Greek-Style Deficits in America?
“States are going to have to cut back spending and raise taxes the same way Greece and Spain are. That runs counter to stimulating the economy and will put a big damper on the recovery in the latter half of this year.”
-Dean Baker, co- director of the Center for Economic and Policy Research in Washington.
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Interesting discussion at Bloomberg.com about the coming budget crunches in US states and cities:
Even as the U.S. appears to be on the mend — gross domestic product has climbed three straight quarters — finances in Arizona, Illinois, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of U.S. GDP . . .
State budget woes are a worsening drag on growth as the federal government tries to wean the economy from two years of extraordinary support. By Jan. 1, funds from the $787 billion federal stimulus bill will dry up. That money from Washington has helped cushion state budgets as tax revenue has plunged.
State leaders won’t be able to ride out this cycle the way they have in the past. The budget holes are too large. For the first time since 1962, sales and income tax revenue fell for five straight quarters, through December 2009, according to the Nelson A. Rockefeller Institute of Government at the State University of New York at Albany.
That is an ugly statistic. And I agree with Gluskin Sheff’s David Rosenberg — massive budget cuts and tax hikes will only make the situation worse, not better. The time to raise taxes and cut spending is during an expansion, not immediately post-contraction.
As I have noted previously, we — governments and individuals — are better off when they spend counter-cyclically . . .
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Source:
States of Crisis for 46 Governments Facing Greek-Style Deficits
Edward Robinson
Bloomberg, June 25 2010
http://noir.bloomberg.com/apps/news?pid=20601109&sid=atxrhPqbty_4&
See also:
Ben Bernanke needs fresh monetary blitz as US recovery falters
Ambrose Evans-Pritchard
Telegraph 9:44PM BST 24 Jun 2010
http://www.telegraph.co.uk/finance/economics/7852945/Ben-Bernanke-needs-fresh-monetary-blitz-as-US-recovery-falters.html
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June 26th, 2010 at 10:38 am
Pretty funny here in Georgia. The republican state legislature was counting on $400 Million that was in the unemployment bill that the republican Washington contingent keeps voting against. They are already firing teachers. I wonder how many more teachers will get the axe?
But no worries, there is state funding for a new stadium for the Atlanta Falcons and money to start a football program at Georgia State U.
June 26th, 2010 at 11:07 am
Neil M. Barofsky, the Special Inspector General for TARP stated that, all inclusive, TARP is not a $700 billion program, but a $23 trillion program. Eric Sprott, probably one of the most successful hedge fund managers over the last 10 years, calculates that America is in debt to the tune of $128 trillion. There can never be an economic recovery with that kind of debt overhang.
More compounded Government debt spending may bump up quarterly numbers enough to get politicians re-elected or to subsidize the hundreds of billions in compensation packages for banksters, defense contractors and for big pharma and health care insurance kingpins, but it will never constitute a recovery on bankrupt Main Street America. We live in Enron nation, where people like Madoff are only minor ponzi princes.
June 26th, 2010 at 11:13 am
For some of the worst offenders (eg, California), they’ve been running a budget deficit for years and years that they’ve been covering up with budget games. To spend counter-cyclically, the state would need to build up a reserve when times are flush, and spend it during the lean years. This takes legislative restraint when there is excess money available to spend, and we all know that politicians have all the logic and self-restraint of Charles Manson on crack.
California, especially, did not budget tax windfalls correctly. When tax revenues were really fat after the dot-com bubble (2000 and 2001), they spent their tax revenues on increasing public employee benefits and other long-term budget items, without wondering whether the tax revenues would be there forever. The tax revenues went away very quickly in 2002-2003, and they’ve been in severe deficit mode ever since. The single biggest problem there is that the legislature had *no* clue where the tax revenue was coming from – indeed, in the downturn, the politicians in Sacramento accused business of “not paying their fair share.” When the legislative analysts got to work, they determined that, no, with the exception of the highest personal income tax bracket, tax revenues were pretty much unchanged from the flush years of ’99 and ’00, and that the tax revenue surge in those years had been due to stock option plan exercises, resulting in a sudden bulge in highest-bracket personal income tax revenues.
In other words, the tax revenue surge of ’99 and ’00 was a one-time thing. It came, it went, and it wasn’t coming back. The prudent thing would have been to undo the long-term spending commitments they made with the mistaken assumptions of ongoing revenue.
