Anatomy of a State Budget Crisis

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For those of you who can stomach enormous pdf files about economics, this recent analysis of California's budget woes, by UCLA's Daniel J.B. Mitchell, is a valuable reference document. One of Mitchell's more obvious points is worth remembering, as people compare Gray Davis' budget busting with George Bush's:

The fact is, however, that if California were a large country, it could do what the federal government does. It could run large continuing deficits. The federal government finances its deficits with bonds that are promises to pay dollars in the future. Since the federal government ultimately can create dollars, it can honor these future commitments. For that reason, federal securities are top rated by security rating services such as Moody?s, Standard & Poors, and Fitch. California cannot create dollars, although its bonds are also promises to pay dollars in the future. Therefore, as it increases its debt, its securities are viewed as more risky. Large continuing deficits, particularly if they occur in the context of legislative paralysis, will result in a higher and higher interest rate to compensate lenders for greater risk of default. Eventually, such deficits can lead to a refusal to lend at all.

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  1. Yeah. And if oleanders were wishes, and if everyone in Hollywood crapped gold bricks, then we wouldn’t be in this mess.

  2. Large continuing deficits, particularly if they occur in the context of legislative paralysis, will result in a higher and higher interest rate to compensate lenders for greater risk of default. Eventually, such deficits can lead to a refusal to lend at all.

    Didn’t Keynes once say that eventually we’re all going to die?

  3. One question…by “create dollars” does the author mean a) the authority to actually print money or b) the ability to levy taxes?
    The state of California (as residents can surely attest) can definitely levy income, consumption and personal taxes. So CA’s bonds can be theoretically backed with a guarantee of future payment, albeit with much higher default risk than Uncle Sam’s debt.

  4. Jayson, taxes are not guaranteed revenue — they come from business and private income, which (a) are finite and (b) have the option of leaving the state. Whereas if the government says it owes you $100,000, you know for certain it could just print the money — the worst risk you face is a reduced return due to inflation (a risk you also face with states).

    Something that puts the California budget crisis into perspective, in my opinion, is that Californians pay $255 billion/year in federal taxes, but only $195 billion/year of federal dollars flow back into the state.

    So California has a “tax trade deficit” with the rest of the United States, to the tune of about $60 billion. That puts our $38 billion state deficit into perspective; in theory, if we only “paid for what we got” at the federal level, we could pay for even the current (bloated) state government, with plenty to spare, and reduce our tax burden at the same time.

  5. Steve Smith:

    The quote you are looking for is as follows:

    “In the long run we are all dead.” – Lord Keynes

    “The Money Game” talks quite a bit about just such a subject, except it’s more about personal investing and finance.

  6. Interesting comment from Keynes, made, I’m sure, to silence critics about the long term consequences of his proposed policies. Unfortunately, we’ve certainly seen Keynesian failures in our lifetime (stagflation comes to mind), but even on a longer time scale it’s still not true. Yeah, one day all of US will be dead, but a good number of us are reproducing. What a morally corrupt argument, that basically it doesn’t matter what shape we leave the economy in for our children.

    Sigh…I’m all better now. Thanks.

  7. Interesting comment from Keynes, made, I’m sure, to silence critics about the long term consequences of his proposed policies.

    No. It was made to criticize those who asserted that no action was warranted to address the economic situation because it would right itself over an impossibly long time horizon.

  8. Dan, Maybe CA just needs people representing them in congress that are better skilled at stealing the residents’ money back with a few more pork projects.

    Then again, if you consider all of the welfare dollars that get pumped into CA from all over the country in the form of box office and merchandizing receipts, you’re not doing too bad.

  9. Before, we could blame the bulk of the deficit on the hole-in-the pocket Democrats but now we’re essentially paying for the GOP re-election bid for 04.

    Buying votes sure is expensive and you don’t even always get what you pay for, just look the steel tariffs and the Teamsters backing that one guy, umm, let see, his name was on the tip of my,. . Gephardt, that’s it. The guy from MO.

  10. Along the lines of CH’s suggestion, they need someone like Robt Byrd though his Klan connections are only tolerable as long as he stays in the backwater.

