The social fallout of a dying credit bubble

This post will ruffle feathers, but it’s not my intention.  I don’t mind speaking the unpopular messages when I have to.  Let me start by saying that I am a public sector employee.  I have nothing against the public sector and those who work in it (how could I since I am one of them…).  I think the vast majority of public sector workers are hard working and provide valuable services to the people of this country.  But as a collective, the public sector needs to get its head out of the clouds and see what’s coming.

In the aftermath of the credit crisis in 2008, private sector wages declined while public sector wages held steady.  Most people erroneously believe that being employed in the public sector will somehow shield them from the same wage pressures exerted on the private sector.  That’s ridiculous!  As I’ve said before, any increase in the wage and/or benefits in the public sector that outstrips the gains in the private sector amounts to the private sector being asked to take a reduction in their standard of living to enhance the standard of living of those living off government dollars.  Since the private sector pays our wages, if their salaries go down and ours don’t, we’ve just robbed them.

Most estimates place the wage and benefit premium enjoyed by the public sector at 40% over comparable jobs in the private sector.  When we’re in boom times, no one seems to care.  But what happens if I’m right and the coming slowdown in residential real estate will have far-reaching impacts on employment and economic growth? The pay increases and generous benefits that the public sector is used to receiving will not be in the cards.  What then?

I suppose you can look no further than Greece, France, and Britain for that answer.  While perhaps not perfectly analogous, these tensions highlight what happens when the government tries to take away something that people perceive as their right.  With such a long history of generous pay increases and over-generous benefit packages, you can expect that any attempt to try to bring these back in line with private sector reality will be met with swift retaliation.

This is the reality of trying to balance public sector spending with falling private sector revenues and an attempt to restore fiscal integrity to a nation.

You see, after the crisis in 2008, governments blew the wad trying to stimulate their rapidly slumping economies.  It was the greatest peace-time deficit spending the world has ever seen.  And now it must be repaid.

Just this week, Britain announced deep budget cuts in an attempt to restore balance.  Half a million public sector jobs will be slashed. As Prime Minister Cameron noted, public sector job losses are unavoidable when a country runs out of money.  Go figure.

So what about us?  We have the dual problems of a coming economic slowdown and increased pressure for austerity measures.  This week, the Parliamentary Budget Office has suggested that the conservative government needs a tougher deficit cutting plan.  Look out federal employees.

This week we also learned that the federal government plans to cut federal transfers to the provinces.  As the Globe noted:

“The Harper government is signalling that it intends to scale back the growth rate of federal transfers to the provinces – a warning that means tough decisions lie ahead on health care, education and social programs as Canada moves to balance the books.”

If that’s not bad enough, the provinces already have their own fiscal issues.  With such massive debt loads themselves, the risk that bond holders may begin demanding a premium for provincial government debt looms large.  The Globe also ran a great piece along these lines earlier this week:

Tough fiscal choices ahead for provinces

“The provinces’ fiscal health is tethered to forces largely beyond their control (interest rates by bond holders). The kinds of struggles faced by Greece, Spain, Ireland and others could quickly cross the Atlantic, forcing some provinces to make tough and painful fiscal choices – cut teacher salaries, close schools, fire nurses, or hike taxes to pay for it all.

So what should the public sector union response be?  I think it should be one of understanding and respect for the private sector who pay their wages.  To demand ever-increasing salaries while private wages stagnate is the height of arrogance and ignorance.  Yet what likely will their response be?  Start at 1:00.

I’ll let you identify the ridiculous statements made by Mr. Hahn.  There are plenty of them.

It would be a breath of fresh air if my union had the foresight to work proactively with the governments to ensure the long-term financial health of our province and nation.  But I’m not holding my breath.

What the unions need to realize is that in the economic climate to come, they will quickly create the political atmosphere that will ensure their own demise.  To alienate a financially hurting public by staunchly demanding more would set the stage for a Chris Christie or Mike Harris type to come in and really clean house.  Public sector unions had best tread lightly and use common sense over the next few years.

Cheers

Ben

Advertisements
This entry was posted in Economy, Real Estate, Social trends and tagged , , , , , , , , , . Bookmark the permalink.

