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Belmont Club

Dense Pack

November 30th, 2010 - 2:02 pm

News that President “Obama proposed a two-year freeze on raises for federal employees, apparently in some sort of concession to the reality of the midterm elections” signals the erosion of fixed incomes before the raging deficit torrents.

The American Spectator’s Phil Klein notes that the pay freeze represents a “sixth-tenths of one percent reduction in the projected $4.52 trillion deficit over that same period (2011 through 2015).” It is a thin wedge in a gigantic pie. The graph below can be visualized as a blue-hulled ship with a small red superstructure. What will happen is that the $4,520 billion will pull under the $28 billion. That blue hull is taking on water all the time in the form of interest costs and is getting heavier. The pay freeze has the effect of lightening the red part, but as long as the blue part keeps expanding it is a lost cause.

The Pie That Ate Itself

Government employees will have to give up pay in order to feed the deficit monster. Moreover, since the only way the government can meet interest payments is to print money, inflation may sooner or later start galloping and then federal employees will be caught between an income ceiling and a rapidly rising inflationary floor. It will be like one of those Republic Serials where the the hero is trapped in some vise. Except in this case there’s no way out in the next reel.

The blue, flooded part of the ship was partly caused by the expansion of the federal bureaucracy itself, a process which will continue as new entitlement programs like Obamacare kick in. The New York Daily News says “federal payrolls jumped by more than 137,000 slots in the last two years – at a time when unemployment in the private sector climbed close to double digits and nearly 15 million workers are without jobs.” And in the salad days before people realized the money would run out — and have to be borrowed — the government offered generous terms. “Federal employees ran 36% ahead of inflation since 2000. Private-sector workers limped along at 9% above inflation in the same period.” Now it turns out that government wrote a check it can’t cash.

The politicians who did the hiring neglected to say they would be paying salaries on credit; funding it from the deficit; putting it on the credit card. Now that the monthly minimums can’t be met except by borrowing from the printing press, they’ve come to the reluctant conclusion that they have to welsh on those promised salaries and pensions to those already onboard.

The Huffington Post calls the pay freeze a “stupid and cynically symbolic” move because there’s still so much that needs to be done! Disaster relief, police protection, healthcare, etc. Don Surber’s roundup of reactions includes this gem: “the plan is small potatoes that risks driving away valuable civil servants with little budgetary upside.” But that misses the point. What is driving away value in government is the bloating of government itself. The cumulative weight of all those wonderful programs, all of which the politicians touted as absolutely necessary, is now crushing itself to death, like an 800 pound obese man on a bed suffocating under his own weight. Feeding him won’t help. Things have reached the point when growth causes as much damage as it purports to help. All government expansion is now budgetary fratricide.

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