Sunday, May 20, 2012

Never mind Greece, there's a bigger basket case

Its the world's ninth largest economy. Its six times the size of Greece. Its actually bigger than India. And its hopelessly bust . Yet; we aren't hearing much about it. Only because ,  its not a country. Its a state. The State of California. The world's biggest basket case ! This has been a favourite topic of mine having blogged before here and here.

California has a state budget of some $90 bn. And it just projected a deficit of $15 bn. What sort of an economy runs a deficit of 18% of the budget ?? This has been going on for years . And what does that state do - simply borrow . And borrow. And borrow.  And with no hope of ever bridging that gap. If California had its own currency, I would be merrily shorting it. It would be a prime candidate for begging at IMF's door. 

For once you can't blame the political leaders for the mess, although they are the ones being vilified and quartered. The blame must squarely rest on the citizens of California. For they are the ones who have brought this mess upon themselves by indulging in direct democracy.

California is a perfect example of democracy run wild. For decades they have been passing laws through referendums without the level of serious evaluation and trade offs that are necessary for good governance. The infamous Proposition 13 of 1978 drastically limited property tax and imposed a requirement for a two third majority to raise any taxes , making it virtually impossible to do so. Then they passed scores of spending laws like Proposition 98 of 1988 which mandate 40-50% of the general revenue to be spent on education. And Propositions like 117 of 1990 that mandated a minimum spend of $30m on wildlife habitat. Proposition 49 of 2002 increased spending on before and after school programs by some $450m. There are tons of such mandated spending with barely a thought on how they would be funded. They also pass whimsical Propositions that mandate that a chicken must be able to spread its wings and turn a full circle without touching another chicken as I outlined in this post !

The problem is simple. California depends for more than 50% of its income on personal income taxes. These unfortunately fluctuate. Recessions drastically reduce tax revenues. In boom times the revenue increases are spent away and nothing is saved. In hard times, there's a massive hole in the budget. There is zero political will ( read citizen appetite) to do anything about it. Budgets are never passed on time. Fiscal irresponsibility has a new meaning in California that would make Greece blush. California is the perfect example of how not to run an economy.

The puzzling thing is that California is also home to the smartest people in the world.  It is arguably the most intelligent place on earth. And yet ..... 

Maybe intelligence is no insurance against stupidity !