California — a Sinking Ship

If growing an economy were as simple as expanding government spending and increasing deficits, then California would be the leader in global economics.

Whether it’s highway funds or solar subsidies, for every new construction job politicians claim will be created from government spending, they neglect to disclose that the money to pay for the government-created jobs is taken from the private economy. Which causes the loss of at least an equivalent number of jobs as those they claim to create.

‘Stimulus’ Spending Healed Nothing

Moving money around from one part of the economy to the other does not expand the economy. And taking from the private sector does not create more jobs — it only creates more dependency on government.

To prevent further defiling of our state by career politicians, supporters of the free market must insist on policies that support long-term growth for California. And demonstrating to the people why big government does not bring economic growth, should be first on the list.

It would be easy if all we had to do was throw a bucket of water on the wicked politicians, and watch them melt. Dorothy had it easy compared to today’s citizens. Because politics in California is a big business, and does not involve the recognition of individual freedoms or the defense of liberty. Nor does it support the entrepreneurial spirit any longer.

Meltdown Warnings

The warning signs of an economic meltdown were all there. Economists accurately predicted what could and would go wrong if politicians and governments did not make substantial spending cutbacks and provide tax relief.

Some states embraced the necessary moves, and others continued toward a Greece-like meltdown.

Instead of cutting tax rates and government spending, California Democrats ramped up spending, passed more regulations and sneaky tax increases, creating a worse economy for the state. The increase in government spending, expansion of subsidies, and welfare and entitlement programs has only created a loss of growth for California: Stagnant wages, job losses, high taxes, a total lack of competitiveness with other states and a loss of economic standing.

While politicians claim that they inherited a failing economy from predecessors, against sound warnings they defiantly ramped up government spending, insisting millions of jobs would be created.

History is the Best Teacher

In 1981, President Ronald Reagan inherited a stagnating economy, suffering under 70 percent marginal income-tax rates. Then Reagan cut the top tax rate to 28 percent, thereby creating a surge in business investment. America enjoyed the strongest 25-year economic boom in the country’s history.

But California politicians ignored the historical economic success of Reagan. And in doing so, it became more evident than ever, that it was business-as-usual with career politicians despite dire warnings.

To Cut or Not to Cut

Whether or not politicians admit that cuts are the only way to save our cities, states and the nation, taxpayers recognize this. It’s not rocket science; it’s tough love. Even Germany and Canada recently recognized this dilemma, and appropriately cut welfare programs in order to begin reforms.

In the United States, Wisconsin Gov. Scott Walker has instituted real reform through collective bargaining restrictions, while other states’ liberal governors continue to pray at the altar of the labor unions. California’s governor, Jerry Brown, talks a tough game in front of the television crews, but always concedes to the unions which are responsible for putting him in office.

Throughout history, reformers have recognized that talk is cheap and easy, while real government reforms may make them unpopular with those receiving entitlements.

Risking unpopularity, Walker’s reform is ground breaking: he stopped the automatic union dues deductions from workers’ paychecks. And when he did, most workers chose not to make the payments.

Government Green is Wilting

Under the guise of an economic boost, politicians embraced the man-made global warming hysteria. And while most of these same politicians couldn’t possibly believe that the earth is dangerously warming because of man, those in power recognized it as a fantastic way to expand government, and subsequent control over the people.

The only thing more politically correct in California than saving the Delta Smelt is anything to do with the environment. Environmentalists and complicit politicians threatened that, unless citizens gave up selfish driving habits, such as driving to work, life as we know it would end. They demanded that we cut back on selfish energy usage, such as running appliances, and heating and cooling our houses. They told us to live in smaller urban spaces, and take public transportation.

While conservation is very important, the people have not embraced the ridiculous and unsustainable demands made by global warming zealots.  So, in order to force the green agenda, legislators have been passing freedom-reducing legislation at breakneck speed, while increasing state spending on solar, wind and other energy programs. Despite the exposure of the Solyndra scandal,  the clean-energy racket continues. But most know that it is merely a political gravy train and not about clean air, or smart growth. We just don’t know how to stop it.

Going Green Alone

While California continues to promote ending global warming alone, Canada announced last week that next month it will formally withdraw from the Kyoto Protocol, aimed at fighting and preventing global warming.

Likely to follow Canada are the three provinces left in the Western Climate Initiative.

Thousands of new emails have been exposed yet again, from the same ‘Climategate’ characters previously discredited through emails exaggerating the extent of global warming. Caught privately admitting to one another that the evidence is nowhere near as a strong as they’d like it to be, this confirms that the man-made global warming hysteria is not about science, and is instead merely about political activism, power, control and money.

But California’s politicians have so much invested already into the global warming scam, they will go down with the ship before they admit that it’s a ruse designed to control the state’s citizens, and take more taxpayer money.

Meanwhile, California is melting, all right, but not from the heat.

(Katy Grimes is CalWatchdog’s news reporter. Grimes is a longtime political analyst, writer and journalist. This article was first posted on CalWatchdog.)

Gov. Brown Plans to Gouge Middle Class Even More

It’s open season on California taxpayers.

Gov. Jerry Brown is painting bull’s eyes on the backs of the middle class. He wants to increase taxes $7 billion, putting it on the November 2012 ballot. It’s supposed to help close an expected deficit of $13 billion.

The tax increase would have two parts: First, a half-cent sales-tax increase. That’s really going to slam the middle class. Need to buy a $20,000 car for your family just to get to work and to take your kids to the soccer game? It’ll cost you another $100. Thats in addition to the $1,600 you’re already paying in sales taxes. Plus gas taxes, sales taxes on the gas, and road tolls.

Maybe you should just skip that car and wait for Gov. Jerry to build his High-Speed Rail.

