Obama's State of the Union and California

I listened last night to President Obama’s State of the Union address to find out whether he will adapt policies that will revive the economy. This is critical for California because the assumptions in the state budget proposed by Gov. Schwarzenegger assume a modest economic recovery: “For 2010‑11, revenues without proposed policy changes or other solutions are expected to increase slightly to $90.9 billion, a 3.2‑percent increase from 2009‑10.” No recovery, and the state’s deficit problems will be much bigger.

People usually make the task of economic prediction too complicated, often using the Keynesian analysis they learned back in Econ. 101.

But it’s really simple: Is the burden of government going to be lessened appreciably? Then the economy will recover. Or: Is the burden going to remain high, or be made higher? Then the recession or depression will continue.

The Great Depression is a good example. The government assaulted the economy in every possible way: imposing the 50% Smoot-Hawley tariff, debasing the currency, massively increasing taxes, massively increasing government spending, massively increasing regulations on industry. It was a full-scale assault on businesses and jobs begun by President Hoover in 1929, then continued by President FDR from 1933-41. After Pearl Harbor, business basically told FDR: The only way we can produce the Arsenal of Democracy is if you let up on us. Which is what happened.

The 1970s suffered stagflation for similar reasons: wild inflation that pushed the middle class into upper-income tax brackets, wild spending, new regulations including wage and price controls. Things got better when Reagan took office in 1981 and reversed those policies.

Today’s recession was caused by massive mistakes by President Bush and the Republican Congress: debasing the currency (gold has tripled in value since 9/11/01; artificially low interest rates by the Federal Reserve sparked the housing/boom bust that hit California especially hard), heavy regulations (Sarbanes-Oxley), wild deficits and spending. Even Bush’s tax cuts were temporary, making them almost worthless. Obama has just continued Bush’s policies, while adding mistakes of his own, such as pushing Obamacare and even bigger bailouts.

So, recovery will happen only when those policies are reversed. I saw only the slightest indication that Obama is going to change course. Even the victory of Scott Brown in Massachusetts so far only has slightly dazed him. He has yet to have a Clinton Moment, as I call it, when President Clinton, after losing Congress to the Republicans in 1994, ditched his high-tax, Hillarycare policies for Dick Morris’s famous Triangulation — meaning, basically, selling out the Left to get re-elected. It worked: Clinton embraced welfare reform and tax cuts, the economy boomed, and in 1996, easily beat Bob Dole.

In his speech yesterday, Obama did call for some middle-class tax cuts and eliminating capital gains taxes on small business. Republicans should embrace those ideas and push them into law. Otherwise, Obama just called for more government assaults on business. Here’s a list, in his words, with my comments in brackets:

* I’ve proposed a fee on the biggest banks [tax increase].

* workers will soon break ground on a new high-speed railroad funded by the Recovery Act. There are projects like that all across this country [boondoggles].

* the House has passed a jobs bill [government make-work].

* Last year, we made the largest investment in basic research funding in history [private-sector research is what’s needed].

* But to create more of these clean energy jobs, we need more production, more efficiency, more incentives [that is, more anti-business regulations].

* we’re launching a national export initiative [just reduce burdens on business, and they’ll export without government “help”].

* This year, we will step up refinancing so that homeowners can move into more affordable mortgages [but it was government artificially boosting housing ownership that caused the boom/bust in housing that is a major part of the recession].

* Next, we can put Americans to work today building the infrastructure of tomorrow [more pork for Chicago-style politicians].

* We should put more Americans to work building clean energy facilities [more pork for Al Gore, Goldman-Sachs and others profiting from investing in green companies].

* And, yes, it means passing a comprehensive energy and climate bill with incentives that will finally make clean energy the profitable kind of energy in America [watch your energy bills skyrocket].

* But at a time of record deficits, we will not continue tax cuts for oil companies, for investment fund managers and for those making over $250,000 a year. We just can’t afford it [he’s not going to renew the Bush tax cuts, which expire next year, meaning massive tax increases].

With its own heavy burden of government at the state and local levels, California is not positioned to compete with other states. As the national recession continues, businesses will be looking for ways to cut costs just so stay alive. One way will be to move from California to more business-friendly states and countries.

Sure, Apple and other high-tech firms will remain here. But have you looked at a Macintosh computer lately? It says, “Designed in California/Made in China.”

It’s clear that Gov. Schwarzenegger just wants to get through the next 11 months and leave the whole mess to his successor. I suspect that the bond houses are going to begin telling California that it had better get its house in order by balancing the budget through large spending cuts — or face seeing the state’s bond rating drop to junk-bond levels, which means another hit to the budget from higher interest rates on bond payments.

The day of reckoning is at hand for decades of pyrite policies in the Golden State.

– John Seiler