Saturday, November 14, 2009

State Budgets Imploding Too

California is not the only state in big, big trouble. Governor Patterson of New York state announced this week that New York state will run out of cash in four weeks. New Jersey, Oregon, and California all have income tax rates north of ten percent and they are likely to raise them even higher. Why?

The states suffer from the same malady that afflicts the federal government: entitlements and income transfers. In truth, what most of us think of as government costs very little. In our first century and a half as a nation, the US government absorbed barely one percent of the nation's national product. That was back in the days when government was supposed to provide police, a court system, deliver the mail, provide for the national defense, build roads and bridges and provide for basic education. All of these items are absurdly cheap to produce and would require only a modest government expenditure at all levels.

Instead of one percent of national product, the Obama agenda, if enacted, would move government to nearly forty percent of national product (if you include state and local government activities in the mix). Why? Does government cost that much more? No. Government, actual government, is dirt cheap. What isn't cheap are entitlement programs and income transfers?

Social security, medicare and medicaid are enough, by themselves, to bankrupt the nation and will bankrupt the nation and the various states unless curtailed or eliminated. But these are just the beginning. The vast bulk of government activity since the early 1930s has been to take wealth and income from one group of citizens (mostly from citizens not yet born) and give to another group of citizens (current voters).

States are unwilling partners in this grand scheme of income transfers. That's why they are going broke too. You can only borrow so much from unborn Americans. Eventually those holding US and state debt will balk. They are beginning to balk already.

Not only do these income transfers suggest bankruptcy within a generation for the US government and for most states (especially the larger states of California, New York, New Jersey, Illinois, Michigan and Massachusetts), it distorts incentives for ordinary people, reducing the efficiency of the economy, slowing the growth of technology, and dampening entrepreurial enthusiasm.

One side effect of all of this is a growing and permanent group of unemployed Americans. While the economy will probably stagger along (at Japanese growth levels), those who are adversely effected by the government's overwhelming new role in the economy, will not recover quickly. Minorities, old folks, women are the most likely victims of the Obama economy. Obama folks will attribute this to racism, sexism, etc.

The real truth is that government programs that favor groups, end up hurting the very groups that they favor. If Joe can sue you, then you would be better off hiring Sam not Joe. If you are going to force feed your employee benefits program into a new Orwellian Obamacare, then why not outsource? Why not do that part of your business that requires employees by importing that part from China. They don't have Obamacare and aren't going to have Obamacare. The Chinese can see clearly where the US is taking itself.

Gradually, the American public is waking up to the disaster of the Obama Administration. Public opinion polls have turned dramatically against the President and against his political party. That doesn't mean that the President and his party won't ram their unpopular programs through this Congress. The President and the Congress seem unconcerned about what the public thinks and unconcerned about the number one problem facing the economy -- unemployment. Fortunately, 2010 and 2012 aren't that far away.