The second tax increase would be an additional 1 percentage point increase on the state’s exceedingly, filthy-rich taxpayers, defined as those with income tax for single-filers making $250,000 or more.

Maybe Gov. Jerry doesn’t realize it, insulated as he is from what’s really going on, but $250,000 in California actually puts you in the middle class. Certainly, the high-end of the middle-class. But the middle-class just the same.

Due to the state’s absurd regulations on housing construction, plus the massive tax gougings, California is so expensive that $250,000 goes as fare here as about $60,000 does in Michigan. Think I’m kidding? Decent houses in the nice city I grew up in, Wayne, Mich.,  go for about $50,000. OK, you can’t drive to the Pacific Ocean and surf in February. You can’t even surf on the lakes, because they’re frozen over.

But the point is that, in Michigan, you can live comfortably and raise a family making a lot less than you can in California.

Will Gov. Jerry be able to impose his tax increase? It’ll be hard. But he’s designed it to use the old Democratic “Appeal to Envy” campaign, hoping also to get a boost from the Occupy movement. You can see the TV ads now: “Rich people are plundering California. Let’s gouge them to fund our wonderful state schools, police and fire. And we want to assure you, dear voter, that the money won’t just get sucked into the pension system that’s $500 billion in the red — we really, really assure you of that; government never would lie to you, would it?”

OK, so they wouldn’t include that last sentence.

The last tax increase voters approved in California was Proposition 63, back in 2004. It imposed a new, 1 percentage point tax increase on those making more than $1 million a year to fund mental health programs. And it was another example of the insanity of “ballot-box budgeting” in which special interests force taxpayers to fund their pet projects — at the expense of the general fund. Thereby depleted, the general fund then doesn’t have enough money for everything else, and a bead again is taken on the backs of the middle class.

Other tax increases likely will be on the November ballot, including the reform of state budgeting, with a $10 billion tax increase thrown in, as part of the plan from the Think Long group of the rich and famous.

And the California Federation of Teachers seeks a “millionaire’s tax” on anyone making more than $500,000 a year. Yes, the CTA actually says it wants to “Tax Millionaires,” yet defines them as those making $500,000 or more a year.

So those teaching math to our kids need a remedial math class. Maybe that’s why state budget and pension numbers never add up.

(John Seiler, an editorial writer with The Orange County Register for 19 years, is a reporter and analyst for CalWatchDog, where this article first appeared.)

Court strengthens public retiree health rights

A state Supreme Court ruling last week could make it more difficult for state and local governments to cut spending on health care for their retired employees, one of the fastest-growing costs.

In a widely watched Orange County case, the court said when local elected officials approve a health care benefit for retirees, a lifetime right to the benefit can be created even if the ordinance or resolution does not specifically say so.

The court unanimously said the approval can create an “implied” vested right, fully protected by contract law, if it can be shown that was clearly the “intent” of the action by the elected officials.

The League of California Cities and the California State Association of Counties filed briefs in support of Orange County’s contention that a county and its employees cannot form an implied contract.

The court said the local government groups “raise legitimate concerns” that retiree health insurance benefits, unlike pensions, are usually not funded in advance during working years and that costs have “skyrocketed in recent years.”

But the court said it was dealing not with a policy issue but a legal question posed by a federal appeals court:

“Whether, as a matter of California law, a California county and its employees can form an implied contract that confers vested rights to health benefits on retired county employees.”

The decision written by Justice Marvin Baxter that “a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution” could have a broad impact.

A lawyer for Sonoma County retirees told the San Francisco Chronicle last week that the decision should revive a lawsuit over a five-year reduction in county contributions to retiree health care insurance premiums.

In a discussion of whether retired state workers could be required to pay part of the cost of their health care, the nonpartisan Legislative Analyst said in a 2008 budget analysis that some experts believe the payments are guaranteed by the constitution.

“To our knowledge, however, the ability of the state to reduce the percentage of premiums it pays for retirees has never been addressed by a court,” the analyst said.

The cost of providing retiree health care was a long-ignored government debt, often not even calculated. But in 2004 the Governmental Accounting Standards Board said the retiree health care “unfunded liability” should be reported.

Now some think keeping promises to pay retiree health care costs could be a long-term financial problem that ranks with soaring pension costs.

In 2007 state Controller John Chiang made the first estimate of the cost of providing retiree health care for current state workers and retirees — $50 billion over the next 30 years. He has since increased the estimate to $60 billion.

A 2008 report by a governor’s post-employment benefits commission estimated that the total state and local government debt for retiree health care was $118 billion over the next three decades.

A 2009 report by the U.S. Governmental Accountability Office on retiree health benefits predicted that state and local government budget problems in the decades ahead will “largely be driven” by total health care costs.

Unlike pensions, which are usually a fixed cost with some adjustment for inflation, retiree health care can be an open-ended promise to pay for services, whatever the cost.

Again unlike pensions, retiree health care is usually “pay as you go.“ Most government employers are not setting aside money to invest, presumably paying for much if not all of the retiree health care promised current workers in the future.

The California Public Employees Retirement System began offering local government employers a way to prefund retiree health care in 2007. By last June the program had 306 employers with $1.85 billion invested to cover 212,000 persons.

The state has chosen to let future generations pay for the retiree health care of current workers. Two decades ago legislation by former Assemblyman Dave Elder, D-Long Beach, created a retiree health fund for state workers, but it received no money.

Few employers in the private sector provide retiree health care. And some government employees, notably more than half of all teachers, do not receive retiree health care.

Retiree health plans often cover the worker and dependents. Many government employees can retire at age 50 or 55, usually taking a reduced pension if they are not police or firefighters.

When retirees become eligible for Medicare at age 65, the federal plan is expected to begin covering part of the cost. Some think state and local governments could do more to shift costs to Medicare, which also has major long-term funding problems.

