Connecting the Dots: The Coming War Between Generations

Almost everyday the newspaper headlines across the country warn of problems with local government budgets centered around public sector employee wages and benefits.  Today one read,  County Pension System Hits Tipping Point.  The other day it was how one city wasn’t funding its medical retirement benefits.

Some are trying to make what is happening in Wisconsin a workers rights issue.  This is complete nonsense, in our opinion.  Though the political approach to a solution may differ, this is more about the beginnings of the coming war between generations that we have written about in prior posts.  President Obama — of all Presidents — should understand this and it may be why younger voters stayed at home during the mid-term elections, resulting in the political facial he received from the Tea Party.

The fact is, we have never fully funded our defined benefit public sector retirement programs (including social security and medicare), relying instead on rosy scenarios and fantasy assumptions about investment returns either to prevent tax increases or a reduction in public services.  The markets have started to revolt and the chickens are  coming home to roost.

It is also time to connect some dots.  What we are witnessing in the Middle East where the young, who have little or no political voice and a not so bright future are throwing off their autocratic gerontocracies at an incredible pace.   Something similar will manifest here and the rest of the aging west, though probably in different way, when younger generations realize the consequences of being saddled with a massive debt and declining public services as the tax revenues are diverted to debt service and retirement benefits.   Not to mention the world full of carbon they have inherited.

They to, like their Facebook brethren in the Middle East, will revolt and throw off the gerontocracy that will control the political system as baby boomers age, which over taxes them to pay the debt used to finance the excessive consumption and current retirement benefits of their parents and/or grandparents generation.

It doesn’t take a C.I.A. analyst with a Ph.D. to realize the potential for political blowback when one generation is rendered into servitude due to the excesses of another.   Or does it?

This, of course, assumes our creditors don’t beat them to it.   Even then, we’re starting to have our  doubts about the country’s  political capacity to deal with these issues.  We spent years as analysts in Latin America during their days of hyperinflation and witnessed that public sector unions, though not the only problem,  were a big part of the fiscal imbalances, which were financed by the printing presses.

This is really a problem of state and local governments and not so much at the Federal level.  We cannot, however,  blame the public employees who are just are playing by the rules that our political leaders and unions have set up.   But shame, shame, shame on those leaders who have not led and have failed Demographics 101 in such a big way.

The Wall Street Journal really nails it today,  writing about the huge distinction between public and private sector unions,

We’ve previously mentioned FDR and Fiorello La Guardia. But George Meany, the legendary AFL-CIO president during the Cold War, also opposed the right to bargain collectively with the government.

Why? Because unlike in the private economy, a public union has a natural monopoly over government services. An industrial union will fight for a greater share of corporate profits, but it also knows that a business must make profits or it will move or shut down. The union chief for teachers, transit workers or firemen knows that the city is not going to close the schools, buses or firehouses.

This monopoly power, in turn, gives public unions inordinate sway over elected officials. The money they collect from member dues helps to elect politicians who are then supposed to represent the taxpayers during the next round of collective bargaining. In effect union representatives sit on both sides of the bargaining table, with no one sitting in for taxpayers.

We’re hoping that our generation, the baby boomers,  will do the right thing here and give the younger ones a fighting chance.    If that means playing muni golf courses instead of Pebble Beach and Pinehurst as we move into our sunset years, so be it. (click here if charts are not observable)