[Editor’s Note: Norm is out of town this month, so we’re running his column from last November. It’s interesting to note that the points made in it are still relevant to today’s concerns.]
Welcome to the November Money issue of NorthBay biz magazine. On the subject of money, I guess it could be worse. California’s annual budget deficit seems to be around $20 billion—give or take a few billion. A trifling amount really, when compared to the national debt, which is currently $13.2 trillion and rising. So, even though our state legislature’s spending looks like it’s being done by amateurs when compared to the U.S. Congress, it’s still managed to run up debt that’s equivalent to almost $2,500 per person. That’s not just tax-paying adults. That’s $2,500 owed by every man, woman and child living in California.
I wish I could state this in a stronger fashion, but here it is: No government can spend its way to prosperity. The logic behind this statement is unassailable. Every single dollar pumped in to the economy by the government first had to be taken out of the economy by taxing someone. Sounds like a zero sum game to me. It isn’t wealth creation, it’s simply redistribution with the government choosing the winners and losers.
Here’s a partial litany of the federal government’s stimulus efforts since 2008:
• $150 billion Foreclosure Prevention Act—How’s that working?
• $150 billion (seems to be a popular number) government takeover of Fannie Mae and Freddie Mac that did nothing to stem the housing market’s value decline.
• The Fed’s bailout of AIG and Bear Stearns did nothing to prop up the stock market nosedive later in the year.
• TARP funds were used to recapitalize banks instead of buy troubled assets.
• $816 billion stimulus package resulted in unemployment growing to almost double-digits nationwide and to more than 12 percent in California.
• Fiscally mismanaged and bankrupt states like California have been bailed out to the tune of $145 billion in 2009 and $26 billion (so far) in 2010.
• Then there’s Obamacare (I can’t really go down that road, as it merits its own separate column. This quote from Nancy Pelosi says it all: “We have to pass the health care bill first to find out what’s in it.”) and the Dodd-Frank financial takeover bill, which, after you cut through all the rhetoric, does nothing more than create a mechanism for the government to seize any company it deems systemically risky. It will be funded by hidden taxes levied on the financial sector and paid for by us through higher fees.
There’s much more I could add to this list. Suffice to say that every ploy put in place has failed to stimulate the economy or create jobs. In fact, many of them have had the exact opposite effect. And looming just a few months down the road is the expiration of the 2001 and 2003 tax cuts, which will result in massive tax increases for all. Just the tonic the economy needs, don’t you think?
One way to reduce current American society to its simplest terms is to say there are two types of people: makers and takers. And once the makers are pushed too far, they inevitably do something about it. In California, more and more of them are voting with their feet—registering their displeasure by leaving for other states (or countries) that are more hospitable to business. Competition between companies is always keen, but given the difficult economy of the past few years, high taxes and an overly restrictive regulatory environment make it almost impossible to compete. So companies and their jobs leave for more friendly confines, effectively shrinking the tax base.
What I can’t comprehend is how this escapes the notice of policy makers in Sacramento. Do they exist on some other plane of reality? How can they be so oblivious? The state can ill afford existing companies picking up stakes, moving elsewhere and taking their jobs with them. And for every business that leaves, how many decide not to come to California in the first place? Just this past July, state revenues were $91 million below estimates, but state spending was more than a $1 billion over budget. To use a fashionable buzzword, not a very sustainable formula.
Noted economist Arthur Laffer said, “People don’t work to pay taxes. People work to keep what they can after taxes. They’ll change where they earn their income. They’ll change how they earn their income. They’ll change how much they earn, when they receive the income. They’ll change all those things to minimize taxes.” So then is it so difficult to believe companies and people are choosing to leave? A 1,200-square-foot California home translates to a 3,000-square-foot home for the same cost or less in another state. And, by the way, instead of paying up to 9.3 percent in state income tax, many of those other states have no state income tax.
California needs to come to grips right now with the effects of its policies. Do we want an expanding tax base that can foot the bill? Then enact business-friendly policies. Do we want to see this exodus of jobs, capital and brainpower to continue to increase? Then do nothing—you’re on the right course. But think about this: Who’s going to pick up the tab when takers outnumber the makers?
That’s it for now. Enjoy this month’s magazine.
