— Bud Norman
Tag Archives: austerity
The Bluest State Is in the Red
There are still a few fine folks left in California, we suppose, so we find no pleasure in reading that the state is $16 billion in debt. The state as a whole is sufficiently smug that we’ll admit to a slightly satisfying sense of vindication for our stingy prairie ways, but by no means do we stoop to schadenfreude.
California’s $16 billion shortfall is about $7 billion more than Gov. Jerry Brown anticipated when he proposed what was called an austerity budget at the beginning of the fiscal year, and he’s warning Californians that further cuts will now be necessary. The man known to both his admirers and detractors as “Gov. Moonbeam” deserves some credit for taking such a politically risky stand, but only so much. Democrats, especially ones of such impeccably Democratic lineage as Brown or New York’s Andrew Cuomo, can cut a budget and expect to be hailed for their hard-nosed realism and fiscal probity, whereas Republicans who cut budgets, especially ones of such low birth and Republican instincts as Kansas’ Sam Brownback or especially Wisconsin’s Scott Walker, can expect all manner of calumnies against their compassion and character.
Proving that he is still a Democrat through and through, his budget-cutting ways notwithstanding, Brown is also proposing tax increases. In a message to the state released on YouTube, where he has to compete for viewers with videos of street brawls and cute kittens, Brown said that next November’s ballot would include initiatives to raise the state sales tax by 0.25 percent and raise income taxes on people making more than that magical yet arbitrary amount of $250,000 a year. Given that everyone in California pays the sales tax, which is already the highest in the nation, and that most people there make less than $250,000 a year, we expect that the latter proposal will prove far more popular than the former.
Brown will likely find it difficult to persuade an overwhelmingly Democratic Senate and Assembly to start spending less money, but even if he does succeed it is unlikely to help in balancing California’s budget. Much of the bigger-than-expected budget shortfall is a result of state courts and federal regulators blocking the cuts that had already been made, and further attempts to limit spending will likely face the same stubborn resistance. With grievance-mongering still one of the state’s most vital industries, and a robust tradition of union thuggery and rioting in the state, one can also expect a nasty public reaction to any effective degree of budget-cutting.
The liberal explanation for California’s woes is to blame the 34-year-old Proposition 13, which infuriatingly restrains the state from taxing every last penny out of the citizenry, but we don’t believe that Brown’s tax increases will significantly reduce the deficit. Most of the blame for the budget crisis is being ascribed to the state’s lousy economy, which Brown describes as the worst since the 1930s, and adding to what is already the nation’s highest sales tax will further hinder growth, perhaps to the point that the tax increase becomes counter-productive. Even at a harmless-sounding quarter-of-a-penny the tax would also be a further burden to an increasingly impoverished population, given the extraordinary number of pennies it takes to live in the Golden State.
Raising the income tax rate, which is also the nation’s highest, will most certainly drive even more wealthy California taxpayers out of the state and result in a net loss of revenues. There is much to recommend California, such as its climate, natural beauty, and abundant resources, but there is nothing there that a wealthy person can’t find in some more hospitable tax jurisdiction. People have been fleeing California by the hundreds of thousands since 1990, and taking their tax payments with them, so a further increase will only hasten the exodus.
Most of the people leaving California are doing so because of the state’s high taxes, a regulatory system that thwarts entrepreneurship at every opportunity, and a popular culture that is not conducive to raising a family. The fewer number of people moving in do so for reasons that are harder to explain, given the high unemployment rate and myriad social problems, so we’ll assume most of them intend to become movie stars or are drawn to the state by its reputation for generous social programs and potent marijuana. In other words, the state is rapidly losing Republicans and gaining Democrats, so we don’t expect that California will soon ditch its high-tax, high-service model for the more austere sort of state government favored the rubes out here on the plains.
— Bud Norman
Paris When It Fizzles
The news from France is very bad. Perhaps not so bad as it was back in 1940, when Winston Churchill famously began a speech with the same line, but it’s not good.
French voters on Sunday ejected President Nicolas Sarkozy after five desultory years in office, which is reasonable, and replaced him with Francois Hollande, which is quite unreasonable. Hollande is a Socialist — and we use that term with a capital letter and no fear of contradiction, because that is what his party actually calls itself — so the French economy is likely to take a turn for the even worse.
