Design A Country Rescue Package Here (Comment Competition)

Here’s your Memorial Day assignment.  You have been called to the table for top-level policy discussions in a large monetary union.  One of the bigger countries in this union has a serious problem.  Their exports are down slightly and there are some longer-run structural issues, but the immediate issue is (1) a housing bubble just burst, resulting in a big fall in tax revenue, (2) the political system seems paralysed, i.e., cannot raise other revenues or cut spending in any sensible fashion, and (3) the market for this government’s debt appears likely to turn very sour.  Sounds like a classic fiscal crisis.

Here are your possible recommendations:

  1. Let them go bust.  This is tempting, given the failure of the political class in this country to come to terms with its obvious problems.  Also, this would presumably shake the rules of the system enough so they can finally raise revenue or cut spending sensibly.  But this would also create dangers for other countries in your currency union, for example by increasing the risk premia on all debts.  And a lot of poor people will get hit hard; you know that always happens in a free fall.
  2. Give them a big loan.  This is, of course, what the political elite in this country would like – they are asking for money on easy terms, arguing that none of these current difficulties are really their fault.  If you feel that at least some of their problems are temporary, a loan makes sense.  But you’ll also want some conditions, meaning steps they should take to ensure you get paid back.  If they don’t pay back (or can’t pay back for a long while), that creates costs for taxpayers in other (more fiscally responsible) parts of your union and what would be fair or politically sustainable about that?  So what conditions do you want to impose negotiate towards?
  • No conditions.  You trust them and they are your friends.  Hopefully, they will run things better in the future.
  • Tell them to raise revenue and/or cut spending.  They can decide; it is a sovereign country after all.
  • Insist that they raise revenue.  If doing so effectively is prevented by their constitution, they need to change the constitution.
  • Tell them to cut spending any which way they can.  This will hit the poor just like in the “go bust” scenario, but this way the country’s elite can blame you.

Underlying all this, of course, you have to take a view on the politics.  What vested interests exactly have got them into this mess?  Certainly, there was a big shock from circumstances outside their control, but this country’s policies were asking for trouble – any time you run a big housing boom, you are vulnerable to a dramatic slowdown (and loss of revenue).  If you are going to lend money, don’t you want to feel that the loan will allow or even force the political equilibrium to shift ?  Otherwise, won’t this country repeatedly run into the same kind of fiscal difficulties?  This kind of fiscal crisis is always about powerful groups, but are we facing oligarchs or something else in this particular instance?

This missing option above, of course, is to give the country a loan at the same time as they restructure their debts, i.e., a form of debtor-in-possession bankruptcy financing.  But the creditors to this country are also powerful at the level of the monetary union and perhaps in the more fiscally-responsible parts of that union – so count on these groups to oppose any debt write-downs.  One argument they’ll use is that such restructuring will either trigger a panic or lead to higher borrowing costs for other member countries.  So what are you going to do about that?

You can answer these questions either for Spain or California.

By Simon Johnson

60 thoughts on “Design A Country Rescue Package Here (Comment Competition)

  1. I’m a Californian: let them go bust, and provide temporary social services to clean up the mess. Same thing I recommended for the banks.

    The latter didn’t happen and, given the relatively cheap price tag of bailing out California, the fact that it is reliably Democratic and that the public employee unions have already gotten the Obama administration to threaten the state govt. over cuts, I don’t see any reason to expect anything other than a smile and a check from the Federal Govt.

    Carson Gross

  2. Item 2 in the problem statement is a bit of a misfit when applied to California: California did not ask the Feds for a loan; it asked for a loan guarantee to lower its cost of borrowing from the markets. Now there are plenty of reasons to object to the loan guarantee, but it isn’t quite the same as a loan.

    California’s problem stem from the 1962 two-thirds budget amendment to the state constitution (Proposition 16, which was itself a change to the 1933 Proposition 1), and the 1978 Proposition 13 which limited property tax revenues. The problem is that these things are now part of the state constitution, and so only changeable by the voters for a constitutional convention. I think it is time for the latter.

  3. As with any great wound, you must first stop the bleeding. All new hires in a defined benefits program must be under a new set of rules relevant to the times. Oregon has a multi-tiered retirement system in place.

    In California, the retirement multiplyer in affect for teachers is 2.0 @ 60 – 2.4 maximum – 63 I believe. 2.7 for city and county employees and 3.0 @ 50 years of age for police and prison personnel. This is not sustainable. Benefits need to be grandfathered in for existing employees and workable rates and ages for retirement figured going forward for all new employees. Stop the bleeding.

