Two days ago I reported on France’s rising unemployment and the potential for a large-scale repetition of the Greek crisis. I concluded that so long as the French economy continues to lose up to one percent of its taxpayers to unemployment every year, the government does not stand a chance at balancing its budget. Any attempts at doing so will one way or the other set a downward macroeconomic spiral in motion that, as Greece has demonstrated, can continue to the next Big Bang.
Unlike its southern neighbor Spain, France still has time to save itself from the Greek tragedy. However, their room to take appropriate action is limited by three factors:
1. The mere size of government as it is today heavily stifles private entrepreneurship. Even if the French government did nothing from hereon to try to balance its budget, the French economy would have a long, slow and frail journey to growth, full employment and rising prosperity. This makes it very difficult to defend continuing EU-imposed budget-balancing measures.
2. The socialist ideology of President Hollande, the prime minister and his cabinet prevents the current French government from thinking clearly about alternatives to big-government intervention whenever there is a problem. Since the only sustainable path out of France’s crisis goes through reforms to reduce the size of government, the people that French voters elected to lead the country are ideologically predisposed to reject such a solution. Even if they tried to develop the right kind of solutions it is highly unlikely that they would get very far before their voters, party grassroots and left-leaning media would cry foul and call them ideological hypocrites. Unfortunately, that alone can be a strong deterrent against the right kind of reforms.
3. A rescue plan to have France evade the Greek dungeon would require that most of the rest of the euro-area economy is in reasonably good shape.
Even if lightning struck twice and the French socialists managed to get their act together, the third condition will stand in their way like a concrete road block. Made in Germany. Behold this report from the EU Observer:
In December 2012, leaders from 25 EU countries all signed up to a pact championed by German Chancellor Angela Merkel. The so-called fiscal compact is supposed to discipline countries into spending within their means and reducing their budget deficits and overall debt. In Germany, the “debt brake” will fully come into force in 2019, when the federal state and the regions (laender) are legally bound to stop making new debt.
This is a charade of royal proportions. The EU has had a ban on member-state debt beyond three percent of GDP since 1992, Effectively, the Stability and Growth Pact, which has been in place over two decades now, has made “excessive” debt illegal. As we all know, that has not prevented EU member states from building excessive debt. But that does not prevent the Eurocracy from making what is already illegal, really illegal.
Back to the EU Observer, which reports some worrying signs from inside the German government conglomerate:
Germany is in a much better position when it comes to deficits and debts than its southern neighbours. But still the federal government currently has a debt running at 75 percent of the gross domestic product – above the 60 percent threshold enshrined in EU rules. But in the multi-layered German state, cities fear it will be they who will ultimately foot the bill for Germany’s exemplary balance sheet.
This is crucial:
Ulrich Maly, the mayor of Nuremberg, told journalists in Berlin on Tueday (1 October) that more and more tasks are being moved from federal and regional to the local level, but without any extra funding. … As head of the association representing 3,400 German towns and cities, Maly tabled a series of requests to the upcoming German government, warning of the unfair burden being placed on townhalls in reducing the country’s budget deficit and debt.
Let’s take this in slow motion. The federal government creates a welfare state, then asks states and local governments to participate in the execution of the welfare state’s entitlement programs. To encourage full participation from lower jurisdictions the federal government sends them money. States and local governments get used to the cash and think nothing more of it. Until the day comes when the federal government has made more spending promises than its taxpayers can afford.
All of a sudden the federal government has to make choice:
a) Do they raise taxes? or
b) Do they reduce spending?
The German government tried alternative (a) but tax-paying voters put an end to that. That is in no way surprising, and incumbent prime minister Angela Merkel is trying hard to avoid tax hikes. But choosing alternative (b) is tougher than one might think. Merkel could just slash spending across the board, but if she did she would be accused of wanting to dismantle the German welfare state. That is a battle she does not want to take, probably because she – like most of today’s European “conservatives” – has embraced the welfare state and wants to keep it.
Merkel avoids a battle over the welfare state if she can come across as not cutting any entitlement programs. But since the entitlement programs are the cost drivers for the German government – just as they are for any welfare-state government – she cannot fend off the deficit wolves without somehow reducing the cost of those same entitlements.
Her solution: pass on more obligations to local governments, so the federal government does not have worry about them. But don’t increase spending – have the cities do more with the same or even less money. That way you look like you are protecting the welfare state while also balancing the federal budget.
Does this seem cynical? Understandable. After all, it is cynical. But this is the way politics works when our elected officials set up policy goals that are entirely incompatible, and where the pursuit of one goal, such as the welfare state, hampers the pursuit of another goal, in this case the balanced budget.
This does not stop Merkel’s political opponents from exploiting the apparent inconsistency in her policies. The EU Observer again:
With social expenditure – such as for the integration of disabled people or kindergardens [sic] – taking up over half of cities’ budgets, the question will be “what kind of country do we want,” the Social Democrat said. “The debt brake will put political choices in the spotlight. It will be a question of what we can still afford if we’re supposed to make no new debt. Do we want inclusion of disabled people – which will cost several billion euros – or do we abandon this human right?”
