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from MuniLand:

Dark clouds in the Golden State

http://www.youtube.com/watch?v=NPc85z9uhJQ

In a YouTube address released last Friday, California Governor Jerry Brown shocked his constituents with an announcement that the state's projected revenue shortfall had increased to $16 billion. This followed very weak April state income tax collections, which deepened the budget hole from the $9 billion that Brown had originally forecast in January. The new deficit is a result of a reduced revenue outlook for California, higher school funding costs, and decisions by the federal government and courts to block certain budget cuts. New cuts that Brown floated yesterday will reduce General Fund spending as a share of California's economy to its lowest level since 1972‑73.

The $92 billion budget that Brown had proposed in January for the fiscal year 2012-2013 (which starts on July 1) looked like this: With the new revenue shortfall, almost every area of the state budget has been targeted for cuts; education, which accounts for 53 percent of General Fund spending, is the only category that was spared. In his revised proposal, Brown substantially increased K‑14 spending (i.e., includes two years of community college or vocational training) and protected the University of California and California State University from further, deeper cuts. School spending is mandated by Proposition 98, which requires that California pass through a substantial portion of state revenues to local governments to fund education.

Overall, Brown proposed that half of the budget hole should be plugged with spending cuts, 35 percent with tax hikes and 15 percent with financial gimmicks. Brown's preferred budget cuts (pages 5-7) total $8.3 billion and include a $1.2 billion reduction to California's medicaid program (Medi-Cal), an $880 million reduction to welfare (Temporary Assistance to Needy Families payments) and a 7 percent reduction in hours to in-home supportive-care-services providers.

These monies are the lifeline that millions of Californians rely on. It's hard to get a sense of the human side of this, but it's enormous. And without additional revenues, deeper cuts will be required.

Reuters' Jim Christie picks up the story here:

In California, where local property taxes are limited by law, and local services, including schools, are thus largely funded by the state, the most important source of government revenue by far is personal income taxes. Capital gains income from the state's wealthy residents helps fill the state's coffers in good times, but falls sharply in bad times.

California's larger-than-expected deficit did not faze traders in the $3.7 trillion U.S. municipal debt market, said Gary Pollack, managing director at Deutsche Bank Private Wealth Management in New York.

"The market is taking it in stride for the time being," he said.

California bonds have been trading a little better over the last few weeks, aided by rising prices and falling yields in the overall municipal market, Pollack said.

California, the muni market's biggest borrower, has about $80 billion in outstanding obligation debt, compared with its $1.9 trillion in economic output.

from The Great Debate:

Larry Summers is playing economic Jeopardy

Editor's note: This op-ed was originally published at the Financial Times in response to the recent piece by Lawrence Summers for Reuters. It has been republished, verbatim, with the FT's permission.

Larry Summers’ considerable intellect suggests that he would be an excellent contestant on the popular game show Jeopardy. Of course, on the show, the question offered by the contestant must match the answer on the board. Summers and I disagree on the answer that matches the question “What is President Obama’s budget?” Let’s see why.

I asked two questions in an op-ed in Wednesday’s Wall Street Journal. (Neither question was addressed by Mr Summers, or in the simultaneous parallel critiques offered on the airwaves by US Treasury Secretary Timothy Geithner and former Council of Economic Advisers Chairman Austan Goolsbee). The first question was whether the tax increases on high-income individuals proposed by President Obama (the Buffett rule, higher taxes on dividends and capital gains, a higher top marginal rate, and so on) raised enough revenue to materially offset the country’s large budget gap or higher federal spending under President Obama. The answer, using revenue estimates from the Treasury Department and spending estimates from the President’s budget is ‘No’. The second question was what that spending growth implied for future tax rates. That is, if federal spending as a share of gross domestic product was to increase permanently as the president proposes, by how much would taxes need to rise? Answer: a lot and for everyone. This simple thought experiment presumes that we will not ratify permanently larger deficits.

Without addressing these questions, Mr Summers proposes a different one. President Obama’s budget is supposedly fiscally sound because the Congressional Budget Office (CBO) has estimated that the budget would stabilise federal debt as a share of GDP for a short while. Yet, let’s look at what the CBO said. First, while the CBO shows the debt-to-GDP ratio stabilizing for a period of time – at an uncomfortably high level – in the budget window, it is not stable in the long run. Second and more importantly, in its April 20, 2012 report, the same CBO that Summers cites so selectively observed that the permanent deficits in the President’s budget would reduce the level of economic activity. By CBO’s estimate, under the President’s proposals, the CBO estimates for the 2018-2022 period, that the nation’s real output would be between 0.5 and 2.2 per cent lower compared to what would occur under current law. This adverse effect would grow in the future, as deficits continue to mount.

