What Budget Crisis

By Jon Coupal

Humans have been around for tens of thousands of years. And yet, as recently as a thousand years ago, there was a broad consensus -- even among the most highly educated -- that the world was flat. The problem with "consensus" is that it becomes groupthink. If an idea has no challengers, it becomes difficult to disprove and those who speak against the established orthodoxy are always marginalized.

There seems to be a consensus in California that we have a "Budget Crisis." But if "crisis" is defined as a situation where impending disaster is a probable outcome -- think Cuban Missile Crisis -- then the notion that California is in the midst of crisis needs to be challenged.

In support of the crisis mentality for California's predicament is the contention that California is "going to run out of money" by February. This is inaccurate for two reasons. First, even with significant reductions in tax revenues to the state and local governments, California remains a tax producing behemoth. Because of its $1.6 trillion economy, California will generate tens of billions of dollars more than next-ranked Texas.

The distinct nature of California's economy reveals the second inaccuracy. It is not California that is running out of money, it is California government that, more accurately, has a cash flow problem. And government is going to run out of money only if one assumes a continuation of the rate of spending based on previous years. But why should we be forced to make this assumption?

It is not a "crisis" if you are merely driving down the freeway. It is a crisis if you fail to slow down when you get to your exit. Reducing government expenditures when revenues decrease should be as natural as slowing down a car when approaching an off ramp -- and we can do it without invoking the "C" word.

You want a real crisis? Talk to the folks at Circuit City and Mervyns. Except for inventory liquidations, there is no more revenue coming in the door. Could those corporations and thousands of other small and large businesses going through bankruptcy have avoided this fate with a ten or fifteen percent reduction in revenue?

Probably.

Although the vast majority of Californians have indeed been convinced that government is in the midst of a budget crisis, our political leaders have another problem on their hands: Not everyone cares. As recently reported in the Sacramento Bee, citizens are more concerned with their own issues than with the threat of a government shutdown. It is not that they want failure; it is simply that they don't see a direct impact on them.

For that reason, and motivated to ensure that the voting public will resign itself to a tax increase, our political leadership has taken steps in an effort to engage -- or frighten -- the public. Sure, if asked, the taxpaying public would prefer that California governments' books be balanced, but the majority of citizens do not rely directly on government for their livelihoods.

The first scare tactic -- and one targeted specifically at the productive segment of our population -- is the threat to pay tax refunds with IOUs. But is this really necessary? We have our doubts.

It turns out that there exist in the vaults of governments billions of dollars of unused funds. Whether it is redevelopment money, excess revenue from the tobacco tax or millionaires' tax, the account balances of dozens of funds under the control of the state do not reflect the level of poverty we are being told.

What is sorely needed now is a healthy dose of skepticism about the threats now being issued by our State Controller, State Treasurer and Director of Finance. Just one question illustrates this concern. We have been told that, without a resolution of the budget deficit, California would be shut out of the bond market. If that is true, then how did California just recently manage to sell almost $350 million in Department of Water Resource Bonds? Obviously, someone still recognizes that debt issuances by California are a worthy investment.

All this is not to say everything is coming up roses in the Golden State. To the contrary, government's rampant overspending continues and we indeed have a cash flow problem. But let's not accept without critical analysis a "cure" for a problem that now appears to be significantly overstated.

What Stimulus Package?

Democrats in Congress are certainly taking Emanuel's advice to heart. The 647-page, $825 billion House legislation is being sold as an economic "stimulus," but now that Democrats have finally released the details we understand Rahm's point much better. This is a political wonder that manages to spend money on just about every pent-up Democratic proposal of the last 40 years.

We've looked it over, and even we can't quite believe it. There's $1 billion for Amtrak, the federal railroad that hasn't turned a profit in 40 years; $2 billion for child-care subsidies; $50 million for that great engine of job creation, the National Endowment for the Arts; $400 million for global-warming research and another $2.4 billion for carbon-capture demonstration projects. There's even $650 million on top of the billions already doled out to pay for digital TV conversion coupons.

In selling the plan, President Obama has said this bill will make "dramatic investments to revive our flagging economy." Well, you be the judge. Some $30 billion, or less than 5% of the spending in the bill, is for fixing bridges or other highway projects. There's another $40 billion for broadband and electric grid development, airports and clean water projects that are arguably worthwhile priorities.

Add the roughly $20 billion for business tax cuts, and by our estimate only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus.

(Source: Santa Barbara County Taxpayers Association)