    Teachers pay into their retirement – everyone should. It is only one part of a massive problem – but the sooner the benefits are aligned with reality – the better.

  4. Carson Gross: “I’m a Californian: let them go bust, and provide temporary social services to clean up the mess. Same thing I recommended for the banks.”

    In a similar vein: Make them a loan on the condition that all of the money go as directly as possible to the households in the bottom 20% in income. Not through social services that have significant administrative costs, but directly. That will provide immediate stimulus, as those people spend the money. Then let the chips fall as they may.

    Prophylaxis (if that is still possible) is better than cure.

  5. California could be in a tougher situation if additional measures to raise revenue would squeeze mobile businesses and individuals too hard and encourage them to make the easy move to other states.

    So perhaps the only way to resolve the problem is in true California fashion – with a public referendum. Except it should be multiple choice instead of true or false questions. Instead of voting yes or no on particular taxes or particular spending cuts, you would insist as a condition on the one-time bailout that the voters choose among a small number of professionally prepared balanced-budget solvency plans. Something like this:

    Which of the follows solvency plans do you prefer
    A. All government departments get a spending haircut
    B. Taxes raised to cover current spending but with a spending growth freeze.
    C. Half (A) and Half (B)
    D. Put the state government into a conservatorship and let the dictatorial trustee figure it out.

    Plurality wins, and whatever the pain of the result – it would have at least some legitimacy in the eyes of the population. There is no better place than California to have this kind of plebiscite – the infrastructure is in place and the population is completely accustomed to them. It’s a Democracy, and if the political system is jammed – we can let them vote on their own solution – with the only condition that it actually be a solution.

  6. Iam a Californian. My State is now in meltdown, and the ‘common people’ are hoping for a complete restructuring, including the state constitution. The leading item is nothing gets voted on without a statement of where the money to impliment such item is coming from. But the real mish-mash is the bureaucratic regulatory system. You have to wait 5 years for a permit to build a house. Officers from the health department brag that you can’t live in a house without breaking a regulation, and they have the power to decide what will be enforced. A whole power structure (with associated fees) has been given the power of law without recourse. The banks have the same power.

  7. For those who blame California’s fiscal crisis on Prop 13 or it’s 2/3 rds vote requirement for new taxes explain this:

    Property Tax revenue since 1978 has grown much faster than the increases (multiplied) of inflation and population growth.

    The fact is that over the last ten years the State Budget has more than doubled with no apparent benefit to constituents. Double digit increases in government outlays have been the rule for the last twenty years, yet virtually nothing has been spent on California’s traffic problems and the schools are a crime ridden mess even though the teachers are the best paid in the land.

    There are three big problems in California:

    • The public employee unions control the big urban counties and the Legislature completely. These unions have turned the taxpayer into a big Sugar Daddy for their over the top never ending featherbedding and socialist schemes.

    • Back in the 60’s the State Supreme Court instituted “one man- one vote” in the State Senate, turning the Senate into a smaller version of the Assembly and denying the rural counties a check on urban power. The vast majority of California’s counties vote conservative and this budget boondoggle could never have happened without this Judicial meddling and overreach.

    • The illegals are given better services than citizens in California; better schools, better health care and better social services and it’s driving budgets through the roof.

  8. Question: If they go bust, what exactly went “bust”? Perhaps what we consider “normal” isn’t. Maybe the bust is a credit driving mania that can’t and shouldn’t be allowed to continue. We are confused that credit = money. It does not. In regard to Spain, let them unwind, retrench, and come out of this on their own. The fear isn’t that they’ll collapse and never be a power again. The fear is that they’ll come back stronger and be in a better situation than the rest of us since they may no longer be tied to debt. That’s what has the rest of us frightened. We can’t allow another country to be a net negative debtor. A country has the ability to maintain its own currency and the value of that currency, once debt and the owners of this debt are turned away.
    In California’s case, they can’t spend currency into circulation and must rely on revenues to meet expenditures. So do that. Cut services that should never have been created to begin with. If it can’t be supported through taxes and real money (no credit), then you can’t have it. Why is this concept so hard to understand?

  9. How about making them a secured loan? Then if they don’t repay, you can start seizing large industries and national monuments and such.

  10. Click to access GB%20GF%20Proposals.pdf

    In 1998-99, the state’s budget was balanced and projected to stay balanced. One year later, the revenues increased 23% from unprecedented gains in the stock market and Another surge of income hit 2004-2005, again not program cuts.