The President’s budget has met with little success in Congress. The 2013 budget was voted down in the House of Representatives, 414-0. The Senate did not bring the 2013 budget to the floor, though the 2012 budget was voted down in the Senate, 97-0.

And Mr Romney? The Romney budget proposes to reduce federal spending as a share of GDP to 20 per cent (its pre-financial-crisis, long-term average level) by 2016. It is ironic that the administration has criticised Mr Romney for specific cuts (for example, block granting the Medicaid program), while Mr Summers now argues the plan is not specific. Mr Romney is also the first candidate to propose specific ways of slowing the growth of Social Security and Medicare, a subject not mentioned by the president. And Mr Romney’s call for fundamental tax reform – reducing marginal tax rates accompanied by reducing tax expenditures to be revenue-neutral and distributionally-neutralcaptures the spirit of the bipartisan Bowles-Simpson commission, which was both appointed and ignored by President Obama.

In a ‘Final Jeopardy’ round, if the answer is long-term fiscal sustainability without large, across-the-board tax increases, the question cannot be “What is President Obama’s budget?”. There are important debates to be had over policy – Mr Summers is right that this is a “very consequential election”. But we first must make sure that we agree on math. Fortunately, the concept that permanently higher spending eventually requires taxes to match is not a controversial one to most Americans. And, at the levels of higher spending proposed by President Obama, higher taxes on the well-to-do won’t fix the gap.

from David Cay Johnston:

Politicians keep placing bets

Politicians in both parties are betting that allowing more gambling will make them winners at the polls by raising revenue without appearing to raise taxes.

Governors Andrew Cuomo of New York and Steve Beshear of Kentucky, both Democrats, each want seven casinos.

In Kansas, where the state owns casinos, Governor Sam Brownback, a Republican, wants more gambling money to pay down state debts.

In Minnesota, Governor Mark Dayton of the Democratic-Farmer-Labor party wants more gambling to finance a new stadium for the privately owned Vikings football team.

Florida legislators are mulling three casinos, one in Miami. Illinois lawmakers may allow a casino in Chicago.

In Texas, Governor Rick Perry says he opposes more gambling. Yet eight years ago he called the legislature into special session to allow gambling at the gas pumps to help finance schools. He lost that bet.

Egging on these and other politicians is anti-tax crusader Grover Norquist, who has made “tax” the vilest four-letter word in American politics. Norquist wrote Texas politicians a letter in January saying that more gambling is better than more taxes.

from MuniLand:

Krugman’s argument for bloated government

Paul Krugman, Nobel Prize-winning economist and New York Times columnist, is once again banging the drum for federal aid for state and local governments. In theory, the federal government has the capacity to prop up states and municipalities by providing stimulus dollars to keep economic activity from stalling. However, this would require Congress to raise the debt limit and the Treasury to borrow from bond markets to get the money. Krugman contends that this would cost little and that the Obama administration is postponing the recovery by not fighting for more money from Congress:

The federal government has been pursuing what amount to contractionary policies as the last vestiges of the Obama stimulus fade out, but the big cuts have come at the state and local level. These state and local cuts have led to a sharp fall in both government employment and government spending on goods and services, exerting a powerful drag on the economy as a whole.

What Krugman's analysis overlooks is that government at the state and local levels has been ballooning for decades and that a contraction may be necessary to purge the system of bureaucracy and outdated programs. Krugman's borrowing plan would simply freeze budgets which, on their own, are basically unsustainable for state and local governments. As their costs increase, there is no more "fiscal space" in many state and local budgets to maintain the status quo without large tax increases. So after Krugman's proposed federal stimulus expired, states and municipalities would likely have to raise revenues to support their expanded size.

Hoping that state and local government can provide a large number of jobs is unwise policy, since government employees have substantial attendant costs, notably generous pensions. Unlike private corporations, government cannot quickly add and reduce jobs as public budgets must go through the legislative process, which is infinitely more complex than corporate planning.