This would be the perfect point to explain to the German people that not even their economy can carry the welfare state any farther. The addition of new entitlements on the top of already existing ones, while people expect existing entitlements to grow, is a formidably bad idea. It goes to show that to the statist there is no such thing as a government big enough.
But it also goes to show how illiterate the backers of the welfare state actually are when it comes to basic macroeconomics. They choose to believe whatever they need to believe in order to motivate a sustained, even growing, welfare state.
And just to show how desperate the situation is getting in Germany, the EU Observer introduces us to…
Eva Lohse, a member of Merkel’s Christian Democratic Union and mayor of Ludwigshafen, … [Lohse] warned that the townhall has virtually no money left for infrastructure projects. “Reducing deficits and debt actually means that somebody else is doing it, not that the task is gone. So whoever does it also needs to have the proper funding for it. We have bridges crumbling down in the middle of our towns – this is unacceptable,” Lohse said.
In effect, there is a glaring lack of understanding of basic macroeconomics on both sides of the ideological aisle in German politics. This lack of insight will delay or entirely rule out appropriate policy solutions. Both the “conservatives” and the social-democrats in Germany will continue to try and preserve the welfare state while balancing the budget in the midst of zero or negative GDP growth. This is a recipe for decline, putting Germany in the same category of struggling welfare states as France, namely one step behind Spain and two steps behind Greece.
Germany still enjoys a lot of economic strength, but with the country’s fiscal policy makers focused on the unworkable combination of the welfare state and a balanced budget that strength can evaporate quickly. Right now, the case for German economic decline is actually stronger than the case for Germany economic recovery. And with German economic decline other euro-zone countries are in grave danger. Greece and Spain won’t get more bailouts, and France and other less-disaster-stricken economies will not have the same strong support anymore from trade with Germany as they have had historically.
Inevitably, our conclusion from this must be that Europe is continuing its slide into the cold, dark dungeon of industrial poverty.
The crisis in Europe is claiming many victims. The other day we learned about how mental-health patients are taking a bad beating from austerity policies. First, governments in Europe’s welfare states monopolized health care and promised people to provide everything they could ever demand in terms of health care services; when the welfare state’s spending promises exceeded what taxpayers could afford, politicians took to austerity to try and fit the welfare state in a smaller box. That never works, but until the statist lawmakers in Europe realize that they will keep on trying to cut back spending, raise taxes, claim more of the private sector’s resources and give less back.
People suffer as a result. They can’t get what they were promised by government, and they can’t build private alternatives because government is sucking the life blood out of the private sector. As austerity continues, frustration piles up among voters/taxpayers. Since the EU is built to shield Eurocrats from the people, it is practically impossible for austerity-suffering families to make their voices heard. So far they have been able to exercise their rights under parliamentary democracy at the national level, but as more and more national governments resort to desperate, EU-imposed austerity policies, voters’ frustration previously reserved for the EU is now spreading downward to the national level as well.
As The Financial Times reports, this could have serious consequences:
Canadian regional elections seldom set the international pulse racing but this week’s victory in Quebec of the separatist Parti Québécois was closely watched in Spain, now facing a revival of Basque and Catalan independence demands. These, in turn, are being carefully monitored by the Scottish National party, committed to a referendum in 2014 on Scotland’s future relationship with the UK. By then, the die may be cast in Spain, where separatism has stormed on to the agenda amid the worst crisis of the post-Franco, democratic era. Alongside the eurozone crisis and Spain’s worsening public finances and chronic lack of economic growth and jobs, Madrid looks to be sleepwalking into a constitutional crisis that could lead to the break-up of Spain.
This is about as sensational as if Alaska decided to declare independence.
Next Tuesday, Catalans celebrate their national day, or Diada, in a year when the clamour for independence for the first time commands the support of more than half the population – including figures such as Jordi Pujol, the mainstream nationalist who ran the restored Catalan autonomous government from 1980 to 2003, and Pep Guardiola, the former manager of Barcelona’s football team. Next month, Basques go to the polls with the separatist Bildu coalition going head-to-head with the mainstream Basque Nationalist party (PNV). After a decade-long ban for links to Eta, the separatist group that recently ended its 50-year campaign of violence, political separatists won more seats than the PNV in municipal and general elections last year. Separatism has gone mainstream, in a Spanish state being shaken to its foundations.
Spain is, technically, not a federation, but thanks to secessionist movements in the Catalan and Basque regions, there has been a weakening of the central government over the past three decades. However, the fact that Spain is still a traditional, centralized nation state makes the revival of regional autonomy movements even more problematic: a nation state is by design not suitable for regional autonomy. A federation is built around the principle of enumerated, not unlimited, central government powers.
