There’s always something to howl about

The Next bubble to burst: Government!

I’ve been a bit slow on this one.  I have been wondering what sector of the economy was going to over inflate and burst next.  The answer has been right in front of me the whole time but the reason I did not see it very clearly is because I was wondering what part of the private economy would burst next.  Sure, I knew the government was in trouble, but I did not think of it as a “bubble”, like real estate or the era.

A simple headline today put the perfect perspective out there for me to get it.  If I apply “bubble economics” to the government sector, it is perfectly clear.

The economic collapse of Greece is a wake-up call. The unsustainable combination of a bloated public bureaucracy, high deficit spending and unfunded pension obligations busted Greece’s government bubble. Now the birthplace of modern democracy is on the brink of becoming a failed state.

The Bank of England recently warned that the U.S. is on the road to the same fiscal failure as Greece, and the Obama administration’s insistence on massive public spending and increasing deficits is the reason.

At this rate, the U.S. government will be the next economic bubble to burst. We’ve seen similar downturns: the information technology bubble in 2000, housing in 2007 and Wall Street in 2008. If unchecked, America’s government bubble will depress our economy with higher interest rates and defaulting state and local governments.

Politicians Aren’t Businessmen

Federal spending alone this year accounts for 25% of our nation’s gross domestic product. If you add state and local spending, the number is closer to 50%. No economy can thrive when nearly half of all economic output is directed by politicians rather than entrepreneurs and small businesses.

After big government spending, government employee unions pose a serious threat to America’s fiscal health. Over the past 30 years, union membership has declined significantly, from 23% of all workers in 1980 to about 12% today. But the percentage of union members working for government has soared: Over 50% of all union workers in the U.S. are employed by the government compared with only 17% in 1980.

In addition, government workers make about $10 per hour more than the average private sector worker.

And when they retire, taxpayers are on the hook to pay for lucrative pensions promised by a generation of politicians trying to win the next election. America’s small-business owners could only dream of providing the type of pensions that government workers take for granted. – IBD Editorials


5 Comments so far

  1. Sean Purcell May 21st, 2010 1:36 pm

    Nice post Al, though I’m not sure I agree with all the bubbles. bubble? Yes. Housing bubble? Yes. But Wall Street bubble? Government bubble? I’m not so sure.

    A “bubble” popping implies that there is some correction to a pricing model that got out of alignment with underlying fundamentals. We saw that in housing and we certainly saw that in the (companies trading at infinite p/e ratios!) But did we see it on Wall Street? Where are the failures? When you get bailed out it’s not a bubble popping, it’s an economic aberration growing. Did we see an “auto bubble”? No. Why not? Car manufacturing costs, model lines and prices were certainly out of line withe market. But the government (us) bailed them out. Remember that game as a child: everyone walked around a circle of chairs and when the music stopped you grabbed a seat as quickly as possible. Last child standing without a seat was out of the game. Well… if everyone finds a chair after the music stops, there’s no real risk and no definable bubble.

    A government bubble might make sense on a local scale. Statewide? Doubtful. When California fails – which it will as surely as the sun rises – the Fed will bail it out. No bubble, but lots of austerity for the regular folks. On a national level? They own the printing presses. No bubble possible when you own the printing presses… just catastrophe. Although, I suppose if you call the last days of the Weimer Republic a “bubble popping,” than I guess it could hold true. 🙂

  2. Keahi Pelayo May 21st, 2010 2:18 pm

    We have ceded too much of our economy and lives to Washington, we need to take it back. Elect new people.

  3. Bob Jenkins May 21st, 2010 7:46 pm

    Yeah, I agree with the overall construct of your article. I want to make one point about “unfunded pensions.” It’s easy to look at fat-cat politicians and government appointees, but the OVERWHELMING amount of pensions are for hard-working teachers, dedicated public servants, and regular folks who managed to get a job with the state or Fed, worked all of their lives, lived modestly and so on. The inference that these folks are parasites is just wrong. They have been funding their pensions all their careers.

  4. Robert Worthington May 22nd, 2010 11:05 am

    I love the whole government bubble idea. With all the communists in office I see government getting bigger.

  5. Jeff Brown May 22nd, 2010 3:41 pm

    Bob — The hard working teachers/gov’t workers? Their pensions were forged using the heat of our taxes money. They’re no less bloated than a dying whale on the beach.