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Thursday, May 28, 2009

California Budget Crisis
Mike Rappaport

One hears a lot about the California budget crisis, but what are the facts?  One blogger writes:

As a Floridian, I’m looking at California’s budget mess with some amazement.  The state’s 2009-10 budget is $111 billion, up 6% from the prior year, and $25 billion more than the year’s projected revenues of $86 billion.  The budget’s expenditures are 29% greater than projected revenues!  Yes, times are tough, we’re in a recession and all that, but during tough times shouldn’t we tighten our belts?  Instead, California’s expenditures are growing at a fairly good clip, and 29% larger than revenues.  This strikes me as crazy, and I’m happy to be saying this from Florida rather than California.

Think about that -- a 6 percent increase in expenditures from the prior year during a recession/depression.  How can anyone blame this on anything else than excessive government expenditures?  As the post says, "during tough times shouldn’t we tighten our belts?"  Apparently, not.   

https://rightcoast.typepad.com/rightcoast/2009/05/california-budget-crisismike-rappaport.html

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Mike Rappaport
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Comments

Keynes says we should tighten our belt in good times, and run a surplus. That prudence allows relatively painless deficit spending in the bad times. But even without the cushion, Keynes said, government spending is necessary in big recessions to head off big depressions.

Posted by: Floridian | May 28, 2009 6:46:03 PM

The problem with running a surplus is that it's money that's no longer in the hands of investors and businesses. What's the average rate of return on money invested by its owners as opposed to by pols and bureaucrats? For this reason alone it's wise to keep govt expenditures as low as possible as a proportion of GDP.

Posted by: Jonathan | May 29, 2009 12:22:59 AM

This analysis is incorrect for two major reasons:

1) It fails to account for the increase in government spending that's due to the crisis itself. For example, unemployment and assistance to the poor will go up all by itself during bad times.

2) The "tighten your belt in an emergency" argument is perfectly backwards. No, you tighten your belt when things are fine so that you can loosen it in an emergency. The argument is equivalent to saying that if you lose your job, you should increase the amount of money you save each month.

Posted by: David Schwartz | May 29, 2009 5:51:59 PM

"The "tighten your belt in an emergency" argument is perfectly backwards. . . . The argument is equivalent to saying that if you lose your job, you should increase the amount of money you save each month."

Uh, no, David. The argument is equivalent to saying that if you lose your job, you should strive to DECREASE the amount you SPEND each month. That may not solve all your problems, but I really can't see why it would be "perfectly backwards." (And sure, governments, like individuals, should save for a rainy day. But if they haven't -- and CA sure hasn't -- acting as though they had is not a solution.)

That said: Prof. Rappaport, I'm not sure where Holcombe gets his figures. As I read it, the CA budget website suggests that the 2009-2010 budget ($134.7B as of 5/30) is actually roughly $6.4B less than the 2008-2009 budget ($141B and some change as of 5/30). Compare (https://www.ebudget.ca.gov/agencies.html)to (https://www.dof.ca.gov/budget/historical_ebudgets/).

The $111B may be out of date or simply wrong or the official state website may be out of date or simply wrong, and maybe there are more reliable figures elsewhere, but I'm not sure where. This post commences with the question "One hears a lot about the California budget crisis, but what are the facts?" but unless I'm missing something I'm not sure Mr. Holcombe provides the answer.

Posted by: Salaryman | May 30, 2009 1:12:57 PM

"Uh, no, David. The argument is equivalent to saying that if you lose your job, you should strive to DECREASE the amount you SPEND each month."

That works quite well for individuals, but doesn't work for governments. Thank you for showing another way the argument is wrong.

When there are economic problems, government revenue drops and the demand for government services increases. It is vital that governments not reduce services or expenses under these circumstances as the services are as needed as ever and reducing the expenditures increases the damage to the economy.

Governments need to increase their spending when the economy gets bad. They need to meet the greater demand for services and not take away businesses and jobs from the sectors that depend on the government.

Make no mistake, California has screwed up big time. But it was in not being able to respond to the crises due to decades of short-sightedness, not in refusing to tighten its belt in response to the crisis itself.

Posted by: David Schwartz | May 31, 2009 10:07:43 PM

"Thank you for showing another way the argument is wrong." Actually, that probably would have been YOUR job.

"The services are as needed as ever." This phrase merits careful analysis for a lot of reasons.

"Governments need to increase their spending when the economy gets bad." Great. Japan increased its spending when its economy got bad. I suppose that fixed things right up for them. Or perhaps "governments need to" doesn't mean "It is beneficial for governments to" but rather "governments can't resist the temptation to."

At any rate, the present federal response to the recession will tell. It will take a few years, but either I'm proven right, in which case the economy eventually hits the 1970s doldrums all over again, or you're proven right, in which case I get to enjoy my golden years in a booming economy with amazingly good free health care and top-notch American cars to boot. (I'm too old to get very exercised about either eventuality.) Of course, if the economy hits the 1970s doldrums we'll be hearing "Well, of COURSE that will happen if you don't increase spending ENOUGH," if not from you, then from Paul Krugman and others.

Posted by: Salaryman | Jun 1, 2009 7:11:43 AM

I think the economy would be hopelessly screwed up for many years even with perfect government response. And I think the government is getting all of the big things wrong in its response. However, decreasing government spending below pre-crisis levels won't work either. I don't think good free health care is possible.

I think you are preferring to address the arguments I'm not making to addressing the arguments that I am making. That, or you assume there are only two alternatives -- one where government spends money on anything and everything and one where it reduces spending below pre-crisis levels.

Posted by: David Schwartz | Jun 2, 2009 8:29:25 PM

I'm really scary about the recession and its effects

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This post commences with the question "One hears a lot about the California budget crisis, but what are the facts?" but unless I'm missing something I'm not sure Mr. Holcombe provides the answer.

Posted by: generic viagra | Mar 24, 2010 10:26:36 AM

the recession and its effects are worth our concern.

Posted by: Laser pointers | Nov 25, 2010 6:49:14 PM

One hears a lot about the California budget crisis, but what are the facts?

Posted by: green Laser pointers | Nov 25, 2010 6:53:48 PM

i am afraid of the coming of 2012.

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Earth will be destroied?

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