The Welfare State has Destroyed California’s Economy

May 17, 2012

California is back in the news. On Saturday, Governor Jerry Brown announced that the state’s budget deficit would exceed the original estimate he made in January of $9.2 billion. The new deficit is projected to be a remarkable $16 billion. With state spending still through the roof, unemployment at 11 percent, and poverty on the rise in the Golden State, hope is diminishing that California’s finances will ever return to normal with anything short of a declaration of bankruptcy.

So how did California get in this ugly predicament? The same way the federal government did; by interfering with free market forces by erecting a massive welfare leviathan. The only difference between the caretakers in Sacramento and the caretakers in D.C. is that the latter have the political luxury of printing money to forestall the inevitable day of reckoning. Sacramento does not have that same luxury and unless something drastic happens, it faces insolvency right now.

The five features of the welfare state that have brought the current financial calamity upon California are overregulation, bureaucracy, high taxes, social welfare programs, and unionization.

Overregulation and bureaucracy go together. It has been said that the fastest-growing entity in California is government and its biggest products are bureaucracy and regulation. California’s environmental regulations have always been legendary, but little noticed is the enormous bureaucracy built to regulate most other areas of life. Maintaining these ever growing monstrosities costs a fortune. Additionally, their onerous regulations are one reason that for the seventh year in a row Chief Executive Magazine’s survey of 500 chief executives ranked California as the nation’s worst state to do business in.

Besides regulations chasing business from the Golden State, there are also high taxes. Statists claim that California’s budget deficits have been caused by an ever-shrinking tax base. This is the old chicken before the egg argument.

The reason the tax base continues to shrink is precisely because taxes are so high. California has the 48th worst business tax climate. Workers who earn more than $48,000 a year pay a top income tax rate of 9.3 percent, which is higher than what millionaires pay in 47 states. Its sales tax is one of the highest in the nation, at 8.25 percent. Rounding out the levies that rank among the highest in the country are its capital gains taxes, gasoline tax, and vehicle license taxes. High taxes are a big reason why the state has seen a net loss of four million citizens to other states in just the last two decades. When government raises taxes, the astute find ways to avoid them. The industrious cut back their enterprises and in the case of California, many simply left for lower tax states.

Lastly, Californians have voted for and built a huge social welfare system that puts an enormous strain on the state treasury. The state has about 13 percent of the country’s population but 33 percent of its welfare recipients. Add to that the union contracts of state workers and it is no wonder California is a sinking financial ship. Her prison guards and public school teachers are the highest paid in the country. As of 2009, the average pay and benefits package for a firefighter was $175,000 per year.

California is not alone. For decades, the United States, Greece, and Spain have created welfare states that have choked the lifeblood out of the free market. All face grave financial circumstances today. The free market’s great revenge is that welfare states cannot last forever. Their inevitable collapse comes because they are not self-sustaining. They grow by feeding off the labor of hard working citizens either through higher taxes or inflation. At some point either those sources dry up or the social programs become so large that no amount of money could ever be raised to keep the scheme going. Like Spain and Greece, California is facing immediate financial insolvency. The only thing keeping the United States from the brink is Bernanke’s printing press.

Article first published as The Welfare State has Destroyed California’s Economyon Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina.


Greece is a Harbinger of Things to Come

May 8, 2010

Greece’s bankruptcy proves one thing: welfare states are wasteful and unsustainable.  Since the early 1970s when Greece transitioned from a military dictatorship to a republic, the country has had one socialist government after another.  Years of government largess in the areas of education, health care, paid vacations, and early retirement has brought the nation to its knees and has made it the current number one beggar nation in the world.

Of course, it wasn’t just the wild spending that got the Greek people in trouble.  It was the fraudulent financial records their government submitted to its benefactors to keep the gravy train rolling.  It was also the lack of courage Greek politicians had in making sure that all those government goodies were paid for with tax increases.  You see, Greek politicians for too long were like the parent who just couldn’t say no to their children – ever.  Now, out of necessity, some of the toys bestowed on the Greek children by their government are being taken way and they are throwing a tantrum in the streets of Athens.

Governments like Greece that ultimately do not control their own currency have about two options when the bills come due and the till is dry – default or grovel at the feet of big bankers to loan you more money with which to financially hang yourself.  Greece, of course, has turned to groveling, but at a huge cost.  In order to get bailed out, the Greek government had to enact measures that are foreign to the Greek people.  It had to get its financial house in order by cutting benefits to the citizenry.  Hence, all the stomping of feet, banging of heads, crying, and screaming in the streets.

But, enough about Greece, let’s discuss why this matter is important to the average American.  It is because our gravy train is on the same track as Greece’s.  The only difference is that we can inflate our currency wildly to pay the bills, but only to a point.  Remember the opening line of this article:  welfare states are wasteful and unsustainable.  They are wasteful because they entail taking resources from productive members of society and giving them to unproductive members of society.  Thomas Jefferson warned us about that when he said, “I predict future happiness for 
Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them”. In other words, government should not be in the business of diverting money away from enterprises (new factories, inventions, jobs) that make our economy grow and giving it to groups that contribute little to the well-being of society.  Yes, these groups I speak of include the banking cartel, the military industrial complex, and individual welfare kings and queens.

Welfare states are also unsustainable because you have to fool all the people all of the time, but at the same time you cannot fool the laws of nature.  It is easy to convince a large segment of society that welfare spending is compassionate and is the cost of building a civil society especially since you aren’t raising their taxes to pay for it.  It‘s a piece of cake to convince the underprivileged that they are entitled to public assistance because they somehow are the victims of a harsh economy   As for the banking cartel and military industrial complex, they will gladly accept low-interest loans, bailout funds, and big government contracts as a normal course of doing business.  In this scenario everyone wins.  The working man has low taxes, the underprivileged have income security, the corporate elites have implicit government guarantees against failure, and most importantly the ruling elite collects campaign contributions and votes which install them in office usually for however long they want to “serve”. 

For the last forty years in America this has been the routine.  And our leaders kept telling us that this was not too good to be true.  “We are the United States.  We have the strongest economy in the world.  Someone will always be there to buy our debt – the Europeans, Japanese, Middle East, and China.  Besides, the deficits and national debt don’t matter.”  Do you remember when Dick Cheney told us that one?

But, deficits do matter.  And our national debt is a powder keg waiting to explode.  The laws of nature will catch up with us just like they caught up with Greece.  If and when the Federal Reserve raises interest rates to attempt to quell inflation, the new interest payment on our national debt will be crippling to the federal budget.  If the Fed never raises rates again, our economy will be relegated to the same level as Zimbabwe’s.  At that point, perhaps the Fed governors will attempt to print our way out of trouble.  The only problem is that no one will be interested in buying our debt.  

Article first published as Greece is a Harbinger of Things to Come on