Didn’t happen. They’ve been in a structural deficit ever since, unwilling to undo the rampant spending on public employee pay packages from those years.
June 26th, 2010 at 11:21 am
Theoretically BR may be right that the best time to increase taxes and reduce spending is when the economy is doing well. But practically speaking, those are times when politicians are most likely to respond to the demands of the electorate to reduce taxes and increase spending. The only time when the public is clamoring to reduce government spending, particularly public employee salaries and benefits, is when the general public is suffering. Plus there is the argument that public spending doesn’t solve the problem. It delays the necessary adjustment in the economy, and increases the debt of future generations. I say lets clean out the excesses of the past and just keep a safety net combined with compulsory public service and ongoing training to ensure that people can maintain a adequate lifestyle during these difficult times (say $12k per adult and $5k per child.)
June 26th, 2010 at 11:23 am
“To spend counter-cyclically, the state would need to build up a reserve when times are flush, and spend it during the lean years”
This is why I am just not comfortable with spending during the downturn because we don’t know how to save during the good times, and we never will. Barry, what is the end goal here, we don’t pull back spending now to thwart a depression but we somehow get religion when growth returns and don’t repeat past mistakes? Never in a thousand years. Do you want to keep the bubble and burst economy going because you can make more trading it than you can a normally functioning boring ole economy?
June 26th, 2010 at 11:41 am
YouthInAsia
BR and a legion of others prefer an inflationary environment. Anyone with some serious money would prefer that over deflation. The only people wanting deflation are those on relatively fixed incomes whish is the vast billions who work every day for survival incomes.
You must read BR in that context then it all makes sense.
They ALWAYS talk and write their book when it comes to economic winds that might jeopardize the status quo.
June 26th, 2010 at 11:45 am
“Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of U.S. GDP ”
The numbers are irrelevant. All the states will be bailed out. As for the long term, no one cares. All else is kabuki theatre. If it weren’t we would not be counting our debt in the trillions. What I find more amusing is that folks truly look up to the Barney Frank’s/ Chris Dodd’s for solutions. Too funny. Even more hilarious is the thought that an actual cut in spending might take place.
June 26th, 2010 at 12:01 pm
Barofsky’s estimate is unfathomable… if correct.. we’re screwed… i thought the numbers are closer to 10-20T backstop… .. at this point.. given 70% of the economy is consumer spending , neutralizing ALL States annual deficits for 1 year would be better for GDP, Growth and the economy recovery then bailout 13 banks on Wall Street… Also given BRs grade on financial reform.. we’re doubly screwed, as leverage, size and instability are just going to increase in Financial Services.. with the instability another crises will loom eventually .. .. these 1 in 100 year events seem to happen every 5 years now…
the transaction based mentality of Wall Street, seems to not realize as long as Main street has state budgets in severe deficit, home values falling, stock portfolios leveled, and massive unemployment 70% of the economy isn’t ‘recover’n’ and their long term profits are asymptotically constrained….
June 26th, 2010 at 12:04 pm
Actually, I’m not sure that what DR is saying. And I certainly don’t agree as an Aust(e)rian. The way to solve a debt crisis is not with more debt. Cameron and Merkel are right to say, enough, we have to stay in control before the debt markets control us. The US can do as it wishes, and it can get away with it longer by virtue of having the reserve currency, but IMHO, the end result will be the same or worse. Ultimately, you don’t help a drunk sailor with another bottle.
And wouldn’t it be a wonderful thing if Washington, like the States, HAD to balance its budget? What a simple way to address all of the problems of the The United Corporatocracy of America.
June 26th, 2010 at 12:15 pm
How is it possible to spend counter cyclically? How do you know how long the good times will last, how much do you have to save? It just doesn’t make sense.
All you have to do is stop allowing the banks to blow credit bubbles. Reinstate Glass-Steagall and simply enforce the Fed mandate on monetary inflation. The only problem we have is people forget and think that leverage and borrowing equals prosperity when it does not. Stop teaching this keynesian garbage and start teaching people common sense. I don’t need Agency Theory or whatever its called to realize that a banker is going to be quite happy taking 100 million dollar bonuses by the magic of lending 40 to 1.
Stop trying to deal with the after effects. There is nothing that should be done except for taking our lumps.
