WHACK!! … (you feel whacked upside the head yet?)

If you read no other post on this blog, you must read this Globe and Mail article.

In a succinct and lucid report, Barrie McKenna outlines the end game that some of us have always maintained is inevitable and that now has become reality. There is no particular satisfaction in vindication. Not at this cost. Not when it is largely avoidable.

And still! Even though the report is lucid, it is but a picture of real life today. Mr. McKenna like most people, is unaware of the how and why and, like most people, gets lost in pointing the finger of blame at one court decision or a one administrative system. People are thoroughly unaware (blissfully?) that this is not the failure of a policy or the failure of some administrative system. This is a failure that is designed into our monetary/political system at the outset. This is human failure at the largest degree.

http://www.theglobeandmail.com/report-on-business/economy/california-on-verge-of-system-failure/article1609891/

Excerpts with comments interspersed throughout:

Arnella Sims has seen a lot in her 34 years as a Los Angeles County court reporter, but nothing like this.

Case files piling up by the thousands, phones ringing off the hook, forced midweek courthouse closings and occasional brawls as frustrated citizens queue for hours to pay parking fines.

“People think we’re becoming a Third World country,” said Ms. Sims, 55. “They don’t understand.”

It’s a story that’s being repeated all across California – and throughout the United States – as cash-strapped state and local governments grapple with collapsed tax revenues and swelling budget gaps. Mass layoffs, slashed health and welfare services, closed parks, crumbling superhighways and ever-larger public school class sizes are all part of the new normal.
The epiphany

None of this would matter much to anyone outside the not-so-Golden State except that California’s budget crisis is a harbinger of a grim dilemma that all Americans will soon confront. The country has built an elaborate and costly government machine, tied to a regressive tax system that can’t generate enough revenue to pay for it all.

Guido here – The problem is just that – an elaborate and costly government machine. However, the problem is not that this costly machine is tied to a regressive tax system. The elaborate and costly machine has always been tied to a regressive tax system that everyone knows is regressive… but for as long as people have the impression that the economy is expanding, nobody cares. This a typical political dilemma of democratic societies. Even assuming that a politician should rightfully embrace the regressive tax system as his/her platform, he/she would stand very little chance to be elected because the electorate cannot and does not see a problem in advance. Our political system and, indeed, our educational system do not encourage the prevention of problems at national level. Certainly, democratic politics are not designed to offer the electorate solution to potential future problems because the problem is “potential”. Democratic politics are designed to offer the electorate what it wants now and offer solutions to what the electorate perceives to be a problem now.

“This is a classic American dilemma,” explained Peter Dreier, a professor of politics and director of urban and environmental policy at Occidental College in Los Angeles. “Americans expect a lot of their government. But politicians have convinced them they’re not getting what they want.”

Guido here – Of course this is not a “classic American dilemma”. It is the dilemma of all societies and countries and it is particularly a dilemma for societies based on democratic principles.

Experts say the U.S. government will inevitably have to come to the rescue, using its borrowing clout to save the state from near-bankruptcy or devastating service cuts. Do nothing, and the entire U.S. economy could be put at risk. California, like the country’s banks, may be too big to fail.

Guido here – And right there in that paragraph is proof that “experts”, like most people, do not understand that government is nothing but the sum total of the people of a country. If people have no money, then the state has no money and, by definition, neither does the government. The experts claim that government has “borrowing clout” which may be true. But even borrowing clout cannot be infinite. And this is where main stream economics of the past century differs from those that have a more realistic view of life. Politicians and economists of all stripes believe that the government’s borrowing clout is infinite and can heal all. Clearly though, borrowing has some very real arithmetical limits that we are now pushing against after almost 100 years of borrowing that today is counted in numbers that till very recently could only be found in Carl Sagan’s lectures.

And California isn’t alone in angling for a bailout. U.S. states are facing shortfalls totalling nearly $300-billion in 2010 and 2011; they also must wrestle with hundreds of billions more in unfunded pension obligations to their workers. “There are a few Greek crises brewing among the United States of America,” said economist Ed Yardeni of Yardeni Research Inc.

Soul searching

How California, the largest and once most-prosperous state, got in this mess is a story decades in the making. It began with middle-class angst and a property tax revolt in the sprawling suburbs of Los Angeles. The movement would eventually sweep the country in the inflation-ravaged economy of the late 1970s, leaving government unable to pay for many of the services and entitlements people now take for granted.

Guido here – It is correct to say that this mess was decades in the making. It is not correct to blame exclusively property tax law. The problem begins much further upstream than property tax law. The problem is the fiat monetary system.

In the years since Prop. 13, California has come to the rescue of local governments, taking on ever-greater responsibility for schools, low-income health care and welfare. And it has paid for all that with volatile sales and income tax revenue, making it tough to balance its budget when the economy stalls.

“A lot of people predicted doom and gloom in 1978. It just took a long time,” said John Tanner, executive director of Local 721 of the Service Employees International Union, which represents 85,000 government workers in Los Angeles and throughout Southern California.

Experts say tax reform is the only option for California, short of a massive and unprecedented shrinking of government. And that requires an “open conversation” between voters and their elected leaders, and almost certainly higher taxes, according to Ms. Ross, the economist.

Guido hereThe experts are wrong again. It is not the tax system that needs reforming. What needs to change is our spending habits. Democratic politics ensures that state expenditure will always follow a positive slope. In a fiat monetary system, democratic politics guarantees that spending will always and everywhere exceed what the underlying economy otherwise justifies. Fiat money and democracy guarantee and inflationary blow off phase followed by a deflationary bust. The only unknown variable is how long government intervention can stretch out the time line of the cycle. But bust it will and busting it is.

“We have tried to be all things to all people and we can’t afford to do that any more.”

Guido here – That’s a ding-ding-ding cigar moment for the comment. Trying to be all things to all people is the hallmark of democratic politics. And how can you be all things to all people? You spend money of course. Spend money on programs, spend money on projects, spend money on adventures… spend, spend, spend…. and when the tax base is not sufficient to finance your ambitions? Go on… borrow…

Borrow and spend… borrow and spend…

And it all works as gradually all countries around the globe get onto the same policy…

But once everyone has borrowed beyond their limits and has spent grossly in excess of their income and when global GDP stalls…. then what?

Today the “what” is whacking us upside the head.

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One Response to “WHACK!! … (you feel whacked upside the head yet?)”

  1. ducati998 Says:

    guido,

    Of course you should simply apply to Warren Mosler, a candidate to the US Senate for the solution. I have been going through his “answer’s” for about a week or so now. Here are a couple of links for you.

    http://moslereconomics.com/

    And his treatise on all things monetary, this is truly scary:

    http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/

    jog on
    duc

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