Tuesday, March 13, 2012

Will California Fall Into the Ocean?

In today's Wall Street Journal, Michael J. Boskin and John F. Cogan write an important op-ed detailing how high-taxes, high-government spending and burdensome regulation are choking California and may result in California falling into the ocean and landing next to sinking Greece.

Boskin and Cogan are both revolving door government technocrats of the Republican variety, so they offer no real solutions to the California crisis. Cogan was Assistant Secretary for Policy in the U.S. Department of Labor and Associate Director and Deputy Director in the U.S. Office of Management and Budget. On the private sector side of the revolving door Cogan is a director of Venture Lending and Leasing Funds II, IV and VI, Inc. and the Charles Schwab Family of Funds.

Boskin was chair of the Council of Economic Advisors under George H. W. Bush and was Chairman of a Congressional Advisory Commission on the Consumer Price Index. That commission, known as the Boskin Commission, is controversial for introducing changes into the calculation of the CPI. Laughably, the commission  concluded that the CPI overstated inflation by about 1.1 percentage points per year in 1996 and about 1.3 percentage points prior to 1996, mostly the Commission argued because of failing to account for substitution bias. (See:http://www.economicpolicyjournal.com/2012/03/business-insider-attack-on-ron-paul.html)

Cogan and Boskin, since they are both Republican operatives are also currently out of government and have landed at Stanford, where they are allowed to snipe at governments run by Democrats. And, they do a good job in their op-ed. Just keep in mind that these guys are mercenaries that will justify government spending and higher taxes when Republicans are back in power. They are not friends of freedom from interventionist government, they are just against Democratic intervention.

Here's a bit of their correct analysis of the brewing California crisis:
Long a harbinger of national trends and an incubator of innovation, cash-strapped California eagerly awaits a temporary revenue surge from Facebook IPO stock options and capital gains. Meanwhile, Stockton may soon become the state's largest city to go bust. Call it the agony and ecstasy of contemporary California.

California's rising standards of living and outstanding public schools and universities once attracted millions seeking upward economic mobility. But then something went radically wrong as California legislatures and governors built a welfare state on high tax rates, liberal entitlement benefits, and excessive regulation. The results, though predictable, are nonetheless striking. From the mid-1980s to 2005, California's population grew by 10 million, while Medicaid recipients soared by seven million; tax filers paying income taxes rose by just 150,000; and the prison population swelled by 115,000.

California's economy, which used to outperform the rest of the country, now substantially underperforms. The unemployment rate, at 10.9%, is higher than every other state except Nevada and Rhode Island. With 12% of America's population, California has one third of the nation's welfare recipients.

Partly due to generous union wages and benefits, inflexible work rules and lobbying for more spending, many state programs and institutions spend too much and achieve too little. For example, annual spending on each California prison inmate is equal to an entire middle-income family's after-tax income. Many of California's K-12 public schools rank poorly on standardized tests. The unfunded pension and retiree health-care liabilities of workers in the state-run Calpers system, which includes teachers and university personnel, totals around $250 billion.

Meanwhile, the state lurches from fiscal tragedy to fiscal farce, running deficits in good times as well as bad. The general fund's spending exceeded its tax revenues in nine of the last 10 years (the only exceptions being 2005 at the height of the housing bubble), abetted by creative accounting and temporary IOUs.

Now, the bill is coming due. After running a $5 billion deficit last year and another likely deficit this year, Gov. Jerry Brown's budget increases spending next year by $7 billion and finances the higher spending with income and sales-tax hikes. Specifically, he's proposing a November ballot initiative raising the state's top income tax rate to 12.3%, making it the nation's highest, and raising the basic state sales tax rate, already the nation's highest, to 7.75% from 7.25%....

The ballot initiative's $31 billion, multiyear "temporary" tax increase is larger than the "temporary" hike it replaces and its income-tax hike is retroactive to Jan. 1, 2012. Worse, it doubles down on excessive reliance on high-income taxpayers, especially their stock options and capital gains, which are taxed as ordinary income. ...

No wonder many Silicon Valley CEOs say they won't expand in California because of high taxes and burdensome regulation. And no wonder net migration has recently reversed, with hundreds of thousands of workers and their families leaving the state in search of better opportunities.

California still ranks first in technology, agriculture and entertainment among the 50 states. But it is near the bottom in business and tax climate and state bond ratings. It's a complex picture, but at its core is the high-tax welfare state run amok.