You can see the growth of government in the graph above, which plots state and local government employees per capita. In the early 1980s one government employee served 179 citizens. By 2002 one government employee served 155 citizens. This increase in employees either happened because governments took on more responsibilities, became less productive or padded the employee rolls as a result of political pressure (or a combination of all three).

A more striking example of the expansion of government is spending on law enforcement. As seen in the graph below, spending (in constant dollars) for law enforcement went from $192 in 1982 to $344 in 2007, far outpacing population growth. After watching police in riot gear break up peaceful Occupy protests and swat teams being used for small-time drug arrests, we might ask if there are too many public resources dedicated to "peacekeeping" already.

from David Cay Johnston:

The siren call of austerity

The World Economic Forum opened in Davos amid choruses of central bankers and economists calling for governments to cut spending.

This message of austerity is like the call of the ancient Sirens, whose music lured sailors to shipwreck.

We should take a lesson from Odysseus, who poured wax into the ears of his crew and had himself lashed to the mast of his ship to resist the Siren call.

Austerity supporters are selling the idea that governments, like families, must cut back when income shrinks. But economically, governments are not like families.

Firing teachers, cops and government clerks will, for sure, reduce public spending. But budgets, like the song of the Sirens, are only part of the story. Listen only to the alluring lyrics and, like the many voyagers before Odysseus, we will suffer disastrous consequences - in our case falling incomes and worsening economies.

The full economic story begins with this principle taught to every economics student: spending equals income and income equals spending. Cut spending and incomes must fall; cut incomes and spending must fall.

from MuniLand:

The soft side of federal spending

It's not clear that Congress is capable of doing its job of managing the nation's purse strings. Capitol Hill failed at identifying a combination of tax increases and reductions in spending that would have lowered our growing debt burden. Now every constituency that draws funds from the U.S. Treasury is angling to push others away from the trough. A perfect example is the internecine warfare to come over defense cuts. Here is a slick ad against funding for the military's nuclear arsernal obviously coming from the traditional munitions and equipment makers:

http://youtu.be/DZvhjG8YtwA

The military players are well versed at battling over the spoils. But it's the soft side of federal spending, where social support and services are funded, that is less equipped to fight over its share of decreased funding.

The automatic cuts that kick in due to the failure of the supercommittee are aimed at defense, Medicare and Social Security, and other discretionary social programs. The legislation spares cuts for Medicaid payments to states. It's interesting that this area was protected when other major areas of the budget will have reductions. Medicaid cuts were the reductions that governors and county officials feared most because they consume an increasing amount of state and local budgets. Maybe governors were the real winners of the lobbying game when the Budget Control Act of 2011 was being written.

Politicians seem to be stuck in the blame game and hyperbole about who would or wouldn't raise taxes on millionaires. We do need tax increases and we must cut everywhere as precisely and wisely as we can. Enough with the soundbites. It's time to start talking hard numbers.

from MuniLand:

Don’t let the hawks win

The Supercommittee has failed. Their mandate to cut $1.5 trillion from the federal budget over 10 years was too great a hurdle for its members to climb. Now the automatic provisions of the Budget Control Act of 2011 will kick in. These require half of the $1.2 trillion in spending reductions to come from the Departments of Defense, Homeland Security, and Veterans Affairs; the National Nuclear Security Administration; some management functions of the intelligence community; and the international affairs budget from the State Department.

Already the fight over these required cuts is on. The war hawks in Congress are starting to circle in an effort to kill the automatic cuts to the military that are included in Budget Control Act. Reuters reports:

[T]he defense industry turns to lawmakers to undo the automatic cuts known as "sequestration."

Top Republicans, including Senator John McCain, have already said they will pursue legislation to do just that, although President Barack Obama has said he would not support such a move

Republican Senator Jeff Sessions of Alabama, the ranking member of the Senate Budget Committee, says in the Bloomberg video above that across-the-board cuts would not apply to Social Security, Medicaid, Medicare beneficiaries, civil and military employee pay, or veterans. He says these areas need to equally share in budget cuts. There are certainly reductions that can be made in every area of the gargantuan federal budget. But I think we really need to dig deep when members of Congress fight to protect the U.S. military on grounds of global insecurity. In the case of Senator Sessions it's useful to know a little about the dominance of military spending in his state. Bloomberg did a brilliant article last week that explained:

Overall defense spending in Madison County, [Alabama] jumped 76 percent over a decade to $15,889 a person, the sixth-highest in the country, based on data compiled by Bloomberg. In the six years since the nationwide base realignment, military contracts in the area have swelled 48 percent to $32 billion, bringing in 4,650 new government jobs.

