The Center of the Universe

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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.


Posted by WARREN MOSLER on June 17th, 2009

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Rather than let the states cut essential services and lay off employees with unemployment over 9%, I would give all the states an immediate $500 per capita distribution from the federal government.

It is the same voters and the same taxpayers, so per capita is the way to go.

This gives California most of what it needs and also gives the other states the same per capita distribution to use as desired.

That way it is equitable and helps support aggregate demand during this obvious shortfall.

Calif. Aid Request Spurned By U.S.

Officials Push State To Repair Budget

By David Cho, Brady Dennis and Karl Vick

June 16 (Washington Post)— The Obama administration has turned back pleas for emergency aid from one of the biggest remaining threats to the economy — the state of California.

Top state officials have gone hat in hand to the administration, armed with dire warnings of a fast-approaching “fiscal meltdown” caused by a budget shortfall. Concern has grown inside the White House in recent weeks as California’s fiscal condition has worsened, leading to high-level administration meetings. But federal officials are worried that a bailout of California would set off a cascade of demands from other states.

The administration is worried that California will enact massive cuts to close its deficit, estimated at $24 billion for the fiscal year that begins July 1, aggravating the state’s recession and further dragging down the national economy.

After a series of meetings, Treasury Secretary Timothy F. Geithner, top White House economists Lawrence Summers and Christina Romer, and other senior officials have decided that California could hold on a little longer and should get its budget in order rather than rely on a federal bailout.

“After June 15th, every day of inaction jeopardizes our state’s solvency and our ability to pay schools and teachers and to keep hospitals and ERs open,” Gov. Arnold Schwarzenegger (R) said Friday.

California’s budget is also heavily dependent on taxes paid on capital gains and stock options, which have been clobbered during the meltdown of financial markets. State budget analysts made their annual estimate of revenue a month before the crisis spiked in the fall and have been backpedaling ever since.

Consider capital gains — income from sales of stocks or other assets. In California, that income dropped to $52 billion in 2008 from $130 billion a year earlier. It is estimated to be $36 billion this year.

By February, the shortfall was projected at $42 billion over two years.

To close an annual gap now put at $24 billion, Schwarzenegger and leaders of the legislature’s Democratic majority have put aside talk of tax increases to concentrate on cuts.

“A lot of the burden,” Geithner said, “is going to be on them to lay out a path that gets their deficits down to the point where they’re going to be able to fund themselves comfortably.”


17 Responses to “California”

  1. King of California Says:

    Why can’t california start their own bank, issue their own currency, and deficit spend it to their hearts content? Fundamentally what are the big reasons for them to stay part of the USA collective? Transfer payments from florida and illinois? Military protection from chinese soldiers? Can anyone explain it to me? They have lots of sun, so going forward they should be a solar energy exporter, lots of coastline for wind and wave power. They have silicon valley and all the high tech industries. Next to my home in palm beach, they have some of the most desirable coastal real estate on the planet with moderate weather. They have all that wine country and fruit crops too. They also have hollywood, the world’s leading entertainment manufacturer. (porn industry aside) What does california need from the other states? Population? They can get all that they want from mexico no?

    The banks can be saved but not the 8th largest economy on the planet? Even Professor Delong called for money to the states, obviously larry summers and crew have a different agenda then what many smart economists are crying out for.

    Rahm is on cspan talking about how america’s biggest competitive disadvantage is our healthcare policy. I know if you get the harrison begerons depending on the US national government for healthcare, that will IMMENSELY increase thier power over the citizens, is this a good thing fundamentally when dispersed power was supposed to be a good idea according to the founders?


    warren mosler Reply:

    california can and has payed in ‘script’ that it accepted for payment of state taxes that worked perfectly well during the ‘emergency’ but never did figure out they could do that in the normal course of business as you suggest and i have suggested for a long time.


  2. Mike S Says:

    We need to start getting you way better marketing!


  3. jcmccutcheon Says:

    W, this is the one area I disagree with your policy. States and municipal gov in larger states are replete with corruption,cronyism, voter apathy, and unbalanced real estate tax policies, to name a few of the problems. This is the one area where the “puritanical purification” mentality of the fixed currency crowd is warranted in my mind. Sustaining these government entities in their existing form will perpetuate the corruption. Why can’t state and local governments institute 15 to 20% paycuts, as the private sector does?

    Also, because state and local governments are part of the private sector, they will naturally and proportionally benefit from the payroll tax holiday policy that rewards hard working citizens.


    Scott Fullwiler Reply:

    So . . . do you think it’s a good thing that the private sector is instituting 15% to 20% pay cuts? And if the state government does the same, do you think that helps the private sector at all?


    jcmccutcheon Reply:

    So . . . do you think it’s a good thing that the private sector is instituting 15% to 20% pay cuts?
    I think its a moot point if aggregate demand was robust enough. As you said in the previous thread, fiscal policy should be distributed democratically. My vote is we should reward hard work and put more money into the hands of the private citizens and they can decide how much of that they want in the hands of local/state gov.


    Scott Fullwiler Reply:

    OK. Couldn’t tell.

