Tuesday, December 4, 2012

The Red Ink in the Blue States Just Keeps Coming ... Does Blue State = Red Ink? ... Or is It Just a A Coincidence?

The traditionally "blue," heavily populated and equally heavily unionized states of Illinois and California, to mention just two, also have what appear to be insoluble political and financial issues.

No money and no political courage to tell the truth to their citizens. Of course, lots of citizens would just as soon not have to hear the ugly truth, so life goes on as normal. Until it doesn't, that is.

In these heavily populated states, the Democratic Party officials usually run the political show, which in turn means that their friends the unions will have an enormous influence on state and local governments' fiscal conditions as well. When added together, this combination of blue is hardly a prescription for fiscal propriety. Red ink in great big chunks is the result.

But it's not only the "blues" of Illinois and California that are in dire fiscal straits. Connecticut's Red-Ink Spill is yet another example of a blue state covered in red ink:

"Quick, name a rich blue state with saltwater swimming, a monster budget deficit and dire fiscal projections as far as the eye can see. . . . it is in the worst fiscal position of the 50 states, as measured by unfunded pension liabilities and debt as a percentage of GDP. . . . {NOTE: Perhaps surprising to some, the correct answer is not California.}

The answer is Connecticut. . . . where in May 2011 Democratic Gov. Dannel Malloy promised to fix the state's fiscal woes by sharply increasing taxes— (it) is broke. And Mr. Malloy will not rule out another tax increase.

Is recent weeks, Mr. Malloy's administration has come clean about the state's fiscal future, and it's not pretty. The official number for this year is now a shortfall of $363 million, up from a meager $60 million deficit projected by state comptroller Kevin Lembo only one month ago. But that's the good news. In 2013-14 the deficit is expected to grow to $1.1 billion, and the bleeding won't stop there. According to Dan Haar, writing "The CT Business and Economics Scene" on Nov. 27 for the Hartford Courant, in each of the next three years the state's "spending plan" will "fall short" by almost $1 billion unless the cost of services is reduced.

"Worse still," writes Mr. Haar, "the state government would have to slice spending by an average of $1.7 billion in each of the next three years just to stay within the mandatory spending cap, as defined by overall income and economic growth." It is worth mentioning too that things are only likely to turn out this rosy if personal income tax grows at 7.2% annually over each of the next three years, according to Mr. Haar. . . .

The Connecticut Business and Industry Association (CBIA) warned back in 2010 that over the previous 20 years, the state's population had "grown only slightly but state spending [had] grown 158%."

Ballooning Medicaid expenses are the biggest cause of the overruns, but there are plenty of other problems, including the fact that Mr. Malloy, who narrowly won office in 2010 thanks to union support, has guaranteed no layoffs to public-sector unions during his first term. The state also has the highest per capita debt in the country.

Connecticut's biggest problem though may be its inability to grow and revive employment . . . .

Democrats might not want to hear it but it is likely that Nutmeggers have Mr. Malloy's tax increase to thank for the sluggishness. . . . Republican state Sen. John McKinney noted when it was signed that the two-year, $40 billion budget was already $2 billion "out of balance," and that it was "the most expensive budget" ever.

None of this has convinced Mr. Malloy that tax hikes are bad for prosperity."

Summing Up

When a state manages to achieve both low to no economic growth and uncontrolled government spending, a fiscal disaster looms.

More taxes impede economic growth, of course, so what do the blue state politicians do next? They increase taxes, of course.

After the tax increases come, the already 'financially challenged' state becomes an even less attractive place in which to live and conduct business as well. As a result, the existing fiscal disaster soon becomes an even bigger disaster.

Throw in the influence of unions and an aligned Governor who genuinely believes, or at least pretends to believe, that the state's politicians can tax their way to financial solvency, and the bigger disaster becomes an even worse disaster.

So here's what has to happen for the state to have a chance to avert financial collapse and reverse course. Three things, in fact.

Unless and until (1) the tax hikes stop, (2) the politicians and unions settle down and (3) the private sector and entrepreneurial individual investors are properly incentivized to invest and stimulate economic growth in Connecticut, even more red ink will flow.

The formula for financial success is simple. So is the formula for financial ruin.

Blue states, assisted by their union allies, seem to have an uncanny way of invariably picking the road that leads to more and more "red" ink. Until the inkwell runs dry, of course.

And then a state which once was very blue becomes very, very red instead. Game over.

Thanks. Bob.

No comments:

Post a Comment