Therefore, even a moderate surge in support for regional autonomy can lead to constitutional tensions. To make matters worse, the immediate cause for this surge is to be found in the current welfare-state crisis. Spain’s central government is in large part responsible for funding regional governments, and when those governments cannot keep their books in good order the central government threatens to simply take over. As a result, separatism is on the rise.
At the same time, the Financial Times reports, relatively wealthy regions such as Catalan feel that they are already getting short-changed by the central government:
The genteel nationalists who run the Catalan government are in a quandary. The Rajoy [central] government is ideologically opposed to any extension of fiscal federalism. But any government in Madrid will need the Catalan subsidy to meet the health and pension liabilities of an ageing population. The conditions attached to Madrid’s rescue money, moreover, imply a loss of self-government, just as EU bailouts dilute national sovereignty. … The Diada demonstrations next week look set to be massive and massively separatist.
Similar sentiments of separatism are reflected in a story by Russia Times about a city in the Catalan region:
Catalonia’s Sant Pere de Torello has declared its independence from the Spanish central government. Local deputies unanimously approved a resolution plan on “free Catalonian territory” after Catalonia asked Madrid for a 5-billion-euro bailout. The resolution suggests setting up Sant Pere de Torello’s own finance ministry, a national bank, a taxation office and justice ministry. Once approved, the crowd of about 1,000 people gathered outside the council exploded in thunderous applause, local media report. … Local separatists have appealed to the local Catalan parliament to hold a referendum on the national sovereignty of their territory within the next two months. … The deepening crisis and tough financial situation have added fuel to the conflict between Catalonia and the rest of Spain, because Catalans “feel they are not treated fairly by the Spanish tax system and also that economic policies of the central government are not helping Catalonia to sort out the crisis,” Murado told RT.
In plain English, this means that Catalan voters are tired of paying higher taxes for less and less government services. Since they cannot get out of the choking grip of austerity by influencing their national government, they look for a way to seize control over their own destiny.
The only problem with this is that they are in all likelihood not going to do away with the welfare state. This will eventually bring about the same problems as Spain is facing nationally. The question that the Catalonians need to ask themselves is: what do they do then?
As the Russia Times reports, the Catalonian regional government is not exactly in good fiscal shape:
The move comes a week after Spain’s debt-struck Catalonia region on August 28 asked Madrid for a 5-billion-euro (US$6.3-billion) bailout from “the liquidity fund,” the 18-billion-euro body set up to finance troubled regions. If Catalonia receives financial aid from Madrid, it will become the second of Spain’s 17 autonomous regions formally to request aid. However, it will not accept the money if “political conditions” are put on the table, because “the money is Catalan money.”
In other words: give us the cash and let us spend it without any austerity strings attached.
While there is no intrinsic reason to keep a country like Spain together, separatism in itself won’t solve anything. The macroeconomic mechanisms that have brought Spain to the edge of the austerity dungeon will work just as forcefully at the regional level.
If on the other hand Catalonia declared itself independent, structurally reformed away its welfare state and built a new economy based on libertarian principles, the outcome could indeed be formidable.
For some time now, this blog has been warning about the bad consequences of austerity. One reason why austerity does not work is that the policies do not structurally reform away government programs – they just shrink their size without giving the private sector a chance to replace what government is no longer providing. In other words, the commitment from government is still there – government just chooses not to honor its obligation toward the citizens.
The reason why government makes this choice is, of course, that it does not have the money. Austerity does not create more money for government; if anything, it makes it even harder for government to fund its operations. But that does not excuse the fact that government maintains its spending programs- and thereby maintains its promises to the citizens. If government cannot deliver what it says it is going to deliver, then why not retreat from the promise and give room, financially and regulatorily, to the private sector?
The consequences of over-promising government are visible everywhere. Nausha, NH-based The Telegraph reports on a small but very illustrative example:
An interesting story about cost downshifting to local communities as a result of the New Hampshire Legislature’s recent knife-happy approach to budgeting came to our attention this week from The Telegraph. The paper reported that in the 8,271-population community of Litchfield – which lies smack-dab between Manchester and Nashua – town officials learned weeks after the New Hampshire Department of Transportation repaved a stretch of road that repainting the reflective stripes marking the edges and center of the road was not part of the package. In the face of budget cuts, the state highway agency has cut back to a three-year cycle for restriping and – despite its newly naked surface – the curvy, well-traveled Litchfield road that is maintained by the state in the summer and plowed by the town in the winter isn’t due for that yet, state officials said.
So who is going to take care of the road?
Town officials told The Telegraph the road, which has no street lighting, will either be a driving hazard during dark or foggy conditions, or the town will have to foot the bill for the painting. This is just the latest example of ways that – rather than disappearing with the wave of a magic legislative wand – governmental costs in the Granite State are simply being pushed down the ladder to counties, towns and cities.
