It's Time to Tackle Government Pay

It's fairly well known that the U.S. public sector is paid more than the private sector. What's less well known is that the gap between federal-employee pay and benefits and private-sector pay and benefits is increasing - by about 18% over the last decade.

Given the current level of U.S. unemployment and the size of the budget deficit, it would appear that some economies could be made. In short, it's time to tackle government pay.

After all, if Greece can economize, so can the United States...

The public-sector pay cuts Greece proposed to try and avoid bankruptcy are exceptionally wimpy: We're talking about salary reductions of only 1% and an extension of the retirement age from 61 to 63. The Greek government will need to do more than that if it wants to extract money out of Germany, where the retirement age was recently raised to 67 and taxpayers take a dim view of public-sector shenanigans.

Cutting public-sector pay used to be a tried-and-tested way of getting out of budgetary difficulties caused by recession - and it often worked exceptionally well.

In 1931, for instance, British Chancellor of the Exchequer Neville Chamberlain imposed a 10% pay cut on the British public services. His argument was twofold. First, prices had declined, so public-sector salaries should be brought down in line. And second, public-sector employees had job security - a benefit that private-sector workers don't enjoy, and an employment perk that's worth even more during a recession, when private-sector employees are getting sacked en masse.

The rather sophisticated understanding of option theory demonstrated by Chamberlain in that case contrasts markedly to the bumbling of his present-day successors!

Chamberlain's pay cuts caused a mutiny in the Royal Navy, but they worked. Unlike the United States, which sank further into the Great Depression, Britain had the best five economic growth years in its history from 1932-37, with that country's international-trade position recovering as rapidly as the living standards of its people. The elimination of about 10% of the government's costs - which otherwise would've served as additional dead weight on an already foundering economy - actually caused a negative "crowding out" effect, making capital available for investments in innovation and small businesses.

It wasn't what John Maynard Keynes would have recommended, but then Chamberlain thought Keynes was a charlatan.

The case for a Neville Chamberlain approach to U.S. public-sector pay and benefits is a strong one. In 1998, average wages and benefits for federal employees was 70% higher than in the private sector. Some of that may have been justified: Federal civil servants have, on average, better qualifications than private-sector workers, although there are fewer of them with the very highest qualifications.

By 2008, however, the total cost per civilian employee in the U.S. federal government had risen to $119,932, compared to $59,909 in the private sector. There can be no justification for paying federal employees twice the average private sector wage; the private sector, after all, has to pay the costs of employing all these overstuffed bureaucrats.

Even in state and local government, there is now a premium for wage costs over the private sector, though state-and-local government employees are, on average, less well- qualified than their private-sector counterparts.

There are some outrageous examples of feather bedding. Consider, for instance, the near-bankrupt state of California, which allows a worker to retire at 50 with an annual pension payout equal to 3% of salary for each year of service. In other words, a person who joined that state's workers ranks at 20 can retire at 50 on 90% of salary - indexed to inflation with full healthcare benefits, of course

And last year - in the depths of a horrid recession, and with states forced to make draconian cutbacks to balance their budgets - the remuneration of state-and-local-government employees increased 2.4%, double the 1.2% increase seen in the private sector.

Cutting federal employees back just to their 1998 levels in terms of what the rest of us earn would involve a 15% pay cut. That's a bit more than the 10% cut imposed by Chamberlain, but is certainly justified.

Based on 2008 figures, which must surely be conservative for 2010, given the recent growth in government, such a reduction would save $116 billion a year. That's the equivalent of about $1.3 trillion between now and 2020, a 10-year stretch that represents the normal budgetary horizon.

That doesn't eliminate the U.S. deficit problem, but it certainly makes a decent hole in it.

That's clear a government cutback I can go for...

[Editor's Note : Martin Hutchinson has terrific foresight. He warned investors about the dangers of credit-default swaps - half a year before those deadly derivatives ignited the worldwide financial firestorm. Hutchinson even predicted where and when the U.S. stock market would bottom (a feat that won him substantial public recognition).

To find out more about The Permanent Wealth Investor, please just click here.]

News and Related Story Links:

• Wikipedia:
  Neville Chamberlain
• Google.com:
  A Timeline of the Great Depression
• Wikipedia:
  Option Theory
• The Royal Navy:
  Official Web Site
• InvestorWords.com:
  Standard of Living
• Wikipedia:
  John Maynard Keynes