Fed Decision Led To 'Tough' CA Budget

JAN. 12, 2011

By CHRISS STREET

Ten years from now university economists will analyze Federal Reserve Chairman Ben Bernanke’s recent presentation to the U.S. Senate Budget Committee as the successful turning point in American economic policy from a focus on demand side consumption spending to supply side production investment. As Bernanke clearly stated:

“We need to think about making investments for the future as opposed to simply spending our seed corn on current needs. So thinking about government programs, we should ask the question, will this provide benefits in the future. … On the tax side, I don’t think it’s really very controversial among economists that rising rates, combined with a multiplication of exemptions, deductions, credits and so on, leads to a tax code which is very complex and can distort economic decisions.”

For the last decade our nation’s economy grew at an above average rate of 3.8 percent rate and tax revenue grew at the average rate of 2.5 percent; but government spending exploded at a 13.7 percent growth rate. Fed Chairman Bernanke’s newfound appreciation for getting government out of the way of the private sector only comes after America’s government debt burden has reached a Greek-like 127 percent of our economy. When gold is soaring, unemployment at record highs, and serious efforts are underway to eliminate the dollar as the world’s reserve currency; the U.S. is clearly in trouble.  To put the debt in personal terms, the U.S. government debt burden equals $103,692.20 for every working American.

The shock and awe of the chairman’s rejection of bailouts nullified the intensive lobbying campaign by California and other state and local municipalities for a federal debt guarantee.  Having run-up over $3.5 trillion of municipal bond and pension obligation debts in the last decade, state and local governments are now facing widespread defaults.  Newly inaugurated California Gov. Jerry Brown, who many blame for passing legislation 30 years ago that allowed the state to become the perennial poster child of deficit spending, just announced a six-month moratorium on all state borrowing. A solemn Brown said:

“I am too old to play games anymore; we have to come up with a serious budget right now that reflects serious reality.”

Notice how Brown used the word “serious” twice in the same sentence.  Facing a $28 billion deficit, stratospheric borrowing costs and a coming state downgrade to “junk,” Brown is in a very serious situation.  An Internet search of quotes from the former Catholic seminarian, Buddhism student and Moonbeam politician found no references to “serious.”  Common themes included:

“The conventional viewpoint says we need a jobs program and we need to cut welfare. Just the opposite! We need more welfare and fewer jobs.”

Bernanke knows the last time America stood on the precipice of collapse was in 1979, when President Carter gave his famous “Malaise Speech.”  The speech asked the American people to accept the “New Normal” that Japan would become the dominant world power and Americans would rely on government spending to cushion their diminished expectations.  Carter was actively trying to distort the economy to pay for his government cushion attempting to raise the top income tax rates to 90 percent and the inheritance tax to 77 percent.  His policies resulted in the Federal deficit soaring, price of gold doubling, unemployment rising to post-Depression highs of over 10 percent and international calls to end the U.S. dollar’s dominance.

Federal Reserve Chairman Paul Volker finally refused to print more money to support Carter’s deficits and the spending game ended.  The next year Ronald Reagan swept into office on the supply side economic platform of cutting taxes and the limiting of the intrusion of government into the private sector. President Reagan reminded Americans: “Facts are stubborn things.”  Reagan emphasized: “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”  He understood: “Entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States.”

University professors screamed that President Reagan’s policies would destroy the country.  But over the next 20 years his common sense supply side policies slowed the growth of the national debt, price of gold collapsed, unemployment fell steadily from 10.8 percent  to 4.6 percent, the Japanese economy wilted and the US dollar was again dominant.

Bernanke’s comments appear to be having a positive economic effect as university professors like Paul Krugman are again screaming supply side economics will destroy the nation.  Perhaps we should remember the wisdom of my favorite university professor who had a real working knowledge of economics, Dr. Ray Stanz of the Ghostbusters (Dan Akroyd’s character):

“Personally, I liked working for the university! They gave us money and facilities. We didn’t have to produce anything. You’ve never been out of college. You don’t know what it’s like out there! I’ve worked in the private sector… they expect results!

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  1. antonio caetano
    antonio caetano 12 January, 2011, 19:08

    California had the best system of public education in the US maybe the world. But we threw that away so we could have “tax relief.” But as usual, the public’s greed leads to deep ruinous unfariness, most of the tax relief went to corporations. We needed tax relief but we did it dumb, dumb dumb.
    California’s population has doubled, we have build 20-30 new prisons but only one second rate campus which at this point is more like a junior college.
    Jarvis’ Prop 13 was the will of the people. every legislature including the governor let them have their will. There has been 30
    Even Schrag admits that Prop 13 is “sacrosanct” — that “no politician dare criticize it.” It is the third rail of California politics

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  2. antonio caetano
    antonio caetano 12 January, 2011, 19:12

    continued, ended by typo error.
    There has been 30 years to change it. It’s a little much to blame Brown.
    The people got what they wanted so maybe they have to live with it.
    ( I relied on the Peter Schrag book for helping me articulate my views.)

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  3. Gerry Good
    Gerry Good 13 January, 2011, 06:35

    Antonio, you are just flat out wrong. The Legislature (and the Governor) has failed to live within its means. California has a very high combined tax rate but continues to spend more than it has.

    The Legislature has hobbled our schools to give to the unions who give to the Legislature. Therine lies a significant problem. There is no need for a government union. The government employees are protected by a civil service system. A government union only “feeds” on government.

    Guess who brought government unions to California – Jerry Brown.

    Reply this comment
  4. John Seiler
    John Seiler 13 January, 2011, 13:53

    Chriss:

    Thanks for this insightful article. And welcome back to the private sector!

    When the Volker-Reagan policies were introduced, there was a deep recession in 1980, and another in 1982, before prosperity took off in 1983 and lasted until Pappy Bush’s 1991 tax increases.

    Do you see a similar deep recession happening now? (Which would be the second “dip” in a double-dip recession. The first being 2007-09.)

    It seems to me it can’t be avoided. As the Austrian economists say, the malinvestment has to be wrung from the system. And that includes not just business malinvestment, but the malinvestment of excessive government debts and out-of-control pensions.

    Reply this comment
  5. David from Oceanside
    David from Oceanside 13 January, 2011, 22:13

    My guess is there will be another dip alright.

    Reply this comment
  6. Daryl
    Daryl 13 January, 2011, 23:00

    Speaking of University perfessers and eating your seed corn, did you read that the UC pension fund can no longer meet its pension obligations?

    The apparent reason for this debacle is that in order to save money, the UC budget honchos failed to put any money into the fund for TWENTY years!

    Huh? Maybe candidates for elective office and candidates for Ph.Ds alike need to first demonstrate that they are capable of balancing a checkbook.

    Anyway, what me worry? Charlie ChiCom will surely be happy to lend us the money for our Food Stamp program.

    Reply this comment
  7. Matt Young
    Matt Young 18 January, 2011, 13:02

    Reagan, started the biggest deficit run in history. Somebody is fudging the facts. He had central government at 23% of the economy at the time.

    Reply this comment

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