And it is not just roads that fall between the budget cracks:
This week, the Cheshire County delegation met to review the budget it set in March and, unsurprisingly, officials said the cost of running Westmoreland’s Maplewood nursing home continues to outpace reimbursement from the state for Medicaid patients who live there. For years, county officials have been singing warnings about the possible effects of the funding gap. It’s reached the tune of a $4.5 million deficit.
In Europe they know this as “health care rationing”. They know it as health care rationing because they have single-payer health care systems. Thankfully, we have not yet gone that mad here in the United States, but if Obamacare stands we are headed there, faster than you can drive on Litchfield Road in New Hampshire.
Attend any legislative budget session or county delegation, select board or school board meeting and you’ll hear an identical refrain – voters are hurting and they want to see smaller budgets. In Concord last year, many lawmakers thought the best solution was taking a knife to the state budget, while blithely warning that tough decisions had to be made and priorities reexamined. Apparently, some still think there’s room for even more cutting, as House Speaker Bill O’Brien, R-Mont Vernon, recently told The Telegraph when he said he could see slicing another $400 million out of the state budget next year.
Local governments in New Hampshire get about 28 percent of their revenue from the state. So the question…
Does that just mean more shifting of costs to municipalities?
…is the one that will decide how we are going to deal with our government in general here in America. Are we going to let government maintain all its spending obligations and just try to squeeze them into a smaller box of tax revenues? Or are we going to structurally reform away government spending promises and let the private sector take over?
There is no doubt that Maryland has a very statist governor, and an equally statist legislature. Two weeks ago I noted that Governor O’Malley has raised taxes in Maryland once every ten weeks since he came into office five years ago. Rather than trying to restrain spending, the governor just can’t get enough revenues for his spendoholism.
But while spend-as-you-go liberals are harmful to the economy, even they deserve credit when credit is due. Or at least a slight not of acknowledgement. Governor O’Malley has done a lot wrong, but he should not be criticized for the errors he have not (yet) made. A good example is the expansion of government in his state. The other day the Washington Examiner reported that Maryland has a less favorable combination of private and government employment than its neighbor Virginia:
Local governments in Maryland are growing thanks to higher taxes banking their payrolls, a trend that bucks the rest of the nation and stands starkly in contrast with downsizing in Virginia, new U.S. census survey data show. The number of people on local government payrolls in Maryland grew by nearly 3 percent — or about 6,000 people — to 220,314 during the year that ended in March 2012, the data released Thursday show. The growth comes while most local governments shrank their payrolls, combining for an average drop of 1.7 percent nationwide. Meanwhile, local governments in Virginia collectively downsized by 1.4 percent, or roughly 4,500 people, to 313,907 total. At the state level, Virginia stayed relatively flat, adding about 200 people to its roughly 125,000 state employees. Maryland’s nearly 87,000 state workers represents a total that’s about 1,600 fewer people than last year.
I am not going to dispute the Census data, but generally I prefer to use the Bureau of Labor Statistics for labor-market data. According to their numbers for July 2012,
- There were 104,600 state government employees in Maryland and 148,300 in Virginia;
- Local governments in Maryland had 240,500 employees compared to 365,700 in Virginia.
Since Virginia is a larger state we would of course expect a higher number there. As the Washington Examiner points out, the trend is important – but so is the relation between private-sector and government employment. Private employees pay the taxes that state and local government workers live off (while federal employees get their paychecks from Chinese lenders). If we look at the government employment situation from this perspective, Maryland does not look as bad anymore:
- In July of 2012 there were 165 state and local government employees in Maryland per 1,000 private employees;
- In July of 2012 there were 169 state and local government employees in Virginia per 1,000 private employees.
Furthermore, the total number of state and local government employees has grown in Virginia two years in a row, 1.4 and 1.7 percent respectively, while it has been at a virtual standstill in Maryland.
In fairness, local governments in Maryland have indeed expanded their payrolls over the past two years, by almost 4,000 workers. This is a 1.7 percent increase. However, local governments in Virginia have been much harder at work expanding their payrolls: from July 2010 to July 2012 they added 14,900 employees, an increase by 4.2 percent.
The private sector job trend is marginally stronger in Virginia: one percent increase in 2011 and 1.8 percent up in 2012, again measured July to July. As for Maryland, this is the one number where Governor O’Malley’s tax hiking policies may be having their first effects: from 2010 to 2011 private employers added 1.2 percent to their ranks of employees in Maryland; from 2011 to 2012 they added only one percent.
One of the interesting aspects of this comparison is that there is a lot of interchangeability between the two states. It really does not matter whether your employer is in Maryland, DC or suburban Virginia – you can choose to live anywhere within commuter distance. This makes for sharp competition between the states (the District is not really playing in the same league due to its high crime rate) and almost a live-size laboratory for studies in tax competition. It remains to be seen how far up in the sky Maryland can push its taxes; even though I would not cry wolf to the level that the Washington Examiner does, it is nevertheless worth keeping an eye on the monthly numbers from the Bureau of Labor Statistics. In particular, it is going to be interesting to see the trend in private-sector jobs as the new, high taxes in Maryland begin to take their toll.
