Thursday, December 09, 2010

California Budget crisis

 Feeding the Goose that lays the golden eggs.
It is clear that the California budget is in crisis, and the issues were  clarified in the budget summit sponsored by Governor elect Jerry Brown on Wednesday, December 7. There are no quick nor easy solutions. We can not simply cut our way out of the crisis, budget cuts and lay offs make the recession worse.
School funding reveals the nature of crisis.  In the last two years the k-12 budget “solutions” have cut 4.6 billion dollars from the schools. We have larger classes and fewer teachers.  School reform has stopped- except for the politicians hot air.  School funding makes up a total of 30% of the state budget.  Any crisis in the state budget and any cuts in the state budget will make school budgets worse.
California will need to raise taxes to fund the schools and to repair the social safety net.  Anti tax radicals and Republicans  oppose any tax increases.   The state ‘solutions’ of the last three years depended upon receiving federal stimulus money.  The stimulus monies are almost finished and with the Republican winning control  of Congress there will probably not be more funds.
The California economy , if it were a country, would be the 8th. largest economy in the world.   The California economy is larger than that of Brazil, Spain, Canada, India, Russia, Australia and most of the rest of the world.  California can and should use Keynesian economic policies to find  our way out of this economic crisis.  We are, of course, a state integrated into a national economy, so the collapse of the U.S. economy will have a direct effect on our ability to use Keynesian stimulus to grow the economy.   For description of Keynesian economics see here.  http://www.newdeal20.org/2009/07/01/keynesian-economics-101-894/


The world wide economic crisis was created by  U.S. finance capital and banking, mostly on Wall Street ,ie. Chase Banks, Bank of America, AIG, and others.   Finance capital produced a $ 2 trillion bailout of the financial industry, the doubling of U.S. unemployment rate and the loss of 2 million manufacturing jobs.  More than twenty-five  million people are out of work. 
Since we are integrated into the national economy and effected by the decline of the U.S. economy,  some stimulus money generated and spent in California will be spent in other states, thus stimulating other states- and of course money spent in other states will stimulate the California economy.  However, over 60% of all economic business is local.  Money spent in California will help the California economy to grow.  Keynesian stimulus will work- it just won’t work as directly as the original theory predicted.
The economic stalemate in California has produced school funding cuts far beyond reasonable levels.  At present,  the state ranks 47th among all states in its per-pupil spending, spending $2,856 less per pupil than the national average. The Brown briefing at the forum  detailed our standing in class  size, counselors, and librarians. To continue on this path is to produce another Mississippi or Alabama for our children.
The finance capital collapse and theft on Wall Street produced this crisis, not immigration.   Now Wall Street has recovered, but the states and specifically California is left with the destruction.  The best available response is for California to tax and spend to stimulate the economy- that is Keynesian stimulus. The anti tax radicals and the Republicans will oppose this approach.  They must be defeated.  
Specific proposals :
            Enforce the current California law taxing the sales of goods by out of state companies ( such as Amazon)  over the internet.  Gain. 1.2 billion $.
            Pass an oil extraction tax.  Require that the oil companies pay taxes when they take our oil out of the ground and then refine it and sell it back to us.  Gain. Billions.
            Establish a  public state bank such as the Bank of North Dakota. Initially move 25% of all state revenue, receipts and reserves into this bank and 25% of all PERS and STRS funds. Manage the bank as a public service. Over time, finance state borrowing from our own bank.   Gain.  6% of the budget.
            Continue efforts to eliminate waste, fraud and abusive where it exists.  There may be legitimate savings here.  For example not paying $13.2 billion for a Bay Bridge that originally was to cost under $6 billion.  And, not paying to import the steel for the bridge from China.
            Many more sources of revenue need to be developed.  Unfortunately we have been thinking too small and looking in the wrong directions.  Please make suggestions.
            Unfortunately we would be unable to tap  a major source of potential revenue because it is tied to the national economy.  There should be a significant tax on the sale of stocks, bonds, and financial instruments.  The sources of this tax are in New York and can be easily moved around the globe.  Some planning is necessary to develop this source.  Potential Gain.  $30 billion per year.



