Inefficiency in California, Greece and Other Places and the Socialist Disease of Parasitism: They will NOT stop spending and WILL default.

Abstract: Government inefficiency is the major source of debt in most nations, states and other entities. The comparison is made between the corporate structure and its balance sheets and states. It is clear that the wise management of tax revenues is essential to maintaining a government that can avoid deficits and massive debt and avoid financial crises and defaults. Many states appear to be deliberately driving toward a financial collapse in the hope that they can gain power and wealth if the economy collapses. Many states are dominated by unions who refuse any spending cuts and thus directly contribute to massive deficits and defaults. Much of this process is inefficient and that inefficiency is the root cause by which states fail. Several states will financially collapse in the near future because they cannot effectively spend their current revenues and will not cut spending for a host of reasons.  California, Greece, Portugal, Spain and the US are among those on the current list to default. These nations should be contrasted with Brazil, Canada and Australia for comparison. If they refuse to cut spending then default will be inevitable.

Certain political entities, such as states and sovereign nations, are sliding into a financial and social crisis and face debt defaults, social unrest and other maladies if they cannot correct their deficiencies and improve their capacity to function in markets, manage the tax structure and financial matters. This may be intentional.

Part of this, or perhaps the major portion of this problem, lies in the level of efficiency by which some entity [national, state, local, country, city or province] can collect taxes, spends and manage to assist business [or government in Marxist states] with the generation of suitable tax revenues to pay the government bills. By efficiency I mean that various entities must spend their revenues wisely and attain the maximum effect from the outputs and not waste money or use their power to obstruct their own tax revenues.

Corporations are under the strict international requirement that they maintain a viable and visible balance sheet that demonstrates to the public that they can properly and expertly accommodate debt, minimize costs, manage spending on expansion and other business factors and control what their profit status is. Those who cannot do that fail [as do 80% of all new businesses] in the first five years of operation. States should be under such an analogous regimen of competence and honesty and transparency except they are not because they can run deficits and borrow money to sustain their political positions. Hence, there is no incentive to run a zero deficit, or, what is politically inferior, maintain a surplus. If their systems were more efficient they could probably do much more for their citizens but they tend to subsidize programs that lower overall efficiency and reduce revenues. They spend everything they can get and more.

California and Greece are but two limited but classic examples of ‘states’ that cannot manage their finances because they cannot balance spending, taxation and maintain the efficiency of commerce that provides their tax revenues and simultaneously handle debt. The current Greek state of affairs is that they have a 12.7 % deficit to GDP[1] ratio[2] and that level is far above the 3% allowed by the EU. There are several variables that could explain this such as insufficient taxation, over taxation, insufficient profits on local domestic goods sold thus resulting in lower state revenues, high business costs or a combination of factors that include the balance of trade between this state and other trading partners. The US government is in worse shape as the ratio of debt to GDP will reach 100% by 2011.  States cannot afford to waste money or put up political roadblocks to commerce or their deficits will grow with time ultimately resulting in a default of some form. Many prefer to follow that course anyway.

The GDP and its components:

GDP = C + I + G+ [Ex –Im] where C is consumption, I is investment, G is government spending, Ex is exports and Im is imports all denominated in the state’s currency.

GDP is the sum of all products and services in a year’s time. The efficiency metric is thus complex and depends on essentially all these factors. Most of the U. S.’s GDP is driven by consumer buying C at %65-%70 but a critical part is investment I and government G spending. The final assessment of efficiency is judged by the ability of the state to operate with minimal debt and low deficits and grow GDP at a reasonable rate such as 2-3% per year. Growth is not achievable with sufficient investment capital, I. Some states think creating government jobs leads to ‘growth.’ Although not exactly equivalent, states, banks, nations and corporations all run on very similar financial principles. The similarities are more important than the differences. They must watch spending, not over tax or over regulate and control spending, deficits and debt.  Any failure to do so in any of these enumerated areas prompts excessive debts, future defaults and financial crises.