There is one principled issue when it comes to government spending that is gaining far too little attention in the public policy arena. Our governments, especially at the local level, often sit on large rainy-day funds that they built as a financial cushion for those days when the economy goes into a recession and tax revenues fall short of spending obligations. Interestingly, now that the economy is indeed in a recession and there is very much need for the deployment of those rainy-day funds, states and cities tend to refuse to use them.
A good example is the city of Lawrence, Indiana. This is a slice of traditional, American heartland. Located on the north-east outskirts of Indianapolis with its 45,000 residents, Lawrence matches the national average in almost every way: income, household size, crime rate, education… and of course the recession. It comes as no surprise, then, that the city is running a budget deficit: it can only fund $19 million of its $21 million (general fund) budget with current revenues.
And, true to the American Heartland character of their city, the elected officials in Lawrence are wrestling with the question of whether or not to spend the city’s rainy day fund to cover the deficit. The Indianapolis Star reports:
Lawrence is considering deep cuts from its public safety fund to bridge the city’s budget gap for 2013. Mayor Dean Jessup is proposing to slash about $600,000 from the Lawrence Fire Department budget. This entails eliminating 24 civilian EMT positions and replacing them with firefighters. Jessup’s budget proposal also includes a $30,000 cut from the Lawrence Police Department budget.
The city does not publish its budget online. This makes it difficult for the general public – including the city’s taxpayers – to see what their elected officials are doing with their money. But assuming that there is no unusual levels of waste going on, the city’s budget situation is representative of what most local governments are going through these days.
Which brings us to the question: what do you do about it? Unlike a state or the federal government, a city is relatively limited in its options when it comes to improving its economy. This is especially true for a city like Lawrence where many of the residents are commuters and thus depend on jobs outside of the economic jurisdiction of the city.
Still, the city does have some options. One of them is to put its rainy day fund to use:
City Controller Kim Diller said if Lawrence were to use its rainy day fund to shrink the $2 million deficit, the city will be a little more than $1 million in the hole for 2013. “That’s not what the mayor wants to do,” Diller said. “It’s not fiscally sound.”
This is an issue of principle. The city has obviously over-taxed its residents for a number of years in order to build the rainy-day fund, for the very purpose of having some margins available when the economy is weak. Now, the economy is weak. Should not taxpayers be allowed to enjoy the benefits of having over-paid for city services in better times?
Apparently, city officials in Lawrence don’t think so. They believe that it is “not fiscally sound” to use the rainy day fund. But even thoguh I am not a taxpayer in Lawrence, I do have to ask: how it is fiscally sound to cut city services for taxpayers who have been over-paying for them for years (taxes for current expenditures plus taxes to build the rainy day fund) and have money sitting uselessly in the bank?
The Indianapolis Star again:
Keith Johnson, Jessup’s deputy chief of staff, said the mayor thinks cutting EMT positions is a viable solution because that would enable to [sic] city to keep the same number of fire stations, fire engines and ambulances. But City Councilwoman Linda Treat said she does not support the mayor’s proposal. “Public safety has always been a top priority for the council,” Treat said. “It’s the one thing we cannot afford to lose.”
Councilwoman Treat has a very good point: public safety is a core government function. Since, again, the city does not publish its budget online, it is difficult for an outside observer to assess what else the city could cut down on. However, if it is spending money on economic development – which it appears to be doing, given that the city has an economic development director and a redevelopment commission – this would be a good time to consider short-term priorities. Such priorities could include scaling back economic development spending while using rainy-day funds to save core government functions.
That said, it is also important to recognize that the city, ccording to the Indy Star story, has a history of making relatively sound budget priorities. But the city has also fallen for the temptation to take temporary federal money for permanent expenditures:
History indicates that Lawrence had spent a huge chunk of its budget on public safety. But that spending appears to be why the city is now in a deep budget hole. In 2010, Lawrence hired 18 firefighters and bought a fire station from Lawrence Township in a merger with the Indianapolis Fire Department. As a part of the deal, the city acquired $1.5 million to pay for salaries and benefits of those firefighters. That, however, was a one-time federal grant that was depleted in 2011. “The former mayor and the former council never put in place a permanent source of revenue (to pay for the firefighters),” Johnson said. Diller said the city continued paying for the firefighters by taking $1.6 million annually from its reserves with not enough outside revenue coming in.
If the city is over-spending, that does not necessarily mean that it is over-spending on its core functions. This is a good time for Lawrence to review its spending structure, especially in departments outside of public safety. Economic development tends to be an inefficient way to spend taxpayers’ money – it is rare that economic development spending pays for itself – but regardless of what priorities the city council ends up making, it owes its taxpayers to use all of its rainy day funds before cutting core government functions.