June 26th, 2010 at 12:19 pm
flipspiceland Says:
“BR and a legion of others prefer an inflationary environment.”
and,
“The only people wanting deflation are those on relatively fixed incomes whish is the vast billions who work every day for survival incomes.”
______________
Inflation is inherent in a fiat monetary system. That’s all it can do. I don’t know if anyone actually prefers it, it’s just the only tool in the box, and we’re not going outside that box for a while yet.
As for who wants or would benefit inflation or deflation, I think the exact opposite of what you wrote.
The uber-wealthy are not seriously damaged by deflation, as their dollar holdings (or other deflating currency/money holdings) increase in value due to higher demand and lower supply. OTOH, inflation (especially wage inflation) causes the opposite to happen (who cares if you are a Billionaire in Zimbabwe?).
Of course, our orchestrated move from consumption based on income (especially during a long-term trend of declining wages), to one based on credit and debt makes matters even worse for the middle class in a deflationary scenario — how the hell is one supposed to service existing debt (undertaken in the assumption of higher wages in the future), when those wages have not materialized?
__________________
On BR’s post:
The old adage that all politics are local no longer holds true. We, as a nation, are obsessed with spending and taxation by the Federal government, when State and local governments are, by far, the most profligate spenders and usurpers of individual/non-corporate wealth.
We are much more on the hook for our states than the EU ever was for one of its members.
June 26th, 2010 at 12:21 pm
The time to raise taxes and cut spending is during an expansion, not immediately post-contraction.
c’mon BR you can use those one or two classes of college psychology you must have had to call bullshit on that statement-
during good times- the thought is- they’ll never end- why save when all that stretches before you are guaranteed days of prosperity. Spending cuts? Puleeeeeease . . . stop that nonsense-
reminds me of the saying- “if not now- when?”
the answer to that is never-
deep down you know it’s true- so quit w/ your “supposed” common sense and “Keynesian sensibilities”- better to use your intellect on other things-
like how to stop the erosion of our civil liberties.
June 26th, 2010 at 12:24 pm
@dsawy
California is a special case. The problem isn’t that the state failed to raise a cushion with tax revenue in the boom years–that’s *A* problem but not *THE* problem.
The problem is that California’s Prop 13 made the state ungovernable. It’s impossible to build a budget cushion here because Prop 13 and an earlier law requires a 2/3 majority to raise taxes or even to pass a budget. And it just so happens that the GOP controls just barely enough seats to filibuster any tax increase or budget they don’t like.
So what happens? When the state is flush, the GOP demands tax cuts as the price of passing a state budget. When the state is broke, the GOP demands…tax cuts as the price of passing a state budget. Doesn’t make sense, right? Well, now you know why California is literally broken.
Oh, and the other terrible fact about Prop 13 is that it rearranged California’s tax structure. Before Prop 13, 60% of the tax revenue in the state came from corporations, 40% from individuals. Now, as a result of Prop 13, 40% of the tax revenue comes from corporations, 60% from individuals.
So Prop 13 was the biggest tax increase on California homeowners in state history. So you’d think we’d be fixing that, considering the dire state of the budget?
Nope. The price of passing a state budget in 2009 was that the GOP demanded and received…a massive…state…tax…cut…for…the…corporations.
Thank you, Prop 13.
June 26th, 2010 at 12:31 pm
Most of the elites who manage this economic system don’t really understand macro-economics at all. And they hire economists to compartmentalize the data series of prices and profits with mathematical functions that presume constant probabilities and bounded values. Monetary salvation is the ointment that keeps the paradigm operating. All the bugs that hit the wind-shield are seen as annoyances, rather then clues to something more systemic.
The various special corporate and elite interests have carved out of the people’s government their spheres of influence, and pay for the political mouth-pieces who pride themselves on the buckets of foul water they carry for the monetary interests. Why else are Sarah Palin and her ilk paraded before the television news cycle? What knowledge and relevance do they bring to the discussion, other than create confusion so that the elite paradigm can continue to exist.
Why even expect “Washington … to balance its budget?” Look at the history of nation-states and other elite structures of governance since the middle ages. The finances of the realm were always subject to the depraved notions of the aristocracy and their delusions of grandeur.
The larger question to ask is why the elites persist in this charade of “balancing-the-budget” when they themselves are the parasites who create the unbalanced budgetary process.