    I’ve thought for some time that block grants to the states during bad times should be automatic but complemented by a requirement that participating states provide evidence that they would have had balanced budgets (or within some agreed upon deviation) if there were no output gap (according to some model set by the feds). There’s a bit of a moral hazard in there otherwise. So, I think I agree at least with the spirit of your comments here.

    warren mosler Reply:

    Yes, states will benefit from the payroll tax holiday.

    also, the states are composed of the same voters and tax payers as the federal govt, and they just as capable of voting out bad govt at either level. and from what i’ve seen i’m not certain if the corrupton is worse at local, state, or federal levels.

    at least with my per capita revenue sharing the corruption is limited to the state and local level, rather than the state, local, and federal levels combined as is currently the case.


    Mike S Reply:

    Is there any govt anywhere that is perfectly pure and has zero corruption? I think it might be impossible for there to be a completely non-corrupt govt.

    My preference is for there to be some loose federal guidelines on the disbursement to the states. This would provide some oversight parameters for people at the state and local level to use as leverage on their local politicians. These parameters might be best used as 50% to be spent on infrastructure repair, and then another parameter would be at what level this is decided. For example, 30% is controlled by the state level and 20% at a regional level, then 10% at a local level. Tough to pull off but in the end it would insure that money gets to people rather than cronies at the state level.

    I don’t have time here to explain exactly what I mean, but for a long time we have ignored regional concerns at the expense of the well being of our population. We are organized by state, but our geographic needs are not organized by state.


    warren mosler Reply:

    agreed that kind of policy has it’s place. but current circumstance in my opinion call for an immediate pro rata distribution

    Mike S Reply:

    I agree with you Warren. Given this crisis and todays circumstances, lets go for the $500 per capita disbursement to the states.

    I was only talking about a scenario that could be legislated over time. This is something that a well run government economic team (hint!) would have in place for use to fine tune demand. We can forsee doing a $50-100 per capita spend as necessary.

  4. zanon Says:

    Same problem with this as the payroll tax holiday. It helps everyone, so Govt cannot reward favored constituencies, and punish out-of-favor constituencies.

    But California will get its bailout. This is just brinksmanship


  5. Gerrymander Says:

    “Is there any govt anywhere that is perfectly pure and has zero corruption? I think it might be impossible for there to be a completely non-corrupt govt. ”

    That is why the founding fathers wanted the fed power to be as diffuse as possible. Today the federal government is SO POWERFUL that evil forces of Darth Vader can manipulate it to really hurt the citizens if so decided. No one here has given me a good reason why arnold kling is wrong and that we DON’T need 5000 people in congress instead of 500 so that the power is more dispersed and congresspeople are more beholden to individual voters instead of the corrupt lobbyists.

    On snother note, I appreciate all the realization of corruption and waste, fraud, and abuse. Outside of the monetary tunnel vision however, can anyone answer my origianl question? What does California NEED from the rest of the USA to stay part of the collective? Is it coal from illinois? Is it oranges from florida? Is it the chicago economists from illinois? Beyond monetary talk, what are the fundamental underlying issues that make it beneficial for california to stay in the union and turn over power and control to washington DC? A place where barack obama’s mother has been shown to have many ties to certain individuals that probably don’t have much to do with california.


  6. No more social security Says:

    With the recent government announcement that the Social Security trust fund is set to run out in 2037, four years earlier than previous estimates, many young workers are asking themselves: Why am I paying into a system that might not be there for me when I retire?

    “It seems unfair,” says Kouri Marshall, chairman of the board of governors for the Youth Entitlement Summit, which advocates more youth participation in public policy. “We have a Social Security system that was built upon us having a certain number of people employed in this country.”

    Indeed, the entire premise of the Social Security system is that Americans will continue to innovate and the economy will grow so that the current generation of workers will be able to fund current retirees’ benefits. But because of shifting demographics and the added stress of the recession, when the baby boomers begin to retire in 2016, the benefits being paid out will start to exceed the amount being taken in. After the trust fund is depleted in 2037, beneficiaries will be able to receive only what current workers are paying in, which will be about three quarters of the scheduled benefits, unless changes are made.

    “It’s very much a Ponzi scheme where the next generation will get stuck holding the bag,” says Laurence Kotlikoff, author of The Coming Generational Storm and a longtime advocate of reform. “We have a huge generational imbalance.”

    The justice of the situation is up for debate. David Walker, former U.S. comptroller general, says that Social Security was never designed to be a quid-pro-quo system. It was designed to provide extra income to lower-income groups at the expense of those with higher incomes, so analyzing the rate of return for current workers doesn’t make much sense, he says. “I hear young people saying, ‘I’m not getting a good deal.’ That’s technically right, but it doesn’t reflect the nature of what Social Security is,” he explains;_ylt=AvTE_LbTZ0FntXahvv5R5XG7YWsA?mod=fidelity-startingout


  7. Tax Rates Vs. Federal Debt Says:

    A long term 100 year chart of tax rates versus the debt and deficit. So Warren do you still think tax rates will go down instead of up? I am coming to the USVI and live with YOU! 4% sounds pretty damn good to me, I have lots of jobs I want to fund at that rate!


    vipul Reply:

    So what’s the R-squared on that correlation?

    “Yes, in previous eras, it appears that high taxes preceded the exploding debt and deficits.”

    Isn’t that sentence acknowledging that the data completely contradict his implied relation.


  8. First Electric Aircraft Says:

    Warren, the chinese are coming with the world’s first commercially available electric aircraft. If the USA is so great, why haven’t we been first to market with it? California wants clean air, why no electric aircraft factories in california? EDIT

    For that matter, why isn’t your superboat running electric motors. Make those OIL boys HURT, stop using thier product, then they can get mad and nuke everyone cause we have cut them out of the economic loop.


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