This is, again, a matter of principle. Rainy-day funds do not grow out of thin air. They grow from deposits made out of current tax revenues. To afford to build these funds, governments must tax us in excess of its current operating costs. We as taxpayers – whether in Topeka, Kansas or Lawrence, Indiana – deserve to enjoy the benefits of that rainy-day fund before being asked to accept cuts in government services. Let’s keep in mind that when government makes its cuts, it does not cut the cost of government to taxpayers: the residents of Lawrence still pay the same taxes even as the city cuts public safety services.
If the city is not going to use rainy-day funds to protect its core functions – then what is the city going to use those funds for? So long as they prefer spending cuts in core functions to the use of those funds, they are shortchanging taxpayers. That is neither fiscally nor morally sound.
Are you fit to live in Smiley-Face Bloomberg’s NEWYORK?
First he took on big servings of soda. Next on Mayor Michael Bloomberg’s agenda is infant formula. Going into effect on September 3, New York City’s mayor will implement his voluntary Latch On NYC initiative in which infant formula will be kept locked away at hospitals to encourage breast-feeding for new mothers. Under the new program, reported by the New York Post, mothers who insist on bottle-feeding will still be able to do so, but nurses would have to sign out the baby formula, which would always be on hand for mothers who have difficulty breast-feeding. The Post reports that 27 of the city’s 40 hospitals have also agreed to eliminate gift bag giveaways of infant formula and other free items like lanyards or mugs with formula-company logos. The mayor has gotten criticized over the new policy, which is set to take effect in September.
Mayor Smiley-Face is hard at work creating a New Engineered World for the Youthfully Optimized and Radically Konformed. Eat, drink and breast-feed according to his enlightened directions, and he will protect you against the evils of personal choice, individual responsibility and self determination.
While some are chiding the mayor for imposing a “nanny state,” The National Alliance for Breast-feeding Advocacy says it’s a good program. The Alliance’s executive director says keeping baby formula under lock and key, like medicines are kept, helps prevent hospital staffers from reaching for a bottle first, instead of encouraging new mothers to nurse their babies.
There is no doubt that nature has equipped female mammals – humans included – with a safe, nutritious way to feed their babies. But that does not mean that advancements in the technology of feeding babies are for the worse. But at the end of the day, this is not about the best way to care for a baby. This is about a fundamental issue of government vs. individual and economic freedom. This is a debate about how politicians are using government powers for increasingly authoritarian incursions into people’s lives – in the name of the good, of course.
To put this in perspective, let’s get back to the CBS News story, which notes that Smiley-Face Bloomberg is but an errand boy for a broader effort at social engineering in America:
The program is voluntary for hospitals, and is part of a nationwide effort to improve newborns’ health by promoting breast-feeding for babies.
There are two reasons why the Obama administration would promote this. The first reason is that the president and his wife have shown a disturbing affinity for getting involved in children’s eating habits. Their intrusions open children’s lunch bags for government inspection and dictate what you can and cannot sell at PTA fundraisers.
Parents are being demoted to feeder units for the growing generation of government approved citizens. Exactly the kind of society I grew up in.
Obama’s second reason is purely ideological: he and other statists want to expand government in all directions possible, including having government take over our health care system. In order to make everyone fit into their socialized health care system they have to make sure we all live according to their standards: if they believe that obesity is the root of all evil, then they will control what we eat. Hence the invasion of government into our children’s lunch bags.
And the first weeks of a newborn baby’s lives.
In addition to getting people accustomed to eating according to government standards, the breast feeding dictate also serves the purpose of cutting costs in our health care system. Rationing, in other words. Which, incidentally, happens to be a crucial component of a socialized health care system.
The CBS News story continues:
Some city hospitals are already taking part in the program. At NYU Langone Medical Center, breast-feeding rates have surged from 39 percent of new moms to 68 percent since the program was implemented, the Post reported.
Of course. If you make it more difficult for people to use breast milk substitutes, then fewer mothers will use it. If you make substitutes illegal you could probably reach a breast-feeding rate of 100 percent. It is very easy to accomplish something if you can force people to do what you want them to do.
Again, there is no doubt that breast-feeding is a superior way to feed a baby, but again, that is not what this is about. If this was entirely a matter of promoting something good, then every government entity, from the Obama administration to Smiley-Face Bloomberg and down, would be making suggestions and producing colorful brochures about the virtues of breast feeding. But since they are using the coercive powers of government to inject themselves into the lives of our most infant fellow citizens, it is clear that there are other, more sinister motives behind this. It is a matter of social engineering and economic planning along the same lines as the Scandinavian welfare state. It is a matter of shaping the economy, and the population, for single-payer health care, government-run child care and other features of the authoritarian welfare state that have not yet made landfall in America.
Nutritional dictates are a small but disturbingly invasive part of the Dark Side of the Welfare State – the side American liberals don’t want you to know about.
