Kicking the Budget-Deficit Can "Texas Style"

Thursday, July 15, 2010

Kicking the Budget-Deficit Can "Texas Style"

In a foolish attempt to postpone doing anything serious about budget deficits, states have resorted to various can-kicking procedures to delay the inevitable (and much needed) firing of government bureaucrats and reducing public union salaries and pension benefits.

For example: Illinois simply does not pay its bills, Arizona sold its House of Representatives and Senate buildings, and California Governor Arnold Schwarzenegger, facing a $19 billion budget deficit for the year that began this month, is trying to force 200,000 state workers onto minimum wages temporarily.

Texas is investigating yet another can-kicking exercise, this one involves paying benefits to the unemployed. Please consider Texas may sell $2 bln of debt for unemployment fund http://www.reuters.com/article/idUSN1325777420100713

Texas might refill its unemployment trust fund by selling $2 billion of debt later this year, a strategy that cut its borrowing costs in the last downturn, according to a state official.

Along with at least 33 other states, Texas has also borrowed from the federal government, which will start charging interest at the end of this year.

By early May, U.S. states had borrowed a total of $38.9 billion from the federal government to pay unemployment benefits, according to a Government Accountability Office report.

Texas has taken out a $1.3 billion loan, but its own debt, which would be issued through the Texas Public Finance Authority, could have lower interest rates than what the federal government would charge [said Ann Hatchitt, a spokeswoman for the Texas Workforce Commission].

Structural Problems Numerous and Deep

Texas needs to bite the bullet and fire government workers. The irony is doing so will increase the underfunding of its unemployment insurance plan. However, Texas would save far more by slashing government expenses than it would lose in benefit payments.

These various can-kicking measures (See Municipal Bonds Benefit as States Kick the Can Down the Road; How Long can it Last? for numerous details), have one fatal flaw. http://globaleconomicanalysis.blogspot. ... -kick.html

States all assume this is the typical garden variety recession quickly cured by the Fed slashing interest rates and sugar-daddy Congress sloshing dollars around.

Clearly, that's not the case as numerous data points (and trillions of dollars in wasted stimulus efforts) have proven.

Unemployment is high and it is going to stay that way until the structural problems are addressed. Unfortunately the Obama administration is adding to the structural problems instead of fixing them.

For discussion on structural problems please see Krugman vs. Greenspan on "That ’30s Feeling"; Calculated Risk Sides with Krugman, I Side with Greenspan. http://globaleconomicanalysis.blogspot. ... t-30s.html

Fix the Structural Problems

Instead of "jobs programs" per se, we need to fix the structural problems: Unsustainable pension promises and government wages, debt at every level, corporate tax policies that encourage jobs to move overseas (deferral of taxes on profits held overseas and excessive corporate taxes in the US), and the entire tax and spend structure at every level, especially the public level.

If we address the structural problems, jobs will eventually take care of themselves.

Krugman is on the wrong side of this debate while Greenspan is mostly right. However, no one will pay any heed to the now discredited Greenspan who ironically was worshiped for all the things he got wrong and ignored the few times he ever said anything that made any sense.

Not the Typical Recession

The structural problems have not gone away at the city level, the county level, the state level, the federal level, or in the pathetic "too big to fail" moral hazard policies at the Fed. Yet, amazingly people think (and states are acting) as if the economy will come roaring back "like it always does".

Since someone is apt to call me on that last sentence, I may as well defend it in advance.

I am not saying "It's different this time". Rather, I am saying this is more like the great depression than the typical garden variety recession. Those who think otherwise are the ones suggesting "It's different this time", not me.

Sadly, neither Congress nor the states (with the sole exception of Governor Chris Christie) have shown any inclination to fixing the massive structural problems we face.

Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot. ... style.html