Recently in The Budget Category

I came across the article, Why the Economy Grows Like Crazy Amid High Taxes, by Larry Beinhart, and it says some things that the people of California should hear.

Beinhart make some very good points. first, he points out that if you look at the periods of higher taxes, you see that these are the very periods when the economy does much better. He writes,

Examples include World War II and the Truman-Eisenhower years, when it was around 90 percent, and the Clinton years, when it was high relative to the preceding and following administrations.

He also points out that big tax cuts are often followed by bubbles and crashes, like the big crashes of 1929, 1987 and 2008.

Beinhart says that one reason for this is that low taxes encourage businesses to distribute profits rather than reinvest them in their companies. When taxes are low the owners have incentive to grab all the cash they can out of the company.  But when taxes are high every dollar they take out of the company is immediately reduced.  If the money stays and is reinvested in the company the company's value grows and can later be taken as capital gains.  As a former business owner I understand how this works. 

Beinhart writes,

With high taxes, the only way to retain the bulk of the wealth created by a business is by reinvesting it in the business -- in plants, equipment, staff, research and development, new products and all the rest.

The higher taxes are (and from 1940 to 1964 the top rates were around 90 percent), the more this is true.

This creates a bias toward long-term planning.

If a business is planning for the long term, it wants a happy, stable work force. It becomes worthwhile to pay good wages and offer decent benefits.

So low taxes cause companies to only think a few months ahead and sacrifice their long-term good for short-term gain, instead of planning to be in business year after year.  Also, low taxes encourage a fast-buck climate in which takeovers and disruption rule.  Beinhart writes that when the Reagan tax cut era took over,

It was no longer enough for a business to be a reasonably good business, making steady, reliable profits.

Indeed, that became a very bad condition for a business to be in. It made it a target for takeovers by people who were willing to milk them of their profits.

There is a lot more over at the article, so go read the rest.

This holds important lessons for Californians.  Along with Beinhart's observations, there are other reasons to think that low taxes harm the economy.  For one, it is the nature of our economic system that a few people can come into possession of huge shares of the wealth.  This dries up the economy because regular people don't have enough of a share of the wealth to allow them to spend much on consumer goods, etc.  We are seeing this happening today.  On top of that we are seeing the government forced by tax shortfalls to lay people off just at the time we need more people to be able to buy houses, cars, etc.  Taxes provide jobs and redistribute the wealth in multiple ways, so that regular people CAN buy houses, etc.

But in California we have rules that don't let us raise taxes, even though we can see that we need the income so that the state can keep teachers, firefighters, roadworkers, etc. employed!  We as citizens actually tolerate rules that keep us from asking corporations and wealthy people from pitching in to help fix the economy!  It is time for us to start looking at how to fix these rules that hobble us during times of economic emergency.
 

After months of playing "chicken" the yearly California budget compromise ritual once again passes the buck to the next year.  Everyone breathes a sigh of relief that the "stalemate" is over.

But the problems aren't solved at all, they're worse.  Next year this will happen again but because of this year and previous years' so-called "solutions" it will be that much harder to agree on a budget.  So if you thought this year was bad...

Friday Dan Walters, in, Revised state budget is still a sham, wrote that the budget,

...remains a stopgap budget filled with accounting gimmicks and questionable "spending cuts" and "revenues" - and still leaves the state's fiscal house in great disorder. It makes little, if any, headway on closing what those in the Capitol call the "structural deficit" - the chronic gap between revenues and spending that was plaguing the state even before its economy went into the tank.

and wrote yesterday,

They violated every principle of fiscal responsibility by conjuring up billions of dollars in sham revenues -- basically money borrowed from corporate and personal taxpayers that would have to be paid back later -- to cover a huge deficit so they could blow town.

Senate President pro Tempore Don Perata (D-Oakland) said,

"I have agreed with the Governor to make some tweaks to the budget we sent him. I'm not proud of this budget - it just kicks the can down the road. But the reality is, Democrats agreed to nearly $10 billion in tough cuts while the Governor could not get a single Republican vote for the $5 billion in new revenue we need to close this gap and solve the problem."

