Posted by Karl Denninger
If jobs are being created, how come state and local governments are firing, as reported by Challenger:
Employers announced plans to cut 67,611 jobs in March, according to outplacement firm Challenger, Gray & Christmas Inc. That’s up 61% from February, when 42,090 jobs were lost, the lowest level in nearly four years.
Anecdotally I’ve been hearing of major reductions in state and local employment for the last couple of months, as “stimulus” transfer payments run out and budgets must be balanced on a state level. A recent surge in Facebook groups coalescing around the government leeches howling about pay, benefit and job reductions are quite impressive, with literal thousands squealing about New Jersey’s moves to bring teacher, firefighter and cop leech, er, “employee” pay and benefit levels in line with private sector costs.
Government, of course, has long been populated with leeches. Indeed, by definition every government employee is a leech, since the money to operate a government program can come only by taxing it away from those who produce in the economy to be redistributed to these “essential” programs.
Some of these services are indeed important – or even essential. But over the last 20 years or so we have changed a government job from something you do because you want to be of service to something you do to extract as much money as possible from your neighbor across the street – or next door.
Witness the pension abuse loopholes that are being closed – and are generating the loudest screams. The usual practice for years has been to use take the last handful (frequently three or five) years of service as the salary base, then pay that. But “salary base” has nearly always included overtime, “hazard pay” and any other “add-ins”, including in some cases pay taken in lieu of accrued vacation time off! The result is that many people “retire” from these positions with six-figure pensions that frequently exceed the base pay that they would have earned while on the job. Further, many of these systems allow people to retire at 50 or 55, instead of the private-sector standard of 65 or even 67 (as is now the case for full Social Security benefits.) Many of these pensions also provide full medical coverage – all paid in full. And then you have the abusive changes made to state law and constitutions which effectively protect these payments as “super-senior” obligations that cannot be renegotiated or defaulted upon.
Contrast this with a private pension plan which can and sometimes does default. When private sector employees push too hard and abuse their pension systems, forcing them underwater, the PBGC comes in and takes over the plan. This results in the plan forcibly resetting back to whatever it can actually fund, which frequently results in a 50% or more reduction in benefits for pensioners.
Those who think that the “pain is over” need to look at state finances. There’s nothing good going on in this regard and layoff notices are increasing rapidly at the state and local government level. There isn’t a thing that can be done to fix this, as the distortions that drove the so-called “economy” over the last three decades are so outrageous as to expect them to be able to be maintained is laughable.
Yet that’s a huge part of the “juice” behind the calls of “economic recovery” – the premise that we can pay retired firefighters and cops $150,000 pensions plus full medical insurance for 30 or more years as we can let them retire at 50 with full benefits. At the same time we can have public employees that are dramatically overpaid relative to the private sector in their current jobs.
All of this can be done while the entirety of the underpinning of the consumer and business sector – living beyond our means via home equity withdrawal – has literally disappeared and there is no possibility for that cycle to be restarted as more than a third of all mortgages are underwater on valuation. And don’t look at commercial real estate loans – yesterday we were treated to a report showing that CMBS deterioration hit another record for the current month.
At the same time these homedebtors are being cajoled into taking “modifications” on their notes that leave them with debt-to-income levels (on gross income!) of up to 60%, virtually guaranteeing they will not be able to make the payments on a continuing basis and, what’s worse, locking them into their underwater home and preventing them from moving to where job prospects are better. Those who do not currently own homes remain unable to buy them as a consequence of artificially-propped valuations, and the reservoir of suckers who took the $8,000 tax credit for “home buyers” appears to have been exhausted.
These factors are not mentioned on ToutTV and ToutPress, with the screamers on CNBS, Bloomberg and the Wall Street Journal all waving pom-poms and proclaiming “economic recovery is here!”
Yet here in the real world of Spring Break of Destin, Florida the streets are nearly empty. Oh sure, there are people here getting drunk and sunning themselves, but with good weather I would expect that the roads would be packed and the restaurants brimming with hour+ wait times.
Neither is or has been the case; last night I dined out right in the middle of the “rush” and while we had to wait a few minutes that was almost entirely due to the size of our party – half the local Olive Garden was empty despite it being 5:30 in the evening. This time three years ago there would have been an hour wait with the line out the door.
Yes, it’s anecdotal, and I’m sure there are places in this country where the economy is doing just fine. But there were during The Depression too – remember, 75% of the people had jobs during the worst of it in the 1930s.
That there are places where “all is doing ok” is not the test. The question is whether we can generate actual spending growth organically – not with government subsidy or games, but through actual private economic activity. To do so consumers and businesses must have de-levered and returned to sound balance sheets. While many firms are in decent shape the banks are in fact sitting on hundreds of billions of concealed losses enabled through balance-sheet bogosity made legal, while the consumer has gotten no break at all and are in fact hopping from rock to rock attempting to avoid the black hole of insolvency.
Rationalization of state and local government employment costs along with de-leveraging consumer balance sheets is not going to be over any time soon. Yet without it the sort of growth being priced into the market today – 5% or better annualized returns for the next five years forward – is flatly impossible on a sustained basis. The longer we play “extend and pretend” the more compounding of interest expense continues and the worse the ultimate damage will be.
Oh sure, in the short term the government can (and has) replaced nearly 10% of GDP with deficit spending. But even there the impact is waning, as the home sales numbers prove. Even enticement with an $8,000 tax credit is no longer sufficient to continue to stimulate final demand for homes, and despite this enormous subsidy activity is once again falling.
The monetary flat spin that I brought up at the end of 2008 continues to tighten, and objects out the window (that would be the ground!) are closer than they appear.