Thursday, March 24, 2011

The Embarrassment of Banality

So, for Californians, apparently the only game in town that the powers-that-be can come up with to deal with our $25 billion budget hole is the Solomonic exhortation to split the baby in half: let’s fix it by $12.5 billion in cuts, and $12.5 billion by “extending” the 2009 tax increases.

(The Recovering Bureaucrat puts the word “extending” in quotation marks because of the old saw that taxes, once raised, are rarely trimmed back.  And in this case, that appears to be a very real concern, because there is no evidence that any serious thought has been given, by either the Governor or the legislature, as to just what will happen in five years, when the Schwarzenegger tax increase “extension” expires.  Unless the economy recovers to a remarkable degree so that tax revenues grow to cover the demand side of the ledger, we will just be back at square one in 2016—two years, the RB notes, after the next gubernatorial election.)

As painful as the result would probably be, the RB is inclined to vote No on the tax proposal, if and when it ever gets to the ballot.  Why?  Because there has been no commitment on the part of the state’s political leadership, including the business and labor establishments, to the serious and radical reforms necessary to bring the cost of government down to a manageable magnitude.

Look: every economic forecast projects a lengthy and slow recovery for California.  Most economists who have given the matter serious consideration assert that significant recovery in our housing market and in job growth will not show up much before 2015 at the earliest. 

In the meantime, upward pressures on the state’s budget will continue because of three factors: automatic increases in benefit programs (including the impact of Prop 98), greater demand on the public pension system, and continued demand for wealth transfers to ameliorate the effects of a slow turnaround.


The response to this crisis—now at least two and a half years old—has been remarkably unimaginative.  (And, to be fair, this insipidness seems endemic to the political establishments of almost every state and in Washington.)  The constituencies of the traditional Left in California—Big Labor, Big Enviro, and Big Entitlement—are remarkably resistant to anything creative to transform the situation—unless one is willing to call creative the deus ex machina of the “Green economy” fantasy.  One sees that in their blatant projection onto the Republicans: the unwillingness that they charge the GOP with in refusing to give in on tax increases is their own unwillingness to thoroughly reform the antiquated and costly machinery of government from which they draw their political power.

The Republicans have, not unexpectedly, thoroughly dropped the ball on the opportunity they were presented after last November’s election to offer a coherent alternative based on their historic commitment to the primacy of wealth creation and individual initiative.  For some reason, rather than rise to the occasion and proudly champion their principles in their own proposals for transformative change, they have curled up into what appears to be a permanent fetal ball.

Friends, how can we put this?  The system is irreparably broken.  There is no going backwards to restore it to its previous grandeur.  The only way out is forward.

That means that we must face the painful reality: the era of the free lunch is over.  We now must be willing to take on, at least in the government sector, a period of austerity, in order to liberate the private sector, the creative and wealth-producing dimension of California, to invent, make, and sell goods and services in increasing quantities.

This imperative is not simply because we the citizens of this great state have, by our actions over the past thirty years, succumbed to the mass delusion that we can bitch slap the Goose that lays the Golden Egg forever without consequence.  More imperatively, it is because humanity as a whole, across the globe, now has to face the same challenge. 

And it is going to be incredibly difficult.  Everywhere we turn, we see a straw that can break the camel’s back, whether it is a 9.1 earthquake in Japan, the collapse of the minority government of Portugal, or dramatic rebellion against Arab autocracies in North Africa and the Middle East.  The RB can guarantee his readers that tomorrow it will be something else unexpected that will rattle the fragile stability of the world economy.

In truth, however, the difficulty we face in taking this challenge head-on is different only in degree to that which a drunk faces in deciding to sober up.

In a fragile and unstable economy, taxes, at the very least, delay recovery.  Why?  Because government spending, by its very nature, does not create wealth.  It can only nick from the wealth created by its citizens.  When the economy is booming, the wealth it generates is of sufficient magnitude that it can afford government's take, because it spins off so much surplus that what we are willing to give to government is a manageable portion of it.  There is enough to both supply the primary role of surplus—reinvestment in the next cycle of wealth creation—as well as financing the nonproductive government sector.

But in economic slowdowns, the economy does not produce sufficient surplus to meet all the demands upon it.  If the government insists on getting the same amount as it got in good times, this now cuts into the portion of the surplus that goes into reinvestment.  Applying brute political muscle to maintain the governmental share at the expense of the economy as a whole is folly of the most immoral kind.  It inverts the social compact: we have government to bring order to the market place, not the other way around.

California’s way of doing government is an embarrassment (although to be fair, this is an embarrassment we share with the world; in this, at least, our egalitarian obsession finds success).  The state that nurtured Silicon Valley and the world of advanced technology still lets its government run on pre-Information Age systems and philosophies.  In a world where wealth creation is driven by automation and application of sophisticated advanced technologies, we still can’t transact most of our business with all our wonderful agencies of government online.  We still permit only the most rudimentary transparency, while Google works to make all of the world's wisdom available free at the click of a mouse.

We still have rules that require work that can easily be automated or contracted out to be done by government workers.  We tolerate a civil service system for these workers that rewards showing up rather than producing results.  We run a government based on risk-aversion rather than innovation.  We create budgets without the slightest measurement of how successful the investment in taxpayers’ money is. 

This is worse than silly, it’s bankrupting us, for cheaper and more efficient ways of conducting the citizenry’s business are accessible on the worldwide web for anyone who knows how to use a keyboard.

So the budget “solutions” being discussed in the Capitol, are, unfortunately, just the latest version of the Kabuki dance Arnold Schwarzenegger used to so impotently decry.  Until we the citizens of the state demand a government that adopts the efficiencies of the Information Age economy that the rest of us live with, we are still just kicking the proverbial can down the road.

The problem is, that road has a dead-end just around the corner.

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