February 7, 2010

Honey, They Shrunk the Private Sector

Filed under: Economy,Taxes & Government — Tom @ 6:55 am

Meanwhile, the federal government keeps growing and growing.

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Note: This column went up at Pajamas Media and was teased here at BizzyBlog on Friday.

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There’s a reason why Americans who don’t happen to work for the government or directly benefit from its largesse are not sensing an economic recovery. For them, it’s mostly not happening. ADP’s January employment report showing 22,000 private-sector jobs lost, the latest available jobs-related information available when this column was written, only confirms that feeling.

A look at what has happened to the nation’s inflation-adjusted Gross Domestic Product (GDP), the value of all goods and services produced in the economy, during the last six quarters is sadly instructive. Comparing the fourth quarter of 2009 with the second quarter of 2008, we see that:

  • Even after six months of “recovery,” the economy as a whole has shrunk by almost 2%.
  • Uncle Sam’s level of annualized consumption and “investment” has grown by 8.5%.
  • Despite the incessant pleadings of poverty by most state and local governments, their consumption and “investment” have hardly changed.
  • What remains, i.e., the private sector, is 3% smaller.

The private-sector shrink is really about 1 percentage point higher than indicated, because the above data treats General Motors and Chrysler as if the government and a meddling Congress aren’t in control of them. This of course is nonsense.

Meanwhile, the past year and a half has been a great period to be a federal government employee. While the private sector has shed almost 6.4 million jobs on a seasonally adjusted basis during that time, federal non-postal employment has leaped by over 150,000, a stunning increase of over 7.5%. Two-thirds of the increase occurred during the first eleven full months of the Obama administration, even though the severity of the recession was drop-dead obvious well before he took office. Even higher federal employment is on the horizon.

The burgeoning ranks of federal employees are in an enviable situation compared to their private-sector counterparts — or perhaps I should say, “underlings.” In December, USA Today reported that:

  • The average federal worker’s annual pay is over $71,200, compared to just over $40,300 in the private sector.
  • Almost one in five federal workers makes $100,000 a year or more — “and that’s before overtime pay and bonuses are counted.” It’s also before considering a far better than average benefits package.
  • In late 2007, “The Transportation Department had only one person earning a salary of $170,000 or more. Eighteen months later, 1,690 employees had salaries above $170,000.”
  • Effective in January, despite a virtually zero-inflation environment and while pay and jobs were still being slashed in the private sector, a typical federal worker saw his or her pay increase by over 3%.

There is little doubt that whether or not the economy ever returns to something resembling normalcy again, the government’s influence on our daily lives, absent a historic pushback, will be demonstrably larger.

Chalk all of this up as yet another “accomplishment” of what I have identified and have been calling the POR (Pelosi-Obama-Reid) economy since (imagine that) mid-2008.

Others, including editorialists at the Wall Street Journal and Investor’s Business Daily, have more recently named what we are living through “the uncertainty economy.” But the key to understanding what has transpired is accepting the truth about when it really began. Its origins go back to June 2008, when Nancy Pelosi, Barack Obama, and Harry Reid injected enough of the aforementioned uncertainty to cause deep concerns about the future among the people who matter most when it comes to creating and sustaining economic growth: entrepreneurs, businesspeople, and investors.

June 2008 is when the terrible triumvirate went visibly wacko on energy. In the name of “protecting” humanity from the horrible consequences of supposedly settled assertions that have since been exposed as utterly without credible support — namely that global warming is occurring, and that human activity is causing it — they promised to starve the nation of the conventional energy it needs to function, in the likely vain hope that acceptable, affordable alternatives will just, like, well, y’know … show up. The fact that they and their party intend to pursue their radical cap-and-tax plan in spite of the comprehensive scientific debunking that the colossal ClimateGate scandal represents merely proves that the business community’s fear-based mid-2008 reaction was more than justified. Their accurate advance perception was that the “climate change” discussion isn’t really about the environment; it’s about control.

At the same time, Pelosi, Obama, and Reid — but especially Obama — promised to punitively tax the 5% of the nation’s most productive so they could redistribute money to everyone else. These promises were routinely accompanied by heavy doses of business-bashing, pseudo-populist rhetoric. Again, those who saw big trouble on the horizon in mid-2008 from a potentially hostile government have been more than vindicated. Few of us ever thought that a president of the United States would be telling bankers who had money forced onto them at figurative gunpoint but who fully repaid their loans that he still “wants our money back” — and that he would then mobilize/mob-ilize his minions in an attempt to create the pressure to make it happen.

In mid-2008, perceptive entrepreneurs, businesspeople, and investors reacted defensively — as anyone who has decided that they are under attack would — by abandoning expansion plans, trimming employment, and cutting their spending to the bone. Thus, the second quarter of 2008 recovery from the previous quarter’s difficulties abruptly ended. In the third quarter, the recession as normal people define it began.

Matters only worsened in ensuing months. The decades-in-the-making Fannie Mae- and Freddie Mac-driven housing and mortgage lending debacles, the “stimulus” that has only stimulated bogus claims of jobs “created and saved,” and the Chicago-way conduct of the Chrysler and GM bankruptcies have only reinforced the business community’s justifiable siege mentality.

In this POR “Rebound? What Rebound?” economy, it should not surprise anyone that the government has become bigger, bolder, and more intrusive, while a worried private sector has contracted. Is there any good reason to believe that this has not been part of the plan all along?

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2 Comments

  1. One aspect of the public sector growth / private sector shrinkage is the push in DoD (and perhaps other gov’t agencies, I happen to be familiar with DoD) to convert as many contract support positions as possible to civil service (gov’t civilian). Many support functions in DoD, mainly technical or scientific tasks which may be relatively short-term, are filled under contracts with civilian companies, small as well as large. Advantages of contract support are the ability to precisely target specific requirements, flexibility to meet changing needs, control through working with the contract site manager, and the option of re-competing the contract or letting a new one relatively quickly. The main perceived disadvantage is the cost, because the customer pays the entire cost during the life of the contract, and the cost includes not only the workers’ salaries but their benefits, including health care and requirements, along with the company overhead and profit and any other agreed-upon costs. However, there are (in general) no residual costs: once the contract ends, so do the costs. Gov’t civilians salaries’ are paid by the organization hiring them, but their benefits come out of another gov’t ‘pot’, so they are ‘cheaper’ to the using organization, but at a greater long-term cost as they are on the books potentially until they die. Possibly as important, or, from an operational point of view, there is much less flexibility. An organization with a requirement has to fill it from the available pool of gov’t civilians, where the required capabilities may or may not be available, and the ability to hire specific people is very restricted. An organization furnishes a job description, the personnel system advertises it, sends qualified persons responding to the requisition to the organization for interviews, and conducts negotiations with those designated by the organization. Once a gov’t hire is in place, it is very difficult to them, and they have strict work rules, including work to the clock, not the contractor’s ‘get the job done’. Obviously this is a generalization, and there are many dedicated gov’t workers, but the incentives for contractors are largely absent.

    This is also one of those things that cannot be reversed quickly, if at all, once it’s in place. Even if you flipped a switch and said ‘No more gov’t hires! Civilian contractors for all new requirements!’, all those gov’t hires are in the system and have to work their way through, for the next 20-30 years…

    Cheerful thought…

    Comment by Paniolo — February 7, 2010 @ 7:44 pm

  2. #1 great points. The govt should only hire for FT positions when it absolutely has to.

    Comment by TBlumer — February 7, 2010 @ 10:02 pm

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