Here are a few predictions for next year. It will be hot in Dallas in July, it will be cold in Stockholm in February, and Governor Jerry Brown of California will ask Uncle Sam for some sort of bailout.
I’m actually not sure about the first two predictions, but I think the last one is as close to a sure thing as you can get. Sven Larson is one of America’s top experts on state fiscal issues (his blog is an excellent resource for people who want to keep informed about the shenanigans of governors and state legislatures), and here’s his assessment of the mess in California.
California state spending has outgrown the state’s tax base by 1.3 percentage points annually for 25 years. Simple arithmetic dictates that in lieu of constant tax increases, this perpetuates a deficit. From 1985 to 2009 state GDP in California grew by 5.5 percent per year, on average (not adjusted for inflation). Annual growth in state spending was 6.8 percent, on average. Three spending categories have dominated this spending spree: public schools, cash assistance and Medicaid. Making up half of state spending, they are outlets for traditional redistributive welfare state policy. …Of the three aforementioned spending categories, two have grown faster than state GDP, i.e., the tax base, throughout the past quarter-century: • Public school spending grew at 6.5 percent per year on average, one full percent faster than state GDP • Medicaid grew at 10.7 percent per year on average, approximately twice the rate of state GDP.
In other words, California is in a fiscal mess because spending has grown too rapidly. It’s unclear why taxpayers in other states should be ripped off so that Golden State politicians can maintain an unsustainable vote-buying racket – particularly when the state goes out of its way to punish economic growth and discourage job creation.
To make matters worse, bailouts (or even the expectation of bailouts) send a terrible signal. Matt Mitchell (no relation) of the Mercatus Center looked at precisely this issue and concluded that state politicians would be even more profligate if they got any indication that they could shift the tax burden to people in other states. He even found an interesting study showing how sub-national governments in Germany responded to this kind of perverse incentive structure. Here’s an excerpt from that research.
States with a softer budget constraint [i.e., greater expectation that the German national government will bail them out], have higher deficits and debts and receive more bailout funds. …The larger the expectation of a bailout, the higher the amount spent in a number of spending categories, and special interests are most likely to benefit from this additional spending. We also find that bailout expectations lead to less efficient state government service provision.
By the way, I don’t want to imply that this is solely a California issue. There are several states that have taxed and spent themselves into fiscal ditches. Indeed, it’s quite likely that Illinois may be the first state to experience a fiscal collapse.
[…] But it also has high taxes, absurd regulations, a bloated bureaucracy, and a costly welfare state. […]
[…] it also has high taxes, absurd regulations, a bloated bureaucracy, and a costly welfare state. The net result of all these factors is […]
[…] But it also has high taxes, absurd regulations, a bloated bureaucracy, and a costly welfare state. […]
[…] You may be thinking that I’ve merely provided a handful of anecdotes, so let’s recycle some numbers that I first shared back in 2010. […]
[…] stated, productive people are paying too much of a burden thanks to excessive spending, excessive taxes, and excessive […]
[…] You may be thinking that I’ve merely provided a handful of anecdotes, so let’s recycle some numbers that I first shared back in 2010. […]
[…] California has violated Mitchell’s Golden Rule, letting government spending grow faster than the productive sector of the economy. […]
[…] You may be thinking that I’ve merely provided a handful of anecdotes, so let’s recycle some numbers that I first shared back in 2010. […]
[…] You may be thinking that I’ve merely provided a handful of anecdotes, so let’s recycle some numbers that I first shared back in 2010. […]
[…] You may be thinking that I’ve merely provided a handful of anecdotes, so let’s recycle some numbers that I first shared back in 2010. […]
[…] states, such as Illinois and California, are filled with voters who refuse to recognize reality. Think of them as the Greece and Spain of […]
[…] states, such as Illinois and California, are filled with voters who refuse to recognize reality. Think of them as the Greece and Spain of […]
[…] California has violated Mitchell’s Golden Rule, letting government spending grow faster than the productive sector of the economy. […]
[…] states, such as Illinois and California, are filled with voters who refuse to recognize reality. Think of them as the Greece and Spain of […]
[…] states, such as Illinois and California, are filled with voters who refuse to recognize reality. Think of them as the Greece and Spain of […]
[…] when leftist states such as California continue to finance bad behavior, at least I’ll know that I’m not being coerced to […]
[…] Barbara Boxer is any sort of example, no wonder California is such a mess, losing jobs and investment to other states. Rate this: Share […]
[…] I’ve had several reasons to mock California in the past couple of years (see here, here, here, and here). […]
[…] control of the House of Representatives will prevent a bailout of out profligate states such as California and Illinois, but Fed chairman Ben Bernanke has demonstrated that he is willing to curry favor with […]
[…] The new GOP Congress presumably wouldn’t be foolish enough to bail out profligate states such as California and Illinois, but that does not mean the battle is won. Ben Bernanke already has demonstrated that […]
[…] The new GOP Congress presumably wouldn’t be foolish enough to bail out profligate states such as California and Illinois, but that does not mean the battle is won. Ben Bernanke already has demonstrated that […]
[…] new GOP Congress presumably wouldn’t be foolish enough to bail out profligate states such as California and Illinois, but that does not mean the battle is won. Ben Bernanke already has demonstrated that […]
It was very clear to me when my fellow Californians elected Jerry Brown AND reelected Barbara Boxer — To maximize the chances of a bailout. That, coupled with the state budget now only needing a simple majority to pass is really going to hasten the inevitable.
I agree that Brown will ask for money next year, but it will be for a very small, politically viable item like Medicaid. There will be a lot of hoopla from the libertarian blogs when that happens, but it will only be for $1 billion, not much in the scheme of things. We shall see if the fiscal conservatives coming in next year will see it for what it is — a camel’s nose.