California Economy Near Collapse

Economics / Recession 2008 - 2009 Jan 30, 2009 - 03:09 AM

By: Oxbury_Research

MSNBC: California 's fiscal future lurched yet another step toward oblivion on Friday as state Controller John Chiang announced he could no longer make payments for services to disabled and blind people who need the money to pay for rent and food .Chiang said payments would most likely have to be stopped by Feb. 1.

"Delaying these payments will hurt real families," Chiang said .About one million people would be affected by the non-payments, Chiang said. "People are going to be hungry at my house," said Shirley Magers, who receives a $900 monthly payment related to her disabilities. "(This is) not to mention the utilities. Personally I can't pay all the utilities right now."

Back in September I started writing about the inevitable bankruptcies that would ensue at the state and lower municipality levels. We discussed here at Bourbon & Bayonets the debacle of Jefferson County , Alabama 's budget in the first week of October. These articles looked at the funding issues as well as made claims about how the coming bankruptcies of some states ( California , Illinois , and New York were noted) was just a matter of time and how federal funding would be used to bail the states out.

As we approach the just mentioned inevitabilities, I would like to take a step back so we can revisit, in brief, the budgeting blunders made at the state level. After the recap we will look into just how bad things have actually gotten in the land of hippies and Compton. Put it this way, I'd rather run outside naked in the negative fifty degree wind chills we've been having here in Minnesota than live in California and watch state level blunders destroy my capital.

They Did What?

So how did it get to this point? The simple answer is sheer stupidity, but that doesn't quite cut it as we've learned over the past 18 months that there are countless kinds of stupid. The less damaging answer to this question would be fundamental flaws in the political system combined with the inability of regulators to foresee anything close to this economic mess.

Let's start with the latter of those two reasons and look a little deeper into the consequences of the economically ignorant clowns that run our states. For some reason, they, and the other 99% of Americans, expected home prices to continue to rise at double digit levels year over year. This comes despite home prices rising historically increasing a point or two above inflation.

When the state puts together a yearly budget, they do so with projected figures that were probably derived from some sort of econometric regression modeling. The models failed as Keynesian academics has no actual application to the real world, and to try and do so, as we have learned, is very dangerous.

So the states budgeted anticipating an economy that would be supported by more years of double digit growth in housing prices. Obviously the exact opposite has occurred as housing prices have declined by levels not seen in history. Then the snowball started rolling.

As property values deflate, revenues from property taxes decline respectively. We've also seen massive amounts of lay offs. That's less income tax revenue as well as increased payouts in social programs. Now we're looking at consumer expenditures dropping off a cliff resulting in less sales tax revenue. We could get into the details of these issues more extensively, but for the point of this article, I think you get the idea.

While all of this tax revenue is drying up, the state is still budgeted as if the party was just getting started. In other words, revenues dried up, but expenditures didn't budge, and now the state is broke.

Backtracking to the initial paragraph of this sub-section, the other reason the situation regarding states' budgeting has gotten so extreme has to do with a fundamental flaw in our political system. I just want to touch on this briefly.

The flaw is simply that elections are held every two and four years. Both state and federal regulators want to spend as much money as they can to please as many different social groups as they can. This gives them the best chance at reelection. In other words, these officials use the budget as a tool to buy themselves reelection.

So when the worm began to turn economically, state regulators all but refused to make the necessary budget cuts that would sustain self solvency. This doesn't work and directly results in liberal Keynesian economics. I don't care if you voted to elect a Republican or a Democrat. They are all economic liberals save a very select few.

California has set the bar high in enacting the above mentioned practices. Regulators there have run that state, which by itself would be the 7 th largest economy in the world, into the ground.

“Obama, we need your checkbook!â€