What Went Wrong with California, New York, and New Jersey?

This is a tale of three states — California, New York and New Jersey. They are states with strong economies and large populations, yet they are financial and fiscal basket cases. What went wrong?

The Albany-Trenton-Sacramento Disease (Wall Street Journal, June 26, 2009)

…A decade ago all three states were among America’s most prosperous. California was the unrivaled technology center of the globe. New York was its financial capital. New Jersey is the third wealthiest state in the nation after Connecticut and Massachusetts. All three are now suffering from devastating budget deficits as the bills for years of tax-and-spend governance come due.

These states have been models of “progressive” policies that are supposed to create wealth: high tax rates on the rich, lots of government “investments,” heavy unionization and a large government role in health care.

This last sentence says it all. Despite decades of ‘enlightened’ policies, these states are in trouble. To hear the media and the politicians, the problem is all about the current recession and the resultant drop in tax revenues. Yet, aren’t recessions fairly normal? Doesn’t it make sense to save a bit in the fat years, so there is less belt tightening in the lean years?

The Wall Street Journal continues:

…Has all this public sector “investment” translated into jobs? Not quite. California had the nation’s third highest jobless rate in May (11.5%). New Jersey and New York had below average unemployment rates in May compared to the national average of 9.4%, but one reason is that so many discouraged workers have left those states. From 1998-2007, which included two booms on Wall Street, New York and New Jersey ranked 36th and 31st in job creation. From 2000 to 2007, the New Jersey Business & Industry Association calculates that nine out of 10 new Garden State jobs were in the government.

…The state-local income tax burden, according to the Tax Foundation, is the highest in the nation in New York, second highest in California and sixth in New Jersey. New York City boasts the highest business tax rate, 17.6%, according to a study by the American Legislative Exchange Council. Seven of the 10 highest property tax counties in America are located in New Jersey.

Instead of balanced budgets, these high taxes have produced record red ink. California’s deficit for 2010 is projected at $33.9 billion, New Jersey’s $7 billion and New York’s $17.9 billion, despite multiple tax increases this decade. The Manhattan Institute finds that three-quarters of the loss in revenues this year in Albany is a result of reduced income tax payments by rich people even though the state keeps raising taxes on high earners.

In California, we hear that we just need to raise taxes and then everything will be fine. Yet, taxes are already very high. One definition of insanity is doing the same thing over and over and hoping for different results. The problem we see is that our officials can and will spend everything that comes in, and more.

From the New York Times comes some startling statistics from a study of state spending and tax revenues:

“These are some of the worst numbers we have ever seen,” said Scott D. Pattison, executive director of the National Association of State Budget Officers…

OK, I’ll bite. How bad are they? Many businesses have had revenues declines of 20% or 30% or even much more. Is it that bad at these states?

Over all, personal income tax collections are down by about 6.6 percent compared with last year, according to a survey by Mr. Pattison’s group and the National Governors Association. Sales tax collections are down by 3.2 percent, the survey found, and corporate income tax revenues by 15.2 percent.

Frankly, a revenue drop of 6.6% really does not seem like the end of the world to me. But then we get a glimpse of the real problem:

While state general fund spending typically increases by about 6 percent a year, it is expected to decline by 2.2 percent for this fiscal year, Mr. Pattison said. The last year-to-year decline was in 1983, he said, on the heels of a national banking crisis.

First, state spending increases by about 6% per year? Why? Cost of living increases are way below that and even if you add in population growth, the total would be much less than 6% for most states. Not to mention those states with population decreases. So, the states are used to fat increases each year, but this year revenues are down by 6.6%. Have they cut spending by that much? Not a chance. In fact, spending is set to be slashed by the enormous amount of 2.2%.

So, when you read about draconian budget cuts and slashed spending, take it with a grain of salt.