  11. Chthus-

    Movie ticket=welfare dollars

    help me out here, I thought it was intra-state commerce

  12. Jim:

    Actually, no. It deals with the fact that humans have finite life-spans, and that life itself as a long-term thing is made up of many individual short-terms.

    It furthermore addresses the fact that all decisions must be made according to specific time-goals and horizons, because the fundamental way of things is that you can always push back the pay-off of something farther and thus cause it to be bigger when (and if) it comes, or to take the pay-off earlier and thus get less. But to say that somehow you should always go for the bigger pay-off ignores that humans 1) Do not live forever, 2) Live in the present, and 3) Individuals, not all being the same, value things differently – including Savings vs Production/Investing vs Consumption.

    In “The Money Game”, ‘Adam Smith’ notes how this fundamentally effects the money game itself, as played out in the stockmarket, with the story of the “Never Touch The IBM” family (the original man who bought IBM stock became a millionaire multiple times over, died and left the IBM to his children with the instructions never to sell it, and passed it on to his children who did not sell it and they all grew to millionaires, and so on and so forth – every single one of them lived just like they never even had the stock, working just as hard as everyone else to make a living since they would not sell the IBM, and only one member even so much as borrowed against it, such that by never selling it they all lived truly as if they didn’t have it at all, and possibly always will), and with the example of the man in the 1860’s who had made over a $1.3 million in the stockmarket (at a time when an 8 course meal would cost $1) who locked away a collection of solid stocks, such as in copper and gold and alarm clocks, to pass on to his children and family – by the time they got ahold of the inheritance the whole thing was worth exactly $0 as every company had gone entirely out of existance.

    Indeed, as both Keynes and this pseudonymed Adam Smith noted, this sort of capitalism is “Always jam tommorrow, and never jam today.”

    As applied to the economy, this means that just because something will fix itself in the long-term means nothing, because an entire generation (or more) could be dead by then (assuming something else doesn’t come along to push it back yet further) – short-term disruptions in the market are not squiggles in an economic curve that will right themselves eventually, but destroyed lives which might never be back in the same place they were.

    Thus an inescapable problem that humanity will forever face: Upon what hour will we judge our success, and deem ourselves to have done well or to have erred? To what end shall we make our decisions toward?

    Always jam tommarrow and never jam today is one way of answering this question – but what kind of life is that? It is not “for the children”, because the children themselves will just live out this same always jam tommarrow and never jam today, to the same end – just as the “Never Touch The IBM” family. Indeed, it is an inescapable part of the human condition that it may be great to have cake, but what good is it if it is never eaten?

    The other extreme is no more satisfying, for if we have all our jam today, will we not starve tommorrow?

    As such we must spend and produce, consume and invest, and, I argue, leave the world a better place when our own time has come to an end. Generations can always complain that they could have been left more – and they surely always will, as it is forever true – but what right does anyone have to claim that that which is not theirs should not be used, because then they would be denied from having it?

    It may sound good to create the best of all worlds possible for our children, but if they do the same thing generation after generation, is anyone ever truly made better off? Is this not indeed a case of always jam tommorrow, never jam today?

  13. You know, Dan if we eliminated vast chunks of federal welfare and social spending – most of which is actually unconstitutional anyway – but which seem to be ideas the CA electorate favor we could put a serious dent in the “Tax Trade Defecit”

    Of course the other reason for the deficit is probably the left wing’s overwhelming desire to tax the rich – of which there is a fairly high percentage in CA

  14. Dan, Maybe CA just needs people representing them in congress that are better skilled at stealing the residents’ money back

    We have exactly two Senators. There are 33 states which receive more federal money than they contribute in taxes. They have 66 Senators.

    Talk about “skill” all you want, the simple fact of the matter is that this is the state-level equivalent of progressive taxation — California is rich, but heavily outnumbered by the other voters in the Senate, which means we get to take it up the ass extra-hard on taxes. The flyover states simply vote themselves our money.

    Then again, if you consider all of the welfare dollars that get pumped into CA from all over the country in the form of box office and merchandizing receipts, you’re not doing too bad.