A 12-point pension reform plan issued by Gov. Brown last month said: “Contrary to current practice, rules requiring all retirees to look to Medicare to the fullest extent possible when they become eligible will be fully enforced.”

Some retiree health plans are generous. The administration of former Gov. Arnold Schwarzenegger said active state workers pay 15 percent of their health care costs, while retired state workers can have the full cost of their health care paid by the state.

Brown’s reform plan would “change the anomaly of retirees paying less for health care premiums than current employees.” The state general fund is expected to pay $1.5 billion for retiree health care this year, up 60 percent in five years.

To cut costs, Orange County in 2007 ended a pooling of active and retired health premiums begun in 1985. The pooled rate had lowered the premium paid by retirees, who on average are older and more expensive to insure.

A retiree group filed a suit in federal court to block the split on behalf of 4,600 county retirees. Some said the county expected the average premium paid by retirees or their families to increase $3,000 a year, a figure disputed by the county’s lawyer.

The retirees said bargaining agreements approved by county supervisors did not specify the duration of the pool. They contended that long-standing practice and county statements in a booklet for employees created an “implied” contractual right.

The county said the annual motions and resolutions approved by the board of supervisors during the two decades of the pool only set health insurance premiums for a single year.

A federal district court agreed with the county and dismissed the retiree lawsuit, holding that a county cannot under state law be liable for something not explicitly authorized by a resolution approved by the supervisors.

After the retirees appealed, the U.S. 9th Circuit Court of Appeals asked the state Supreme Court for a ruling on whether, under California law, a county can form an implied contract that creates a vested right to retiree health care.

In ruling that an implied contract can be formed, the Supreme Court said that a court should “proceed cautiously” when deciding whether a contract has been implied by the actions of officials.

“The requirement of a ‘clear showing’ that legislation was intended to create the asserted contractual obligation (ruling cited) should ensure that neither the governing body nor the public will be blindsided by unexpected obligations,” the court said.

The Orange County case goes back to the federal appeals court, which some lawyers reportedly think may ask a trial court to decide whether the circumstances created an implied contract.

(Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. This story was first posted on Calpensions.)

Reaganomics and the American Character

What was the American economy like in the decade prior to the Reagan presidency? The 1970s, for a myriad of reasons, were not a happy time. They featured a combination of stagnation and inflation, which came to be called “stagflation.” The inflation rate peaked at just over 13 percent, and prime interest rates rose as high as 21-and-a-half percent. Although President Jimmy Carter did not use the exact words, a malaise had certainly set in among Americans. Many wondered whether our nation’s time had passed. A Time magazine headline read, “Is the Joyride Over?” Did we really need, as Jimmy Carter told us, to learn to live on less?

Ronald Reagan did not believe America was in decline, but he did believe it had been suffering under wrongheaded economic policies. In response, he offered his own plan, a program for creating economic freedom that came to be known as Reaganomics. Of course, most of Reaganomics was nothing new. Mostly it was the revival of an older understanding that unlimited government will eventually destroy freedom and that decisions regarding the allocation of scarce resources are best left to the private sector. Reagan explained these old ideas well, and in terms people could understand.

But there was also a new element to Reaganomics, and looking back, it was a powerful element and new to the economic debate. It was the idea that tax rates affect a person’s incentive to work, save and invest. To put it simply: lower tax rates create more economic energy, which generates more economic activity, which produces a greater flow of revenue to the government. This idea—which came to be known as the Laffer Curve—was met with media and public skepticism. But in the end, it passed the critical test for any public policy. It worked.

To be sure, there were a couple of major impediments to the economic success of Reagan’s program. First, the Federal Reserve Bank clamped down on the money supply in 1981 and 1982, in an effort to break the back of inflation, and subsequently the economy slipped into the steepest recession of the post-World War II period. Second, Soviet communism was on the march, the U.S. was in retreat around the world, and President Reagan was determined to rebuild our national defense as part of a program of peace through strength. All of these factors worked strongly against Reagan in the battle to revive the American economy. Nor was it a forgone conclusion that his program would get through Congress. We shouldn’t forget that it was a tough program. For example, it eliminated three Social Security benefits in one day: the adult student benefit, the minimum benefit, and the death benefit. Reagan’s program represented a dramatic change in public policy.

With his great skill in communicating ideas, Reagan got his program through Congress. And despite Fed policies and large expenditures for national defense, his program succeeded. I don’t want to bore you with statistics, but I will have to present some to make my case. Most importantly, I hope I will succeed in demonstrating what a difference good policies make to the average citizen.

The evidence is, I think, overwhelming: the Reagan program, when fully implemented in 1983, ushered in a 25-year economic golden age. America experienced very rapid economic growth and only two minor recessions in those 25 years, whereas there were four recessions in the previous 12 years, two of them big ones.

What exactly did Reagan do? For starters, he cut the top tax rate from 70 percent to 28 percent. And yes, high income earners benefitted from these cuts. But as I used to say in Congress, no one poorer than I am ever hired me in my life. And despite lower rates, the rich ended up paying a greater share: In 1979, the top one percent of income earners in America paid 18.3 percent of the total tax bill. By 2006, the last year for which we have reliable numbers, they were paying 39.1 percent of the total tax bill. The top ten percent of earners in 1979 were paying 48.1 percent of all taxes. By 2006, they were paying 72.8 percent. The top 40 percent of all earners in 1979 were paying 85.1 percent of all taxes. By 2006, they were paying 98.7 percent. The bottom 40 percent of earners in 1979 paid 4.1 percent of all taxes. By 2006, they were receiving 3.3 percent in direct payments from the U.S. Treasury.