A decade of deficits

This chart shows how strong tax revenue growth has been in California for most of this decade. Yet, despite strong revenue growth, spending always exceeded revenues. So, now we’re in trouble. Had our legislators kept spending in line with revenues, we would not be in this mess.

Source: California Republican Party

As you can see from this chart, spending was about 9% over revenues at the beginning of the decade and it still exceeds revenues by that much, despite strong tax revenue growth. In fact, tax revenues have grown consistently for this decade at a substantial annual rate of 4.35%. If state spending had grown at 3% per year, which is roughly the rate of inflation, then the budget would be balanced this year.

The WSJ piece summarizes the issues well:

So goes the real-life experience of progressive governance, with heavy tax burdens financing huge welfare states, and state capitals dominated by public-employee unions. Formerly rich states, they are now known for job losses, booming deficits and debt, wage stagnation, out-migration and laughing-stock legislatures. At least Americans have the ability to flee these ill-governed states for places that still welcome wealth creators. The debate in Washington now is whether to spread this antigrowth model across the entire country.

What is the path to prosperity?

This excerpt from a post I did last year, points out a path to prosperity that — as opposed to the CA, NY & NJ model — has worked well. The factors of this approach are high levels of economic freedom, moderate taxes and sensible regulations:

Source: American

The Path to Prosperity (The American Magazine, August 7, 2008, Amela Karabegovic and Alan W. Dowd)

A new report confirms that low taxes, limited government, and flexible labor markets help to spur economic growth.

There are times when common sense is not so common. We may be in one of those times, which is why a new report on the power of economic freedom is so important.

Common sense tells us that low taxes, limited government, and flexible labor markets will help to spur economic growth. The Fraser Institute’s 2008 Economic Freedom of North America (EFNA) report offers a striking, yet unsurprising, picture of the benefits that flow from such policies.

In 2005, the most recent year for which data are available, Colorado, Georgia, Delaware, North Carolina, New Hampshire, Tennessee, and Texas-states with consistently strong records of promoting economic freedom-had an average per capita GDP that was more than $4,300 above the U.S. average. Their total growth from 1981 to 2005 was nearly 20 percentage points higher than the U.S. average.

In the latest EFNA index, Delaware is the top-ranked state or province in all of North America while Texas is tied for second with the Canadian province of Alberta. And for good reason: Delaware has the smallest size of government at the subnational level and ranks first among U.S. states on key taxation measures; Texas ranks first in labor-market freedom at the all-government level and has a state top marginal income tax rate of zero. Delaware and Texas also rank high in the categories of government transfers and subsidies as a percentage of GDP at the all-government level.

By comparison, West Virginia, Hawaii, Maine, Montana, New Mexico, North Dakota, and Rhode Island-states with low levels of economic freedom-had an average per capita GDP that was more than $4,300 below the U.S. average. Their total growth from 1981 to 2005 was 10 percentage points below the U.S. average.

Again, this is predictable: all of these states rank in the bottom half of the nation on taxation at the all-government level, labor-market freedom at the state/local level, and size of government at the all-government level…

If you improve and enhance economic freedom, more prosperity ensues. If you restrict economic freedom by increasing taxes or laying on more bureaucratic red tape, you inevitably reduce prosperity. Our economy is resilient, yet it should also be clear that people gain prosperity faster in areas with more economic freedom.

See also:

• Is California Broke?
• New Jersey Can’t Afford Its Government

Via: Instapundit

Comments

[WS1835:]

There is indeed a single reason for the failure of all three states, and it is SOCIALISM. There is no such thing as a free lunch in this world. If the body politic insists on supporting the nonproductive and punishing the productive, it should not be a surprise when the productive leave or stop producing.

I have lived and worked in all three of the "left coast" states. Current public policy in all three of those states encourages the working poor to simply not work and the working middle class to move to a state that sees them as more than a cash cow. I know a single mother who was recently faced with the choice of being single with a part-time job to being married with a full-time job.