That's right, once again a small minority was able to get their way by refusing to participate in normal, civil,, give-and-take negotiation.  They are able to do this because the public doesn't really know what is happening in Sacramento, only that no budget is passing.  So therefore it must be everyone's fault equally -- even if it isn't.
 

Friday morning's San Francisco Chronicle story, Legislature's approval rating at a record low, illustrates why California's budget impasse continues. From the article,

"Democrats and the minority Republicans have hunkered down, with neither side willing to make the compromises needed to put together a budget plan that can garner the required two-thirds support."

The budget problem is that reporting like this keeps the public from understanding what is happening in Sacramento.

Here is what is happening with the budget:

• The Democrats have offered plan after plan, accepting deep budget cuts, some borrowing and offering various ways to raise revenue.


• The Governor has offered a plan, with deep budget cuts, borrowing, and a temporarysales tax increase.


• The Republicans have refused to compromise, refusing any budget that raises any revenue at all, not even asking the extremely wealthy to pay the same sales taxes that the rest of us have to pay.

It is just that simple. The Republicans have been blocking the budget and they are getting away with it because the press refuses to report that the Republicans are blocking the budget. If the press reported this simple fact public pressure would build and the Republicans would have to yield.

Update - A comment on the possible budget "compromise": It just kicks the can down the road by delaying dealing with our problems. It doesn't fix anything, and cuts essential services from the people who need government most. In fact it just makes it much, much harder to solve the problem in the next budget because it steals revenue from next year.

California's elected Republicans continue to block any and all efforts to pass a budget, because any honest budget must ask the wealthy and big corporations to pay their fair share. Even the Governor's extremely modest one cent sales tax increase was too much for them.

So let's talk about paying a fair share. David Sirota has a good column today at the Campaign for America's Future blog, The Aristocrats, Part II - Starring George Will. In the column Sirota writes about wealthy Republicans who complain when regular people get decent pay for performing services that benefit ... guess who ... wealthy Republicans. Sirota writes,

In a column about underfinanced municipal pension systems today, Will expresses deep anger that veteran police, firefighters and municipal workers eventually get paid well for their services. In one California town on San Francisco Bay, Will tells us that - gasp! - "after just five years, all police and firefighters are guaranteed lifetime health benefits." The horror.

Such salaries and benefits, of course, are part of a bargain: Enticing people to turn down the high-paying private-sector job and instead run into burning buildings (firefighters), do the dangerous work of apprehending criminals (police), disposing of sewage (garbage collectors) and administrating all the other services that conservatives pretend aren't necessary (municipal workers) requires, well, an enticement - namely, the promise that making such a public-minded choice will result in decent and stable pay and benefits.

When you accept a public sector job, that's the bargain: In exchange for being willing to do a tough job and accepting that you won't have the chance to make hundreds of millions dollars like a corporate CEO, you are rewarded with the chance - if you play by the rules - to make a pretty good living.

Yes, there is a BARGAIN at work here. We, the People have built a system that has been working pretty darn well for the rich. We built a system of roads, schools, courts, police departments and firefighters. We built up a system of laws. We work in the factories and offices.

Last week, after months of blocking every single budget and budget compromise the Republicans revealed a budget proposal of their own. This was months later than it should have been, and does little good at this point. Of course it was widely panned and was voted down.

So what was in their budget? They offer a few new cuts -- beyond the Governor's already proposed cuts -- in the "big government" they complain about. They refuse to raise revenues from any source.

Mostly, what the Republicans want to do is borrow. This is the big, responsible solution they offer: more and more borrowing. They want to borrow $2 billion from future lottery revenue. This, of course, means that $2 billion won't be there when needed because they have been borrowed and spent it now.

It costs money to borrow. We have to pay interest. We also have to pay back the borrowed money. This adds up.

Remember, much of the current budget shortfall is because we are already paying interest on previous borrowing. All those bonds that Schwarzenegger floated to meet previous shortfalls without raising revenue were certainly not free.

But there are also other costs. The Republicans offer cuts in health care, assistance to the disabled (including housecleaning and home care) and of course help for the poor. Those cuts mean layoffs and income cuts and these will ripple out through the ecosystem that depends on the purchases these funds would have meant. This at a time of pending recession.