In the 12 years prior to the Reagan program, economic growth averaged 2.5 percent. For the following 25 years, it averaged 3.3 percent. What about per capita income? In the 12 years prior to the Reagan program, per capita GDP, in real terms, grew by 1.5 percent. For the 25 years after the Reagan program was implemented, real per capita income grew by 2.2 percent. By 2006, the average American was making $7,400 more than he would have made if growth rates had remained at the same level as they were during the 12 years prior to the Reagan program. A family of four was making $29,602 more. During the 12 years prior to Reagan, America created 1.3 million jobs per year. That number is pretty impressive compared to today’s stagnant economy. But during the Reagan years, America added two million jobs per year. That means as of 2007 there were 17.5 million more Americans at work than would have been working had the growth rates of the pre-Reagan era continued.

Inflation, which had been 7.6 percent for the previous 12 years, fell to 3.1 percent. Interest rates plummeted. The average homeowner in America had a monthly mortgage payment of $1,000 less as a result of the success of the Reagan program. Poverty, which had grown throughout the 1970s despite massive increases in anti-poverty programs, plummeted despite cuts to these programs. The poverty level fell from 15 percent to 11.3 percent. These results are tangible evidence that government policy matters.

This is not to say that no mistakes were made. In order to secure lower tax rates, it became good politics to raise the number and amount of income tax deductions, thereby removing about 50 percent of Americans from the tax rolls. In my opinion, that was a mistake, and I think we are suffering for it today. I believe everyone should pay some income taxes. Nevertheless, the net result of the Reagan program was good for all Americans.

So how does the Reagan recovery compare to the recovery going on today? In sum, this is the most disappointing recovery of the post-World War II period by a large margin. I don’t think people understand what an outlier this recovery period is. If the economy had recovered from this recession at the rate it recovered from the 1982 recession, which was roughly the same size in terms of unemployment, there would be 16.3 million more Americans at work today—in other words, all those who say they are unemployed plus almost 60 percent of “discouraged workers” who have dropped out of the labor force. If real per capita income had grown in this recovery at the same rate it grew during the Reagan recovery, real per capita income would be $5,139 higher today. Both the Reagan program and the Obama program instituted dramatic changes. One program worked. The other is failing.

In the end, government policy matters. The truth is, Americans are pretty ordinary people. What is unique about America is an understanding of freedom and limited government that lets ordinary people achieve extraordinary things. We have been getting away from that view recently, but if we can get back to that understanding, which was Reagan’s, our nation will be fine.

Let me conclude by saying that the argument I am making is not just about money or GDP. It’s an argument about character.

If you want to see the effect of bad government policy on character, simply turn on the news and see how Greek civil servants have been behaving recently. They are victimizers behaving like victims. Greek government policies have made them what they are. But what made Americans who we are is a historically unprecedented level of freedom and responsibility. The real danger today is not merely a loss of prosperity, but a loss of the kind of character on which prosperity is based.

I occasionally hire a man to do bulldozer work on my ranch. He doesn’t know a lot about foreign policy, but he knows a lot about the economics of the bulldozing business. In his freedom to pursue that business and to be the best he can be at it, he’s the equal of any man. He’s proud, he’s independent, and he knows his trade as well as anybody else in America knows theirs. That’s what America is about. For me, today’s battle, as it was in 1980, is not just about prosperity or goods and services. It’s about freedom, and it’s about the kind of character that only freedom creates.

(Currently vice chairman of the investment bank division of UBS, Phil Gramm served as a member of the U.S. House of Representatives from Texas’s sixth congressional district from 1979-1985, and as a U.S. Senator from Texas from 1985-2002. Prior to his career in public service, he taught economics at Texas A&M University from 1967-1978. Reprinted by permission from Imprimis, a publication of Hillsdale College.)

What our elected representatives can learn from history: It may take a Revolution

We live in an age when our politicians seem incapable to reach a consensus, make a decision or act in the best interests of the nation. They vote to establish a “Super-Committee” to do by November 23, 2011 what they are unable to do themselves – make tough decisions. It too failed and no final decision was reached. Our elected leaders would be well served by studying our own history, and what our founders faced in 1776.

In the wake of the bestselling Common Sense, by Thomas Paine, the Second Continental Congress met in a red brick building in Philadelphia in the spring of 1776. That building would come to be known as Independence Hall because of the brave words uttered by Richard Henry Lee of Virginia on June 7th, 1776. Lee proposed the colonies break entirely from England. Finally, the words that no one wanted to speak were on the floor for debate.

Jefferson drafted the Declaration of Independence in three weeks, which was read to the delegation on June 28th. It was not accepted at its face and some words were stricken; the issue of slavery was remanded to another day. The vote was cast six days later on July 4th 1776, and the rest is history.

Was the topic of independence less an issue in 1776 than the jobs, spending and budget crisis of 2011? Do you believe the debate in 1776 was less partisan, or contentious, than the debate today?.  The removal of Jefferson’s words on slavery attest to the stark difference between north and south that would later lead to civil war. Despite deep differences,  fifty-six delegates signed their names to that declaration knowing the vote they cast could lead to war and the loss of many lives. Our founders were leaders and decision makers. They knew the risks to their own lives and freedoms by their signature on the declaration sent to King George. .

Our problems today seem so insurmountable to our politicians. Yet they pale in comparison to the decisions of 1776. Our politicians need to re-visit our own history and re-learn how our elected leaders faced the challenge of independence in 1776. They need to study what the founders told the colonists in 1776 that convinced a skeptical population to follow them to war and independence. The colonists were not overwhelmingly in favor of independence. As today, between Republicans and Democrats, there were deep divides between loyalists and rebels. Both sides could predict the destruction of their country and way of life if the wrong path was followed.  The delegates who walked out of Independence Hall to announce the Declaration of Independence faced a deeply divided population.

