What he means is that the private sector has to deal in reality, a place where the concept of a "bottom line" actually exists. The federal government on the other hand exists in a fantasy world where there's no such thing as a bottom line. The federal government merely decides what they feel like paying themselves and if that means a bigger defecit, so what?
That's why your earlier point about private sector compensation "not keeping up" with government compensation is so incredibly stupid.

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