Common Sense Government Blog

The Divide Between the Public Sector and the Private Sector

By John Eberhard

The recent confrontation between the Wisconsin Governor and GOP, and the public employee unions has highlighted the huge divide between the public sector and the private sector.

First let’s talk about the yawning gap between the average pay of public and private sector employees. USA Today reported in March 2010 that federal workers earned an average salary of $67,691 for occupations that exist in both the public and private sector. This compares to an average of $60,046 in the private sector. It’s higher in the public sector, but not that much higher (12.7% higher).

But now let’s talk about total compensation, which also includes benefits. Public sector employees received health, pension and other benefits totaling $40,785 per federal employee per year in 2008, compared to $9,882 for private sector employees, according to the Bureau of Economic Analysis.

That makes the average total compensation for public sector employees $108,476, versus $69,928 for the private sector. That means the average public sector employee receives 55.1% higher compensation than in the private sector.

This begs two questions: Why is it that way? And should it be that way?

Should It Be That Way?

Let’s answer the second question first. It should definitely NOT be that way. There is no way that working for the government should be a gravy train with sweet deals that are significantly more than the private sector can afford to pay.

For one thing, these salaries are paid for with yours and my tax dollars. Do you want your tax dollars to pay for someone’s compensation at an average level of 55% more than what you make?

For another thing, there is the issue of fairness, a topic often overused and abused by the liberals. It is inherently unfair for a government employee to be earning 55% more compensation than a person in the private sector, and paid for with our tax dollars to boot. This is especially true during a recessionary period, but it is true regardless of economic conditions.

Why Is It That Way?

I’ve seen several commentators in recent days saying that the reason why public sectors employees have this ridiculously high compensation comes down to 1) the fact that they are heavily unionized, and 2) the people the unions negotiate with on the other side of the table have no real incentive to hold back on the gifts.

Charles Krauthammer in the Washington Post wrote “In the private sector, the capitalist knows that when he negotiates with the union, if he gives away the store, he loses his shirt. In the public sector, the politicians who approve any deal have none of their own money at stake. On the contrary, the more favorably they dispose of union demands, the more likely they are to be the beneficiary of union largess in the next election. It's the perfect cozy setup.”

Working in the Private Sector

But even beyond the fact that the (mostly Democratic) politicians have an incestuous relationship with the unions, there is another factor at work here. It is simply the fact that most people who have worked only in the public sector and never in the private, don’t understand how money is made, and they have none of the incentives that cause private sector companies to keep expenses down.

I had the good fortune of working for several companies over the last 20 years, in the capacity of being on the committees that did financial planning for the company. These committees would meet once a week, and review the amount of money made by the company that week, and all the bills and purchase orders that were submitted. We had to figure out how to pay all the bills, make payroll, and decide which purchase orders to approve. And of course, with a finite amount of money to work with, we had to decide to which purchase orders to say “No.”

And sometimes, when income was low, we had to figure out how to intelligently promote the company’s products or services in such a way as to get the income back up. And sometimes we had to figure out how to tighten the belt, even identify “deadwood” employees and fire them (something that is almost unheard of in the public sector).

And at those private sector companies, there is no such thing as an automatic cost of living raise or larger budget for your division next year. If everyone wants raises, everyone has to work hard and get the income up into a higher range, so that there is some money to use for raises. And there were incentives there to figure out how to do things better or faster or more intelligently or with more innovations than your competitors. Because if you didn’t do all that, you weren’t going to get any raises, your company wasn’t going to expand, or quite possibly your competitor was going to eat your lunch. You could even go out of business.

Now I own my own marketing consulting company and so I do all this and more on my own behalf.

But what about people who have never had the good fortune of this type of experience? Many of them who have worked only in the public sector have no clue how all this works. They don’t even recognize that during an economic downturn, everybody has to tighten the belt.

While millions of jobs have been lost in the private sector during the last several years, public sector employment numbers have gone up. How is that sensible or even right?