Our elected representatives face such a divided population today. They face daunting budget deficits and run-away government spending that seems impossible to control. But they must address the crisis. They can no longer vote “present” and kick the can down the road. The young OWS protestors from Wall Street to Oakland drum their complaints against crony capitalism, joblessness, and the status quo. The Tea Party, who could be no more different than OWS, also protests the status quo.

Like the colonists of 1776, there are many people today who believe America is headed the wrong way. Rasmussen Reports, a poll on where the country is headed, finds 75% of Americans believe we are headed in the wrong direction (November 6, 2011). A similar Rasmussen poll finds just 37% of Americans believe our best days are in the past, a percentage similar to the Loyalist position of 1776. Interestingly, the same Rasmussen survey found 59% of Americans rate their own life as good or excellent.

Revolution

America is on an unsustainable path. With $15 trillion of debt, America is at a crossroads. Congress could not reach an agreement and created a Super Committee. The Super Committee was tasked with reaching an agreement on how to tame deficit spending that is projected at more than $1 trillion per year for the next ten years. More than 100 Representatives and Senators demanded they “Go Big” and make more than $4 trillion of cuts. Like Congress itself, the Super Committee failed to reach a decision. When a population is so deeply politically divided, and it’s elected representatives so partisan and paralyzed that nothing can be accomplished, it may take a revolution to change the status quo. This is what happened in 1776.

The Tea Party and Occupy Wall Street are clear signals that a Second American Revolution is brewing amongst the population. The Rasmussen polls are proof positive that the country is headed in the wrong direction. Americans will not accept the fate of Greece and Italy and allow this great nation to become a second or third-rate country. It may take a Revolution to prevent it from happening. It happened once before.

(Robert J. Cristiano, Ph.D. is the Real Estate Professional in Residence at Chapman University in Orange, CA, Senior Fellow at The Pacific Research Institute and President of the international investment firm, L88 Investments LLC. He has been a successful real estate developer in Newport Beach California for thirty years.)

Could Eurozone Debt Collapse Hit CA?

As of 2011, California received $89 billion in fund transfers from the federal government. That was on top of the state’s own $87 billion general fund budget, according to the California Legislative Analyst.

What would happen to federal fund transfers if the U.S. Federal Reserve Board went broke and the bond market collapsed due to a ripple effect of the Eurozone debt crisis?

This heretofore implausible question derives from respected financial historian Martin Hutchinson’s recent observation that the U.S. Federal Reserve is so overleveraged at a 60:1 debt ratio that a slight rise in long-term interest rates of four tenths of one percentage points — 0.4 percentage pionts — would be sufficient to wipe out its capital.

Hutchinson, a mathematician, Harvard MBA and author of the book Alchemists of Loss: How Government Intervention Crashed the Financial System, states:

“Needless to say, a rise of 4-5 percent in long-term interest rates, back to a historically normal level 2-3 percent above the true level of inflation, would put a hole in the Fed’s balance sheet that in current stringent budgetary conditions would be politically impossible for the U.S. Treasury to fill. Thus if a debt default in the Eurozone spread even partially to the over-indebted economies of Britain, Japan and the United States, not only will government bond markets be wiped out, but central banks in their current form will disappear also.”

It is a naïve notion that states send their federal tax dollars to Washington, D. C. and the feds transfer it back based on federal policies. California receives about 78 cents on each dollar it sends to Washington, DC.  But fund transfers include more than what states get back in return. Such transfers also includes what the federal government funds by printing its own money and going into debt.

Unlike state and local governments that must undertake a semblance of balancing their budgets, the federal government has no such obligation and can go into long-term debt in order to finance wars, emergencies and even entitlement programs. The federal government does this through the Federal Reserve, a private bank that is authorized to “make money” and manipulate interest rates, something states cannot do.

If the Federal Reserve and bond markets went bust, this would force the states into painful self reliance, especially if there was no concurrent deregulation.

Federal Highway Trust Fund Precarious

For example, the Federal Highway Trust Fund is already described as “precarious.”  Not only has funding been cut for 2012, but there is a conspicuous absence of funding for high-speed rail such as the California High-Speed Rail Authority, as well as of funding for light-rail projects such as the extension of the Gold Line light-rail system in the suburbs of Los Angeles County.

Highway funding has not been authorized past 2012. On Nov. 14, House Transportation and Infrastructure Committee Chairman John Mica, R-Florida, sent a letter to Senate Environmental and Public Works Chairman Barbara Boxer, D-Calif., that a proposed Senate highway bill will “essentially bankrupt the Highway Trust Fund and make it impossible to provide funding for fiscal year 2014.”

The Republican-controlled House is trying to find a new long-term revenue source for highway funding from expanded offshore gas and oil exploration.  This would be done through a proposed new transportation and energy bill called the “American Energy and Infrastructure Jobs Act.”

Boxer and others have criticized the proposed bill because there wouldn’t be enough oil and gas royalties to cover the $109 billion level needed to keep the Highway Trust Fund from going insolvent.  Neither would the funding arrive fast enough to fund the new measure or fund pet projects currently being planned or underway.

Using oil royalties to fund transportation projects would undermine the concept of a trust fund supported by highway user fees.  But user fees wouldn’t pay for many transport projects anyway, such as California’s Bullet Train, which would require continual subsidies.

The Republican attempt to shift the federal highway tax base to offshore oil royalties is obviously a way to try to get more offshore drilling permits, which the Obama Administration has been incredibly dragging its feet on in the midst of a deep economic recession.

This is no different than Democrats who, in the past, have conditioned receipt of federal highway, education and Medicare funds on California cleaning up its smoggy air basins, which resulted in the California Energy Crisis of 2001.

On October 27, 2011, House Republicans introduced a bill, H.R. 3264, that would return authority to the states to determine their own transportation projects. This would put a halt to withholding highway funding from states unless they complied with other federal mandates. No more tax-transfer extortion.

