Belmont Club

Dense Pack

Honoree former Secretary of State Hillary Clinton speaks at the Planned Parenthood 100th Anniversary Gala on Tuesday, May 2, 2017, in New York. (Photo by Charles Sykes/Invision/AP)

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.

It’s an effect which calls to mind the “dense pack” strategic defense strategy of the 1980s. It worked on the theory that if you put US missile silos close enough together then incoming enemy missiles would interfere with each other. Each Soviet warhead would send up a cloud of debris that would knock out the others.

As the first inbound warhead detonates over its target silo, it would throw a large of cloud of debris over the entire missile field. Every other warhead targeted on that missile field would have to travel through that debris cloud to reach its target, and it was theorized that the act of traveling through that debris cloud would “trash” the warhead before it could detonate. Every successful explosion over the missile field would throw more debris up into the air, increasing the chances that each successive warhead would be destroyed before it could trigger.

Government programs do almost exactly that. They create budgetary ripples which go on for decades. They instigate unfunded liabilities that rebound off other fiscal shockwaves. Get enough spending missiles on the taxpayers’ wallet and after a while, they start colliding with one another.  Sooner or later one government program knocks the other out of the air; the cost of another entitlement becomes another federal pay freeze.

Paul Ryan, though not the Huffington Post, understands this. He knows that the biggest torpedo headed toward the fiscal Titanic is Obamacare. Once that hits the hull then the water pumped out by freezing federal government salaries is going to be inconsequential by comparison. “You cannot preempt a debt crisis, get this fiscal house in order without dealing with health care”.

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The only way that the really valuable civil servants can be sustainably employed is when it stays in sync with the tax base. Ultimately the elementary rules of arithmetic must prevail. Jane cannot eat more apples than the tree grows. If you want more apples, plant more trees. Freezing Jane’s consumption of apples will only work for as long as you are not offering future apples to Mary and Robert. This seems like a simple idea, but it is the hardest thing in the world for Hope to come to terms with.

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