- There Will Be (Public Sector) Blood!!!

Oh did I say blood? I meant haircuts.... "There will be haircuts...Public Sector Haircuts!!!" Doesn't sound nearly as bad that way does it? Actually, in this context, those two probably mean the same thing. I'm convinced that while it may take a few years, the unionized public sector is going to be decimated by the failure of their pension system.

I don't mean to be playing the same tune all the time, but it doesn't look to me like the media has put the pieces of this puzzle together yet. Like most people who don't have to face personal consequences for being wrong, reporters are typically rent seekers. Except the rent they seek is greater access to the halls of power. So when they see a public figure they are less inclined to view them harshly than the general public would. That typically makes them a day late and a dollar short when it comes to identifying trends in public policy, and this issue with the public pension system is no different. Somewhere there is a reporter who is saying "If I report this too negatively they won't grant me interviews anymore so I'd better spin it nice."

I have no such limitation so let me say it plainly, the public pension train is going off the cliff. At this point there isn't much that can be done about it. The people who track these things for the public sector still seem to be assuming that some miraculous transformation in the capital markets might give the pensions higher returns than expected, and that event can still save them. But that event won't be forthcoming.

Inflation will drive markets nominally higher for the next few years. But his rhetoric aside, Obama is no more a friend of the free markets than anyone at the AFL-CIO or the SEIU is. A radical change to the tax code could re-invigorate the American economy and with it the capital markets. But the kind of thing we need will reward the productive (the rich) far more than the unproductive (the poor) and is therefore absolutely off limits to Obama and his far left allies. They want the economy to grow but they want it to happen without the people that make it grow gaining any advantage. In the real world this isn't possible.

So the public pension system is going off the cliff. The consequences of this will be higher taxes (which we are already seeing), municipal default (which we are already seeing) and a MASSIVE haircut for public sector employees. This is the least politically attractive option because public sector workers are unionized. Union members are a minority of the population as are civil servants, but thanks to their PACs and lobbyists (who help clean up and legalize their bribe money) they hold more political influence than their numbers would indicate.

So it's an unattractive option for politicians (most of whom enjoy receiving bribes campaign contributions) but it's going to happen all the same. There is no choice. You simply can't tax productive people at the rate that will be required, and expect them to continue to be productive. Even if you tried, taxes would be so high that you'll shatter economic growth. So in the end, the lawyers will get together and find a way to divest the municipalities of their pension burdens, and force the haircut on to the public sector workers. And the more the public sector unions resist it, the greater the chance that the whole thing ends in violence.

That violence seems likely to me because the very concept of unionization is built on the idea that someone else should be the one who is forced to pay the cost. They don't say to management, "Hey - if we're 10% more productive we want 10% more pay." Rather they say "We want 10% more pay without increasing our productivity - take the 10% you give us from someone else. In fact, we'd like work rules which let us cut our productivity by 10% but you still have to pay us 10% more or we'll riot and burn your factory to the ground!" People with a worldview like that will not be inclined to rational economic argument or civil discourse.

Even worse, we're talking about civil servants, who by their very nature are unaccustomed to those antiquated private sector practices like 'productivity" and "accountability." The idea that some serving politician will want to cut their overall compensation after he's been bought and paid for by the PAC's and lobbyists, will be horrifying and deeply foreign to them. They would prefer that once they buy a politician, that politician stays bought. But in the next few years that's not likely to happen.

Obama's pro big labor economic policies will keep unemployment high, and that high unemployment will eventually mean that the politicians who defend the public sector unions will all be voted out. Eventually even safe Democrat districts will purge themselves. 2008 was not the outlier, it was the beginning of the real trend. This will happen in parallel to rising taxes, and more frequent municipal default - all being driven by lavish pension payments to public sector employees. But as the crisis deepens even the reporters will begin saying things like "This bankruptcy isn't being caused by a payment to a working civil servant who is redistributing wealth, but to a retired civil servant who stopped redistributing wealth years ago but is still collecting a check for it."

Eventually the politicians will see the choice as being between the public sector unions - or themselves. In a choice like that, who ever shall they pick I wonder.

A recession is the way that liberals learn about economic reality. It's a lesson. the kind of lesson that can only be learned by liberals when they live through it. And what they are slowly learning now is that you cannot reward the unproductive at the expense of the productive and expect anything but stagnation. In the private sector union labor is far less productive than non union labor and contribute less to economic growth. Public sector employees don't produce any growth at all, they just redistribute the growth that the private sector produces. And unionized public sector employees make even that process less efficient by radically increasing it's cost. When the majority of America learns these facts, a retired, unionized, public sector employee will not be that difficult to vilify.