    “The surge in revenues resulted in massive and unsustainable new spending commitments. When revenues declined, the state relied mostly on one time measures, such as borrowing, to temporarily reduce spending without cutting back underlying program commitments. Thus, the structural deficit was born.”

    So CA is dealing with a “structural deficit” and has been for 10 years. From what I’ve read, the budget has doubled in 10 years.

    The unreliable funding source, income and sales tax, should have been sheltered, saved and hoarded during those flush years. Instead, new programs were formed and promises made.

    So we have unrealistic commitments AND a fluctuating revenue stream. Add in a severe downturn in the once flourishing housing industry and …with no new bubbles to fund the on-going charade – bang. It just all blew up.

    The point I am trying to make is this goes back ten years when the first influx of unsustainable revenue was mismanaged and committed.

    We either create a new bubble for CA – or cut the commitments.

  11. I am spanish.
    First of all, unfortunatelly the hypothesis (3) (the market for this government’s debt appears likely to turn very sour) seems far to happen yet.
    Therefore local oligarchs (in this case politicians and the bankers) will try to maintain their status while lenders are still willing to lend.
    When credit finish, the loan will be the solution for sure and it will go with new taxes and restriction on expenditure. But then, politicians and bankers will be enjoying the rents quickly harvested in the last months of the system functioning.

  12. What was that famous headline? FORD TO CITY: DROP DEAD. It really didn’t turn out badly in the long run.

    The political system in the USA and CA is so broken (remember that quiet coup?) it hardly seems worth worrying about the political implications.

    Nothing is really as serious as we are ever led to believe.

  13. I realize I’m not answering the question here, but I wonder exactly how much political will there is in Congress to bail out California, no matter what California promises. Congress doesn’t want to authorize more money for TARP because it senses taxpayer anger; how will, say, Sen. Tom Harkin’s voters in Iowa feel about bailing out Hollywood and the Santa Barbara crowd? It would take a very courageous congressman to vote for this.

    It’s probably about a likely as breaking up California into 4 states, which actually sounds like a damn good idea to me, if politically unfeasible. NYT link here:

  14. I like this idea. Offer a loan secured by revenue-generating state property. Perhaps make part of the loan forgivable if state policymakers meet certain conditions.

  15. Let California go bust. They are endangering us all with their fiscal and pension insanity. Bailing them out will only make them more powerful and more short-sighted. They are behaving like a bunch of trust-fund babies with their relentless spending and sense of entitlement. They need to be accountable for their own actions and not be allowed to dump the consequences of their short-sightedness on others.

    Spain’s problems are for the Spaniards and Europeans to deal with. Most Americans (yes, including the high-bred MIT professros and NYT columnists) are in no position to comment on Spain or anywhere else in the world since we receive almost nothing in the way of news or valid information from outside of the US. We need to stop acting like we know something when in fact we really, really don’t know very much about the rest of the world.

  16. In California, one is facing a plutocracy (wealth-power), and one ought to tell the truth, to said plutocracy, and The People. But first one has to find the truth.

    The bottom line problem lays in the inability to think properly and do triage. A lot of micro decisions make no sense. For example in urbanism: cities are not allowed to densify (which prevents in turn profitable public transport). A lot of non sensical decisions are taken, but no feverish earthquake retrofiting (thus the next big quake could kill thousands), etc…
    In the San Francisco peninsula all the wealthy think about is the dreaded expansion of train lines to four, and higher train speeds: that terrifies them. Meanwhile they send their kids to the very well financed local schools.

    Nothing replaces the ability to argue a cogent argument, and if it was not acquired at school, it’s not going to be acquired by empoverished citizens, and wealth ridden politics.

    Patrice Ayme

  17. Pingback: Anonymous
  18. Tim @12.28 “What are the units for the 2.0 multiplier?”

    I’m sorry – I don’t understand the question.

    Called a few friends and this is what I do know…

    I have a teacher friend who have retired with a salary x 1.45 x years worked – early retirement. I have a friend who retired at 60 – 2.0 x last three years salary average x years worked. Retired friend at 2.4 multiplier was 65 when he retired and had 35 years so his formula was – final salary x 2.4 x 35.

    So I don’t understand “what are the units” – To the best of my knowledge -That is for CalSTRS school teachers in CA.

  19. Sorry Tim – I’m new at this – I just noticed that I should have replied here – I posted a rely below.

  20. Should read “I have a teacher friend WHO retired – not “who have retired” – Geesh.

  21. How about this for starters?
    Publish all the salaries of public employees plus their overtime..
    Redwood City did this recently.