What About Wisconsin?

Charles Krauthammer further stated “Wisconsin is the epicenter. It began with economic issues. When Gov. Scott Walker proposed that state workers contribute more to their pension and health-care benefits, he started a revolution. Teachers called in sick. Schools closed. Demonstrators massed at the capitol. Democratic senators fled the state to paralyze the Legislature.”

Columnist Rachel Alexander stated “Governor Walker targeted pensions since their costs are rising at much more unsustainable levels than wage increases. His budget also increases public employees’ healthcare premiums to 12%, and requires them to start contributing 5.8% of their pay to pensions. Wisconsin state employees have one of the most generous benefits packages in the nation. Currently they are not required to contribute anything towards their pensions, and only 6% of their salaries goes towards healthcare premiums. Private employees pay much more on average into equivalent plans; Governor Walker’s budget would merely reduce the generous subsidies given to public employees. This would save the state nearly $300 million over the next two fiscal years.”

A Facebook friend the other day posted something saying that unions were being denied the right to organize. How distorted and naïve could you possibly get?

What’s going on in Wisconsin today is extremely important. The government employee gravy train has to come to an end. The public employee unions have gotten way too powerful, and they are bankrupting multiple state governments right now. Besides which, it is just wrong for public employees to make 55% more than those of us in the private sector. But the more people know about this and recognize the situation, the better. Hopefully there are enough of us now to turn the tide.

Keynesian Economics Is Wrong: Bigger Gov't Is Not Stimulus

USA: The Next Detroit

I just received this from S&A Digest. Very interesting.

John Eberhard

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Editor's note: One of the most controversial pieces we published this year was Porter's essay paralleling America's decline with Detroit's complete economic and political failure. We received more heated e-mails about this Digest than any in recent memory. Some called us "racists," though everything in the below essay is fact. Others agreed with our simple message... A socialist government is dangerous.

USA: The Next Detroit
By Porter Stansberry
From the October 28, 2009, S&A Digest

One of the most important things to remember about socialism – or coercion of any kind – is it fails eventually because human beings have an innate desire for liberty and a strong need for personal property rights. In fact, the origins of government lie in the need of agricultural communities to protect themselves from violence and theft. So it is particularly ironic that in more recent times, it is government itself that has more frequently played the role of bandit.

When you start taxing people at extreme rates to pay for socialist "benefits," when you start telling them which schools their children must attend, when you start giving jobs away to people based on race instead of ability... you quash human freedom, which bogs down productivity... and if continued for long enough, leads to social collapse.

I find it perplexing that only 20 years after the collapse of the Berlin Wall, the West continues to implement laws that mimic all of the failed policies of our former "communist" foes. In fact, our current president won the election by promising to "spread the wealth around." But... truth be told... we don't have to look to Eastern Europe or the Soviet Union to find a society destroyed by coercion, socialism, and the overreaching power of the State. We could just look at Detroit...

In 1961, the last Republican mayor of Detroit lost his re-election bid to a young, intelligent Democrat, with the overwhelming support of newly organized black voters. His name was Jerome Cavanagh. The incumbent was widely considered to be corrupt (and later served 10 years in prison for tax evasion). Cavanagh, a white man, pandered to poor underclass black voters.

He marched with Martin Luther King down the streets of Detroit in 1963. (Of course, marching with King was the right thing to do... It's just Cavanagh's motives were political not moral.) He instated aggressive affirmative action policies at City Hall. And most critically, he greatly expanded the role of the government in Detroit, taking advantage of President Lyndon Johnson's "Model Cities Program" – the first great experiment in centralized urban planning.

Mayor Cavanagh was the only elected official to serve on Johnson's task force. And Detroit received widespread acclaim for its leadership in the program, which attempted to turn a nine-square-mile section of the city (with 134,000 inhabitants) into a "model city." More than $400 million was spent trying to turn inner cities into shining new monuments to government planning. In short, the feds and Democratic city mayors were soon telling people where to live, what to build, and what businesses to open or close. In return, the people received cash, training, education, and health care.

