Stock, commodity, and currency markets have been on a
roller-coaster ride in recent days as Greece’s election results
leave that nation without a functioning government, and without a
clear path toward staying in the euro currency.
The right answer, albeit a very
painful one, may be for Greece to take their medicine and leave
the euro, and for Europe to stop bailing out a dysfunctional
country that can never be competitive without a less expensive
currency. Wednesday marked an all-time low in the Greek stock market.
More important, however, and where few Americans seem to be
looking, is our very own Greece: California. Since California
doesn’t have the option of seceding from the union, one wonders
when the state will ask the IMF for a Greek-style bailout.
California’s economy, with a Gross State Product of about $1.9
trillion, is more than six times the size of Greece’s. At $90
billion, the state’s budget (excluding the few hundred billion
dollars of federal money distributed there) is only sixty percent
of the size of Greece’s national budget. But, California’s budget
deficit, estimated at $16 billion for the current fiscal year
unless substantial changes are made, represents a stunning 17.5
percent shortfall and a huge miss from January predictions of a
$9.2 billion deficit. Greece is now anticipating a deficit under 7
percent of GDP, but even allowing for typical politician optimism,
the Greek deficit problem is arguably small compared to
California’s.
While both places are full of union members and socialists
(pardon my redundancy) focused on preventing cuts in government
spending, California does have one advantage: it is not full of
people who make a full-time job of tax evasion as is the case in
Greece. According to a fascinating
article on the subject, “the gap between what Greek taxpayers
owed last year and what they paid was about a third of total tax
revenue, roughly the size of the country’s budget deficit.”
California Governor Jerry Brown is proposing certain spending
cuts (including cuts to higher education and to programs for the
poor) and tax increases (a massive income tax rate hike — from
10.3 percent to 13.3 percent on those earning over $250,000 — and
a 0.25 cent increase in the state’s sales tax.) Even so, his budget
calls for a more than 5 percent increase in state spending,
including a 16 percent increase to public school spending, over the
prior fiscal year, giving a new meaning to “austerity” and
emphasizing the power of teachers unions over Democrats.
California, like Greece, and most western nations’ governments,
has a spending problem, not a revenue problem. One example: The
state has one eighth of the nation’s population but one third of
its welfare recipients — in part because, according to Business
Week, “it is one of the few states that continue to
provide welfare checks for children once their parents are no
longer eligible.”
Brown is taking the tax hike part of his plan directly to
voters, using the typical Democrat threat of cuts to public
education if the hikes are not passed. It’s time to call his bluff,
at least if California wants to stop hemorrhaging people, jobs, and
talent.
In a Wall Street Journal
op-ed last month, demographer Joel Kotkin discussed “The Great
California Exodus”: “Nearly four million more people have left the
Golden State in the last two decades than have come from other
states. This is a sharp reversal from the 1980s, when 100,000 more
Americans were settling in California each year than were leaving….
[M]ost of those leaving are between the ages of 5 and 14 or 34 to
45.” (California’s population
has grown in the past twenty years, but the growth is due entirely
to the arrival of immigrants and the birth of children.)
One reason for the mass departure of the Golden State’s
American-born adults who are entering the prime of their working
(and tax-paying) ages is the state’s cap-and-trade law and other
regulations that raise energy prices: Electricity prices in
California are about 50 percent higher than the national average,
although nine states have even higher prices. This, along with
bubblicious real estate prices, made California the most expensive
of the 48 contiguous United States in a 2011 CNBC cost-of-living
analysis. Only one of
the contiguous 48, New York, has a higher cost of doing business,
and no state in the nation ranks worse than California in “business
friendliness.”
But perhaps the key factor in California’s dwindling population
of productive citizens is taxes: The current top state income tax
bracket is the second highest in the nation (behind Hawaii, which
is somewhat harder to move away from), and Brown wants to give it
the dubious honor of taking the lead in that category.
What’s arguably worse is that California’s tax rates brutalize
the middle class: Individuals making between $37,005 and $46,766
pay an 8 percent state income tax. Only six states and the District
of Columbia have a maximum tax rate higher than 8 percent,
but that is the burden on someone making only $40,000 in California
— a place where $40,000 doesn’t go very far towards ordinary costs
of living.
And from $46,766 to $1,000,000 of income, the California state
tax rate is 9.3 percent. Only two states, Hawaii and Oregon, have
tax rates higher than that paid by someone earning $50,000 in
California: Oregon’s 9.9 percent rate kicks in at $125,000 of
income and in Hawaii a 10 percent rate starts at 175,000 of income
with an 11 percent success penalty (no, it’s not officially called
that) above $300,000.
California doesn’t just soak the rich; is an equal-opportunity
pillager. And this is why it is losing the productive part of its
population at a stunning pace. Yet Jerry Brown seems not to
recognize that his prescribed medicine is the very poison
decimating his state.
The bad-government-caused brain drain has a parallel in Europe:
Reuters
reported earlier this week that buyers from Greece and Spain
are scooping up London real estate. A quote from a Cypriot living
in London is straight to the point: “Greece is screwed, there are
no jobs and it has been run by crooks.” One might suggest that
California is screwed, there are no jobs, and it has been run by
Democrats — and one notable Republican who behaved like a
Democrat, perhaps to the great chagrin of Austrian economists
everywhere.
At 11 percent, California has the third highest unemployment
rate in the nation, behind only Nevada (12 percent) and Rhode
Island (11.1 percent). The budget is a mess, and Governor Brown is
proposing to address the problem with a method — raising taxes —
that has already been tried and failed (unlike in New Jersey, where
Republican Governor Chris Christie has balanced its budget without
raising taxes). As the Wall Street Journal
noted, California’s tax receipts are more than 20 percent below
prior projections while “state tax collections were up nationally
by 8.9% last year…and this year revenues are up by double digits in
many states.” It’s no wonder the Navajo Nation has a higher
bond rating than the once-great state of California.
So JPMorgan makes a $2 billion mistake — less than 7 percent of
their 2011 earnings — with their own money, and senators are
calling for hearings. The California’s governor’s office raised its
2012 budget deficit projections — namely their overspending of
public money — almost 50 percent, from $9.2 billion to $16
billion, an error of almost eight percent of the state’s total
budget, in four months, yet those same members of Congress
remain as silent as a Trappist monk.
The California budget mess is playing out in the news today. It
will be a difficult fight for economic rationality in a state that
has largely accepted, to quote
Arthur Brooks, European-style “learned helplessness” instead of
the historically American goal of “earned success.”
If you enjoy this movie, take heart, there will soon be a
sequel: Illinois’ state budget website
says that “Illinois faces a budget shortfall of more than $11
billion… Spending growth consistently exceeds revenue growth [and
it is] getting worse each year.”