Now you might assume that public policy would support such a move since it is clearly beneficial for both the individual and the society. But you would be wrong. As a single, part-time head of household she was entitled to ~$15,000/yr in government assistance (daycare support, education benefits, food stamps, free medical, earned income credit, etc). All of those benefits end the day she gets married and goes to work. Since the benefits are all tax free, she would have to increase her work income by $18-20,000/yr to offset the loss in benefits. That is ~60% of her salary at a full time rate.

So to re-cap...... Her choice was to stay single, work part time and get loads of freebies or get married, work full time and watch her benefits go backwards to the tune of ~60% of her annual income. Seems pretty clear to me that American public policy (i.e., society) is encouraging dependence and punishing productive behavior.

Ultimately, my friend decided to get married and go to work full-time, but the choice was motivated by purely her personal desire to get married. From a purely economic perspective, it was a horrible decision. The decision blew a hole in her household budget and has forced her to make huge sacrifices in her personal life and education plans. Most people would not have made the same decision.

Jun 28 12:55 PM

[searcher:]

Lordy! So much admiration for the apparent economic/political model de jour, China. Lastly it was Chile, earlier Nippon, farther back West Germany and, depending on your leanings the paradises of Soviet or National Socialist regimes. Get a grip.

Jun 28 01:26 PM

[CLH:]

Very good article Kurt. Also many good comments. However, blaming immigrants is not the answer. The answer is to get rid of most state workers and make sure no one who works for the govt. is allowed to join unions.

Many have noted that all of these states are controlled by the Democrats. We can only clean this up by removing these socialists.

Jun 28 02:20 PM

[Wisdom vs. ...:]

Wealth growth and creation comes from jobs and capital; jobs and capital come from capital expenditures. Capital comes from banks, rich people, and middle class savings. The more money the state (ie, local, state and federal gov't) spends, the less money there is for capital expenditures, period. Governement capital expenditures are rarely good (the interstate highway system) and usually result in a layer of bureaucracy which completely offsets the wealth it creates; a perfect example of this is the scandalously expensive and wasteful way we build crappy federal highways, and rebuild them continually. Europe and Japan lived off the teat of the strong dollar for 40 years, and their economies have been in chaos ever since we emptied that trough.

I have in Texas most of my life, and lived in Vegas during the boom; if you think illegal immigrants are destroying capital, count yourself as ignorant and start learning.

Jun 28 03:00 PM

[Old Rick:]

As a California escapee, I'd note that one issue that was implied but not addressed directly is that of capital flight from the "progressive" states to the capital friendly states. Note where the foreign auto manufacturers located their plants for instance. One hopes that the Obamaists can read the tea leaves and see that crap and trade, health care (not) reform, illegal immigrant amnesty, higher taxes on wealth,and pork barrel stimulus will drive jobs out of the U.S. In another post on SA is a discussion of the disastrous effect of C&T on the U.S. steel industry. As capital can take flight from "progressive" states to cap friendly states, so to from "progressive" countries to cap friendly countries. I wonder who our John Galt will be??

Jun 28 03:03 PM

[Jimbo:]

Somebody please tell VennData that Europe is NOT c oming out of the depression faster than we are. Their industrial production and rate of export is worse than ours. For those of you enthralled by the "chinese model" please note that millions of young Chinese live in factory dormitories, eat factory cafeteria food and may earn 25 cents an hour to send to their home village. I am not sure Nancy Pelosi would support this even though she did slip a clause in the latest minimum wage law to exempt a cannery in American Samoa that just happened to be owned by a constituent of hers in San Francisco.

Jun 28 03:12 PM

[TeresaE:]

Add Michigan to your list of repressive, primarily Democratic, feed the poor and pay the unions forever.

And, here we go again.

The problem is that no politician EVER solves a problem, they put band-aids on symptoms and (they hope) shove the problems into the next election.

