no aberration. It's the norm.

We can't lay our hands on the research report right this minute...but we'll find it. And what it tells us is that states and municipalities are up to their eyeballs in debt. Harrisburg may be the first. But it won't be the last.

Got municipal debt, dear reader? You should get rid of it.

And you know why? Zombies. The zombies know where the soup is. And they're bankrupting state, local, and federal governments.

Zombies join government because it's a good place to work if you're brain dead and all you can do is slouch and shuffle. The feds can earn a living without actually doing very much. Well, no one knows whether they are doing anything or not. That's the beauty of government. It doesn't have to turn a profit. So, there's no pressure to show a profit or hold down salaries.

In fact, just the opposite. The people who are on the payroll are also on the voter registration lists. And they're also the people with the time on their hands - and the self-interest - to lobby for more government spending, higher salaries, more perks for government employees, and generally less control over public spending.

When the economy is bubbly hot nobody cares anyway...everybody is getting rich; why not share the wealth with the people who patrol the streets and pick up the trash? And then, when the bubble pops and the economy goes into a slump, they have the cheek to call for even more public spending as a stimulus measure.

Zombies. Gotta luv 'em.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

Dear Reader, You Have Been Paying Premiums to Keep Bank Fixed Deposits Safe November 21, 2018
Vivek discusses one of the most important lessons in economics, there is no free lunch.
Banks under PCA are Not Yet Ready to Go All Guns Blazing November 20, 2018
The process of recovery of these banks may have just started and we need at least a couple of quarters more to decide whether all is well with them.
I'm Looking for Companies Not Influenced by Farm Loan Waivers and Minimum Support Prices November 16, 2018
Are there any good companies in the agrochemical space worth looking at?
US Versus China - May the Cheapest Man Win November 15, 2018
Donald Trump has imposed a set of tariffs this year to discourage imports. Yet even with tariffs the deficit is not decreasing but increasing.

Equitymaster requests your view! Post a comment on "Faith in the government declining". Click here!