Both the U.S. House and Senate are reportedly playing a game of “kick the can” down the road, or in this case down the highway, because the government is unofficially broke.  The federal government is running a $1.299 trillion deficit for 2011-12 and is $15 trillion in debt, if the official deficit numbers of the government are reliable. As noted liberal economistLawrence Kotlikoff has stated, “The U.S. is bankrupt but we don’t even know it.”

And the Congressional Supercommittee to resolve the Federal debt has come to a predictable demise.

How Eurozone Debt Default Could Spread to CA

What is potentially threatening state and local governments now is the threat that credit default swaps — or insurance against financial loss issued by U.S. banks — will be called upon to bail out the financial collapse of the Eurozone.

European default could require Goldman Sachs to pay $2 trillion of claims, or against $2 trillion of losses, on credit default swap insurance it possibly purchased from U.S. banks that have gone under or are considered “Too Big to Fail.”

Thus, Martin Hutchinson’s scenario, whereby a debt default in the Eurozone spreads and wipes out central banks and bond markets, is plausible.

It may not necessarily be the Republicans in the House that cancel funding for the California Bullet Train.  It might be a wipeout or partial run on the U.S. central bank and the bond markets from a viral Eurozone debt crisis.  As events are unpredictable and actions are being taken to avert this possibility, there is no way to know for sure.

Keep an eye on how Goldman Sachs deals with the Eurozone crisis.  It may have ramifications for California.

(Wayne Lusvardi is a Political Commentator. This article was first posted  on CalWatchdog.)

Taxes and Regulations Choke the Life out of California Jobs

The California economy remains on life-support. The official unemployment rate, second lowest only to Nevada, is at 11.7 percent. But even this dismal number understates the problem for real people. The unemployment index is based on surveying selected households to determine the numbers of unemployed who have been looking for work in the last four weeks. Not counted are those who work part-time but want to work more, or those who have given up trying to find a job. When these are included, the real unemployment rate (also known as the “U-6” rate) is closer to 20 percent.

Compounding the problem, of course, is the fact that the job creators, tired of high taxes and suffocating regulations, continue to flee the state. When was the last time we’ve heard of a major business relocating to California or even an existing business in the state planning a major expansion? (Solyndra and other rent seeking corporations that rely on government subsidies don’t count as true private sector participants).

Ignoring this grim reality, the majority of Sacramento politicians, backed by those who rely on government, elect to bayonet the wounded, prostrate body of our economy by pursuing new ways to raise taxes.

When it comes to taxes, California ranks first, second or third in almost every category. Even with Proposition 13, which the political class reviles, the state ranks 14th in its per capita property tax burden. But to those who run government, the paramount goal is for those on the inside to survive and prosper, no matter the collateral damage inflicted on the private sector.

Governor Brown, Democrats in the Legislature and government employee union leaders are huddling together and drawing up plans for major tax increases that would appear on the November, 2012 ballot, when they are expecting a good turnout of “low information voters,” those most easily swayed by simplistic arguments paid for by expensive political ads. They are examining every revenue raising possibility, searching for new taxes against which taxpayers will be able to put up the least resistance. Already being considered are new sales taxes and income taxes, but they know from polling that these are not likely to go over well with voters who must contend daily with the adverse impact of our weak economy. For those grasping for more taxpayer dollars, new taxes on millionaires has allure – the state already imposes a 1% surcharge on those making over one million dollars – but the state’s most powerful public employee union, the California Teachers Association, has expressed concern that this will not raise enough money. It will not be surprising if the union comes up with a plan to classify average folks as rich so their taxes can be increased along with those of the wealthy.

Regardless of what form of new taxation is cooked up, it is clear the tax takers have no intention of giving the economy any breathing room. If they have their way, they will suffocate it with new taxes that steal much needed job-creating capital from the private marketplace.

2012 promises a political battle royal over tax issues. It won’t be pretty – maybe the Mayans knew something with their doomsday prediction for 2012. Any plan to transfer more money from the private sector into the hands of the state government bureaucracy is certain to be marketed with the same familiar arguments: rich people need to pay their fair share, the state’s budget deficit must be solved with an increase in taxes, critical programs will be cut beyond the bone without higher levies, and on and on.

Every effort will be made to portray those making a good living as “evil,” and undeserving of their incomes. But those to pay higher taxes could well include those making a little over a hundred thousand dollars, meaning those small business owners, who provide millions of jobs for those Californians still working. Nearly 80 percent of new jobs are created by small business. Raise their taxes and “help wanted” signs will disappear from shop and store windows throughout the state.

No matter how tempting it is to increase the tax burden on someone else, it is important not to lose track of the fact that higher state taxes will take precious dollars out of a wounded economy. Those dollars are the medicine businesses need to heal, and healing means hiring in a state where nothing is more important than getting people back to work.

California’s priority must be real jobs for real people, not the care and maintenance of well-fed Sacramento politicians and bureaucrats.

(Jon Coupal is president of the Howard Jarvis Taxpayers Association – California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights. This story was first posted on HJTA.org)

Occupy Wall Street Crowd Blind to Benefits of Capitalism

Whenever I watch media coverage of another Occupy Wall Street event I am reminded of an exchange between Jewish protesters in the 1979 Monte Python movie Life of Brian. One of the protesters asks another what the Romans have brought to the area and the conversation goes like this:

Question: All right, but apart from the sanitation, medicine, education, wine, public order, irrigation, roads, the fresh water system and public health, what have the Romans ever done for us?
Answer: Brought peace?
Response: Oh, peace – shut up!

The point is that the Roman institutions brought a good deal to the area that was being overlooked by the protesters. The Wall Street protesters, in their hatred of capitalism, overlook things including the fact that over the last 100 years capitalism has reduced poverty more and increased life expectancy more than in the 100,000 years prior.