Our main problem is that we are MUCH higher taxed than the average taxpayers realizes (how many of you KNOW how much tax you pay on your home phone? I do, I have a $29.99 a month plan and pay a $43 bill).

We discourage people in the system to get out, then pay the state unions for life (which is why a 3% cola adjustment equates to a much larger jump in costs, their pensions go up with their pay).

These state's fiscal problems are being played out nationally.

I really doubt the outcome will be any different.

Jun 28 03:23 PM

[derryl:]

The primary purpose of any bureaucratic organization is to GROW, and that's exactly what government bureaucracies have been doing. They don't produce anything marketable.

To justify their existence and their gold-plated salaries, pensions and other benefits, bureaucrats produce rules and regulations to make us 'safer' or more 'tolerant' or more 'equal'. Bureaucrats foist their increasingly piss-ant rules, and the fees they charge for compliance with their rules, on people who are trying to run businesses that actually produce something of value to the economy. Businesspeople are treated like evil Nazis out to endanger, rape and pillage the nation, while the virtuous bureaucrats are there to save us from the rapacious business people.

The bigger you allow bureaucracies to grow, the more they will strangle your productive business sector with their regulationizing. And don't point to the Wall St bankster oligopolists and say "we need regulation". We already have antitrust laws against monopolistic predation on our economy, but the laws aren't enforced because the banksters own Washington.

I'm talking about free enterprise businesses who compete in an open market and who are not 'too big to fail' or otherwise protected from their mistakes. Free market business people have perfectly good economic reasons for trying to operate as safely, equitably and efficiently as possible, without an army of bureaucratic piss-ants second guessing their every move.

You want innovation? Get rid of bureaucrats and their 'standardized' formulas they try to make everyone obey. Then watch individual innovation at work. Abolish public sector unions and fire all the non-essential government workers and state and local deficits will disappear while innovative businesses bloom.

Jun 28 03:25 PM

[Mad Hedge F...:]

the system is clearly broken. As the California budget battle reaches white hot temperatures, Fitches has cut the rating on the state’s debt to A-, and placed it on “credit watch”, a warning of further downgrades. The move is a delayed recognition of reality, as is the rating agency industry’s practice. The legislature tried, but failed to pass $12 billion in budget cuts, which governor Arnold Schwarzenegger said he would veto anyway, because they didn’t meet the full $24 billion tab. In the package were increases in motor vehicle registration fees, $1.50 a pack in additional tobacco taxes, cancellation of health insurance for one million children, a production tax of 9.9% for in-state pumped crude oil, the firing of thousands of teachers, firefighters, policemen, and probation officers, and more smoke and mirrors accounting shenanigans that kick the can into the future. Some of the changes were only possible through a redefinition of the English language that turned “taxes” into “fees.”As California goes, so goes the nation, as many states will follow the Golden State into financial Armageddon. In a new era of soaring unemployment, restrained consumption, high savings, and crashing stock and property prices, states dependant on taxes on incomes, sales, capital gains, and property appraisals don’t do well. Make sure those muni bonds are insured. Why do I get the sickening feeling that I am watching a rerun of Thelma and Louis?

Jun 28 04:07 PM

[notsosmart:]

its all there in history.the romans had a good run but could not see the end nor stop it.same here,sadly.society cant exist pushing phony rated AAA paper all over the world.there is still about close to a trillion of this toxic crap hiding who knows where.there are no leaders able to bring back ethics & truthfullness.lying is the name of the game.greed is the driver for everything.i never get an answer to my question-who do you trust?

Jun 28 04:39 PM

[Urbane Gori...:]

This is true. I worked in a County position involving tracking people. We consistently found people with 'cloned' SS#'s. But SS could care less. It fascinated me that there are many Americans walking around with illegal usage of their SS#s, that don't know about it, that SS will do nothing about and will never draw against the increased income as SS knows that the secondary numbers are illegal.. It's an American Ponzi scheme..


