Thursday, November 19, 2009

Hennesssey on Krugman on California, and the long-term fiscal strategy of the left. 

"As California goes so goes the nation", is an old saying in politics. A little earlier this year the now perpetually on-the-brink-of-bankruptcy state had to pay its bills with "IOUs" when it ran out of cash. And now it is back facing another $21 billion shortfall and a return to dealing out IOUs.

With the the future of America at stake, Paul Krugman gives his take on California -- and we get a take on Krugman's take from Keith Hennessey...
Krugman telegraphs the Leftís long-term fiscal strategy when he writes about California Republicans.

For what we may be seeing is America starting to be Californiafied. Ö And if Tea Party Republicans do win big next year, what has already happened in California could happen at the national level.

In California, the G.O.P. has essentially shrunk down to a rump party with no interest in actually governing ó but that rump remains big enough to prevent anyone else from dealing with the stateís fiscal crisis.

If this happens to America as a whole, as it all too easily could, the country could become effectively ungovernable in the midst of an ongoing economic disaster.

The [telegraphed] strategy is simple:

* Increase government spending, especially through rapidly growing entitlements. At the state level itís Medicaid.

* Wait.

* While youíre waiting, define deficits as the problem, rather than spending.

* Try to label as radical and extreme those who argue for slowing spending growth and preventing tax increases. The goal is to discredit these solutions as legitimate.

* Once deficits get large enough, shrug and say we have no choice but to raise taxes.

* This is especially true for entitlement programs directed toward the elderly, who have less ability to adjust to changed government promises.

* Argue we must protect low and middle-income from higher taxes, so upper-income taxpayers must bear the entire burden increase.

* Raise taxes on upper-income taxpayers.

* Rinse and repeat.

This is a simplified version of an Engorge the Beast strategy, which is almost the converse of the Starve the Beast strategy...

When Dr. Krugman writes "no interest in actually governing ... prevent anyone else from dealing with the stateís fiscal crisis," he means "no interest in raising taxes ... prevent anyone else from raising taxes"...

Both parties have their paranoid nutcases and bigots. Dr. Krugman tries to use a few signs [at tea parties] to discredit a reasonable position on fiscal policy. I would dismiss this as amateurish if the Times didnít give him such a big megaphone.

California and the Federal government have another quite reasonable option available. Cut spending. Indeed, just slowing unsustainable spending growth would be a great start...

Our long-term deficit problem is a spending problem...

California was tied for second-highest per capita tax collections in the nation in 2007, according to the Tax Foundation...

1. New York 8.8%
2. California 7.9%
2. New Jersey 7.9%
2. Hawaii 7.9%
5. Maryland 7.6%
US Average 6.7%

... so it doesn't seem that California's problem really is being starved of taxes by Republicans.

Indeed, there are other more complete and nuanced explanations of California problems, for instance in Who Killed California? and The City Journal's look at The Big-Spending, High-Taxing, Lousy-Services Paradigm.

As to Krugman, we might recall once again that a little while back he told the Asia Times that the US has the finances of "a banana republic" and...
"We should be getting 28% of GDP in revenue. We are only collecting 17%."
... that increase to 28% being equivalent of about a 90% increase in all income tax revenue (both personal and corporate). And that was before national health care and all the recent rest.

Strangely, Krugman has never had the nerve to mention this to his American audience through his New York Times column (in spite of how he presents himself as the brave speaker of hard truths).

Perhaps, as brave about speaking truth as he is, he feels it would be tactically disadvantageous as a matter of politics to openly admit that his side's political agenda would require a 90% increase in income taxes (or the equivalent) to start with, today -- if implemented responsibly.