The Model Cities program was a disaster for Detroit. But it did accomplish its real goal: The creation of a state-supported, Democratic political power base. The program also resulted in much higher taxes – which were easy to pitch to poor voters who didn't have to pay them. Cavanagh pushed a new income tax through the state legislature and a "commuter tax" on city workers.

Unfortunately, as with all socialist programs, lots of folks simply don't like being told what to do. Lots of folks don't like being plundered by the government. They don't like losing their jobs because of their race.

In Detroit, they didn't like paying new, large taxes to fund a largely black and Democratic political hegemony. And so, in 1966, more than 22,000 middle- and upper-class residents moved out of the city.

But what about the poor? As my friend Doug Casey likes to say, in the War on Poverty, the poor lost the most. In July 1967, police attempted to break up a late-night party in the middle of the new "Model City." The scene turned into the worst race riot of the 1960s. The violence killed more than 40 people and left more than 5,000 people homeless. One of the first stores to be looted was the black-owned pharmacy.

The largest black-owned clothing store in the city was also burned to the ground. Cavanagh did nothing to stop the riots, fearing a large police presence would make matters worse. Five days later, Johnson sent in two divisions of paratroopers to put down the insurrection. Over the next 18 months, an additional 140,000 upper- and middle-class residents – almost all of them white – left the city.

And so, you might rightfully ask... after five years of centralized planning, higher taxes, and a fleeing population, what did the government decide to do with its grand experiment, its "Model City"? You'll never guess...

Seeing it had accomplished nothing but failure, the government endeavored to do still more. The Model City program was expanded and enlarged by 1974's Community Development Block Grant Program. Here again, politicians would decide which groups (and even individuals) would receive state funds for various "renewal" schemes. Later, Big Business was brought into the fold. In exchange for various concessions, the Big Three automakers "gave" $488 million to the city for use in still more redevelopment schemes in the mid-1990s.

What happened? Even with all of their power and all of the money, centralized planners couldn't succeed with any of their plans. Nearly all of the upper and middle class left Detroit. The poor fled, too. The Model City area lost 63% of its population and 45% of its housing units from the inception of the program through 1990.

Even today, the crisis continues. At a recent auction of nearly 9,000 seized homes and lots, less than one-fifth of the available properties sold, even with bidding starting at $500. You literally can't give away most of the "Model City" areas today. The properties put up for sale last week represented an area the size of New York's Central Park. Total vacant land in Detroit now occupies an area the size of Boston – Detroit properties in foreclosure have more than tripled since 2007.

Every single mayor of Detroit since 1961 has been a Democrat. Every single mayor of Detroit since 1974 has been black. Detroit has been a major recipient of every major social program since the early 1960s and has received hundreds of billions of dollars in government grants, loans, and programs. We now have a black, Democrat president, who is promising to do to America as a whole what his political mentors have done to Detroit.

Those of you with a Democratic political affiliation may think what I've written above is biased or false. You may think what you like. But there is no way to argue that what the government has done to Detroit is anything but a horrendous crime. You may think what I've written above is merely a political analysis. Perhaps so, but politicians drive macroeconomic policy. And macroeconomic policy determines key financial metrics, like the trade-weighted value of a currency and key interest rates.

The likelihood America will become a giant Detroit is growing – rapidly. Politicians now control the banking sector, most of the manufacturing sector (including autos), a large amount of media, and are threatening to take over health care and the production of electricity (via cap and trade rules). These are the biggest threats to wealth in the history of our country. And these threats are causing the world's most accomplished and wealthy investors to actively short sell the United States – something that is unprecedented in my experience.

Regards,

Porter Stansberry

Directed Distraction

See this excellent program by Glen Beck: