Quote of the Day: The Salad Days of the Keynesian public sector economy are over

The salad days of the Keynesian public sector economy are over, so argues author Patrick Buchanan at the Lewrockwell.com

In the Reagan-Clinton prosperity, officials earned popularity by making commitments that could be met only if the good times lasted forever. They added new beneficiaries to old programs and launched new ones. They hired more bureaucrats, aides, teachers, firemen, cops.

Government's share of the labor force soared to 22.5 million. This is almost three times the number in the public sector when JFK took the oath of office. These employees were guaranteed job security and high salaries, given subsidized health care, and promised early retirement and pensions that the private sector could not match.

The balance between the private and public sectors shifted. As a share of the U.S. population, the number of taxpayers fell, as tax consumers – the beneficiaries of government programs and government employees who run those programs – rose.

The top 1 percent now pays 40 percent of the income tax. The top 10 percent pays 70 percent. The bottom half, scores of millions of workers, pay nothing. They ride free.

This could not go on forever. And when something cannot go on forever it will, by Stein's Law, stop. The Great Recession brought it to a stop. We have come to the end of the line.

U.S. cities depend on property and sales taxes. But property tax revenue has fallen with the collapse of the housing market. Sales tax revenue has fallen as a result of the recession that has kept the consumers out of the malls.

Revenues down, cities and counties face a choice. Raise taxes, or cut payrolls and services. But if taxes rise or workers are laid off and services decline, Americans in our mobile society move across city and state lines, as they are moving from California to Colorado, Nevada and Arizona.

This does not end the crisis, it exacerbates it.

Bankruptcy not only offers cities relief from paying interest to bondholders, it enables mayors to break contracts with public service unions. Since the recession began, 650,000 government workers, almost all city, county or state employees, have lost their jobs. Millions have seen pay and benefits cut.

The salad days of the public sector are over. From San Joaquin Valley to Spain, its numbers have begun to shrink and its benefits to be cut.

A declaration of bankruptcy by a few cities, however, has an impact upon all – for it usually involves a default on debts. This terrifies investors, who then demand a higher rate of interest for the increased risk they take when they buy the new municipal bonds that fund the educational and infrastructure projects of the solvent cities.

Cities and counties have no way out of the vicious cycle. Rising deficits and debts force new tax hikes and new cuts in schools, cops and firemen. Residents see the town going down, and pack and leave.

This further reduces the tax base and further enlarges the deficit.

Then the process begins anew.

This is what is happening in Spain and Greece, which have reached the early 1930s stage of rioting and the rise of radical parties.

Since the New Deal, Keynesianism has been our answer to recession. As the private sector shrinks, the pubic sector expands to fill the void until the private sector returns to health. Only Keynesianism is not working.