Dreamin' or Screamin'?

I was going to copy and paste an opinion piece titled "California Screamin'" from Barron's over the weekend. However, it seems they edit their HTML so it cannot be cut and pasted. Smart!

Essentially the opinion piece discusses how Califronia has kept down certain revenue streams over the last few decades, but at the same time increased entitlement expenditures, which were affordable in good times (rising home prices) but difficult to handle during hard times.

It is hard to imagine a State whose GDP would rank it as the eighth largest economy in the world (as of 2008), if it were a country, in such dire straits. In the article you would have seen that California seems less worse off than the US as a whole in terms of deficit and debt to GDP, but do not forget, Cali can't print money!

My immediate thought on the article is that you could substitute in a family or individual in Anywhere, USA and envision the same snowball effect. If I keep layering in fixed expenses to my personal budget, and my income suddenly dwindles or goes away, I am going to be underwater quickly. Fortunately, I have flexibility to cut things like the HD box and high speed Internet, States can move with much less expedience to cut so-called entitlements.

As the article notes, people who are getting more for less are not going to volunteer to give up benefits. But these mounting deficits are avoidable. I do not understand why the legislature would raise unemployment benefits while not ear-marking a source of revenues to pay those expenses. My calculations using the numbers quoted in the article puts that $29 billion in unemployment benefits less $11 in tax revenues to pay said benefits, or $18 billion deficit as 20% of this year's projected deficit of $92 billion (5% of CA GDP, which is estimated at 13% of US GDP, which was $14.2 trillion in 2008). It is not hard for one to imagine the other entitlement programs that have sunk California into debt.

The brilliant legislature's last resort to get Cali out of this deficit position? You got it - raise taxes. If you have been reading the Blog for a while, you know if there is one economic concept that I believe, its that raising taxes on business is the surest way to get those businesses to move to a neighboring state - leaving the home state with less tax revenue. Cali already has the 6th largest state tax burden to GDP in the US.

The solution to this mess? Plan smarter. Put aside political gain for long-term viability that does not cramp growth. Do not expand entitlements if you cannot point to the funds to pay for them, especially on a rainy day.

In the end expanding unfunded entitlements will drive productivity out of California, or any state in a similar situation, at an increasing rate!

-2outof4