The United States spent approximately $700 billion, or 4.7 percent of GDP in 2010, on the military. China, a much bigger nation, spent $114B, or 2.2 percent of their GDP.

from MuniLand:

Irene damage estimated at 0.214% of GDP

Irene has come and gone. She was a big girl but fortunately she didn't cost a lot in terms of economic damages. The biggest toll was the 25 lives she claimed. I mourn those deaths and know their loss is incalculable to their families.

Local, county and state officials responded to the disaster admirably. Local newspapers and television stations are full of stories of families evacuated and emergency measures taken. New Jersey and New York City preemptively evacuated millions of people and shut down mass transit and other infrastructure systems. Given the scale of potential damage the losses have not been that great.

The economic loss of Hurricane Irene has been estimated at approximately $3 - 4 billion. Measured against a gross domestic product of $14 trillion Irene will ding the economy for about 0.214% of its annual output. Some have suggested that this will give the construction industry a boost, but it's not significant. Irene's damage, on its own, is not a substantial blow to the U.S. economy, but nine other “weather disasters” have caused more than $35 billion in damages this year, according to the National Climatic Data Center at the U.S. Department of Commerce (hat tip Empty Wheel).

The federal agencies which man the front lines during disasters are facing funding pressures in this time of budget austerity. The Hill reports that the disaster relief funds of the Federal Emergency Management Agency have dipped below a crucial threshold that keeps them from initiatives broader than debris clean-up. The Huffington Post explains that the National Oceanic and Atmospheric Administration will have trouble launching the replacements of current weather-tracking satellites on schedule due to budget reductions.

All levels of government are restraining their expenditures, but ensuring the safety of the people is the primary responsibility of every level of government. I'd like to suggest to members of Congress that there are plenty of areas in the military budget that can be reduced to ensure that all necessary funds for domestic protection efforts are covered. The events of this weekend show that it is vital that FEMA and the NOAA are fully funded.

from MuniLand:

Money doesn’t make graduates

Chart data

It is hard to make comparisons between different states' data on public schooling because each one is faced with unique conditions. That said, the data above is pretty striking. The graph shows the public school dropout rate -- the percentage of students dropping out annually -- and the amount of public money spent per student per year, in thousands of dollars. You can see that there is not a lot of correlation spending and the dropout rate. Spending more doesn't educate more students.

Of course this data only speaks to the dropout rate rather than educational achievement. So we can't see the upside to higher spending. It's always helpful to have bigger budgets but public schools, like all parts of muniland, will need to dig deeper and achieve more with less money. I'm confident that we can improve our educational system in the face of budget tightening.

I'm interested in all comments and references on the topic please leave them below.

Further:

US Department of Education: Public high school graduates and dropouts: 2007-08

from MuniLand:

It’s the military, stupid

The U.S. Chamber of Commerce has published a letter to Congress's new Joint Select Committee, aka the supercommittee, with the changes they would like to see made to the budget and tax code. The supercommittee's brief is pretty broad; it will be looking at ways to balance the federal budget by raising taxes and/or reducing expenditures.

The Chamber, which represents business interests, strongly insists that the supercommittee slash entitlements and reform the tax code by lowering tax rates. From the Chamber letter:

The Chamber urges you to consider how the current tax laws act as an impediment to worldwide competitiveness, a deterrent to saving and investment, and an obstacle to innovation and entrepreneurship. Accordingly, the Chamber believes that the current code needs a comprehensive reform to lower overall marginal tax rates, to encourage saving and investment, to foster global competitiveness, increase capital accumulation, attract foreign investment, and drive job creation.

The problem with the Chamber's argument about lowering tax rates to increase our global competitiveness is that the United States already has some of the lowest corporate tax rates in the western world. Here are corporate taxes as a percentage of GDP from the OECD. (Countries in dark green collect the lowest amount of taxes, countries in red collect the highest) In the Western Hemisphere only South American countries have lower corporate tax rates than the U.S.

Taxes on corporate income as a percentage of country GDP.

The fact is that the U.S. collects a lower amount of total taxes as a percentage of GDP than most of the western world. We are clearly competitive already on the basis of tax rates. Data source: OECD.