Many Americans fear the federal fiscal train wreck will turn us into Greece. But, barring major change, they need look no further than California to see what this future portends. Relying on ever-higher taxes to fund payments to an outsized population of benefit recipients is a recipe for exporting prosperity. That is one California trend that other states emulate at their peril....

(ht KyleKyllan)


  1. Two bits of good news:
    1. That tax hike will NEVER get approved by the voters. (if it does then it is well and truly over in the Golden State)
    2. California can't print paper money to cover the shortfall. And their bonds will be junk. So the crash will be loud! Maybe THAT will wake the somnolent sheeple.

  2. Bob, I trust you when you say that things are heating up in SillyCON Valley, but, overall, things are not going well here in California. To wit, February retail sales and use tax collections are 25% below one year ago levels.

    Page four, http://www.sco.ca.gov/Files-ARD/CASH/fy1112_feb.pdf

    That drop is almost hilarious.

    But, things must be improving modestly, as the FYTD (Jul.-Feb.) drop is even greater, 27%.

    1. Sales tax rate dropped by 1% last summer (from 7.25% to 6.25%) when temporary tax increase expired and could not be renewed, probably explains most of that decrease.

  3. I would argue that California's problems go back farther than the mid '80s. I came to live in Southern California in 1981, and things were booming, but only because SoCal was pretty much the center of the rapidly-expanding military industrial complex (of which I was a part, unfortunately). Almost all of my friends are in SoCal, and I love all the hobbies I can, and do pursue here (acting, music, you name it....). If it weren't for those factors, I'd already be gone. If the voters passed a 12.5% top bracket above the already crushing 10% state tax, that's probably the last straw for me.

    But I have to agree with Capn Mike. It's very unlikely to pass. I don't think even Californians are that stupid...... but I might be wrong.

    1. Don't ever underestimate your fellow citizens when it comes to voting to tax others under the belief that doing so will mean that they themselves will not be made to pay more. This most idiotic thing about all this is that the state and federal tax systems are making this country extremely dependent on the well being of a small group of people. God help these governments and their precarious finances when the top 5% has a bad earnings year. I live in Florida where the state gets into your pocket via real-estate taxes. A $1mil house requires you to pay roughly $24,000 a year in taxes for the privilege of living in your home. I was going to buy on the water in the US, but instead bought waterfront over in the Bahamas. While the r/e taxes are bad enough in Florida, at least I have a choice and can buy cheaper. I couldn't imagine living in a state like California that sees me as nothing but tax cattle.

  4. We have just the answer for California; push them out of the US dollar and allow their new currency to deflate. They will then bask in the riches of the employers who then come calling for cheap labor, their problems solved, their economy once again vibrant, their problems solved.

  5. I've been reading about what a train wreck California is for years. It never seems to collapse. Maybe they're getting cash from the Feds.

  6. You should ask Congressman Hank Johnson http://www.youtube.com/watch?v=zNZczIgVXjg&feature=player_embedded

  7. We left the golden welfare state in 2000 and have never looked back.

    1. ...damn, I moved my business outa there 25 years ago, and never looked back.

      Started having trouble with the California Board of Equalization; they are accustomed to getting away with bullying businesses (timber, in this case) into just paying their arbitrary assessments (timber has many age classes and species; different tax rates therefore).

      If you decide to go to the mat with them, your life becomes hell. The BE personnel are proud of their sadism; they do their best to ruin your reputation. So, I moved the business and started enjoying life and the timber business again...a lot of business isn't so easy to move, and my heart goes out to them....

  8. I lived in CA briefly, 1987 - 1990; on the ballot in 1990 was an "initiative" to raise taxes to pay to "shave the whales, hug the trees, buy lots of land for parks and all the other feel-good madness that possessed them" (can't remember who said that, darn it!); they wanted six billion or so of bonded indebtedness. Out of 100+ counties in CA, only six voted for it, and it PASSED (S.F., L.A., S.D and Sacramento). I saw the writing on the wall, sold my shack (made a tidy profit from the next fool) and moved out.
    Would not take a job in CA now; it was bad then, insanity has prevailed now.

  9. I'm not optimistic regarding this vote. Those who will vote for the increase will usually not pay for it. Some who would pay will still vote for, you know, to balance some bad karma. All in all, it may pass and Texas is very humid.

  10. Did they really say CA's outstanding public schools!? These people are know-nothings. CA gov't schools are the bottom of the list.