California[3], New York[4], New Jersey[5], Illinois and other states [I will occasionally use the word ‘entities’ as a broad term from now on]  like the US, U.K., Spain,[6] Italy, Portugal[7], are in severe financial troubles because their yearly balance sheets are monotonously negative and their debt just piles up. Debt, alone, requires money for debt service and thus lowers spending on other matters. Debt, alone, can cut 1-2% off of growth. High debt leads to inefficiency in that respect alone. For governments this efficiency process is estimated by an analysis of their deficit spending, the current and cumulative debt as a fraction of their GDP, debt service costs and other factors such as interest rates and credit ratings. In the corporate view, this deficit outcome is equivalent to earnings per share losses or decreases and attention could be directed to the revenues of the business and the quest for ways to enhance those revenues at constant costs. The government equivalent of this is the sum of taxes and fees less spending and deficit and one would expect a similar response to debt problems such as raising such revenues by increases in taxes and fees or their equivalent if possible. The stipulation here is that taxes can only be raised so high because nearly all those taxes derive their source from business in terms of direct business taxes and the taxes on their salaried employees. We can ignore the differences between corporations and states and their interconnecting problems with global commerce and such because these factors, while important, are not directly related to either the core problem or the solution to the debt issue.  All the footnotes below on the states or entities show similar problems among the group: Spending is too high and revenues are too low to maintain the balance sheets in an orderly manner in the long term. Hence, there are really no unique solutions for any one of these entities—the problem is more general and so is the solution: they are ALL running massive deficits that they cannot sustain in the long run and they must cut spending or raise revenues or default.[8] There are no other options. The recovery from a financial crisis such as the 2008 Depression generally takes years and the governments involved incur more debt in the process thus adding to the propensity to default.[9] We see that happening now. This debt is costly to economic progress resulting in perhaps a 1-2% clamp on economic growth.[10]

Cutting spending:

One way to lower deficits is to cut spending. Corporations do this routinely as they shift focus on different products or services and add or drop product lines and staff. In recessions they are forced to cut costs to maintain their current status due to lower revenues. States cannot always readily do this as they have many agencies that provide a broad spectrum of important services like police, education, state services and other programs for the entire state. But, not all government spending is essential and some of that might be cut in an austerity program. Here, the striking difference between business and government is amplified and becomes a strong visible problem: The political thrust is always to raise taxes in every instance I can find. This effort works to some extent until the point where taxes become oppressive and businesses cannot make decent profits or lose money thus pay fewer or no taxes or until business recovers or when prospects are so dire that businesses shut down operations and quit or leave the entity. This is what is happening in California, New York, New Jersey and other US states and entities. I presume this is happening in the EU and U.K. as well. Clearly, in a global economy businesses will shift resources to more favorable business terrains and avoid the excessive costs of certain governments, unions and other factors. Many states and countries offer attractive tax deals to attract new businesses such as Ontario, Canada and Mayfair, Switzerland or Hong Kong. So, corporations will readily cut spending and move to new locations if necessary and states either cannot do this or refuse to since they are immobile both geographically and politically. Many US businesses have shifted manufacturing efforts to Asia and South America to avoid high labor costs and this is a natural and expected corporate reaction to middle line[11] costs. The critical factor here is that in this case domestic labors costs are too high and need to fall, a social and politically unpopular event.

Enhancing revenues from existing sources:

States derive and augment revenues primarily with tax or fee increases; corporations enhance revenues with sales of products. These appear to be independent variables until you realize that the state tax increases go directly to the cost [middle] lines of the corporations and private citizens in terms of property taxes and personal income taxes.  The net effect is corporate profit decline due to higher costs at constant revenue [top line].  Growth in business can, in many cases, offset this marginal tax cost in time and return the business to some desired profit level.  In times of recession when business revenues are decreasing or static this extra tax becomes a burden on profits from higher costs so fewer taxes are paid on corporate profits.  Thus, tax increases can actually reduce revenues. If the recession or bad times progress and if employees are laid off then net taxes on salaries fall and the state again obtains fewer revenues. States do not act in this manner. They tend to keep all employees and raise taxes to meet spending desires, but then tend to want to increase taxes whenever revenue falls for any reason. This is highly inefficient.

