California Progressives Fail Economics 102

Just like Moveon.org, the folks over at the California Progress Report, just don't get it. California is drowning in it's own debt. Rapidly. And it's not pretty. According to MSNBC, the California government could be issuing IOUs instead of tax refunds. We're talking third world levels of mismanagement here.

What do you need to know about it? For starters Gov. Arnold Schwarzenegger's administration Wednesday rushed out its latest plan to cut state spending, raise taxes and borrow heavily to stop California's budget deficit from climbing to $41.6 billion by mid-2010.

The new proposal adds on to the already severe plan he proposed in November. On top of a 1 1/2 -cent sales tax increase and new levies on alcoholic drinks and the oil industry, this plan would also reduce to $103 from $309 the dependent credit Californians could claim on their 2009 income taxes.

The cuts in the proposal are deep, including a reduction of billions of dollars in K-12 education spending from current levels and shortening the school year by five days. State university and community college offerings would also be cut back as tuition and fees go up. Health care programs for the poor would be slashed, as would welfare for the elderly and disabled. The fees for affluent people with assets in the state's veterans homes would rise.

The plan also includes reductions in the state workforce, which the governor is already trying to put in place through executive order. Public employee unions have sued to block the order, which would require state workers to take days off without pay, amounting to a pay cut of roughly 10%.

Genest said the state is already so deep in the red that it will not be able to get through this year without purchasing an unconventional $4.7-billion bridge loan that is certain to saddle taxpayers with steep interest charges -- presuming investors can even be found in this tight credit market.

The situation is dire, and Gov. Schwarzenegger has made some tough decisions that include both spending cuts and tax increases, thus pleasing neither Democrats or Republicans. Back in 2005 he suggested an automatic system of across the board spending cuts if there were a budgetary shortfall. It didn't even come up for a vote in the legislature. The basic problem is simple, you cannot continue to spend more than you generate in revenue and not get a snowball effect. The problem is systemic. Projected revenues are used in California to baseline the monetary expenditure available to the state government. Projections are far from a secure methodology and, as it turns out, can be grossly inaccurate.

California is at the point where Draconian measures are a must. And when that happens, out of the woodwork come the "don't cut our social programs" crowd. No word on whether the "don't raise our taxes any more you thieving slime" crowd will mobilize, despite the fact that they should. I have little sympathy for the progressive bastions of San Francisco and Hollywood, so it's hard to muster the effort to suggest that they need a lesson in basic economics. But they so do:

Throw into the mix the a new report, Proposed Budget Cuts Come at a Time of Growing Need, by the California Budget Project which shows that as many low- and middle-income Californians are finding it increasingly difficult to make ends meet, more are turning to programs such as Healthy Families, Medi-Cal, Food Stamps, CalWORKs, and WIC. Programs facing the greatest cuts are also experiencing great growth in the need for their services.

Arg. How do you deal with this level of myopia? Let's try a logical approach.

1) Government is a weaker source of stimulating the economy than the free market. [Proof]

1a) Every corporate dollar not taxed is a dollar companies can spend on inventory, infrastructure and/or employing labor. That labor can then generate income tax for the state, as distasteful as that may be.

1b) Every individual dollar not taxed is a dollar an individual can spend to pay bills (keeping creditors in business), buy goods and service (keeping companies in business) and keep their homes and put food on their tables (instead of supporting government programs, indirectly including safe havens for illegal immigrants that are certainly a net drainer of economic activity).

2) The first 3 points make the case that increasing taxes is not the best option. Besides, those making the argument for holding the line on spending are suggesting further hurting those who are already paying their taxes. In other words, killing the golden goose that is the taxpayer. So what if it is a death by 1000 cuts, it is still a death.

At some point, taxation becomes unsustainable. It's caused riots and revolutions around the world in the past. It will do so again in the future. California doesn't want to be the host of that type of hysteria.Progressives have long argued that taxes are the solution. But according to this chart, taxes are already pretty high in California.

Even President-elect Obama has said raising taxes in a recession is not a good idea. Not so in California?  So social spending cuts are part of the solution. Sorry. Spend like a drunken sailor and the spending will eventually catch up with you. Fiscal restraint is a reality, not a fairy tale. It's called prioritization, progressives. Read up on it because it's become fiscal reality. Keynes' ideas are as dead as he is.

To make it simple (Rio Linda, you listening?), if I am the head of a household (California) and my income from my work (state taxation) is less than my spending on necessities and luxuries (education, highways, all the way up to funding for obscure special interest groups) then eventually, I will have to start borrowing against my credit card or line of credit (running deficits, and issuing bonds etc.). And eventually, if I continue to do that and not start figuring out where I can trim my expenses, I will reach my credit limit and bankruptcy becomes a real possibility. Now the difference between me and California is that I can't go to my employer and order him to pay me more, while California can do that with the taxpayers. The taxpayers however at some point will have to say 'no'. That point is rapidly approaching.

Guess what liberal organizations and special interest groups, you are going to have to do what individual taxpayers are already doing during the economic downturn - tighten your belts, and figure out the smartest way to spend your funding. Alternately you could try to hit up all those Hollywood liberals to make up the difference and see if they really are all that friendly to the cause after all. I bet you find out they are as phony as the rest of us already realize. You may see it as one way or another having to do actual work, and I know how dreadful that sounds to you. But get your hands 'dirty' by generating the money yourselves through fundraising efforts or entrepreneurial efforts. See what it's like for those who've been carrying your water for the last several decades.

Too harsh? Maybe, but so is reality. Take the cuts and deal.