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May 19, 2012 Economic Illiteracy

Why I don’t get even more frustrated when folks ignore the economics we teach. The reason is quite clear: at some point economics comes back to bite you in the tookus. It’s not really satisfying either to say “I told you so” largely because that means we’re all poorer than we have to be. Here’s the latest from last weekend’s WSJ:

It looks like that Facebook IPO may not be enough to save California’s fisc after all. Facebook co-founder Eduardo Saverin has renounced his U.S. citizenship to move to Singapore, which has no capital gains tax. And now we learn the Golden State’s budget deficit will come in at $16 billion, up from a merely awful $9.2 billion estimate in January.

California Controller John Chiang reported last week that April tax collections were a gigantic 20.2%, or $2.44 billion, below 2012-13 budget projections. You have to admire Mr. Chiang’s capacity for understatement as he noted that “revenues disappointed.” Yes, and J.P. Morgan’s whale trade was a $2 billion rounding error.

Among the biggest surprises is a 21.5% or nearly $2 billion decline in personal income tax payments from what Governor Jerry Brown had anticipated. This reinforces the point that when states rely too heavily on the top 1% of taxpayers to pay the bills, fiscal policy is a roller coaster ride.

California is suffering this tax drought even as most other states enjoy a revenue rebound. State tax collections were up nationally by 8.9% last year, according to the Census Bureau, and this year revenues are up by double digits in many states. The state comptroller reports that Texas is enjoying 10.9% growth in its sales taxes (it has no income tax), while California can’t seem to keep up despite one of the highest tax rates in the land.

"7" Comments
  1. The sad part is that a portion of the taxes paid by some fellow fixing an ice cream freezer in South Dakota will eventually be used for the retirement check of a retired California prison guard.

  2. About the only real solution for California is to secede and then issue their own fiat currency, with Jerry Brown on the three dollar bill. Otherwise, as California cannot coin their own currency, there are two ways to balance the budget, and it’s not higher taxes. I want to thank Jerry for making the debt predicament so clear and understandable. High taxes will chase entrepreneurs to Nevada. Or Texas.

  3. Whatever you subsidize you get more of. Whatever you tax, you get less of.

  4. A whole bunch of the first stimulus package was sent to California to keep public employees employed so California government did not have to think about the leaf rakers. A demand-side trickle-down stupid idea.

    Three years later, California is still on the brink. They pay lifeguards over fifty thousand dollars a year, and let them retire the same as firemen, who get to retire the same as Navy SEALS, maybe better. Some city managers retire and have retired with big six-figure pensions.

    Not all of California’s public employees are on a big gravy train, but in general their whole system has gotten out of hand. The garbage picker has to make quadruple what a garbage picker in central Pennsylvania makes, so he can afford his two-bedroom bungalow in San Diego, assuming he has not yet deserted his family and quit his job to become a lifeguard.

    Chuck nailed it about the North Dakotans paying for Californians. Some Californians. Not the Californians who grow and pick the fresh produce we get in the winter.

  5. There are some simple modifications to the way governments work in the US that could have dramatic effects on the economy. Sooner or later, some state or municipality will require their employees to bid for their job annually. If somebody wants to be a third grade teacher or a snow plow driver or a DMV clerk every year they’re going to have to turn in a figure for the wages and benefits they require to perform the duties. The low bidder will get the job. It wouldn’t be any different than any other kind of government contract, like purchasing paper clips or desks. I’m amazed that this hasn’t been adopted everywhere already.

  6. I sure it happens soon, Chuck. I live in a small municipality where if they would hire me (the only reason why I would charge the same rate as an Oakland, CA, garbage man is to assure they would follow what I tell them, as we together cut the payroll) I know there is at least two hundred thousand a year in cash to be saved. Politicians like to multiply everything by ten, so that’s two million. I used to bill six thousand a week in the eighties, so for an easy two week project, they pay me twelve grand and save two million.

    The problem is you need a client who is willing, one who is willing to lay off a useless high-priced employee. The problem is exacerbated by other public employers cutting back, if they can. Where will John find another job paying eighty-five thousand a year plus Blue Cross and 401-K benefits? Put him out on the street and starve his family, and force him to get another job that is more menial than the present job, where he can spend the day surfing the Internet for, right, grants.

    Even though a few hundred thousand is pocket change to some, we have to do our part.

    Chuck and Wintercow, thanks for your ideas.

  7. Mean to say I am sure hope it happens soon, Chuck.

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