Socialism’s sorry record as an economic system aside, Hollande’s policies will accelerate his country’s and the European continent’s already rapid rush toward fiscal calamity. Declaring that “austerity can no longer be the only option,” the President-elect has promised to renegotiate the laboriously crafted treaty that has imposed a sort of budget discipline on the European Union’s member nations. Hollande’s plan to revive a French economy weighed down by too much debt, then, is to start spending more.
This scheme is proposed in the name of economic growth, but the smart money isn’t betting on that happening. If a massive amount of government spending were an effective way to achieve growth, the French and American economies would both be booming right now, and we’d be looking back fondly at the Roaring ‘30s and the fat years of the ‘70s. Hollande also proposes a number of policies that will negate any stimulative effects that his spending might have achieved. He hopes to repeal a recent law that raised the retirement age from 60 all the way to 62, apparently on the theory that having fewer people working less of their lives will increase productivity, increase the minimum wage, with hopes that struggling companies will then hire more low-skilled workers, and hire 60,000 more teachers, probably not in order to teach basic economics.
Having explicitly stated that he “does not like the rich,” and that “my real enemy is the world of finance,” Hollande further proposes to impose hefty tax increases on corporations and wealthy individuals. France’s corporations and wealthy individuals don’t much care for Hollande, either, so many are already planning to take their money, skills, and business elsewhere. This is not likely to encourage economic growth.
Re-negotiating France’s treaty with the rest of Europe, which the Germans have already indicated they will resist, will cause further problems. The treaty, a cumbersome and complicated arrangement whereby debtors bailed out debtors in exchange for promises of a slower rate of debt accumulation, was always an imperfect plan, but it was good enough to calm the international financial markets and buy some much-needed time to find a better solution. Hollande’s desire to start again from scratch, and with the financial markets as his stated enemy, could even hasten the end of the European Union and whatever economic benefits it has achieved.
— Bud Norman
Debts and Riots
The news reports from Greece give a horrifying account of the rioting, arson, and strikes there, but none offer any explanation of what the rioters, arsonists, and strikers want.
They obviously don’t want the austerity bill that was passed by their parliament on Sunday, which is easily understandable. Included in the bill are 150,000 public sector layoffs, a 22 percent cut in the minimum wage, a 20 percent cut in monthly pensions above €1,200, a 40 percent cut in the pensions of all retirees below the age of 55, and the income tax extended to all people making more than €5,000 a year. Such painful measures are not expected to boost the economic fortunes of a country that has been mired in recession for five years and suffers 21 percent unemployment, either, as one needn’t be a hard-core Keynesian to see how a largely government run economy will be affected by deep cuts in government spending.
What they do want, though, is less clear. The Greeks are discovering what many a profligate individual has learned over the years, that living on borrowed money eventually ends badly. There are no painless solutions, and all options seem to end in austerity.
Some of the rioters are reportedly communists hoping that a Marxist state will arise from the ashes, but if communism were the answer the Greeks would be getting bailed out by the Soviet Union. Others are no doubt hoping for some other form of government or non-government, but they can’t suggest one that comes with enough money to pay the enormous bills that have accumulated. Most are just venting their frustrations, if human nature is the same in Greece as elsewhere, but there is no precedent for rioting, arson, and strikes improving an economy.
Without the austerity bill, Greece won’t receive a promised €8 billion bail-out, and without it the country will be forced into default and an even greater economic catastrophe. As Prime Minister Lucas Papademos put it to the New York Times, “It would create conditions of uncontrolled economic chaos and a social explosion. The state would be unable to pay wages and pensions and cover basic operational costs such as those of hospitals and schools. The living standard of Greeks would collapse, and the country would be dragged into a spiral of recession, instability, unemployment and misery.”
Worse yet, Papademos seems to think, “all these developments would lead, sooner or later, to Greece’s exit from the Euro zone.”
Even if Greece does retain its European Union membership, which may or may not be a good thing, the austerity measures and the resulting bail-out hardly put the country on a sound financial footing. The plan hopes to have Greece’s debt down to a staggering 120 percent of its gross domestic product by 2020, and involves a 70 percent cut in payments to the saps who invested in the country, a bad haircut that’s likely to scare away foreign capital for years to come.
— Bud Norman