Here is where the major problem stems from when states just raise taxes to overcome shortfalls in revenues from spending: the state will tend to raise taxes to levels where some businesses cannot continue to operate and then they will collapse or leave. This is what happened in Greece as the unions burdened businesses with more and more employees until the cost structure was so high that many corporations [air lines, shipping, etc.] went bankrupt and those companies were nationalized by the Greek government. This is what is happening in California and New York and other states as business flee to other locations with lower tax and regulatory structures. Thus high tax states lose population and beginning with those in the high income tax brackets thus, again, lowering revenues. Some states like California envision a ‘wealth tax[12]”or a 100% inheritance tax in the historical vision of the Communist Manifesto.[13] They want to trap wealth citizens and tap some or eventually all of  their money if they can.

This nationalization process by Greece and others probably has some inherent balance sheet virtues as the state-owned entities probably escape some taxes on the business parts and retain taxes from salaries.  But, now, with government ownership and certainly government mentality now embedded  in the operation of the business, the corporation is less fit to adapt to the business climate and cut expenses and jobs if and when  necessary.  Government-owned business revenues fall thus they provide less revenue for the state. Thus, the nationalization process in the main tends toward inefficiency which incurs higher costs and lower revenues for the state. This can become a long-lasting cycle as we see in nationalized entities like Amtrak and the Postal Service.  These items need to be privatized and allowed to be run by private corporate methods to improve efficiency. The unions, of course, object.

The problem of efficiency arises in restructuring debt and spending because nations need to cut inefficient portions of their government and spend what they can to spur growth. This revenue enhancement is highly critical and needs to be handled properly. This effort becomes a general conundrum as many governments favor very inefficient programs for political reasons.  Thus money is wasted and revenues will not increase and the debt picture worsens. Many political groups think saving polar bears is more important than maintaining a good balance of trade or keeping energy costs low so as to be competitive with other nations. Many want companies and their citizens to spend vast sums on Cap and Trade Taxes using the idea that the government will get significant revenues and they will ‘save the planet’ in the process. This is budgetary suicide. Taxing energy is the most inefficient undertaking a government could imagine except for war.  Spending on new alternatives for energy only increase costs and lower efficiently but are politically popular by some sectors.

Enhancing revenues from new sources:

Many states will grudgingly accept the notion that growth in business will lead to higher tax revenues, but they are loath to believe that tax cuts will spur business activity and lead to the same result. There is some nostrum that flatly asserts that tax cuts are a ‘cost’ to the state thus they add to deficits.[14] Paul Krugman[15][16][17] leads the charge [2005] against the Tax-cut Zombies[18] in a general attack on as supply-side economics. The theory here is that if governments were allowed to raise taxes then they wouldn’t have future revenue deficits and other problems.  The left use a static revenue analysis  to determine what effects growth and this is highly biased against tax cuts. For example from the Joint Economic Committee we read:  “The 1993 Clinton tax increase appears to having the opposite effect on the willingness of wealthy taxpayers to expose income to taxation. According to IRS data, the income generated by the top one percent of income earners actually declined in 1993.“[19]

It appears that their reasoning goes like this: If the government was spending 18% of the GDP and tax cuts were implemented that resulted in the GDP increasing to 20% then the left would howl that even though tax revenues increased [or doubled in the Reagan case] and more jobs were created the government lost the difference in revenue between 18 and 20% of the GDP—thus this was a ‘cost’ to the government. Such circular reasoning is a tribute only to Greek philosophy and other nonsense.

This tax increase trend to gain more revenue is factual on a crass balance sheet vision at an instant’s reflection, but does not work in the long or medium term as excessive taxation depresses taxes paid by corporations thus  a fraction of the 99% of the revenues to states are eventually  depressed. The S&P 500 growth curve that started to climb under the Reagan Administration after the disastrous Carter Era shows that business activity did surge from his tax cuts. The claim that he stated he could cut taxes, grow the economy and balance the budget was predicated on the left cutting social spending and they refused to do that as a result debt climbed with soaring tax revenues under Ronald Reagan.  This was inefficient as the debt could have been lowered. Thus RR was able to double the tax revenue[20] and add 35 million jobs but could not persuade Congress to cut spending and debt increased.

