Small Matters: U.S. problem now: Paying people who produce nothing

Posted: October 03, 2011

Name two organizations with "no layoff" agreements in their union contracts.

General Motors is one of them, and it went bankrupt. What a shock! At one time, 5,000 GM workers were being paid for work, but they didn't work or make anything - their production facility closed, but their contract prevented laying them off. Sounds a lot like government in the view of many voters.

The other "company" that comes to mind is the U.S. Post Office. It, too, is "bankrupt," but since it is a government agency, it isn't truly bankrupt.

Any private company that couldn't adjust its workforce in response to technological change and economic conditions would die.

So with declining mail loads, what do all the postal workers - who can't be laid off - actually do? The postal workers also have a heck of a retirement package.

Obviously, paying people who produce nothing raises costs, which must be recouped through higher sales prices, or the firm fails. In the case of the government sector, a "company" failing to thrive must compensate with higher taxes on the public.

This is, on a larger scale, the problem the country now faces. Lots of people who don't produce anything or make anything, get "paid" nonetheless - through pensions, for example, or Social Security. They are "paid" with taxes placed on people who are working, in many cases making the stuff that those not working want to buy. The numbers of those not working are starting to rapidly increase relative to those who are working.

In the near future, it will take two workers to support payments to each Social Security recipient (like taking care of our parents, as in the old days). Decades ago, 15 or 20 workers supported each recipient. But eligibility and payouts have been raised over the years by politicians seeking reelection, and the "baby boomers" are coming of retirement age, so the number of recipients per worker is rising.

Consumers, and the governments that represent them, have tried to live beyond their means by borrowing. Everyone cannot win in this contest, even with the "China credit card" (we import $2 trillion of stuff to consume, finance about $500 billion of it with foreign debt).

Some governments have borrowed so much to keep unrealistic promises to citizens that there is no possibility of repaying their debts - Greece, for example. Thus, no one wants to lend money to the government of Greece. When they do lend, the interest rates would be impossible for the Greeks to repay - 40 percent on two-year notes.

The game is coming to an end, and now we are trying to figure out who the losers will be: The Greeks, who borrowed, or the Germans, who lent them their savings. Other countries - and their citizens and their governments - including the United States - face the same problem, to greater or lesser degrees. The next few years will reveal who the winners and losers are, with politicians trying to decide the outcomes in ways that earn votes for themselves.

In the case of General Motors, the unions won, while the shareholders, bondholders, and many GM dealers lost. So did the taxpayers, who will not recover tens of billions of our dollars the government gave to GM - which just announced that the development and production of its latest auto design will be in China. Go figure.

Then there is the loss of $500 million given to "green" companies, ones that were selected by the government. Taxpayers were the real losers; recipients of the government's money were the winners.

When the economy is growing, at least in recent times, about 600,000 new firms start and about 500,000 exit each year (and few declare bankruptcy). The companies are started by entrepreneurs and supported or rejected by consumer spending. We need lots of success stories, since they provide new jobs and new tax revenue to support all the payments our governments are obligated to make.

Government must become very supportive of this growth, or we will have to renege on many of the promises we have made to those no longer employed - retired or otherwise.


Bill Dunkelberg is a professor of economics at Temple University and a nationally recognized expert on small business. Contact him at dunk@temple.edu.

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