Why do we worry about adding another 2 trillion to keep the states and unemployed individuals solvent for the next one or two years, … but whine over restructuring costly defense department privatization contracts, or permit the various financial tax shelters in the Cayman Islands , both of which double or triple the deficits which seems to be so important !
How come the deficit hawks are so selective in what they chose to bemoan as the great evils of debt and government spending?
June 26th, 2010 at 12:42 pm
@Napster
I agree with you, but in answer to your question, they cut spending on stuff we need (human services) and blow our wad on stuff we don’t (tax cuts for the rich, foreign wars) because the average person is an idiot.
Again, I go back to my Prop 13 argument. In the 1970s, Time Magazine did a poll about Prop 13 in California. They asked Californians what they thought the impact of the law would be. A supermajority of Yes on Prop 13 voters said that the law would result in a massive reduction in state revenue, leading to a budget crisis. But…a supermajority also thought that this crisis would eliminate “waste,” which people defined as government spending on programs that benefited non-whites. And a supermajority also said that these budget cuts would not hurt them personally!
The average person isn’t capable of understanding politics or really of voting in his or her own interest. They’re motivated by stupidities like racism, demagoguery, and the things “everyone knows” but just happen to be wrong–like the myth that balanced budgets create jobs.
And whatever happens, you can be sure that the average person will have forgotten everything within 6 months.
June 26th, 2010 at 12:42 pm
Just a question: How bad were federal deficits before Reagan cut tax rates for the wealthy and increased military spending? How bad were state budgets before they started cutting taxes around the same time?
Just asking…
June 26th, 2010 at 12:49 pm
BR I mentioned this issue months ago when you posited whether we were seeing a recovery. Any hiring in the next year in the private sector, which will be anemic at best, is going to be greatly overshadowed by layoffs in the public sector. There’s no way the lying math-magicians at the BLS are going to be able to keep the unemployment rate under 10%.
Moreover, the problems with public employees, on average, is not their salaries, but their benefits. Ridiculous pension and health benefits in comparison to private employees and little or no participation requirements as far as co-pays or monthly deductions from their paychecks.
I think when the public employees get all up in arms at the local board of education, municipal and state level political meetings the politicians might finally have the power to tell them to shut up. “There’s 10-20% of the population unemployed or underemployed in this country. You don’t want this job with realistic benefits then I am sure we can find plenty of people who want the job” should be their response to any whining.
Moreover Chapter 9 is always an option for these cities and counties.
Living in NJ, while I don’t support everything Chris Christie stands for I certainly support his stance against the hopelessly corrupt local and state unions.
June 26th, 2010 at 12:49 pm
One more question. philipat says “The way to solve a debt crisis is not with more debt.”
I wonder if philipat has ever heard of the concept of public investment in infrastructure? Did spending to build the interstate highway system impede economic growth? Does spending to modernize the electric grid lower future growth? Does spending on education impede growth? Does spending on improving energy efficiency in buildings impede growth? Does spending on high-speed rail impede growth? Does spending on local transit systems impede growth?
We have been living off the seed corn of the pre-Reagan investment in infrastructure for three decades and our competitiveness has obviously suffered. It is time to realize that the Reagan/Chicago School experiment was a complete failure and get to work repairing the national system of public structures – laws and regulations, courts, schools, transportation and the rest – that Reagan destroyed.
June 26th, 2010 at 12:53 pm
HEHEHE argues that since the power of private-sector unions have been reduced private-sector wages and benefits have been reduced, we all work harder, have less job security and all the benefits of the private economy go to a few at the very top, and THEREFORE we should kill off public sector unions, too, because they still have it good.
I think HEHEHE reached exactly the wrong conclusion. I think reviving private-sector unions is the answer. Lift all of us instead of a race to the bottom.
June 26th, 2010 at 12:55 pm
A few months ago Paulson organized an emergency meeting, bail them out or the system will crumble.
In an healthy society, you would think all citizens are equal and “the system” is them.
But some are more equal than others and we live in a feudal society where credit is the engine of the economy, also called usury.
I’m too tired to rant and rave, what’s the point.
June 26th, 2010 at 12:55 pm
davecjohnson:
http://www.scribd.com/doc/3015540/US-Budget-Deficit-or-Surplus-1960present
Another view (with political commentary):
http://www.lafn.org/gvdc/Natl_Debt_Chart.html
June 26th, 2010 at 1:16 pm
@Hehehe
You make a common argument, but one that defies everything we know about human nature. You say that the problem with public employees is not their salaries, but their benefits. Now, in the business world, employees don’t just look at salaries. They add salaries and benefits and look at “compensation.”