    Capitalism = welfare? That’s the most ignorant notion I’ve heard since my last trip to an Indymedia site.

  15. You know, Dan if we eliminated vast chunks of federal welfare and social spending – most of which is actually unconstitutional anyway – but which seem to be ideas the CA electorate favor we could put a serious dent in the “Tax Trade Defecit”

    Lots of things the government does are “unconstitutional”, if by that you mean “against a literal reading of the Constitution” (rather than the actual definition, “disapproved of by the Supreme Court”). These things include the items you list, plus things like “maintaining a standing army in peacetime”, “funding research of any kind”, “paying out farm subsidies”, “building highways”, etc.

    The California electorate may or may not favor any of the above policies; that’s irrelevant. We have two votes in the Senate. If we wanted to repeal Social Security, the Senate vote would be a reliable 2 to 98 against. Ditto for eliminating the army. What’s important isn’t which policies California favors, but which policies the country as a whole favors — which is, face it, plenty of big government programs. Californians may, on average, favor welfare, but they’re also on average willing to pay their share. Arkansas also wants plenty of welfare… they just think states like New York and California should pay for it.

    California could be libertarian to the core, we’d still get fucked up the ass on federal taxes; the silly-ass two-votes-per-state Senate system guarantees that.

    Of course the other reason for the deficit is probably the left wing’s overwhelming desire to tax the rich – of which there is a fairly high percentage in CA.

    On average, Republican/right-wing states receive more federal money than they pay in taxes; Democratic/left-wing states pay more than they receive. It’s easy to be in favor of low taxes when other people are paying for your government programs. It is also natural to demand that the government do more for you, when at the moment it’s doing less for you than you paid for. Why shouldn’t Californians and New Yorkers expect a lot from the Feds? On average, every man, woman, and child in the state paid TWO THOUSAND DOLLARS more in taxes than we got in services. Meanwhile, the South gets fat on our tax money and pats itself on the back for being “fiscally conservative”. Buying stuff with stolen money is not the same as being frugal. 🙂

  16. Actually, Dan, building highways (post roads) is one of the few activities actually authorized by the constitution.

    I doubt the FF had the interstate highway system in mind somehow.

  17. Comparison of the California and federal budgets needs to be seen for what it is: a debating point. The fact is that the rules are not the same for state governments as they are for the federal, that this has always been true throughout recent history, and that notwithstanding this the Democrats in charge of California have run up a staggering deficit over several years. This is malfeasance; the comparison to the federal budget is meant to suggest that such malfeasance is perfectly OK. Look for this comparison, and its suggestion, soon in a Gray Davis ad near you.

    About this “tax trade deficit”: this comes up about once every two years in all the states that send a lot more money to the federal government than they get back in federal spending. It is said to be unjust, unfair, inequitable and it must be changed. And it hardly ever is, because it is not unjust, unfair or inequitable. It reflects federal spending on things that must of their nature be in one place, like military bases; federal spending directed at populations that move, as elderly Social Security recipients move from high-tax states like California and New York; and the fact that the United States has a progressive income tax that collects much more money from VERY RICH PEOPLE, of whom California has many more than other states. It is absurd to argue that the federal taxes of the very wealthy must only be spent near where the very wealthy live. That is what state taxes are for.

  18. ZAthras wrote:
    “Comparison of the California and federal budgets needs to be seen for what it is: a debating point.”

    Bush and Davis both embrace and push a big government agenda. The tragedy at the federal level is that the Republicans in congress, who tend to be much more responsible, have given way to the Bush administration in a way that they never did with Clinton. The ballooning federal budget and the rapidly increasing government involvment in so many aspects of Americans lives along with the attendant loss of individual liberty is the result of this sad acquiescence. There are signs that the Republicans in congress might be ready to wake up and reassert themselves but for that to happen they, no dought, need a strong message from us.

  19. Dan wrote:
    “On average, Republican/right-wing states receive more federal money than they pay in taxes; Democratic/left-wing states pay more than they receive.”