On Jun 28 12:47 PM FloridaBoy2 wrote:

> Illegals do pay taxes under a fictitous SSN. I firmly believe the
> problem only gets lip service from the government because many businesses
> want the cheap labor. These people do not come here to sightsee,
> they come here for jobs. The construction trades, meat, hospitality
> industries and agriculture employ them in large numbers. Taxpayers
> end up subsidizing this cheap labor. If the law was enforced and
> stiff fines imposed the problem would be greatly diminished.
>
> On Jun 28 09:30 AM a. palmer jr. wrote:

Jun 28 05:02 PM

[tonym:]

China is the Low Cost Region and their companies can be more competitive because workers are paid less.

On Jun 28 09:45 AM Glen L. wrote:

> VennDetta: "China has state-controlled "everything" and 40% tax rates,
> their growth rates are great."
>
> Not true, there is far more economic freedom in China now than in
> the U.S. The Communists finally gave up after creating one of the
> poorest societies in the world over a period of 5 decades. It's far
> easier to start a business in Beijing than in New York or Los Angeles.
>
>
> john s. gordon: Delaware also has drawn in thousands of corporations
> that DO have operations in the state due to low corporate taxes and
> other benefits. Furthermore, many other states have draconian penalties
> for businesses that get caught setting up corporate shells in Delaware.
>
>
> It's incredible to me that anyone would still argue the point. Government
> is everywhere and always a parasite on the economy. Governments make
> nothing but trouble and are the only real impediment to worldwide
> prosperity. Many in the U.S. continue to believe that government
> is necessary to protect our freedoms, but what they do is the exact
> opposite: destruction of freedom, economic and otherwise.

Jun 28 07:33 PM

[tonym:]

The good thing about Cali is that the state will soon fail and may take "Progressive Liberalism" with it.


On Jun 28 04:07 PM Mad Hedge Fund Trader wrote:

> the system is clearly broken. As the California budget battle reaches
> white hot temperatures, Fitches has cut the rating on the state’s
> debt to A-, and placed it on “credit watch”, a warning of further
> downgrades. The move is a delayed recognition of reality, as is the
> rating agency industry’s practice. The legislature tried, but failed
> to pass $12 billion in budget cuts, which governor Arnold Schwarzenegger
> said he would veto anyway, because they didn’t meet the full $24
> billion tab. In the package were increases in motor vehicle registration
> fees, $1.50 a pack in additional tobacco taxes, cancellation of health
> insurance for one million children, a production tax of 9.9% for
> in-state pumped crude oil, the firing of thousands of teachers, firefighters,
> policemen, and probation officers, and more smoke and mirrors accounting
> shenanigans that kick the can into the future. Some of the changes
> were only possible through a redefinition of the English language
> that turned “taxes” into “fees.”As California goes, so goes the nation,
> as many states will follow the Golden State into financial Armageddon.
> In a new era of soaring unemployment, restrained consumption, high
> savings, and crashing stock and property prices, states dependant
> on taxes on incomes, sales, capital gains, and property appraisals
> don’t do well. Make sure those muni bonds are insured. Why do I get
> the sickening feeling that I am watching a rerun of Thelma and Louis?

Jun 28 07:34 PM

[tonym:]

Someone tell Paul Krugman, Obama and Pelosi that Spain has over 20% unemployment along with that economic model that they want the US to emulate.


On Jun 28 03:12 PM Jimbo wrote:

> Somebody please tell VennData that Europe is NOT c oming out of the
> depression faster than we are. Their industrial production and rate
> of export is worse than ours. For those of you enthralled by the
> "chinese model" please note that millions of young Chinese live in
> factory dormitories, eat factory cafeteria food and may earn 25 cents
> an hour to send to their home village.

Jun 28 07:37 PM

[Henry Buttal:]

One of the recurring concerns I have at the national level is that the House is dominated by Representatives from (drum roll please)...California and New York.