Now: if government can invade our children’s eating habits in order to prevent future, costly medical conditions, who is to say it won’t invade our children’s lives at an earlier stage?
They say that the devil is in the details. The public policy equivalent to that would be that statism is in local government policies. The big principles being discussed and fought over at the national level of politics are often put to work in our own neighborhoods; counties and cities offer some of the most interesting examples of what misguided policy can lead to, especially when it comes to mismanaging taxpayers’ money.
One example of this comes from Whitehall, Ohio, where the city is trying desperately to boost its property values. Why? Well, let’s see what The Columbus Dispatch has to say:
Bringing homeowners into Whitehall is so important to city leaders that they might be willing to pay for them. A program introduced this week would lend up to $5,000 to homebuyers for down payments, a new tactic the city is considering to tackle its decades-old problem of rental saturation.
Where does the money come from? This is a city with a $25 million annual budget, half of which is spent on public safety. And, more importantly, why are they doing this?
More than half of the occupied homes in Whitehall are rentals. Its home-ownership rate from 2006 to 2010 was 43 percent, compared with Franklin County’s 57 percent and Ohio’s 69 percent, according to the U.S. Census Bureau. “Increasing homeownership has been something that city leaders have talked about for a great number of years without coming up with something concrete,” said Zach Woodruff, the city’s economic-development director. “Everyone is recognizing this is vital to Whitehall’s moving forward.”
The answer to why the city wants to give out down payment loans to home buyers is not to be found in fluffy statements about the city “moving forward”. The reason is instead, in all likelihood, that low and falling property values depress property values and thus erode tax revenues for local governments. As I explained last year, this is a major problem in other parts of Ohio.
That does not mean that the answer is for government to get back in the property lending business. So long as the free market has a say in where people choose to live, the elected and appointed officials in Whitehall should keep in mind that there is always a rational motive involved when people choose not to buy a house in their city.
More on that in a moment. First, let’s get back to the Dispatch story and learn more about the details of this loan program:
The city council is expected to discuss the program at its meeting on Tuesday and could vote on it on Sept. 18. If the council approves the legislation, the city and its partner, Huntington Bank, will immediately begin taking applications from potential homeowners. The city would forgive the loans as long as the buyers live in their home as their primary residence for five years. If they were to rent it out or move out of Whitehall, a percentage of the loan would have to be repaid, based on how long they lived there. If they would sell the home and stay in Whitehall, the loan would still be forgiven, but they could not apply for another one. The loans would cover 4 percent of the purchase price of the home, up to $5,000. Homebuyers would qualify if their household income is less than $125,000. The buyer would have to contribute at least $500 to the down payment.
Wait a second here. Are the city officials in Whitehall going to tell us that a family making $100,000 and more cannot come up with five grand for a down payment on a house?? Are we supposed to believe that a family that has broken into the six figures needs a $5,000 gift from government to buy a property??? What kind of warped reality do these politicians live in?
If you are making six figures in this economy, you’ve done well. You are a hard worker with lots of fortitude and commitment to your career and your family. You are among the last people in this country that needs a government handout.
The ridiculousness of giving a handout to six-figure income families becomes even more glaring when we contrast the potential costs of the program against the potential gains for the city. In order to motivate why the city should give a $5,000 check to a $100+K income family, the city must count on that family increasing the city’s tax revenues by five grand within a reasonable period of time. While governments in general are not known for sound finance, at least let us expect that there is some sort of net revenue calculation behind this whole thing. If so, it would have to conclude that:
a) the taxes that a family earning $100,000 is paying would have to be big enough to exceed $5,000 within the five-year period over which the loan is forgiven; and
b) the family’s tax payments would have to be a net addition to the city’s tax revenues.
The first condition is not that hard to meet: a $100K income should yield about $2,500 in income taxes for Whitehall. The property tax revenue is a bit more murky to nail down. The city only receives about $500,000 in property-based taxes per year; four out of five general-fund revenue dollars come from income taxes. This means that the property tax share of Whitehall’s revenues is about one tenth of what it is for the average local government in Ohio; income taxes, by contrast, are twice as important in Whitehall as they are in the rest of Ohio.
Therefore, the higher the income of the in-moving family, the more likely it is that the city will get the $5,000 back. If the average property buyer pays only $1,000 in local income taxes per year, the city will get the five grand back in five years.
Provided, of course, that we can meet the second condition as well. Which is a bit tricky. If someone buys a property, then reasonably someone else is selling that property. This also means that the property buyer, an inbound taxpayer, replaces a property seller, an outbound taxpayer. In order for the city to get its money back on the property purchase handout program, the inbound taxpayer must pay $5,000 more in income taxes over five years than the outbound taxpayers. (We assume that the property tax revenues will stay unchanged – Ohio does not have an acquisition-based property tax assessment system, and therefore there is no re-assessment when a property changes hand.) This means, plain and simple, that the inbound taxpayer must make $40,000 more than the outbound taxpayer.