This is all instead of asking rich yacht and private jet buys to pay the same sales taxes the rest of us pay on everything we buy.

This is all instead of asking big oil companies to pay a fee to drill oil in our state to sell back to us for huge profits.

This is all instead of asking huge corporations to pay a reasonable commercial property tax.

This is all instead of asking vastly wealthy individuals to pay their fair share in return for the wealth they gained from the infrastructure that all of us built.

Shame on them. A small minority has been able to block California from passing a budget. They use money from these vastly wealthy individuals and corporations to run deceitful ads to keep just enough of them in office to block the things that will help the people of California restore our infrastructure and economy, just so a few wealthy interests can have a few extra bucks.

Not content with blocking the budget, the right is going after the Republican Governor for trying to govern. See Schwarzenegger engages in talk-show tussle,

Schwarzenegger tried to defend new taxes as necessary because the state was still paying off debts incurred by predecessor Gov. Gray Davis. But the hosts pressed further and suggested that Schwarzenegger abandoned his original mission of fixing the state's fiscal situation in order to pursue environmental goals.

That seemed to upset the governor, who maintained that his environmental policies had nothing to do with the state budget.

"This is absolutely absurd what you're saying right now," Schwarzenegger said. "....You're living in the Stone Age if you think that the environmental issue has anything to do with the budget or the declining economy worldwide."

"Don't lie to the people," Schwarzenegger added. "That's all I can tell you, don't lie to the people. Don't pull wool over their eyes. It's nonsense Republican right-wing talk."

That prompted the "anesthesia" joke. Schwarzenegger underwent anesthesia Saturday when he had arthroscopic surgery to repair cartilage in his right knee.

In fact the state is paying off debts incurred by Governor Schwarzenegger, but at least he is trying to move the far-right Republicans off of their "no taxes under any circumstances" ideology. The Governor is trying to govern and should get credit for that, even if it is governing from the right. The far-right that is the rest of the state's Republican Party apparently doesn't want government at all, especially not government-by-the-people. There are lots of people. They want a one-dollar-one-vote approach favored by corporations and the rich who have lots of dollars.

One more attempt to get a state budget in place collapsed -- blocked by the Republicans because it included tax increases. Republicans insist that the budget be balanced with billions and billions of dollars in cuts in our schools and fire protection and the other things most of us want our state to do.

I would bet that most of California's public doesn't know what is going on with our budget. They only know that there isn't one, and that this is causing problems. It makes people angry, and causes them to lose faith in government.

People know that government employees are being forced to take pay cuts, and many are being laid off. But they really do not know why.

Yesterday's budget vote was 45-30. The public doesn't understand that this means that there were forty-five votes FOR the budget and only thirty votes against, and this is why it failed. They don't understand that because it does not make sense. But because of a trick that the Republicans were able to play on the public the rules are that it takes a two-thirds vote to pass a budget. So an overwhelming vote of 45-30 FOR the budget means that the budget does NOT pass!

Every Republican in the state has taken a vow not to raise taxes on wealthy corporations or massively wealthy individuals. They won't vote to require people who buy yachts or private jets to pay the same sales taxes that the rest of us pay when we buy cars. They refuse to ask oil companies to pay fees when they take our oil out of the ground and sell it to us. (Maybe they understand that such a vote will dry up their campaign funding...)

News stories about the latest budget collapse:

San Jose News:

Although the $105.2 billion budget blueprint garnered a majority vote, 45-30, it fell short of the two-thirds supermajority that California's constitution requires to pass a budget.

. . . The vote "shows clearly that we're not going to vote for taxes," said Assembly Republican leader Mike Villines, R-Fresno.

Wall Street Journal:

"We're fundamentally saying 'no tax increases,'" said Mike Villines, the Assembly Republican leader.

They will require workers to take pay cuts and layoffs. They will cut our school budgets. They will cut transportation, the DMV, road repair, law enforcement, prisons, fire protection. But they will not ask wealthy corporations or extremely wealthy individuals to pitch in.

And here is why: by and large California's public doesn't know this. They are not being informed that this is entirely because a small minority of Republicans refuse to represent the public's interests, choosing to represent the wealthy corporations and wealthiest few people.

