THE BLOG

The Cloud on the Horizon

02/23/2011 05:00 pm ET | Updated May 25, 2011

In recent weeks, I have celebrated the resurgence of manufacturing in the U.S., and its happy implications for the overall economy. Those analyses are perfectly valid and offer policy makers a roadmap to economic recovery if they are wise enough to recognize the power of our resurgent manufacturing base and take advantage of it.

But it is not my intent to minimize or understate the gravity of the fiscal cloud gathering on the horizon. Like most economists who do not have their heads in the sand, I have for many years -- during my tenure as President of the National Association of Manufacturers and later the Manufacturing Institute -- warned of a pending fiscal crisis driven by excessive debt and unrealistic government commitments.

That cloud is getting closer. We here in Washington tend to focus on the fiscal challenge posed by the federal deficit and the national debt complicated by the growing burdens of Social Security, Medicare and Medicaid. Those challenges are real enough, but the fiscal travails of state, county, and municipal governments are almost as daunting. State and local debt is over $2.4 trillion, and unfunded state and local pension obligations add $3.5 trillion more.

The stormy standoff between Wisconsin Governor Scott Walker and public employee unions is a harbinger of more to come. Year after year, state and local governments have bought political support from public employee unions by agreeing to generous pensions and benefit programs, including medical care, without setting aside adequate funding for them. That amounts to a giant Ponzi scheme and, like all Ponzi schemes do eventually, it is coming unraveled.

The breadth and depth of the pension crisis beggars the imagination. For decades, tens of millions of Americans have been retiring in their 50s, sometimes younger, looking forward to many more decades of benefits indexed against inflation, plus generous health care. People in recognizably hazardous occupations -- such as the military, police and firefighters -- routinely retire after 20 years on the job. I know many who have done that and gone on to another 20 plus years in other government jobs, and then retired again, augmenting their military pensions with even more generous government pensions, usually with equally generous health benefits. Who is supposed to pay for all this?

We have all sinned and come short of the glory of fiscal responsibility. The Republicans insist on tax cuts for wealthy citizens who have no need of them, depriving the treasury of funds needed to provide basic government services. But the Democrats have probably been even more irresponsible in their collusion with public employee unions, signing off on open-ended commitments the people cannot afford. State and local spending accounts for 15 cents of every dollar of GDP. Moreover, as this unaffordable spending is cut, as it must be, it will substantially worsen the macroeconomic picture. This is a true "Catch 22" that shows that the cloud on the horizon is now overhead.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers, an industrial trade advocacy association, for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.