Are you honestly telling us that public sector employees are any different? Are you telling us that if you keep a public employee’s salary the same and cut his pension, he’s just going to say “thank God…I made it through unscathed?”
Of course not. He’ll say “you cut my compensation.” The good ones will leave for greener pastures where they are given a just compensation commensurate with their skills. Just like they do in the business world.
June 26th, 2010 at 1:19 pm
Barry, *if* TPTB want to print money, then the *only* fair way to dispense it is to give equal amounts per capita and then let people decide how they want to spend it.
I do not want to deficit-spend to fund (a) continued public sector pay at excessive multiples to private sector pay and (b) bailouts of absentee shareholders. This rewards poor investment decisions and political actors.
TPTB are giving us the worst of both socialism and capitalism. (I think you said as much some time ago.) If Obama, Congress or the Fed bails out the states, so f****-ing help me I will write in “Joe the F****** Plumber” on the next ballots in protest.
June 26th, 2010 at 1:30 pm
Yes, and neither chart shows Bush’s LAST budget (2009 budget year), which had a deficit of $1.4 trillion. Obama’s 1st budget year ends in a few months, let’s see how it does compared to that.
June 26th, 2010 at 1:40 pm
Not sure I completely agree about raising taxes. I’d say it all depends on who you raise taxes on. Since the top one percent seem to be thriving while the rest of us are suffering, I think it more than fair that they are taxed accordingly. Here in Calif. Corporations have benefited from a tax loophole created by prop 13. Prop 13 has been the bane of California since it’s passage. What was meant to be a protection for the elderly has turned into a big windfall for big business.
June 26th, 2010 at 1:40 pm
People who believe the average person is an idiot are part of the problem. And sackless to boot, because anyone who went around calling people idiots to their faces would be killed. Go find another species if this one doesn’t measure up to your standards.
The idiots include people who tell you you dropped your wallet, have a flat tire, that they saw that asshole cut you off and are happy to be a witness, give your battery a jump start. If you can’t handle the cognitive dissonance of desperately relying on idiots for your survival while disapproving of their ignorant political decisionmaking, please go take a flying leap. You won’t be missed.
June 26th, 2010 at 1:52 pm
Does spending on education impede growth?
keep selling that lamest of talking points-
what of the Dept of Education? What have they done since their creation in 1980? Have we seen record growth in student achievement? On the contrary- the students have basically given the Dept of Education a giant middle finger. Lets assume we closed the Dept of Education and used that money to build really AWESOME schools w/ all the latest of technology- and while we’re it- lets pay the teachers $200K a year- did I say $200K- lets say $300k-
the results-
the kids will be as dumb as they ever were- because students have to WANT to learn- they have to give a shit- what you get for all that money spent is a collective yawn from the student body- by then cries will go out to raise teacher’s salaries and spend more on better schools (because it must be the problem)-
this isn’t the Field of Dreams- they may come (because they have to)- but no-one says they have to care
don’t you get it?????
June 26th, 2010 at 1:55 pm
California a low tax state? LOL.
June 26th, 2010 at 2:14 pm
“Ridiculous pension and health benefits in comparison to private employees and little or no participation requirements as far as co-pays or monthly deductions from their paychecks.”
I paid $80 a month for health insurance for my wife and I when I was with my former PRIVATE employer. That was for the most part a Cadillac open access plan. Ten dollar copays, 100 massages a year, etc. With the Fed government I am paying $240 month for health care for a PPO plan, $20 copays. Oh, and I am paid 30% less with .gov.
I get FERS and raises that, while scheduled whether they were warranted or not, will be certainly much less than I was getting with my previous employer.
Just sayin.
June 26th, 2010 at 3:33 pm
Yeah, our state budget is really feeling it and you can see its effects in some pretty interesting ways. Right now, there is still a significant portion of the population that hasn’t even received their state tax refund.
It is interesting too, because they are pretty much trying to raise taxes and cut their budget…
June 26th, 2010 at 4:09 pm
Taxes go up and taxes go down. Does government spending ever go down?