    Could you please cite a source for the the above.
    There are a lot of possibilities when were talking “On average”

    “It’s easy to be in favor of low taxes when other people are paying for your government programs.”

    The criticism is not valid because the congress people from the “Republican/right-wing states” vote for much less government then those from “Democratic/left-wing states”. Go to the National Taxpayer Union site and compare; say: Colorado and Massachusetts. The contrast is stark.

    “It is also natural to demand that the government do more for you, when at the moment it’s doing less for you than you paid for.”

    That “demand” is a big part of the problem.

    “Why shouldn’t Californians and New Yorkers expect a lot from the Feds?”

    Oh, they do, they really do, and unfortunately the rest of us get much of what they ask for as well.

    “Buying stuff with stolen money is not the same as being frugal. :)”

    It’s all “stolen money”.

  20. Could you please cite a source for the [the claim that Republican states get more money.

    http://www.taxfoundation.org

  21. the United States has a progressive income tax that collects much more money from VERY RICH PEOPLE, of whom California has many more than other states.

    That’s a bullshit argument, and I’ll tell you why: because the US Federal Tax code does not factor in cost-of-living. Our “progressive” tax system doesn’t tax “the rich”; it taxes people who earn more money. The problem with that is that a person earning $25,000 a year in San Diego has a far lower standard of living than a person earning $15,000 in rural Nebraska. A family with a combined income of $100,000 can barely afford a decent house here, whereas they could live like kings in Kansas.

    It is absurd to argue that the federal taxes of the very wealthy must only be spent near where the very wealthy live

    It’s “absurd” to argue that the people’s taxes be spent in ways that benefit them? Interesting. I take it you’re a Democrat. 😉

  22. The criticism is not valid because the congress people from the “Republican/right-wing states” vote for much less government then those from “Democratic/left-wing states”.

    Oh? They vote against farm subsidies, do they? Against useless military bases in Alabama? Against pork-barrel projects in North Carolina?

    Republicans (if by “Republicans” you mean “people other than George Bush and his supporters”, who thus far haven’t met a big government program they weren’t willing to throw a few $100 billion at) are against “big government” programs that distribute money to states, or to people, that they don’t get support from. They are not against big government in general. Do they claim to be? Yes. Is there any empirical evidence at all that they are? No. If the Republicans wanted to shrink government, government would be shrinking RIGHT NOW, because Republicans control the Presidency, both houses of Congress, and the Supreme Court. And before you argue that “they can be filibustered” — sure, perhaps. Except that they haven’t been, because they haven’t even *tried* to repeal any of the Welfare State. They’re too busy adding to it.

  23. If Californian voters cared about the “tax trade deficit” they wouldn’t continue to elect the likes of Boxer and Feinstein, who support highly progressive taxation and federal aid.

  24. California can stop paying my welfare, and I can stop paying for their water. Sound like a deal?

  25. That’s just wacky. The instant the “bond markets” catch wind of the government’s cunning plan to pay off its debt by running the printing presses inflation and interest rates would skyrocket.

    Or, to put it another way, why don’t we just close down the IRS and let the government just spend infinite amounts of money simply by printing it.

    Invaluable example of stupidity.

  26. First thing to decide is what do we mean by “large” deficits. The federal deficit under GWB is larger than California’s defcit right now, but so is the national economy larger than California’s economy.

  27. arjay,

    The power is actually only to designate federal postal routes, not to fund internal improvements. That’s an implied power so broad you could drive a truck through it, if you’ll pardon the expression.

  28. Dan gets to the heart of the matter with: >>>Californians pay $255 billion/year in federal taxes, but only $195 billion/year of federal dollars flow back into the state.

    So California has a “tax trade deficit” with the rest of the United States, to the tune of about $60 billion. That puts our $38 billion state deficit into perspective; in theory, if we only “paid for what we got” at the federal level, we could pay for even the current (bloated) state government, with plenty to spare, and reduce our tax burden at the same time.

  29. EMAIL: draime2000@yahoo.com
    IP: 62.213.67.122
    URL: http://www.enlargement-for-penis.com
    DATE: 01/25/2004 04:52:12
    You are free and that is why you are lost.

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