In fact, the public likely believes that it is the Democrats who are keeping the budget from being passed. If you Google the word Democrat with the word obstruction and you get about 600,000 results. This is a national result, but it reflects the same strategy in use in California. Republicans spent years accusing Democrats of being "obstructionist" when they were not, as a strategy to pressure them to pass Republican-/corporate-oriented bills. Now, after blocking almost everything that the nation's Congress is doing, the Republicans are campaigning saying that the Democrats in Congress aren't passing anything! Meanwhile a new Drum Major Institute polls shows that 72% of middle-class Americans can't name a single bill passed by Congress in the last two years that benefited them or their families! (Minimum wage increase, stimulus package, college more affordable, SCHIP...)

Less than two in five (38%) middle-class respondents to the Drum Major Institute's new poll say they live comfortably. One-third (34%) say they meet their basic expenses each month with just a little left over for extras, while one-quarter (26%) of middle-class adults would say they just meet their basic expenses (17%) or have trouble meeting their basic expenses each month (9%). And, economy and jobs tops their concerns. They are pessimistic about the direction of the economy. They think it's more likely that Brangelina will celebrate their 25th anniversary than gas prices returning to $3 a gallon.

But they do not understand WHY. They don't make the connection between the corporate-controlled Republican party and what is happening to the country.

How do Republicans get away with this? How are they able to get the public to think so many things that are not true? The Republicans have a vast "noise machine" that tells the public things that are not true. (Remember how they were able to convince so many people that Iraq had attacked us on 9/11?) It costs a lot of money to have a noise machine like this, but they get the money from the very corporations and wealthy individuals whose interests they are representing. So it works for them.

Plain and simple, they are bale to reach the public and tell them stuff, and get the public to believe it. The use of overwhelming repetition is the tactic. I use the word “stuff” here with meaning: it’s just stuff they want the public to believe, with no grounding in reality. They do it, and here we are. Nationally the debt is approaching TEN TRILLION DOLLARS and they are still able to get the public to think taxes are bad. In California they are able to force layoffs and school cuts while refusing to make the ultra-rich pay even the same taxes the rest of us pay.

Please leave comments with suggestions on how to fight this.

A post by Texas Nate over at MyDD, Schwarzenegger Makes Recession Worse, says,

Let's take a look at the situation. Democrats have proposed a way to close California's $15.2 billion deficit:

They want to raise $8.2 billion by boosting taxes on the wealthiest Californians and corporations, and say another $1.5 billion can come to the state through an amnesty on tax scofflaws.

Seems reasonable to me. One would think the best thing to do if you disagree with something is to offer an alternative. That doesn't seem to be the case for California Republicans:

Republicans oppose any new taxes but have yet to offer their own budget proposal, said Assembly Budget Committee Chairman John Laird, a Democrat. "It's time for the legislative Republicans to tell the public how they would balance the budget," he said.

Exactly right. Instead California Republicans have fallen into line with their leader in the governors mansion; disagree, complain, argue, kick and scream, but refuse to offer any alternative.

The Governor's plan does nothing but hurt even more Californians facing a bad economy and an even worse housing crisis. Playing with the lives of state employees to score cheap political points, its no wonder the Government is having such a difficult time trying to get a budget deal in place.

Exactly right. Go over to MyDD to read the whole post.

Yesterday Governor Schwarzenegger ordered 10,000 state government employees laid off and ordered the wages of 200,000 more cut down to the bare minimum allowed by law.

This is 210,000 people who will not be keeping up with their mortgages or car payments or attending "back-to-school" sales. This is thousands of local retailers that will see a sales decrease. This is how many foreclosures and car repossessions. What will this do to our own jobs and housing prices?

This is 210,000 families disrupted.

Why is this happening? Because the Republicans refuse to make wealthy yacht and private plane buyers pay the same sales taxes the rest of us pay. This is happening because the Republicans refuse to make the oil companies pay us for our oil as they take it out of the ground. (Yes, even as oil companies post the largest ever profits of any companies in the history of the world.) The citizens of Alaska not only don't pay state taxes, they receive a check every year, because their state government asked the oil companies to pay to take their oil. In California the Republicans in state government apparently think they were elected to represent the interests of oil companies, not the public.