  22. I think you’ve just won my “Croak of the Day” award, though Paul Krugman’s op-ed on California & the broader USA was tough competition.

    Personally, I’d give California a loan and insist that they restructure their government, so that it was harder to filibuster budgets. The majority of the public and the legislature is pro-sensible fiscal policy, and if they are given their heads, things will get better.

    The wingnut response on California is astonishing–check out some of the 580+ comments on Krugman’s op-ed. Despite the demonstrable, on-going failure in California, they still claim that more of the same is what’s needed. Hominids. As to the political background–we have a pretty classic coalition of elite and populist reactionaries. They are a minority, but are taking advantage of the state’s legal system. Beyond that, it’s clear that the kinds of wealth that the California economy is going to generate in the future is going to be different than the past: the military and high-tech sectors are becoming very different and California agriculture is not sustainable. So a recession probably was inevitable. But bad policy-making has turned it into a fiscal disaster.

    ‘scuse me, we corvids have to get back to circling the University of California.

  23. Well the obvious thing would be for CA to default on its debt. That would be “going bust” in the financial sense, but would not have any direct impact on spending the tax revenues it is still receiving.

    Of course whenever a country threatens to do that and cause a loss to the big multi-national banks (as in Argentina and Venezuela at one time or another) we used to send in the marines (or IMF more recently). So I suppose we could send in the marines to CA as well…

    As for Spain, the problem is that they no longer control their own currency, so are not actually an independent state. If they were they could default as well or print money as the US is doing.

    I see civil unrest happening in both places as people start getting hungrier. Capitalism just can’t handle downturns.

    Why shouldn’t municipal or government bond holders be forced to take a “haircut”? They are perfectly willing to require this of the bondholders of GM.

  24. It’s interesting to me a lot of the answers relate to California or something. Am I slow witted?? I thought it was more a vailed reference to America. I don’t consider myself really knowledgable enough to answer this question in a detailed way. But here is how I would handle America’s case
    1. I think you need to rebuild the manufacturing base. And rebuild it with jobs that would last into the foreseeable future, like wind turbines, fuel efficient cars, etc.
    2. I would look at areas the country wastes to much money on. One area is defense contracts. There is a lot of shenanigans going on between The Pentagon and civilian weapons producers. We could have the same defense capability at a much lower cost.
    3. And I would try to cut Medicare payments for drugs. Grandma and grandpa stuff 3 sugar coated cinnamon rolls down their throat and then I pay for the pill that lowers their sugar numbers. Grandpa can’t resist 5+ pieces of bacon and 2 eggs in the morning (cause he did it all his life) and then I pay for his high blood pressure pills and blood thinner. Quit throwing money down a rat hole on pills when people could adjust their diet or suffer the consequences.
    4. Stop dealing with countries like China that “dump” their products (products sold at below cost because they’re subsidized by their own government or use slave/prison labor) on American consumers. WE CANNOT COMPETE AGAINST PRISON LABOR OR CHINESE WORKERS WHO WILL “SLAVE” 10+ HOURS A DAY FOR A BOWL OF GREASY NOODLES AND FAMALDIHIDE FLAVORED BEER. YOU CANNOT AND NEVER WILL COMPETE WITH PEOPLE OF THAT MINDSET. The question is would you rather be able to buy cheap textiles/electronics at Wal-Mart with the money you make from your minimum wage service job, or pay a little more for your goods with a high paying manufacturing job? You can make all the economics graphs you want, I’ll take the latter situation.
    There are other little ways to tweak things, but if Obama could just handle those 4 we’d be light years ahead of where we are now.

  25. Why is it obvious that California should default on its debt?

    This would not help the state’s liquidity problems. California lacks reserves and has to borrow to pay its bills.

    The state would not be able to maintain or construct public works in the future without access to the muni market.

    That is without getting into the consequences for large investors or for the muni market generally (which would then have to be addressed by the federal government).

  26. How do you legally force bondholders to take a haricut when the debt is backed by a state’s authority to levy taxes (and in some cases protected by the state constitution)?

    It is in no one’s interest for a state to default on its debt. A state cannot go bankrupt in the same sense that a company can. It is not like a state can just “go away.”

  27. Easy to explain. California Counties get most of their revenues from property tax. The state gets most of its revenue from income taxes.

  28. I’m a Californian like a number of previous posters. California’s problems are well documented. The LA Times listed five of the leading structural causes:
    1) volatile revenue streams
    2) 2/3 supermajority needed to pass budget annually
    3) citizen initiatives out of control
    4) inadequate reserves
    5) inadequate performance measurement, accountability and performance-based budgeting

    Other structural issues include failure of term limits, polarized political parties, gerrymandered districts and more than our fair share of powerful special interests.