Every semester I ask my students: “What would you rather be? King of England in 1263 or you?” Every student would rather be themself. They enjoy using their iPhone, indoor plumbing, central heating, refrigerators and electric lighting. All of these things are available to the average person in America today and none of them were available to the aristocracy when the West operated under the feudal system.

How is it that for thousands of years mankind made very little progress in increasing the standard of living and yet today half of the goods and services you use in the next week did not exist when I was born? It wasn’t that there was some change in the DNA such that we got smarter. The Greeks knew how to make a steam engine 3,000 years ago and never made one. The difference is in how we organize our economic system. The advent of market capitalism in the mid 18th century made all of the difference.

We need not just rely on historical data. Look at cross-section evidence. I try another experiment with my students. I tell them they are about to be born and they can choose whatever country in the world they would like to be born in. The only caveat is they will be the poorest person in that country. Every student picks a country that is primarily organized in a market capitalist system. No one picks a centrally planned state. No one says, “I want to be the poorest person in North Korea, Cuba, or Zimbabwe,” countries which are at the bottom of the Heritage Foundation’s Index of Economic Freedom.

What does it mean to be poor in our capitalist society that the Occupy Wall Street crowd so hates? Robert Rector of the Heritage Foundation has several studies of those classified as poor by the U.S. Census Bureau. He found that 80 percent of poor persons in the United States in 2010 had air conditioning, nearly three quarters of them had a car or truck, nearly two-thirds had satellite or cable television, half had a personal computer and more than two-thirds had at least two rooms per person.

Contrast this with what it means to be poor in Mumbai, India, a country that is moving rapidly towards market capitalism but was burdened for decades with a socialist system. A recent story in The Economist described Dharavi, a slum in Mumbai, where for many families half of the family members must sleep on their sides in order for the entire family to squeeze into its living space.

The Occupy Wall Street movement has shown a lack of understanding of how the market capitalist system works. They appear to think that the cell phones they use, food they eat, hotels they stay in, cars they drive, gasoline that powers the cars they drive and all the myriad goods and services they consume every day would be there under a different system, perhaps in more abundance.

But there is no evidence this could be or ever has been the case. The reason is that only market capitalism solves the two major problems that face any economy-how to provide an incentive to innovate and how to solve the problem of decentralized information. The reason there is so much innovation in a market system compared to socialism or other forms of central planning is that profit provides the incentive for innovators to take the risk needed to come up with new products.

My mother never once complained that we did not have access to the latest Soviet washing machine. We never desired a new Soviet car. The socialist system relies on what Adam Smith referred to as the benevolent butcher and while there will undoubtedly be benevolent butchers out there, clearly a system that provides monetary rewards for innovators is much more dynamic and successful. The profit that the Occupy Wall Street protesters decry is the reason the world has access to clean water and anti-viral drugs.

The other major problem that must be solved by any economic system is how to deal with the fact that information is so decentralized. There is no way for a central planner to know how many hot dogs 300 million Americans are going to want at every moment in time. A central planner cannot know the relative value of resources in the production of various goods and services. Market capitalism solves that problem through the price system. If there are too few hot dogs, the price of hot dogs will rise and more hot dogs will be produced. If too many hot dogs are produced, the price of hot dogs will fall and fewer will be produced.

Market capitalism is the key to the wealth of the masses. As Ludwig von Mises wrote in his 1920 book, Socialism, only market capitalism can make the poor wealthy. Nobel Laureate Friedrich Hayek in his famous 1945 paper, The Use of Knowledge in Society, showed that only the price system in capitalism can create the spontaneous order that ensures that goods will be allocated in a way that ensures consumers determine the use of resources. The Occupy Wall Street movement would make best use of its time and energy in protesting the encroachment of the centrally planned state that led to the disaster of the Soviet Union, fascist Germany, and dictatorial North Korea.

(Gary Wolfram is the William Simon Professor of Economics and Public Policy at Hillsdale College and an adviser for the Business & Media Institut, where this article first appeared.)

The seeds of solution are found inside our problems: Let’s get to farming

I have good news and bad news. First the bad news — a sampling of recent online headlines:

  • 46.2 million Americans are now poor…
  • 22% of children in poverty…
  • Dramatic drop in median income…
  • Likely to worsen…
  • ABBAS: Palestinians want full UN membership…
  • Netanyahu set for UN showdown…
  • Anti-Israel subway signs in NYC spark religious war of words…
  • Bloomberg warns of riots

Our world is in a state of disruption. Our nation is in a state of disruption.

Business is in a state of disruption. Marc Andreessen wrote a Wall Street Journal essay under the ominous sounding title Why Software Is Eating The World: “More and more major businesses and industries are being run on software and delivered as online services—from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.”

It’s not really new technology that is disrupting, it’s just the new. Anything new is a disruption. And we human beings hate disruptions. We like status quo. We like comfort. We like stability. We like predictability. We like established structures. And that’s precisely why we’re in the mess we’re in. Our established structures are failing miserably.

According to the World Economic Forum, the United States has fallen from having the world’s most competitive economy in 2008 to having the fifth most competitive economy in 2011. Why? The forum cited weaknesses such as rising government debt, declining public faith in political leaders and corporate ethics. There is no way to sugar coat it. If you don’t think we have serious problems you are either dead or delusional.

Now, here’s the good news. “Every problem has in it the seeds of its own solution,” wrote Norman Vincent Peale. “If you don’t have any problems, you don’t get any seeds.”

Think of problems as seed pods. Disruption takes its meaning from the word rupture, which means to burst or break. To get the seed the pods have to be ruptured. Soil has to be disrupted in order to plant the seed. Our established structures — business, government, you name it — are being disrupted. And that’s a good thing. It’s the way we find the solutions to our problems.