Republicans like to say that taxes "take money out of the economy" but the Governor's actions yesterday show exactly the opposite: laying off workers and cutting their wages takes money out of the economy. In fact taxes drive the state's economy by building the infrastructure that enable economic growth. The California state government is police and fire protection and schools and roads and courts and all of those are the engines of economic growth. Taxes fund the services that people want like shorter lines at the DMV and libraries and did I mention schools? These layoffs and wage cuts just illustrate what I wrote a while back about how tax cuts make us poor.

This is the Republican choice -- giving the very wealthiest even more money at the expense of regular working people.

For decades people have been hearing that government "spends too much." They have been hearing that it's spending cuts that we need, not tax increases. They've been hearing that most of the government's money is spent on "waste, fraud and abuse." They've been hearing that it mostly goes to welfare, for people who won't work and sit around all day. They've been hearing that taxes are too high, the highest in the world, the liberals who run the world only want to tax and spend, etc. And no one has been reaching the public with the facts.

And after decades of this here is a surprise: people think the government spends too much, that we need spending cuts not taxes, that the money goes to waste, fraud and abuse -- and welfare and stuff like that. Who would have thought?

But ask for specifics like, "What specifically would you cut and by how much?" and you'll get a blank stare. Try that question on a conservative politician some time and you'll get the same blank stare. (Usually accompanied by an exercise commonly known as "the run-around.")

OK, occasionally when an elected official is faced with no choice but to cut or raise taxes you'll get an answer. We saw this recently when the Governor spelled out drastic cuts in schools and other government services -- the actual stuff that our taxes pay for. The public didn't like that one bit. They want that "other" spending to be cut instead. (Of course, the Governor also came up with that weird scheme to borrow from next year's lottery revenue. So what happens next year when we have to pay the bills and don't even have the lottery revenue because that went to this year's budget??? What do we borrow on then?)

Things might be changing. The public might slowly be coming around to understanding that taxes really do need to be raised -- at least as far as a temporary sales tax increase. The Public Policy Institute of California recently released the results of a survey titled Californians and Their Government. (The full PDF is here.) According to the summary,

Solid majorities of residents (58%) and likely voters (62%) oppose the governor’s plan to raise revenue by borrowing from future lottery earnings, but majorities of residents (54%) and likely voters (57%) favor a temporary increase in the state sales tax if the lottery plan fails.

And, according to the press release,

The potential temporary sales tax increase is the only tax increase included in the governor’s revised budget. Asked whether they believe tax increases should be part of his plan, residents are split (48% yes, 46% no), although the percentage favoring tax increases has risen sharply since December (30%). [emphasis added]

Of course, this doesn't get the budget solved. It's a start but as for real-world solutions today, the public still isn't ready to face facts. This may be because no one has dared explain that there isn't really some "other" spending yet to be cut. Also from the press release:

Californians fail budget math quiz — Page 12
When asked which area gets the biggest share of state spending, only 20 percent of residents correctly identified K-12 education. Asked where the biggest chunk of revenue comes from, only 32 percent give the correct answer: personal income tax.

Let me leave you with a few suggestions for helping solve the budget mess:

Proposition 13, an initiative that was sold as keeping little old ladies on fixed incomes in their homes, cut both residential and commercial property taxes. How about bringing commercial property taxes back to market rates?

Oil companies don't pay a "severance fee" when they pump our oil out of the ground to sell back to us. How about they pay for the oil before they sell it back to us?

How about we ask the wealthy to pay sales taxes - the same sales taxes that the rest of us have to pay - when they buy yachts and airplanes? And how about we ask the wealthy to pay their fair share of other taxes as well?

If you are talking to friends and family about the budget, point out that when Governor Schwarzenegger -- who solved previous budget problems by borrowing -- tried to balance the budget without raising any taxes he had to cut schools, health care, parks and much more, and still find ways to borrow. He is a Republican, not a "tax and spend" liberal, so if there were ways to cut "other" spending he would have done that.

There is no other spending to cut because it takes money to rin a government and provide the services we want and need. "The line at the DMV" is an example because if you cut DMV spending the line you hate just gets longer.

Take a look at the Next 10 site and consider how you would revise the budget.