    The state has become ungovernable. Since Gov. Deukmejian, Governors Wilson, Davis and now Schwarzenegger have been unable to pass mostly balanced budgets, mostly on time, or even lead their own parties, let alone the state as a whole. There is simply no effective mechanism given the conditions listed above.

    A number of conservative critics have pointed the finger at powerful unions and government employees, but this is simply ridiculous – I wish it were that simple. Gov. Schwarzenegger could fire every state employee and the budget would still not be balanced. High public safety benefits and lifetime medical for some state employees are the outsized costs that do not reflect the broader labor market. Don’t pick on the poor clerks who get an adequate retirement against a modest base.

    Four broad categories make up California’s spending: education (41%), health and welfare which consists primarily of Medi-Cal and mental health programs (27%), prisons (7%) and everything else (24%). California has a vast educational bureaucracy (as do, I imagine, most other states), but it’s per pupil spending is low – near the bottom. Medi-Cal provides more generous benefits than Medicaid and those benefits are being cut. Soon California’s social safety net will be much closer to the federal minimums. People can debate endlessly whether this is good or bad, but it is coming. California, like all states, can do little to stop the increasing cost of health care. Medi-Cal payments have increased 40% since Gov. Schwarzenegger took office even though eligibility rules have remained unchanged. Prison costs have soared relative to CPI because mandatory prison sentences under “three strikes”. Ironically, this runaway spending comes from the “tough on crime” right. Prison costs have also risen because federal judges have mandated adequate care of inmates.

    What to do: California’s government is fundamentally broken and cannot be fixed by any individual. There is simply no substitute for three coequal branches of government with checks and balances that compromise to achieve decent results. The power of one party or group should wax and wane over time based upon conditions and it’s performance and accountability to the voters. When it slips the opposition will hold power for a while. This is not happening and may never never happen until there is structural reform. I hope Obama will strike a grand bargain – cash for a new constitution.

  29. That wonder of wonders the internet allows reading foreign newspapers and journals from around the world. Geographic placement does not make one ignorant, but failing to utilize the tools available might keep one in that state.

  30. Wow PLB – Thanks for taking the time for such an informative post. Education took an 11% cut this year and more is slated for next year. I believe they are looking at some of the prison costs as well. Wasn’t there a move to “outsource” prisoners to Texas at a considerable savings?

    Anyway – Thanks for the post. Excellent.

  31. Please explain more about these figures.

    Final salary x 2.4 X 35: Suppose a final salary of $75,000. That formula yields $6,300,000 ! Surely that’s not the yearly retirement pay. ;)

  32. Florida, like all other states, was required years ago by the US Supreme Court to apportion both houses of its legislature more or less on a population basis (there are precedents in the US for measures like allowing one senator per county even though a county is too small to qualify on a population basis).

    For some reason, the Legislature still seems dominated by its rural members. White male ones.

    Florida underpays its government employees as badly as California overpays. I doubt that it makes for a better state.

  33. Let’s stop thinking of private banks as the measure of financially stability. Private banks have created a system that enables itself and preserves itself over the longer term, in order to maintain sustainability no matter the state of the economy. We should treat all corporate level banks as we treat any business, in that if the model doesn’t support the market, then it is deemed to fail as a business. The practices of these banks preceding the current financial decline is evidence of a failed business model. Even with 2 years of news, and analysis that showed these financiers that the market could not support their growth, large banks continued to flood the consumer base with loans, even when there was no low-end capital from which to draw. Even with current rules in place it doesn’t necessarily mean that it is ethically correct to draw money from a source that does not make enough money to support a banking industry that sets elite standards for a market that will never approach an extreme level of assets to pay off the large amounts of debt they might owe. These banks have a extremely unrealistic conception of the American consumer base, in that they assume that the rate of consumption can continue to remain at as high a level as before the financial crisis.

    On this note, the rate of consumption has by far outpaced that of production in this country due to outsourcing, and the implementation of factory work overseas, in order for corporation to dodge the high costs of production here. An increase in domestic production is intrinsically in demand, but the type of production must not remain the same. If production is to remain overseas at its current rate, in order for it to be a benefit to the economy, it is necessary to produce new elements of industry, and also begin to foster production in areas that are failing to receive the attention of the economy (i.e. technology, alternative energy, and progressive infrastructure, etc…). Innovation necessitates new forms of production, and drives economy through novel demand. The rate of lending is strictly based on domestic rate of production versus the rate of consumption via regulation.

