Sunday, May 26, 2013

So Who’s to Blame For All This Prosperity?

The New York times is reporting good news; both California and Wisconsin (and a handful of other states) are expecting budget surpluses in their next biennial budgets. So we have to ask, who is to blame, or in this case, who is to credit for the good fortune?

The interesting irony – perhaps a paradox – is that California has a Democratic governor and a legislature with 2/3 Democratic majorities while Wisconsin has a Republican governor and both of its legislative chambers solidly in Republican hands. Hmmmm! That complicates analysis.

If the dire reports following the Great Recession were accurate, and there is little doubt that they were, both states faced serious fiscal problems, California facing what appeared to be catastrophic problems. Both states responded by cutting programs, cutting the pay and benefits of state employees, and attempting to spur economic growth through encouraging business development. I suppose you could say it has worked in both cases; Wisconsin is expecting to see a 500 million dollar surplus over the next two years, California a 1.2 billion (or some say 4.4 billion) dollar surplus.

It will be tricky for the two sides (Democrats and Republicans) to claim the credit for the good fortune in the states they control without having, logically, to give credit in the states their opponents control. Of course logic isn’t necessarily the gold standard in politics so they will find a way to dance around their inconsistencies, giving credit to their side while denying it to the other.

There are explanations being given as to why this bonanza has suddenly appeared. It would seem that a revival of consumer spending with the consequent reappearance of some new jobs might be a logical (there we go again) explanation. Some economists give credit to a one time boost in taxes paid by wealthy investors who took advantage of opportunities to increase their wealth at the end of last year by some reshuffling of their assets.

The good governors of both California and Wisconsin would like to claim the credit for the surplus, I’m sure, but it is doubtful that anything done at their behest really had the effect of improving the economy. Both implemented severe cuts to programs that typically spur the economy. So any increase in economic activity is occurring despite their wrong-headed approach. We’ll not hear any such admissions from them or their trumpeters.

The real question is what to do with the surplus. And that is also the question that divides Republicans and Democrats. Republicans argue that the surplus should be returned to the taxpayers in the form of reduced tax rates. Well, they do have a few things upon which they would spend some of the bonanza, but the primary cry is for tax rate reduction. Democrats, on the other hand, are divided between those who would like to restore cuts made to social service programs and those who call for the establishment of a “rainy day fund” in case the sudden upturn in good fortune is ephemeral. Undoubtedly the solution to this stalemate will play out differently in Wisconsin and California simply because of the political realities of the day.

I’m for establishing “rainy day funds”, at least for the short term. Twice in my lifetime Wisconsin governors (both Republican) have insisted on giving back surpluses to the taxpayers in the form of rebate checks. They were wonderful to receive. Each amounted to about $300 per taxpayer on average. But the money was soon spent and the state discovered within a year or two that it was running a deficit again. A little caution and a willingness to “wait and see” could have saved the day and distributed the pain more evenly over time.

There is little hope that our politicians will apply either history or logic to our current crisis of surplus. They will be driven by politics as always. Expect a wee reduction in the tax rate (more at the higher income brackets than at the lower) in the next couple of years and then more reductions in government services when it is discovered a couple of years further down the line that we had squandered an opportunity when we had it.

Oh, it might be wise to establish a “rainy day fund” of your own, just in case. That is if your budget projections are as rosy as those in Wisconsin and California. Unfortunately, retirees’ personal budgets aren’t showing any signs of surplus just yet. State retirement checks in Wisconsin, which has, by the way, the most fiscally sound system in the nation, have been reduced again this year by an average of nine percent; nearly twenty-five percent over the last five years. It must be much the same for others whose private retirement savings were nearly wiped out by the Great Recession. We are all waiting for the rain to end and the sun to shine.

1 comment:

  1. Calfornia has raised sales tax
    twice and also increased income tax. Also they don't take into account the unfunded pensions. With the Dems is always smoke and mirrors.


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