8 Responses to The social fallout of a dying credit bubble

  1. Draat says:

    In a perfect world the union would sit down with the government and figure out a reasonable deal which would allow the public servants to do their part to help the country out of the current financial mess however it isn’t in the government’s or the union’s best interest. Back in ’95 when I was a federal civil servant our union agreed to no raises in return for no job losses. The ink hadn’t even dried when over 6000 transport employees were privatized (not laid off). The company I was given the opportunity to work for laid off nearly 25% of the staff after the 1 year guarantee of employment was up. So much for that deal, however I was one of the fortunate ones that still had a job. When times get tough governments like picking a fight with the civil servants. The private sector doesn’t view layoffs in the public sector as job losses, instead they see it as long overdue fat trimming. The popularity of the government increases when they tackle the perceived problem of lazy, overpaid civil servants.
    The union can bargain in good faith however the government can and will simply alter the contract through an act of parliament to get what they want.

  2. tintin says:

    The fall out from the credit bubble will affect all levels of the population. As a public sector employee, I shall be affected as well. I anticipate a spate of layoffs and troubled times ahead. Especially for myself. I fully expect to get pink slipped within the next few years as tax revenues dry up, the push to reduce government costs gets full voice and shedding public workers becomes a viable option.

    However, the idea or working with government to “save” jobs is misguided. We are entering into a high inflation/hyper inflationary future. The dollar in your pocket is dying. The stuff we need to live ( food, clothing, gasoline, heating oil) are starting to increase and in a very meaningful way.

    In a higher inflation environment, those on fixed incomes and the public sector workers are the hardest affected. As noted in Adam Fergusson’s When Money Dies ( http://university.unitedstatesliberty.org/654/textbooks/adam-fergusson-when-money-dies-nightmare-of-the-weimar-collapse/) , the fixed income people were the most desperate, then the public sector.

    Thus, “working” with the government to be employed for a few years longer for lower wages, whilst the state pumps the money supply to stoke inflation to make the dollar in your pocket worth less, is not the way forward for the public sector. It buys time for the government until inflation can eat up the rest of the money it pays to its workers. Reducing the wages of public sector employees will just make their lives more difficult

  3. Public sector wage and entitlements have outpaced growth in the private sector, meaning our standard of living has increased at their expense. I don’t buy the hyperinflation argument here in Canada, but let’s say you’re right. Here’s my simple solution: Peg any wage increase in the public sector to the wage increase in the private sector. Problem solved.

    • fabio tintinaglia says:

      Both sectors are getting squeezed due to inflation. Not a public vs private debate in my eyes. The private sector never seriously worried about public sector wages/benefits until the credit bubble burst. There will always be tension between the groups until the public sector gets privatized as the previous poster well stated. It is bound to happen

      The root cause of these problems is the increase in the money supply. Printing dollars to paper over problems has its consequences. Bursting of credit bubbles are ugly, nasty things. We are all in for it. Public or private.

  4. Pingback: Picking our poison: The icy hand of austerity or the scorching rebuke of the bond market | Financial Insights

  5. anonymous1 says:

    I was a public servant until two years ago when I decided to quit and work in my family business. My co-workers thought I had absolutely lost my mind. They all said to me “What are you doing? This is a job for life, and at age 30 with 5 years in, you can plan to retire at 55 with a great pension! What is wrong with you?”
    Well, I saw the writing on the wall. I certainly don’t think that it’s sustainable for people to be able to work for 30 years, retire at 55, and draw a full (or close to) pension for another 30 years while they travel the world, play golf and otherwise live the high life. It just didn’t add up, especially during the financial crisis. And yet, while mostly everyone in my department hated their job, they all stay because, for a big part, of the pension. Every year we got a statement showing how many years, months, days they had until they could retire. People who were 30 years old had their date set. And not many put money into RRSPs because they said “Why should I save? Here, I’m taken care of for life.” The only thing I could think of to say was “When it sounds too good to be true, it probably is.” We shall see what will happen, I heard a rumour recently that Carney plans on implementing “austerity” measures in Canada next year. I wouldn’t be surprised in the least.

  6. Pingback: Frustration in Europe’s youth; Public unions under the gun in the States; China considering major property tax to squeeze bubble | Financial Insights

  7. Pingback: BMO weighs in on troubling RSP trends and public sector unions | Financial Insights

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s