    Let them go bust!

  34. See Osborne and Hutchinson “The Price of Government” 2004.

    The gist of the book is essentially when a government has a budget crisis, it is best to clean the slate (cut everything – yes, ALL of everything) and reallocate resources based on desired outcomes. Trimming existing budgets does nothing to address a budget’s structural problems or evaluate what is or isn’t necessary.

  35. From a systemic point of view we need to focus on two goals – firstly to enforce a combination of spending cuts and tax increases so that this state is no longer a danger to the financial system in the short run, and secondly to do it in a way which is sufficiently painful for the state’s political elite that they won’t want to do this again for a long while.

    Both these objectives were achieved in a similar situation 30 years ago by something called the New York State Financial Control Board, an entity which despite its spectacular success is now as I write this so obscure that it doesn’t even have its own Wikipedia page.

    You can’t hope to rid a state of its local political elite in the short term. Firstly they are too entrenched. Secondly, many of the same players are also going to powerful (and even in the ascendant) simultaneously at the national level (example: the labor unions in California and in Washington DC today).

    The best you can do is to drive a hard bargain for a bailout which leaves those entrenched elites striving hard to put the state’s financial house in order. The way you do that is to hit them hard in the areas they care about most, i.e. their prestige and their ability to distribute expensive favors to clients and interest groups.

    The New York State Financial Control Board did this 30 years ago by taking away the local politicians’ control over the state budget, effectively until their financial crisis had been resolved. This very public conservatorship also enforced a sharp and visible ongoing humiliation on the state’s political class, which was key to its impact on their motivation.

    None of this requires us to weigh in from outside to determine what the right mix of taxation and spending cuts should be, or what revisions should be made in their democratic constitution or other arrangements. We should be trying to enforce a budget constraint and encourage their democracy to work, not attempting to replace it, which would do more harm to our system of government than good. The key points we should be negotiating for are that if the budget doesn’t balance within a timeframe we determine then spending will be cut, and that detailed outside supervision will be ongoing until specified measures of financial health are reattained.

    All of this assumes of course that the objectives of the central government doing the negotiating on our behalf are consistent with preserving and strengthening our federal system as set out in the Constitution. I could be wrong, but I don’t think this is something Obama takes seriously at all. He is more likely to welcome this as an opportunity to make California ever more dependent on cash from the Federal government (the parallel desire to centralize of the EU political elite is of course already well known). Obama will likely bail California out, but he won’t impose tough conditions because he isn’t really interested in seeing the state re-establish its financial autonomy.

    Where this centralization leads is towards the sort of permanently enfeebled local government the UK has, where since all the cash and virtually all of the expenditure is controlled by the Treasury few bother to vote any more in local elections (especially young people) and hardly anyone on the street even knows the names of their local ‘elected representatives’.

  36. PLB,
    The canard that California is near the bottom in per pupil spending ( 47 th is usually cited) is a lie spread over and over by the teacher’s union. Per pupil spending in roughly in the middle of the US Avearage and teacher’s salaries are the highest of any state. Much of educational spending goes to Administration. LA Unified, the second largest school district in the country is horribly bloated with administrative staff.

    The checks and balances have been completely overwhelmed by the unchecked power of the public employee unions. Protecting the welfare state bureaucracy is the number one priority of the legislature, and has been for decades. The appetite for ever increasing spending for public employee union bureaucracy is insatiable.

    What your figures hide is that every time is the State gets a windfall in tax revenue, it is spent on the bureaucracy. When California received the greatest tax revenue windfall of any state in American history during the dot com years, was the revenue, were taxes reduced or was highway infrastructure improved, ( a dire need in traffic choked California)? No, not on your life. It was spent giving public employee union members a gold plated pension plan that pays workers with 30 years experience a pension equal to full salary at retirement.

    The idea that California needs to overrule the two thirds requirement for new taxes is just ridiculous. California already has the highest state income taxes, the highest business taxes and the highest sales tax. And oh by the way for you Prop 13 phobes, the average property tax of most new homes sold just before the recession was approximately $6,000 a year. That’s average, in LA it was much higher. In poorer LA neigborhoods, it was $5-6 K; in my neighborhood it was $15-20K, and that paid for your almost none existent city and county public services. You get your trash picked up for a fee, and the fire department will probably show up in case of a fire; that’s about it. If your being robbed, well, the police might show up in 45 minutes or so and take a report. Don’t count on protection.

  37. $75,000 divided by 12 = $6250 X 35 X 2.4 = $5,250. or 84% of ending salary.

