California shows how to beat the crisis
Posted on 22 February 2009 with no comments from readers
Tax rises and cuts in public services have been signed into law by Californian Governor Arnold Schwarzenegger, raising the specter of US federal stimulus packages being undermined by budget cutbacks at the state level.
Where California goes the rest of the US and the world normally follows. So is a return to fiscal prudence and tight budgets going to be the way the global financial crisis is solved?
Spend, spend, spend
It certainly seems a lot more sensible than trying to spend more to cure the problems of spending too much. Obamanomics is some kind of warped version of deficit spending – but $90 billion of the last spending package went on healthcare, which might be admirable in itself but is not a recognized economic stimulus.
By contrast the Californian Terminator is cutting four per cent of welfare grants, 2.3 per cent from the blind and disabled, capping wagers for carers and slashing college grants, unless he gets $2 billion more than expected in federal money.
Spending by the State of California will fall for the first time in 17 years, back to levels seen in 2005-6, but of course the costs of services have risen since then, so services have to go. It is a matter of not being able to spend money that you do not have – an old fashioned economic principle and one not currently in vogue in Washington.
Tax rises
Sales and income taxes under state control will go up to keep the $130 billion budget from being cut further. Is this not what is going to be inevitable in the US at the federal level and in other countries now running high deficits such as the UK?
It is a mark of how far policy makers have drifted away from economic reality that the fantasy stimulus programs are now being offered as a magic solution. They can only leave bigger deficits that will require harsher action in the future.
If only Arnold Schwarzenegger could teleport back into history and warn the Federal Reserve about the problems it would unleash with the housing bubble and poor credit controls. But at least The Terminator is with us in the present to show the way forward.
