AIG, GM, and California

Topics: Stimulus
03 Apr 2009

From: Ervan Darnell

We should treat them all the same: let them go bankrupt, and for similar reasons, they are inefficient dinosaurs consuming more resources than they produce. The alternative is to strangle the productive economy to subsidize wasted labor that should be moved somewhere more valuable. Yes, let the State of California go bankrupt.

Some particulars:

1) California already has the 6th highest state tax burden [1]. And that's as a function of per capita GDP, not absolute income. As real income grows, the tax fraction should shrink (as fixed cost become less relative to higher real income). That it is still high speaks to the runaway spending of the California government.

2) Spending spree, State spending went from $49G in '90-91 to $114G in '05-06 [2]. In the same period the population went from 30G people, to 37G [3]. The CPI went from: 127.5 to 191.8 [4]. That means the real spending increased 25%.

3) California has been running a budget deficit, even in good times, i.e. a total lack of prudence. The consequences for that should be bankruptcy. For instance, in 2006, the structural (ongoing spending, non infrastructure) deficit was $5G ("According to Governing Magazine, California’s financial management ranks near the bottom – exceeded only by one state.") [5]. For 2009, it's headed for a staggering $42G [6]. Having watched this play out locally, it's simple: The Democrats refuse to cut spending and the Republicans refuse to raise taxes. The nature of the system is to duck responsibility.

4) Sales tax increase. They just increased the sales tax 1%, for a state average of 9%. That's compared to a national median of 5.5% [7]. At least it's a regressive tax.

5) The state pension fund, CALPERS, has been involved in both political manipulation and "socially responsible" investing [8, with lots of details]. Both of these are serious. The latter means the fund has been under-performing. Now that it has made foolish mistakes based on liberal ideology (Phil Angelides in particular), it's relying on the state's guarantee of pension funds, which means raising taxes to cover the investment mistakes. That's what we are doing at the federal level to cover AIG and GM, and shouldn't be. We're doing so at both the federal level (Obama is bailing out the mismanaged states with "stimulus") and at the state level. Contemplate this bit of corruption: The top 10 most deficit states all voted for Obama, who is now bailing them out by taxing well run states [9, 10].

The former is equally bad. CALPERS used its large investment amount to strong arm companies into adopting bad policies (and the threat of legislation if they didn't comply no doubt helped). State run pension funds are just a bad idea. In the private world, investors who vote their stock in a fashion that ruins a company suffer a loss for their folly. So should the state.

Doubly so that people should stop depending on state pensions being "safe". They are only "safe" in the sense that the state promises to abuse everyone else's retirement (by taxing them more, exactly when they are down). Letting it go bankrupt, just like a private fund, is the right message for the right reason (i.e. the existing assets are marked down to their real value, rather than giving everyone nothing). You should put your income in your 401(k) (even if from the state), just to avoid the political torque that comes with it.

6) While we're at it, lets have the feds remove Schwarzenegger by blackmail, just like they did Wagner, so the level of political corruption is a little bit clearer to everyone.

7) Inefficient diversion of labor. With the state guaranteeing its employees' benefits by taxing everyone else more, instead of sharing in the risk and overall economic productivity, people shift towards state employment to seek security. But this drains people from productive into less productive government work (even for useful state jobs we get an implicitly subsidized labor shift). Were state jobs at the same risk as others, this shift wouldn't occur, and would-be employees would pay more attention to the health of the state before accepting a job, which would be a good pressure in the long run.

8) Bonds. Similarly, were the state to really be allowed to default, the bond rating would sink and borrowing would be harder, which it should be so there is more fiscal discipline (and more efficient loaning of money for bonds).

[2] California Statistical Abstract, table M-12
[3] ibid, table B-1
[8], a good article all around