Further Data Points For The Trend XVI...

Three stories today, from the WSJ...

First this.

I can understand a rationale that says banks should pay into reserves to cover bail-out costs, especially if the US government (=US taxpayer) continues to stand behind the banks to ensure that those too big do not indeed fail. I disagree with the idea that this should be anything but a voluntary act.

But the link points to what is, in my opinion, sheer stupidity: rather than use the fees for the purpose claimed, the money is going to be used to bail out Fannie Mae and Freddie Mac when their continued lending to refinance subprime lending comes home to roost. In other words, the government reaction to the massive losses of politically motivated lending programs is ...

...to toss more money at them. The difference? This time it's the banks that have to pay for this. This is nothing less than robbery: they are taking profits from other banks to pay for the losses of the banks the US government owns and has told to continue to throw away good money after bad.

As the WSJ puts it:

In other words, the White House wants to tax more capital away from profit-making banks to offset the intentional losses that the politicians have ordered up at Fan and Fred. The bank tax revenue will flow directly into the Treasury to be spent on whatever immediate cause Congress favors. Come the next "systemic risk" bailout, taxpayers will still be on the hook. "Responsibility" is not the word that comes to mind here.

The tax will apply to liabilities that are not already insured by government, so the White House is saying it will deter excessive risk-taking. And it does at least tilt at the role of excessive debt in creating systemic risk. But the heart of the moral hazard for the biggest banks is the implicit government guarantee that they will never be allowed to fail, and the tax does nothing about this.

The tax will be levied on financial companies with more than $50 billion in assets. However, as a too-big-to-fail litmus test, $50 billion can't possibly be the right answer. America has just run the experiment by putting a company bigger than $50 billion—CIT Group—through bankruptcy. By any objective reckoning, there were no systemic consequences. The new $50 billion tax threshold thus increases the scope of future bailouts by drawing a wider circle around firms that can gamble with implicit federal backing.

Emphasis was in the original.

It doesn't deter risk-taking: rather, it makes it more expensive. That won't deter it, but will instead push risk-taking into activity that is more and more riskier, since lower-risk is being taxed. If it works as advertised - which it won't - then it would seriously push banks into taking no risk whatsoever in order to avoid paying the tax (woops, they call it a fee...but a tax by any other name is still a tax...).

The second is here.

How are they going to pay for the $60bn gift to the unions? By including capital gains when calculating the Medicare tax of 2.9% on payroll income.

This is party politics at its very worst: those being exempted are the Democratic base. This means that this is probably the biggest political pay-off ever, and it stinks to high heaven. The goal is not to improve anything but the standing of unions: join one and your tax situation improves dramatically.

This administration will go down in history as the administration most corrupted by special interests than any other in history, Tammany Hall included (and that's saying a lot).

The third is here.

Government in the United States currently consumes 23% of total GDP. This is up from 18% in 2000. Do we get more and better government for our money?

No: almost per definition, government activity does not bring as much value to the country per dollar spent than private activity. This is not to belittle government workers: I know some and they're not bad folk goofing off all the time. But when a colleague of mine went into government work as an economist, he started putting in long hours to learn his job as quickly and efficiently as possible. After several months, they pulled him aside and asked him if he need some additional training, if he was having a hard time doing the job? His jaw dropped.

The reason for the question? He had been putting in 50-60 hour weeks to get up to speed and you're not supposed to work more than 80 hours over two weeks, maximum. He dialed back his hours and it took longer to get up to speed, but that is exactly how the system works.

I can understand this for lower-level workers to avoid abuse - and there are those in the government who would abuse them in order to show how good slave-drivers they are, but we are talking about a professional position here.

Governments aren't there to turn a profit, they aren't there to do things private companies do better (well, that's the theory, anyway: reality is a tad different...). Governments should be handling organization and control of activities deemed necessary to be controlled, such as licensing drivers and companies, but not in the business of providing a soft and cushy safety net or paying well over commercial prices for services and goods because of political connections.

The real problem in California?

The government there has less to do with services than servicing politicians:

The resistance comes from the blob of interest groups, inside and outside government, that like California's public sector just fine the way it is and see reform as a threat to their comfortable, lucrative arrangements. It turns out, for example, that all the pointless boards and commissions are bulletproof because they provide golden parachutes to politicians turned out of the state legislature by California's strict term limits. In the middle of the state's most recent budget crisis, State Senator Tony Strickland proposed a bill to eliminate salaries paid to members of boards and commissions who, despite holding fewer than two formal hearings or official meetings per month, had received annual compensation in excess of $100,000. The bill died in committee.

That sort of compensation is what board members see for large private corporations: they're the ones doing oversight on how a company is developing and growing, changing to meet new conditions, etc. Such folks earn their money by giving needed feedback on corporate policies, and usually do so very well because of their decades of experience of running large-scale companies.

This? Nothing more than corruption.

This extends further than just direct payments: when government workers game the system so that they are the winners, regardless of anything else happening:

California government workers retiring at age 55 received larger pensions than their counterparts in any other state (leaving aside the many states where retirement as early as 55 isn't even possible). The California Foundation for Fiscal Responsibility periodically posts a list of retired city managers, state administrators, public university deans, and police chiefs who receive pensions of at least $100,000 per year. The latest report shows 5,115 lucky members in this six-figure club. The state's annual bill for polishing their gold watches is $610 million.

Retire at 55? Ye gods.

California taxpayers are not to be envied. It's not so much the high taxes: it's the knowledge that in the larger view of things, it's money that is being spent on something so corrupted that it's impossible to reform.

California would move only slightly closer to regaining fiscal health if it scraped the gilding off the pensions and health benefits of its most lucratively retired employees. But when even a flagrant example of a government's serving its workforce better than its citizens is politically unassailable, it's hard to be hopeful about the mundane reforms needed to change the rest of the economically debilitating public-employee retirement system. The California Performance Review suggested the sensible thing: gradually substituting defined-contribution for defined-benefit pension plans. (According to a report by the Pew Center on the States, just 20 percent of the nation's private-sector employees are enrolled in a defined-benefit pension plan, compared with 90 percent of public-sector employees.) To no one's shock, the state legislature has rejected all proposals to curb the state's financial obligations to its retired and retiring employees.

As I said: ye gods.

The article contrasts this with Texas thus:

If California doesn't want to be Texas, it must find a way to be a better California. The easy thing about being Texas is that the government has a great deal of control over the part of its package deal that attracts consumer-voters—it must merely keep taxes low. California, on the other hand, must deliver on the high benefits promised in its sales pitch. It won't be enough for its state and local governments to spend a lot of money; they have to spend it efficiently and effectively.

The outlook?

For California's governmental-industrial complex, a new liberal administration and Congress in Washington offer plausible hope for a happy Hollywood ending. Federal aid will replace the dollars that California's taxpayers, fed up with the state's lousy benefits and high taxes, refuse to provide. Americans will continue to vote with their feet, either by leaving California or disdaining relocation there, but their votes won't matter, at least in the short term. Under the coming bailout, the new 49ers—Americans in the other 49 states, that is—will be extended the privilege of paying California's taxes. At least they won't have to put up with its public services.

This is indeed the only hope for California.

But it is the last thing that California taxpayers need. We don't all need to become California.