Here’s a question: Businesses are forced to “prune” things that are too expensive or aren’t effective. They do it all the time. New programs aren’t paid for unless they can be cost justified. It’s so easy to “Add” and so difficult to “prune”. Taxpayers wouldn’t mind paying more if they felt the government was faithful in pruning things they don’t work rather than adding more programs. Over the last 30 years, how many government programs have been added vs. how many have been pruned for lack of measurable results? Spending on education is a prime example of this. Who is a wiser spender: one who is spending his own money or one who is spending someone else’s?
June 26th, 2010 at 4:27 pm
I don’t know who your private employer is but please sign me up. I pay $180 a month for myself, no one else.
Secondly, whether you like it or not the world is what it is not what it was: the days of big labor are done. The politicians and corporations have sold out the middle class in the “first world” countries by engaging in a world wide game of labor arbitrage cloaked in the name of Globalization. Given that is the case our living standards will decrease over time while third world and developing countries will increase. Why was this allowed to happen? Because the multinational corporations saw it as the easiest way to maintain their competitive advantage by preventing businesses in third world and devleoping countries from entering their markets and grabbing market share by undercutting their products on price due to cheaper labor. So you can argue for strong private unions all you want but the cow is out the barn on that already.
Obviously it varies from city to city and state to state but public unions have to make concessions where the pay and benefits are completely out of whack with the private sector; it’s the only way to bring any balance to spending by many of these local governments; of course there’s going to be program/service cuts too. Moreover the social safety net (medicare, social security, etc) in this country is going to have to be modified to include means testing and higher retirement ages, it’s a demographic reality.
I have no political agenda. I am a realist. The two major parties in this country are one party serving the wealthy elite. The mainstream media is owned by the same people. They divide and conquer on the basis of “social issues” all the while destroying the middle class and robbing from future generations. They’ve spent the better part of the past 30 years creating a mirage economy based on ever expanding debt letting the sheeple believe they can have their cake and eat it too buying things they don’t need with money that they don’t have in order to keep up with their neighbors. That world has been coming to its gradual demise. It’s likely not to be pretty.
June 26th, 2010 at 4:55 pm
@franklin411:
There’s a propensity for liberals to point a finger at Prop 13 and use it as the cause of all fiscal ills in California, that the voters were duped, that the voters would change it it they could, etc.
If you examine the budget in California, this is not borne out by the facts. The voters had an alternative on the ballot at the time Prop 13 was voted in, yet they chose Prop 13 instead of the alternative. The voters voted down a later proposition that sought to replace Prop 13 with another alternative (Prop 167, if memory serves). Politicians and think-tank liberals can call Prop 13 all manner of names, but it won’t make the voters change their minds: they want an assurance that they’re not going to be forced out of their house by ad valorem taxation. Evidence from other states shows that this is not irrational fear on the part of voters.
The tax landscape of California was changed by the voters in the late 70′s, and the politicians have known that Prop 13 was part of the landscape for years. It has been upheld in court. In other words, it is part of the job description for the legislature – deal with Prop 13′s effects as part of the budget process.
The state’s budget didn’t start getting into serious trouble until the mid/late 90′s, but even then, the situation could have been reversed, It was in 1999/2000, with the flush of dot-com tax revenue, the legislature spent like drunken sailors in a whorehouse and set up the situation today.
I take that back: sailors stop spending when they run out of money. The taxpayers would be better off with a legislature full of drunk sailors.
The problem in California is spending, in two parts:
1. A great deal of the CA budget has been made off-limits to the budgetary process by the voters and spending initiatives, much of it on education. Rampant spending hasn’t improved educational performance, BTW.
2. A legislature that is beholden to the public employee unions, making promises that cannot be met as we move into the future. In California, it isn’t just the teachers – add prison guards to the top of the list, teachers in the middle and cops and firemen to the tail end of the list of groups to whom huge promises have been made on their pensions.
If we want to look at an alternative to California’s Prop 13 environment, let’s look at New Jersey. There, property taxes are allowed to go up – and they have, drastically. Yet, if it were not for Gov. Christie actually cutting spending, NJ would be out of money as we speak.
The problem in most of these states boils down to this: Their political leaders made promises of spending, especially on public employee comp packages (not just pensions and medical bennies, but the whole package, including staffing levels), that are not sustainable.
If we look to the bond market for the indications of “Greek style” problems, we see that California is not a special case; it is simply one of the worst cases. The new #1 problem state, as indicated by the bond market, is Illinois. There’s nothing like Prop 13 in Illinois.
