Government Sector in Big Trouble

Over the past few years, three of the economic sectors with the most growth were health care, education and government. Of course, health care and education are often intimately tied in with the government. A lot of people strongly believed that these sectors were "recession-proof" and safe places to develop a career. It appears they might be wrong. Very wrong.

A few days ago the Washington Post published this story:

As states across the country grapple with the worst economy in decades, most have cut services, forced workers to take unpaid days off, shut offices several days a month and scrambled to find new sources of revenue.

The good news is that much of the pain this year has been cushioned by billions of dollars of federal stimulus money, which has allowed states and localities to avoid laying off teachers, prison guards, police officers and firefighters.

The bad news is that for the next fiscal year, beginning in July, the picture looks even bleaker. Revenue is expected to remain depressed, even if the national economy improves. There will be only half as much federal stimulus aid available, and many states have already used up their emergency reserves.

The bold emphasis was added by me. California is the prototypical example of this. The budget recently passed is slated to cut a lot of state jobs. As the recession deepens in 2010, we can probably expect further cuts. That means higher unemployment. The cuts to government services will also surely have a negative effect on consumption.

In California, a great number of teachers have been laid off by the new budget. That means both the "government" and "education" sectors, which were supposedly "recession proof," are going to take a massive hit in 2010. As this article indicates, this isn't just a California problem, we're going to see this kind of thing across the U.S.

Here's a report out of Europe, from Ambrose Evans-Pritchard. I'm not usually a big fan of Mr. Evans-Pritchard but I definitely stand up and take notice when he titles one of his articles 'Fiscal ruin of the Western world beckons.' Quite alarming.

Concerning Ireland:

A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go. "The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb", said the Teachers Union of Ireland.

He continues:

But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

He warns:

While I agree with Nomura's Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan's Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l'outrance.

Such policies have crippled Japan. A string of make-work stimulus plans - famously building bridges to nowhere in Hokkaido - has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan's gross public debt will reach 240pc of GDP by 2014 - beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan's bond market will blow up.

No-brainer here. We should already be suspect of spending as a strategy towards solving a debt-crisis, but pointless spending that does nothing to create a more productive future is obviously futile and probably makes the problem worse.

Go over there and check out his article. It will surely make you think, even if you don't agree with his prescriptions.

Ultimately, this is setting up to be a major blow to the American and European economies, especially in 2010. The mainstream media isn't talking about this very much though, choosing to focus on hyping up a supposed "jobless recovery" and encouraging spending, although it doesn't appear to be working very well.