Our country will soon be jolted by successive economic shockwaves that will ratchet down consumer confidence as our states and local governments are constitutionally forced to remedy historic revenue short falls. With public opposition rapidly mounting against tax increases, most governments will be faced with the monumental task of slashing budgets. The state of Wisconsin fired one of the first nationally heard shots across the bow of this newest American crisis.
In the state of Wisconsin, senators are attempting to bring to the floor a bill to give maximum flexibility for crafting a workable budget. One line item of the bill caused half the senate to walk out, and sparked a teacher rally that filled the senate floor. Public primary education teachers in Wisconsin make approximately $100,000 compensation, including salary and benefits. They can retire after 25 years service and receive a one time payment of $950,000, plus approximately $100,000 each year for life after that.
The Wisconsin state senate has 19 Republican senators who have vowed to reduce this budget line item. However senate rules require 20 out of 33 senators to be physically present for a quorum to vote. All Democrat state senators staged a walk out and left the state for Illinois to avoid wounding the state teachers union. However, they must physically step onto the Senate floor to collect their checks. If even one Democrat defects, a vote will occur. Makes interesting politics.
In Sarasota, Florida where I live, the county’s tax revenue will not cover public employee retirement benefits this year. How did Sarasota, Wisconsin, and the rest of the country reach this seemingly overnight crisis? During the economic bubble decades from 1980 until recently, government spending grossly outpaced our population and grew to spend revenues that had been inflated by economic bubbles and consumer borrowing.
When the Great Recession hit, state revenues from most sources shrank, including federal transfer, sales, and income taxes. All these sources had been artificially buoyed by successive bubbles, and now popped simultaneously along with our latest and greatest housing bubble. With shrinking housing prices, plunging ad valorem revenues just added to the fray. When tax revenues shrank to fit our sustainable private industry job base, decades of excessive government spending left an overwhelming shortfall that exposed both our governments’ lack of understanding of bubble risks, and their willingness over thirty years to spend increasing tax windfalls rather than reduce tax rates.
As an example, our local and state governments escalated public employee ranks and pay scales to match escalating revenues; increases that well outpaced our population increase. During the last three decades, the U.S. population increased 37 percent, but our local government employment increased 56 percent, and state government employment increased 68 percent.
State and local budget line items increased well beyond our population growth as well. As an example, while an increasingly older and poorer population could partially explain a 100 percent increase in health/welfare spending in real dollars, the vast majority was spent to increas staffing, compensation, and programs. Also, educational spending increased 50 percent in real terms when the school age population only increased 11 percent. In the last five years of the great housing bubble, total state spending increased 30 percent in an attempt to keep pace with accelerating home prices.
Because of 30 years of escalating state and local government spending during the boom years, we now face yet more waves of economic crises, the first of which will be successive slashing of state and local budgets that will cause economic backlash and social unrest as a poorer public is forced to adjust to fewer government services. Governments will have little choice but to reduce public employee ranks by 20 percent to right size government to our population size. To balance budgets, remaining public employees will be forced to take 20 percent compensation cuts to match resulting sustainable GDP. When the suds clear from this latest bubble burst, 4 million public servants will lose their jobs and an additional multiplier of parasitic jobs will be lost as well, exposing America’s latest of its coming destructive waves.