  38. Marry them off. That way they’ll only make each other miserable rather than the rest of the Unions.

  39. Understandably most of the comments posted refer to California. Spain is an interesting case since joining the EU its economy took off and with it a major construction boom -part infrastructure and part residential. Growth rates in excess of 3% p.a. have been the norm and household debt to income has risen in a similar fashion to the UK – in Spain’s case from roughly 40% in 1995 to 140% in 2007. The economy is heavily dependent on the construction sector for employment and growth. Forecasts of rapidly rising numbers of retirees seeking a “plcae in the sun” also fuelled unsustainable growth. As pointed out above membership of the Euro means that Spain’s ability to use monetary policy is totally constrained by the ECB- under a delusion that somehow it can make “the one size fits all” policy work despite there being no Eurozone agreements in place at national Treasury level. This in fairness to M. Jacques Delors was an issue he pointed out endlessly at the time of the EMU debate. Spain also has a Government “in denial”-until recently the very word recesssion was outlawed-the preferred terminology being a deceleration of activity. Spain also has an over mighty duopoly in its big banks, Santander & BBVA which are deepply exposed to emerging markets especially Latin America as well as the collapsing domestic market. Luckily its Central Bank was tough enough to resist their particpating in the generalised madness that was the CDO/CLO market. Spain needs urgent labour market reform, dumping of indexation and a major stimulus – its deficit is a manegeable 7.5% of GDP. It also needs to restore international comptitiveness and to widen its economic base as a policy imperitive.

  40. In the case of California, have them do what the auto makers were required to do: submit a restructuring plan, which, if deemed sufficient, will be funded by a combination of loans, subsidies (if appropriate) and guarantees of bond offerings. The plan which could be submitted would contain no flexability except a required readjustment to any further negative economic circumstance. If an adequate plan can’t be submitted, have them go into receivership, just like GM, and let the state be run be a committee appointed by the bankruptcy judge by fiat until an adequate reorganization plan is submitted. And, lastly require revision of the state contitution and an immedaite election to replace all public officials currently in office in the legislature.

  41. Letting them go bust may not be all bad. The new California that emerges from the collapse would likely be much more cognizant of “the power of small,” how little details make a difference, and would be stronger than a California whose reckless behaviors are rewarded with a bail-out.

  42. Synthesizing the above posts along with the majority of the current media, it is apparent that America is facing a massive problem with the disintegration of the status quo. The status quo of this country is out of control, the paradigm of the 1950’s is still operating in conference rooms that control the fate of human society. California and Spain are just two more examples of the older generation scared of losing the stability that they currently enjoy.

    I am hard pressed to find many Americans that are thinking. Obviously, anyone reading this post is doing some thinking, but the majority of Americans are content with the status quo and do not care that they are simple passive actors in our current society. Rather than think on a daily basis of how to improve, how to weed out inefficiencies and discover superior practices only comes when someone’s personal status quo is endangered. The teachers union and the UAW are only two examples of stagnate intellectual activity. Innovation in this country is stagnant, innovation in California is stagnate.

    The time is now for leadership. Someone who is willing to challenge the status quo and lead America into the future. Sounds like an Obama cliche at this point, but the fact of the matter is our government is getting old, our institutions are old and outdated. The American constitution is the oldest governing document in use today. Isn’t that the problem? The America of old could not even fathomed the America of today. High School graduates are graduating with more knowledge than 99% of citizens living at the turn of the 19th century. They didn’t know how to drive a car, turn on and program a commuter, operate a cell phone, much less fly a plane. Conversely, I cant sow a field or become a blacksmith. The paradigm of America needs to be restructured.

    To be frank, it starts with a leader. An individual who is willing to stand up and speak not about what is best for them, or even their country, but what is best for the human race. Globalization is happening, the world is homogenizing and the time to capitalize on that homogenization is now. Read Sacks, Diamond, Yunus, they all say the same thing. We need to stop fighting, stop delineating the human race into factions that continually war. That time of our evolution is over, now is the time of finding out a way to foster a tomorrow that will ensure that sustainability of the human race.

    I know this comment is a tad too philosophical for this post, but isn’t understanding philosophy the key to a brighter tomorrow? I watched Bill Maher last night, and I was fascinated to see four men that are driven by reason, not archaic ideologies. America’s future, humanities future, is dependent on solid reasoning driven not by the hope of advancement for an individual in a society, but rather the advancement of the collective human race.

    This moment is of immeasurable importance.