June 26th, 2010 at 5:03 pm
@ Rescission:
Yes, government spending can and does go down. In Wyoming, we a) have a “reserve fund” in the state budget, and b) our governor (a Democrat, BTW), saw that tax revenues were falling off in 2008 and ordered a 10% across-the-board spending cut on state expenditures, coupled with a hiring freeze. That was roads, schools, the works. Every department had to make do with less.
The best indicator I have for spending that never goes down is a state having a “professional” legislature – ie, one that is in session every year, with legislators treating their position as a full-time job, and being paid as such.
In many of the more fiscally responsible states, the legislature meets only every other year, and budgets on a two-year cycle.
June 26th, 2010 at 6:09 pm
@ dsawy
Thank you for taking the time to refute F411′s liberal claptrap.
June 26th, 2010 at 6:10 pm
“And I agree with Gluskin Sheff’s David Rosenberg — massive budget cuts and tax hikes will only make the situation worse, not better.”
Well, it sure will leave a mark! OTOH – stepping on the gas and exponentially cranking the debt levels will probably be worse long-term. They have boxed themselves into a corner alright. Not good no matter what route they take. In fact – I’m not sure they can even print enough cash to get any more “growth”. As with the heroine addict, each injection has less of an effect as compared with the prior one. And time….it is running OUT.
June 26th, 2010 at 6:59 pm
The time to raise taxes and cut spending is during an expansion, not immediately post-contraction
—
I almost fell over when I read this. Really? Well, were you, Dean Baker and Paul Krugman issuing this call during the LAST expansion when government at all levels was spending like a drunken sailor? I mean, THAT spending ran totally counter to the advice above . . . so were where the warnings?
June 26th, 2010 at 7:35 pm
First of all, unbelievable analysis by all contributors. Whether you agree or not, TBP attracts great arguments from all sides.
Second, I don’t need a slide rule or economists to tell me what my Grandfather’s simple logic already knows >> When Governments and their citizens are tapped out, the party is over. It is going to get ugly.
My PWYMYMI? S&P sees 800 long before it sees 1,200. We hit 800 by no later than March 2011.
Before you cook me, here is my last PYMWYMI on TBP back in March 2008. I got cooked then – but I was dead on. In fact, I was too conservative in my otherwise aggressive call (at the time) of the market’s demise: http://www.ritholtz.com/blog/2008/03/golddollar-correlation/#comment-50014
Regards,
George The Greek
June 26th, 2010 at 9:04 pm
So BR has been a closet Keynesian all along…its called deleveraging….get over it….we have behaved like drunken sailors for years as the undisciplined, self-indulgenet baby-boomer generation atttempted to sate its enormouns appetities….now, banks won’t lend? Boo Hoo…people don’t want to borrow once they have seen the abysmal present and future they have created…..those who would use inflation to obliterate the debt are fighting a losing battle……time to sober up folks…..you are entitled to what you deerve, not what you want…..
June 27th, 2010 at 6:18 am
“When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that justifies it.”
Frederic Bastiat
June 27th, 2010 at 11:33 am
Amazing how much “discussion” (actually just fact-free postulates) comes up against a simple fact. If government cuts back before the private side of the economy is recovered and can absorb the slack, then we get into a worse economic situation. That is a fact backed by hundreds of experiences in case simple one plus one math is to much for you. The screams about how terrible further debt would be at this point are not backed by any evidence. Other economies have survived much higher debt levels than ours are in currently. The argument against the debt is not that it is “dangerous” but that it is immoral. But it is also a lot easier to deal with this debt if we don’t allow stupid conservative ideology to sink the economy into a second dip before we begin to pay the debt back.
I agree that we have a serious problem with lack of restraint during the good times. The Bush tax-cuts were a great demonstration of that. They could not wait for that predicted zero-debt world to materialize before they cut taxes, and the rest is history. Maybe we need some kind of automatic tax-increase and budget cut formula that is tied to the size of the national debt and the growth of the economy. It is discouraging that our democracy as well as proposition 13 type initiatives both seem to fail so spectacularly when tested in the real world.
June 27th, 2010 at 12:30 pm
@Carse: Perfect quote for the times.
June 27th, 2010 at 5:36 pm
@dsawy-
I stand corrected. Was referring to central federal government, rather than states and local. But good points.
Many local and state governments have to reign it in. Balanced budget laws, and they can’t print money.