Jun 28 08:30 PM

[437339:]

Re

I left NJ in 1981 , Boy , Am I glad I did .I always say , northern by birth , southern by choice !

Jun 28 08:59 PM

[americansca...:]

Mitt Romney


On Jun 28 03:03 PM Old Rick wrote:

> As a California escapee, I'd note that one issue that was implied
> but not addressed directly is that of capital flight from the "progressive"
> states to the capital friendly states. Note where the foreign auto
> manufacturers located their plants for instance. One hopes that the
> Obamaists can read the tea leaves and see that crap and trade, health
> care (not) reform, illegal immigrant amnesty, higher taxes on wealth,and
> pork barrel stimulus will drive jobs out of the U.S. In another post
> on SA is a discussion of the disastrous effect of C&T on the
> U.S. steel industry. As capital can take flight from "progressive"
> states to cap friendly states, so to from "progressive" countries
> to cap friendly countries. I wonder who our John Galt will be??

Jun 29 12:52 PM

[jackooo:]

Californy has a problem. Millions work here but pay no taxes. They enjoy the benefits though. Roads, hospitals,welfare, etc.
They take away landscaping, janitorial and construction jobs. The money earned by these illegals is sent to Mexico, Guatemala, Honduras, etc.
The working CITIZENS are paying for these people with M O R E taxes as the breeders keep the kids coming.
Senators Feinstein and Boxer do nothing to bring these law breakers to justice. Just turn their heads and tax the citizens. That's the easy way...

Jun 29 02:03 PM

[buddhabill:]

It's funny to hear Republicans trot out the 'Fiscal Responsibility' talking pionts.

I still remember whent he Repubs controlled both houses and the Presidency. Balanced Budget? Fiscal Responsibility? Nope. They spent like drunk sailors.


On Jun 28 03:23 PM TeresaE wrote:

> Add Michigan to your list of repressive, primarily Democratic, feed
> the poor and pay the unions forever.
>
> And, here we go again.
>
> The problem is that no politician EVER solves a problem, they put
> band-aids on symptoms and (they hope) shove the problems into the
> next election.
>
> Our main problem is that we are MUCH higher taxed than the average
> taxpayers realizes (how many of you KNOW how much tax you pay on
> your home phone? I do, I have a $29.99 a month plan and pay a $43
> bill).
>
> We discourage people in the system to get out, then pay the state
> unions for life (which is why a 3% cola adjustment equates to a much
> larger jump in costs, their pensions go up with their pay).
>
> These state's fiscal problems are being played out nationally.<br/>
>
> I really doubt the outcome will be any different.

Jun 29 02:57 PM

[FloridaBoy2:]

Slavery is alive and well in Florida. Google it.

news-press.com/article...

Immokolee is an agricultural town in Collier County. Service workers are housed there and bussed to resorts on Marco Island, Naples and other areas. Think Hilton and Marriot.They also pick winter vegetables and citrus. Many of the farms are large corporations. These people do not commit crimes because they want to stay as far under the radar as possible.

Guess who the workers are in the mid-west meast packing plants?

There was a long dispute with Taco Bell and picking tomatoes. The pickers wanted an additional one cent per pound and TB dug its heels in. The workers finally won. There are some growers with a conscience that pay a decent wage and provide adequate living places for their workers.They charge a little more for their products and packaging is labeled accordingly.

The root problem with illegal immigration lies with the governments
of their home countries. If they could find work there they would be less inclined to journey here.


On Jun 28 05:02 PM Urbane Gorilla! wrote:

> This is true. I worked in a County position involving tracking people.
> We consistently found people with 'cloned' SS#'s. But SS could care
> less. It fascinated me that there are many Americans walking around
> with illegal usage of their SS#s, that don't know about it, that
> SS will do nothing about and will never draw against the increased
> income as SS knows that the secondary numbers are illegal.. It's
> an American Ponzi scheme..

Jun 30 07:20 AM