Of Ozymandias, Detroit, the unions and spending cuts

   My name is Ozymandias, King of Kings:

   Look on my works, ye mighty, and despair!’

   Nothing beside remains. Round the decay

   Of that colossal wreck, boundless and bare,

   The lone and level sands stretch far away”.

  

As the Public Sector Unions marched through London this weekend I thought I would highlight an article I spotted over the water in the Wall Street Journal.   This week the Mayor of Detroit received the latest census figures which showed that the population of Detroit had declined by 25% over the last 10 years.  Shocked, he asked for a recount as these numbers matter – the fewer people he has in the City, the less he receives in Federal and State Government handouts. 

 Detroit at its peak in the 1950’s was the fifth largest city in the United States.  Even in the 1970’s it still had a population of 1.8 million.  Home of Motown music, its big three auto manufacturers, GM, Ford and Chrysler dominated the car industry worldwide.  Today though, the population of Detroit is down to just 713,000 people and its car companies are on life support. 

An article in the Investors Business Daily explains that while bad management played a part in this dramatic decline in the city’s fortunes, the real blame lies with the unions. 

As a parasite sucks the life blood out of its host, the unions over the decades negotiated more and more benefits and restrictive work practices for their members.  Innovation and efficient production was stifled by 5000 page union rules and ludicrous arrangements such as the infamous Job Banks in which laid-off workers signed on, spent all day doing crossword puzzles and then collected 95% of their pay.  The car companies evolved into organizations which were nothing more than huge health-care, pension and make-work programs which just happened to also produce cars.  By 2006 the labour costs for a GM auto worker was about $75 per hour compared to $48 in the Toyota car factories situated in the non-union Southern States, and each GM car came loaded down with $2000 worth of health care and pension costs.

So why do I relate this to the public sector unions march against the Tory cuts?  Well, in economics if something is clearly unsustainable in the long term, then it will be unsustainable in the long term.  In history, nations rise and nations fall.  They become wealthy, but they can also become poorer and the fact that we are born Western and British does not mean that the world owes us a wealthy lifestyle.  We become wealthier, if we produce the goods and services at the price people want to pay.  If we don’t we become poorer.  And if the Government spends more than it takes in, it will in the long run bankrupt the nation.  Taxes and interest rates soar, and the Government has to default on the promises it made to its people.

Yet we continue to pile costs on to the producing sector.  Energy costs are rising due to the government’s ‘Green’ taxes and feed-in tariffs, and feel good employment regulations such as enhanced maternity and paternity benefits make it more costly to produce in the UK and ultimately make us all poorer.  Christopher Booker in the Sunday Telegraph writes that next October, an EU Directive will give temporary workers the same rights as full time workers, costing British Industry an extra £2 billion a year.

 And what of these savage Tory cuts?  Well the spending review last October showed that the government was actually increasing spending rather than reducing it.  What it was merely doing was reducing the amount of increase in spending that the previous Government had planned.  In fact, last week in the Chancellor’s Budget, planned spending for 2014-15 had crept up to £743.6 billion, up from £739 billion proposed a mere five months ago. 

 The Government is in a serious bind.  It has a massive non-producing sector which the producing sector cannot hope to fund.  From millions of public sector workers, to health care, state pensions, entitlements and welfare, it can only keep the whole thing going by paying for it through ever increasing amounts of debt.  It could try to grow its way out of the situation, but that would mean unleashing the private sector by effective deregulation, lower energy costs and low taxation.  A virtual impossibility without leaving the EU and really slashing spending.  

On Saturday the Public Unions marched proclaiming that cuts in spending were neither necessary nor compassionate.  Well last year the Bank of International Settlements put out some very sobering figures about the UK economy, which saw the UK debt soaring to unsustainable levels in the near future. Here thay show Governemnet Debt as a percentage of GDP under a number of different scenarios.

  

 

 

This though is an optimistic picture if you take a look at how Burning Our Money analyzes the true situation of government liabilities.  The official gross National Debt is about £1 trillion, or around £40,000 for every single British household. However, he points out that this doesn’t take into account PFI, public and state pensions, network rail and so on.  The real extent of Government liabilities he argues are currently about £7.5 trillion or £300, 000 per household.

Now given that our entire annual GDP is only around £1.5 trillion, the government has amassed debts of 4-6 times our annual income. You try borrowing that kind of multiple from your friendly high street bank – they’d laugh at you, knowing you would never ever be able to pay it off.

And neither will the government.

Burning Our Money then unhelpfully points out that not only will we be handing over huge bundles of cash, paying interest to Chinese bondholders, we will also each year have to pay the unfunded pensions of all of Brown’ Public sector workers (32bn by 2015-16), make the payments on his PFI contracts (10bn pa by 2015-16), as well as pay the unfunded state pensions (79bn pa by 2015-16).

In a report for the TPA he illustrates this in a graph which takes these payments out to 2015-16.

I am not sure I would want to see what his chart would look like if he took it out to 2030, as did the Bank of International Settlements or what it would look like if interest rates were to rise to any great extent.  The unions say that cuts in spending are neither necessary nor compassionate.  Well, maybe like that Detroit Mayor, a future Prime Minister could one day be staring at a bunch of charts, wondering whatever happened to a once great country.

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