  43. I will have to change my login name here. I am not the Ted K posting the above.

  44. It is also the case that a default by California would freeze up muni markets across the country; this would be an extremely large negative externality. No way would this be allowed to happen.

    Also, I see little that differentiates California and Spain, at least in your analysis. They are BOTH members of a monetary union – Spain subscribes to the Euro and California to the Dollar.

    No, a better solution would be a fairly severe austerity plan. California’s structural imbalances are simply ludicrous.

    Additional note: Spain could not “print money as the US is doing”. The US has the significant and unique advantage of printing the world’s preferred (if that word can be used) reserve currency. Spain, like the UK and other nations, does not have this luxury. Massive liquidity injections would quickly lead to a run on the currency. And a default by a country the size of Spain would rock the world economy, in the end proving disastrous to Spanish interests, not to mention the corollary problems a default would bring forth.

  45. Certainly other measures may be necessary, but how about require state gov’t to revert to its 1998-99 budget (adjusted for 10-years population growth). Then, make guaranteed loans up to the amount of that total budget. Place any new spending on a pay-go system.

    Over the long-term, economic growth should, at the very least, revert to average population growth, so the state should be able to close in on a balanced budget over several years. Of course, they would need to run a budget surplus for several years to pay off the loans, so budget increases may need to adjust downward.

    Another aspect of this may be immigration reform, which can only happen at the Federal level. A comprehensive guest worker program would give the state a new vehicle to collect taxes from currently undocumented workers.

  46. Local politicians in CA only control volatile local sales tax revenue, hence their increasing reliance on the blight of big box stores and car dealerships for revenue. Income and property taxes filter through the Legislature, which is basically controlled by the Republican minority since a 2/3 majority is required to pass the budget each year as well as to raise any new tax.

    Prop 13 unfairly places the tax burden squarely in the laps of new homeowners. Property taxes are frozen at 1% of the purchase price or the assessed valuation in 1976 (with an limited inflation escalator). Children of the original owners who inherit a house and live in it benefit from a grandfather clause that preserves the original valuation and tax basis. Since the price of California real estate has multiplied many times in value, recent buyers pay very high tax rates, compared to their long term neighbors, and bear the tax burden for the state.

    The big CA property tax kicker is that much commercial and industrial property never changes hands and so its property taxes remain low, even though the value is significantly higher than it was in 1976. As Prop 13 prohibits reassessment except upon sale, PG&E is getting a significant tax break, as are property owners in Silicon Valley that lease their land rather than sell it.

    Arnold’s friend, Warren Buffet pays $4000 in property taxes for his Santa Monica beach front home, but is not likely a resident in the state, so his income is exempt from taxes as well. Even he realizes that makes no sense. As Prop 13 is the third rail of CA politics, Arnold dismissed Warren from his campaign for speaking truth to power.

    So, it takes a 2/3 majority to pass a budget and/or a new tax, electoral districts are gerrymandered to maintain the current proportions in the legislature – 1 or 2 seats short of a 2/3 Democratic majority and we Californians are left with minority rule and no way to hold anyone responsible.

    As if tax limitations were not enough for California’s populist urges, they also approved legislative term limits. Legislators just begin to learn what to do when they have to leave office or start running for the next one. Staff is equally naive – 50% or so have less than 2 years experience. They can find the bathroom, but that’s about it.

    Worst of all, the working relationships have completely broken down, and Republicans will unite to defeat anyone of their very small group that crosses the aisle. If it’s the “party of no” at the national level, check it out in CA.

    Voters pass Initiatives and referenda willy nilly without regard to cost or source of funding or even if they make any sense. They pass with a bare majority, but if they change the structure of the government, they have to be repealed with a 2/3 majority – nearly impossible to obtain.

    Three strikes and it’s prison for life was one such bright idea, a cash cow for rural communities where most prisons are located and for members of the exceptionally powerful prison guards union.

    Arnold, elected the first time by a plurality after a recall in a huge free for all, immediately eliminated a tax that was designed and had been passed to smooth out state income shortfalls – and began to borrow, something he had vowed not to do – for operating expenses. So that counter cyclical tax was removed from the set of options, and our bonded indebtedness immediately began to climb. And so, here we are… looking for a new Constitution, a new Governor, a new tax regime, and new legislative districts.

    We California hippies used to enjoy making macrame. Who knew all those knots would foreshadow the state of our state a few decades later. Our golden state looks more like lead these days.

  47. Hope and History, Yes we sure wasted it.
    There is no Hope crisis will be over until well into 2011, and I’m sorry but the US hollywood empire is History.

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