Budget Deficits, Pension Plans, and the Seeds of Rebellion

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“Is the world finally cracking up?” we wondered aloud in these pages earlier this week. From the look of events unfolding across the volatile Middle East and North Africa region, it certainly seemed so. Governments are toppling, buildings are ablaze and protesters are “speak-to-tweeting” their way to freedom…of a sort.

But what about closer to home, back in the belly of the empire? It’s one thing for far-flung outposts to collapse, for the “uncivilized,” “unwashed” masses beyond the gates to storm their capital buildings and raise hell. But surely that couldn’t happen here, could it?

Of course it could. The existence of the state virtually guarantees it!

With this in mind, we issued the following words of caution to our Fellow Reckoners on Wednesday:

“Warning: Riots may be closer than they appear.”

We didn’t know it at the time, but tens of thousands of public sector workers and disgruntled union activists were at that very moment on the verge of storming the Capitol building in Madison, Wisconsin, to protest proposed cuts to their retirement and health benefits. At one point there were as many as 40,000 aggrieved banner-wavers in and around the building, stomping up and down and chanting, “Kill the bill! Kill the bill!”

As far as we can tell, the whole thing is really a kind of sideshow. There’s a much bigger circus in town. For one thing, people in Madison are fighting over money that doesn’t exist. It’s already been spent, in other words. The bill to which they were referring was one introduced by Wisconsin Gov. Scott Walker and his fellow state republicans. At best, according to their own calculations, it would scrape $300 million from the state’s budget deficit. Most of that will come out of state workers’ pockets. That may sound like a lot…until you look at the numbers.

Walker proposes they pay $3,300 more for their health care and pensions, a move that would reduce the average public sector salary from $48,000 to $44,700. But Wisconsin faces a $3.6 billion budget deficit. Walker and his ilk would have to increase the size of their cuts eleven-fold in order to balance the budget. That means lowering the average wages of public servants to about $12,000 per year. Good luck! One report we saw puts the average yearly compensation for a Milwaukee public school teacher – including salary and “fringe benefits,” at $100,005 in 2011. It ain’t gonna happen, in other words.

As events in the Middle East have recently demonstrated, revolution is a catchy tune. One state starts whistling it and, pretty soon, next-door neighbors start getting all sorts of funny ideas in their heads.

“Hey, maybe we should overthrow our own government,” says one man.

“Maybe we’ll storm our Capitol building too,” says another.

From the Mid East to the Mid West, rebellion is catching on. We don’t have any problem with a little old-fashioned uprising. It’s what keeps things entertaining. As far as we can tell, one side is just as bad as the other. Politicians are well employed to beat each other over the heads. We just wish they’d do it harder, with more lasting effects.

In any case, we can expect a whole lot more of this kind of shenanigans. Republicans now hold five of seven governorships in Minnesota, Wisconsin, Iowa, Illinois, Indiana, Michigan, and Ohio. Last year, they held two. Look for more lip-service budget-“balancing” policies from the one side…and more stampedes from the other.

But again, as we said, this is just the sideshow. States from coast to coast are facing budget shortfalls of a magnitude heretofore unseen, unfathomable, even. More than 40 states are in the red for a combined budget shortfall of $125 billion for fiscal year 2012. California is the worst, with a $25.4 billion hole to fill, more than seven times Wisconsin’s gap. Illinois comes in next with a $15 billion shortfall, followed by Texas with $13.4 billion, New Jersey at $10.5 billion and New York at $9 billion.

How did it come to this? As it turns out, the state is almost as costly as it is unnecessary. Monopolizing entire sectors of the economy with increasingly expensive, terminally inferior products and services is an expensive hobby, one that drains billions from the productive, private sector in the process. Still, like any boozehound looking for his next drop, it’s never enough to slake the state’s thirst. Ever larger and ever more costly does it grow.

According to figures from the Bureau of Labor Statistics, 22.5 million Americans, comprising 17% of the entire workforce, now work for the government. The average government employee makes $47,000 per year, while private sector workers pull down an average of $45,000. The average public sector employee pays $3,600 for healthcare. Construction workers, for comparison, pay an average of $4,100. Those in the services and retail industry pay $4,200. Only 20% of workers in the private sector have what are known as “traditional” retirement plans, compared with 79% in the public sector. And, while most private employees don’t get health insured benefits in retirement, 87% of public workers do.

As it expands, the state consumes more and more of the economy’s productive capacity, adding more and more to its debt load as it eats. And the fatter it grows, the more voters there are who have a vested interest in feeding the beast. Of course, this can’t go on indefinitely. In the end, it comes down to a simple question: your money…or your state?

Reprinted with permission from The Daily Reckoning.

Joel Bowman is managing editor of The Daily Reckoning. After completing his degree in media communications and journalism in his home country of Australia, Joel moved to Baltimore to join the Agora Financial team. His keen interest in travel and macroeconomics first took him to New York where he regularly reported from Wall Street, and he now writes from and lives all over the world.

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