Currently the deficits of states can easily be attributed to overspending on social programs and gross salaries and benefits for state employees. The average government salary and benefit package is currently higher than in the private sector. Moreover, we can add more information on those deficits that continually rise from operations  such as busing, HUD, welfare, certain forms of ‘education’ where the work force is dumbed down, government salaries and pensions and benefits and the problems of greedy unions. These programs are highly inefficient.

Some think that ‘going green’ will ‘create new jobs’ and bring prosperity to California and other places like Spain and elsewhere. It turns out that Spain’s ‘investment’ in things green has cost more jobs [2X] than it created.[21][22] This is a political problem because certain forces want to ‘save the planet’ from carbon pollution that they think cause global warming. There are no facts that support this, but there are lots of sleazy persons who claim to be ‘scientists’ who proclaim this to be fact. [23][24] New advances in fuel cell technology are wildly advocated as ‘efficient’ but the fact seems to be that they are not as effective or cost efficient as proffered.[25] The costs of fuel cell replacement, number of cells and other factors appear to have been hidden from analysts so their may be little or no savings and the payback time might be 15-30 years if there was one. Fuel cell technology has not advanced very far since its discovery in 1836. The same goes for the batteries for electric cars, a known technology since 1805 with very few meaningful innovations since that time. Spending borrowed or deficit money on these projects may just create a green asset bubble[26]  that will eventually burst and those assets will be worthless and accordingly bring more debt and defaults.

The Downward Spiral to Financial Oblivion:

So, we can broadly summarize the positions of many states that are being strangled by debt and offer these striking similarities:

[1] Governments and other entities are taxing beyond the permissible limits for efficient governance now and want to increase revenues with more taxes for numerous reasons, mostly political.

[2] They are dominated by unions and leftist groups that are anti business and harbor a rabid disdain for capitalism in general. This tends to make corporations become defensive or move.

[3] They want to go deeper in debt as they think they can sustain their current position with simply more borrowing as New York City did under the Beam Administration. That process gives them more money to spend. They think that loud messages like they are ‘too big to fail’ or ‘the poor people need more help’ will bring new monies into their coffers. Places like California import poverty to make this very case and also use illegal aliens to vote for more such social programs.

[4] Their deficits will increase for many reasons so the need to borrow will constantly increase and drastically. This debt will grow until default is the only relief.

[5] Many expect a bailout from some other entity. If they did get a bailout or gift  they would certainly spend it away on more social programs and subsequently beg for more alms.

[6] Given any bailout scenario, there are never any plans to cut spending to prevent a recurrence of the deficit level thus the need for more borrowing or handouts or both. The California budget fiasco is instructive here.[27] There is no intent to pay off the debt or even slow the debt.

Notice the trends here. There is no departing from the course of various government entities and states plunging into debt and eventually falling into sovereign default as they frantically cling to power. We have seen how nasty this process becomes when debt and inflation rack a society [Russian Revolution, French Revolution] or when revolutionists grab power as in Cuba, USSR, Haiti, most places in Africa, China and Mexico.  The new book This Time is Different: Eight Centuries of Financial Folly[28] by Carmen Reinhart and Kenneth Rogoff reviews this very process of overspending, massive debt, bank crises and defaults and shows that they are very common in the last several centuries. Thus, the plan must be for California, Greece, New York and other entities to eventually default on their debts and grab as much control of business and whatnot as they can. This effort eventually leads to a command economy such as we see in Marxist or Fascist states, both socialist.

Unless the government leaders are turned out of office and their bureaucracies are abridged in authority the end result will be default and chaos. We could argue that this is really not what leftist governments want but the facts are still there in front of us: they will not stop spending and they will go into default and kleptocratically steal the wealth of their citizens to pay for the maintenance of their power structure. And to make matters worse, they now want to grow and tax marijuana to get more revenues.[29]

All we need is for our leftist legislators to conjure up more social programs and increase taxes in a swirl of marijuana fumes. We may get to experience that scenario.

rycK

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