Mr. Andreessen wrote about how new technology is disrupting our lives. But I also found seeds of solution in his essay: “Six decades into the computer revolution, four decades since the invention of the microprocessor, and two decades into the rise of the modern Internet, all of the technology required to transform industries through software finally works and can be widely delivered at global scale.”

It was Thomas Jefferson who famously wrote, “I hold it that a little rebellion now and then is a good thing, and as necessary in the political world as storms in the physical.” Jefferson’s statement is true not only of politics but of everything. The computer revolution was a necessary disruption. It is enabling a global technological transformation to take place.

We tend to think of technology as computers and software. But according to Wikipedia, “Technology is the making, usage and knowledge of tools, techniques, crafts, systems or methods of organization in order to solve a problem or serve some purpose.” Our problems contain the seeds of their solution — but we need new methods of farming.

We will not solve the problems we face in business and government with yesterday’s solutions. We need more disruption not less. We have to introduce new technologies (the making, usage and knowledge of tools, techniques, crafts, systems or methods of organization), disrupt the status quo (crack the pods) and find solutions (the seed).

Take another look at the headlines. The world is in a state of disruption. We have a lot of problems. That means we have a lot of seed. It’s time to fire up the tractor. We have a lot of farming to do.

(For more than 20 years, Jim Whitt has provoked people and organizations to reach their full potential as a speaker, consultant and author. This piece was first posted on his blog, Purpose Unlimited.)

Mary Hayashi is not the only kleptomaniac in Sacramento

California has long suffered at the hands of liberal politicians, left-wing Hollywood personalities and crony capitalists, who perpetually dominate our government, and whose public policy kleptomania of our taxes has left our state in financial ruin and facing a $13 billion deficit.  And when they actually get outed at plying their trade — stealing in public and from the public — though sad, it is life affirming for the rest of us who recognize a cardinal rule of proper financial management: you just can’t have what you can’t afford without consequences.

Assemblywoman Mary Hayashi’s mugshot was released by the San Francisco Police Department in connection with her detention on charges of grand theft (stealing) from the lovely Neiman-Marcus store off Union Square in San Francisco.  It truly is a lovely store and used to be home to a distinct and wonderful San Francisco store named “City of Paris.”  As a youngster my parents would take me there around now to see their famous Christmas decorations and several story decorated Christmas tree placed in the lobby.   But I digress…..

The release of the Hayashi mugshot means her political career is over, thankfully, and there will be one less thief to be concerned about in Sacramento. But will she stay in the Assembly to complete her current term?

The crime Hayashi was detained for is called grand theft because it involves over $400 in merchandize (the leather pants she lifted alone where priced at twice the grand theft threshold, a total of $2,500 in goods were taken from the store).  Grand theft may be charged by the prosecutors as either a felony or a misdemeanor.   It appears that prosecutors have gone the felony route, and now Hayashi is awaiting a “preliminary hearing” to determine if there is sufficient evidence to proceed with a prosecution.  When an Assembly member is convicted of a felony, generally they must resign from office.  Hayashi has already dodged one preliminary hearing date and a new one is being scheduled.  She won a personal “excusal” from that next hearing, meaning it will proceed without her being present, making it a formality.  Her excusal is pretty much an admission of guilt.  This is because the “preliminary hearing” in California is what the Perry Mason television series courtroom arguments were always based on.  When there is exculpatory evidence, criminal lawyers always lard it out at the preliminary hearing stage to quickly derail further proceedings.  Hayashi’s attendance at that hearing would punctuate any “not guilty” plea.  Her absence might otherwise be allowed, but it begs the question of sufficiency of evidence to prove felony theft.  It appears there is no exculpatory evidence, and now rumors of even more evidence that Hayashi was on a “watch list” at the Neiman-Marcus store for past suspicious behavior only worsens the outlook for her in court, and raises new questions about her mental state.

Everyone is entitled to their presumption of innocence and I am entitled to my current opinion that Hayashi is guilty of stealing.  But if she has indeed stolen from the Neiman-Marcus in the past, that would be evidence that she may be suffering from the theft disorder known as kleptomania.  According to the Mayo Clinic, kleptomania is the irresistible urge to steal items one generally doesn’t need.  It is a serious mental health disorder, a type of impulse control disorder.  There is no cure for kleptomania, treatment requires medication and psychotherapy.

The liberal Democrats in Sacramento who spend money the state doesn’t have, who throw new taxes on anything that moves, and who undermine taxpayer protections like Proposition 13 and the 2/3rd requirement to raise taxes in our constitution, are also kleptomaniacs.  But in this case there is a cure if Californians can come to see the disease: throw them all out of office.

Mary Hayashi can beat the felony wrap and stay in the Assembly by arguing that she is “not guilty by reason of insanity,” meaning that at the time of the crime she did not have the necessary “mens rea”, a guilty mind or wrongful purpose, to form an intention to steal, because she was at that moment of theft overcome with the impulse to steal since she is an untreated kleptomaniac.  While I think such a defense could prove fruitful in front of a liberal San Francisco jury, which invented the so-called “twinkie” junk food defense that successfully reduced former Supervisor Dan White’s punishment for murdering Mayor George Moscone and Supervisor Harvey Milk from the death penalty to five years time served, the real precedent it would set would be to establish for all history that a confirmed kleptomaniac can also be and is a member of the California Legislature.  Who knows, maybe she could become a champion of recovering kleptomaniacs and even return to the Legislature, where the disease is rampant, and there are plenty of others in need of treatment.  Mary Hayashi can indeed get better if she has kleptomania.  But can California ever recover from its devastation at the hands of a Legislature full of Mary Hayashis?

(James V. Lacy is publisher of California Political Review.)