More Government, Less Manufacturing

More Government, Less Manufacturing

As the first country to mass produce everything from automobiles to computers, America has a well-deserved reputation for innovation, thanks to its manufacturing sector. U.S. government employees, conversely, are most adept at producing paperwork, as we’ve previously noted.

So which sector do you think employs more people in the U.S.—those who produce or those who bog down production with new regulations?

The answer—and it’s not even close—is that government employees outnumber employees working in manufacturing. In fact, as of a year ago, there were 21,995,000 government employees and 12,329,000 manufacturing employees.  That’s 1.8 government employees for each manufacturing employee, or one employee to produce and nearly two employees to regulate.manufacturing_and_government_employees-1939-2015

Granted, not all government employees are regulators and many serve valuable roles … but is it healthy for the economy to have nearly twice as many employees working in government as we have working in manufacturing?

It didn’t used to be this way. Until August 1989, manufacturing employees outnumbered government employees. But that month, government employed 17,989,000 and manufacturing employed 17,964,000. The two sectors have been going in opposite directions ever since.

The drop in manufacturing employment is not necessarily a bad thing, as much of the drop is due to automation.

As Andy Kessler wrote last week in The Wall Street Journal, “Technology always creates more jobs than it destroys. JFK worried how to ‘maintain full employment at a time when automation … is replacing men.’ Employment was 55 million in 1962. It’s 144 million today. We’ve come a long way, baby.”

Manufacturing jobs in many cases are being replaced, Kessler suggests, by higher paying, more satisfying, but also more demanding jobs.

While that is true in many cases, it makes the economy of the Obama years all the more frustrating, as, on the whole, employees are earning less and many workers have been settling for part-time jobs or leaving the workforce.

Some manufacturing jobs have also disappeared because of other factors, such as American manufacturers moving abroad to reduce their taxes, reduce their labor costs and even, in some cases, reduce their regulatory burden.

The drop in manufacturing employment also reflects the ongoing shift from a manufacturing economy to a service economy.

Government Growth

So the drop in manufacturing employment is understandable, but also somewhat troubling—but not as troubling as the growth in government employment.

Interestingly, most of the growth has been at the local level. Of the 21,995,000 employees working in government jobs in August 2015, 2,738,000 worked for the federal government, 5,092,000 worked for state governments, and 14,165,000 worked for local governments.

So why is this a big deal?

We’re all paying for it.  Salaries and benefits of those employed by manufacturers are, of course, paid by their employers.  Salaries and benefits of government workers are paid by U.S. taxpayers.  And the larger the population that’s working in government, the smaller the population in the private sector that’s paying for it.

Government jobs used to pay less than private sector jobs, but that’s no longer the case. According to the Bureau of Labor Statistics, employees in the private industry earn an average of $29.11 per hour, including $20.47 in salary and $8.64 in benefits. State and local government workers average $42.09 an hour in compensation, including $27.16 in salary and $14.93 in benefits.

So you’re working hard not only to support your family, but to support a workforce where the average employee may be paid more than you.

Even with all of the taxes you’re paying, though, it’s not enough to support the government workforce. Currently, there is a major shortfall in funding for government pensions.

The size of the shortfall is subject to debate. According to the Actuarial Standards Board, state and local pensions are underfunded by more than $5 trillion.

The credit-rating agency Moody’s says state, local, and federal governments are about $7 trillion short in funding coming pension payments, with federal pensions accounting for half of the total.

The variation depends greatly on the returns the pension funds achieve.  On Friday, in “Covering up the Pension Crisis,” The Wall Street Journal reported, “Government pension funds on average estimate they will earn 7.6% a year on their portfolios, according to a survey by the National Association of State Retirement Administrators. Using that number, the funds say they are currently about $1 trillion short of the money they will need to fund pension credits that workers have already earned. But if pension systems were required to use a riskless rate, currently below 3%, the shortfall would soar to more than $3 trillion.”

Imagine what will happen to unfunded liabilities if the stock or bond market crashes.

We’re becoming Greece, but bigger.  Federal pensions are just part of our unfunded liability.  Add in the unfunded costs of Medicare and Social Security and estimates federal unfunded liabilities to be approaching $127 trillion, which is roughly $1.1 million per taxpayer and nearly double 2012’s total world output.

In other words, the U.S. is insolvent.  We’ve sold out our future and our children, our grandchildren and great-grandchildren will pay the price.  Government spending doesn’t end poverty—it creates poverty.  Free-spending politicians recognize that they can delay paying off debt indefinitely and allow it to continue to accumulate.  Today’s voters may not notice, but the next generation of voters will.

It makes America less competitive.  When taxes increase to pay for unfunded government pensions, prices will be forced to increase and corporate America will be less profitable.  American businesses already pay the highest taxes of any industrialized country.  How competitive will they be when taxes increase even more?

More government creates more government.  When’s the last time you heard of a government layoff?  Government employees, which often have strong unions, do not often lose their jobs.

Meanwhile, new government positions continue to crop up.  As the government workforce grows, it becomes a sizable voting block.  Who do you think government workers are likely to support, candidates that want to reduce government spending or candidates that want to increase government spending?

After eight years of low growth and federal deficits that in some years exceeded $1 trillion, our next president is likely to spend even more.  Government will continue to be in a growth industry, especially if Hillary Clinton becomes president.

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