A limit on Keynes.
            A major limit on the use of Keynesian theories within one state is that most states- particularly California- are not allowed to go into debt.  Keynesian theory and practice call for public expenditures  and going into debt to pay for these expenditures.  Of course California has been going into debt each year for the last three years, it is just that accounting moves have been used to disguise the debt.
Since the state can not go into debt it will need to use tax policy to raise the funds necessary for public investments.  The state has also been targeting particular industries, notably the film industry with tax subsidies and local governments have been providing tax subsidies in the form of enterprise zones.  Along with needed  tax reform, these forms of subsidies (debt) should be reformed to focus on economic growth.    Tax suggestions were in the prior section.
California currently sells bonds.  We could develop bonds for more public investment.  At present we pay bond holders a market rate. To achieve a Keynesian stimulus we could sell many more bonds in particular to  the public employees retirement system PERS  and STRS.  These are among the largest investment funds in the nation. Their investment strategies should be re designed to promote in state economic growth.  After all, the money in PERS and STRS is California money.  And, the best way to keep these funds financially solvent is to improve the California economy.  So, directing investment in a manner to promote growth would provide significant capital for public projects.  We could sell bonds to PERS and STRS at a better rate than they are presently getting.  Further, by working with PERS and STRS we could develop a system where they serve as a marketing director to sell state bonds to their members.  There are many people interested in investing in public bonds.
 After a 2-4 year transition period, a similar pool of available funds would develop in the new California Public Bank.
Alternative;
We can follow the process of Ireland and Greece and dramatically cut services and raise taxes and impoverish the economy.  Then, since the nation is poorer and has less income you will need to raise more taxes and cut more services all in an effort to protect the excessive profits of bankers and bond holders.
California can continue the current process of cuts and reductions.  The fiscal crises of the states – all the states- has caused major cut backs and retrenchment and made the economic crisis approach a depression.  The state cut backs are greater than the federal stimulus producing a prolonging of the crisis for working people.  Continuing on the present direction produces obscene profits for billionaires along with growing poverty and hardships for the majority.

Arguments against this view:
            Most academic economists will argue either that Keynesian economics does not work or that you can not apply Keynesian stimulus to a state rather than a nation in part because states do not have the levers of economic control.  Well, granted  you can’t apply Keynesian ideas to smaller states such as New Hampshire, Arizona, Mississippi or Alabama, but perhaps you can apply them in an economy as large as California.  If you can stimulate an economy in France,  Brazil,  or Canada, each of which are about the same size as California, perhaps you can stimulate an economy to growth in a state like California with a    $1.8 trillion dollar   economy.  It is worth a try.
Academic economists will dismiss these proposals as not possible.  They are by and large not interested  in the  looking at real alternatives to their present theories  like applying Keynesian economics to a state economy.  University departments and their publications  continue to promote the same  neo classical economic theories.  Recall, these are the very scholars who gave us the “myth of the rational market” and argued that markets would correct themselves we did not need governmental intervention.  Now, in this depression, we see the results of their theories.   Foundation based economists such as those in the Hoover Institute or the Peterson Institute, are funded by the super rich and are unlikely to see alternatives that would require significant taxation of the super rich. These economists  have, in fact, been deeply implicated in the construction of the new systems of technocratic  politics which serves  them well and the oligarchy.   Few seem predisposed to engage in self-critical reflection of why their theories missed the greatest economic crisis of the last 50 years.  

Sources
Gar Alperovitz, America Beyond Capitalism: Reclaiming Our Wealth, Our Liberty, and Our Democracy.  (2005) John Wiley and Sons
Dean Baker,  Plunder and Blunder: The Rise and Fall of the Bubble Economy, (2009)
Justin Fox,  The Myth of the Rational Market: a History of Risk, Reward, and Delusion on Wall Street. (2009)
Jeff Faux, The Global Class War: How America’s Bipartisan Elite Lost Our Future- and What It Will Take to Win It Back. ( 2006)
William Grieder,  The Soul of Capitalism: Opening Paths to a Moral Economy. (2003).
Paul Krugman, The Return of Depression Economics and the Crisis of 2008.  (2009)
Nomi Prins.  It Takes a Pillage: Behind the Bailouts, Bonuses and Backroom Deals from Washington to  Wall Street. (2009)
Joseph E. Stiglitz.  Free Fall, America, Free markets, and the Shrinking World Economy.  2010.







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