Is this at all a realistic calculation? According to Sperling’s Best Places, a city comparison service, the average household income in Whitehall was $35,682 in 2010. This means that for the Whitehall property purchase handout program to fund itself, the inbound taxpayer has to make on average $75,000 – provided the outbound taxpayer has an average income.
A $35,000 annual income is a low income, while $75K is a high income. Why, now, would low income families leave Whitehall and high-income families move in to Whitehall? Has the city made any drastic changes that would allow it to compete with other suburbs of Columbus for the high earners and high taxpayers?
It is fair to say that the answer is “no”. First of all, this calculation assumes that the inbound taxpayer, which has to make more than twice what the outbound taxpayer makes, will move in to the same neighborhood that the outbound taxpayer is leaving. But it is very rare that a family making $75K buys a house in a neighborhood where people make $35K and houses are of a standard that meets a $35K budget. More likely, the home buyer will be someone who makes roughly the same as the home seller.
Furthermore, how likely is it that a family making $75-$100K, thus having the means to choose where to live, would buy a house in a high-crime neighborhood? Again according to Sperling’s, Whitehall has among the highest crime rates in America: the city scores a 9 out of 10 in violent crime and a 10 out of 10 in property crime. You have to travel to notorious Camden, NJ to find a place with higher crime (though I would not recommend a trip to Camden…).
This property purchase handout program is an extremely risky financial gamble. If the city ends up trading inbound and outbound taxpayers in the same income bracket, it will not gain a dime from the program. On the contrary, it stands to lose up to $5,000 per property that changes hand in the city. If 100 properties change hands in Whitehall over the next year, and all qualify for this program, the city will lose as much money on this program as it takes in on property taxes. Given that, according to realtor.com, there are 155 three-bedroom properties for sale in Whitehall today, this is not a far-fetched scenario.
It is understandable that the city officials in Whitehall want to revive their community. But instead of giving every new home buyer $5,000 the city should perhaps focus on reinforcing its core functions: the protection of life, liberty and property. It is not a good answer to say that the city is already working hard on that – the high crime rate shows that their efforts have not paid off yet. Until crime is down significantly, Whitehall won’t be able to attract the kind of residents it wants.
On the other hand, when crime is down the city will become attractive without having to bribe people to move there. That makes a lot more sense, both financially and morally.
For a host of weird reasons, liberals are obsessed with central economic planning. Even if they have not yet promoted a major central planning model for the entire U.S. economy, they take every chance they get to plan our lives at a lower level. Public education is a big example in terms of how much money is involved, but no other planning effort appeals emotionally to liberals like mass transit. Whenever they get their hands on a new mass transit project, they go in to it with absolutely no connection to the real world. This is why every mass transit project they take on ends up in deep budgetary trouble, such as the very burdensome transit system in Minneapolis, the sugar-coated light rail project in Cincinnati, the excessively costly metro expansion in suburban Virginia, the hilariously expensive commuter rail line in Nashville, or the grand mass transit plans in Atlanta.
The Atlanta project has been the subject of a major political battle over the past year. When I first wrote about it a year ago, no voters had yet had their say on whether or not to go ahead with the project. In October last year, as the debate in Atlanta was heating up, I noted that:
What guarantee do Atlanta taxpayers have that this project is not going to become a permanent burden on their shoulders? What guarantee has the crowd of backers issued that the new mass transit lines will pay their own operating costs? No such guarantees exist, of course, and so for a good reason: government-run infrastructure projects never pay for themselves.
In November voters in Macon, not far from Atlanta, approved the one-cent higher sales tax. But today the Atlanta Journal Constitution reports that the rest of the voters allowed a say on this issue have determined that this sales tax hike was, after all, not a very good idea:
Distrustful of government and riven by differences, metro Atlanta voters on Tuesday rejected a $7.2 billion transportation plan that business leaders have called an essential bulwark against regional decline. The defeat of the 10-year, 1 percent sales tax leaves the Atlanta region’s traffic congestion problem with no visible remedy. It marks failure not only for the tax but for the first attempt ever to unify the 10-county region’s disparate voters behind a plan of action. “Let this send a message,” said Debbie Dooley, a tea party leader who early on organized opposition to the T-SPLOST tax measure. “We the people, you have to earn our trust before asking for more money.”
Congratulations, Atlanta! It is refreshing to see that voters actually turn down tax increases, and it is particularly refreshing that people in and around Atlanta did not fall for the rhetoric that the world would come to an end if they did not approve of this tax hike. This, of course, does not stop local statists from pledging to tell the people that “wrong answer, try again”:
Kasim Reed, who fought years for the referendum as a legislator and as Atlanta mayor, rallied supporters gathered at a hotel in downtown Atlanta. “The voters have decided,” Reed said. “But tomorrow I’m going to wake up and work just as hard to change their minds.” … “It’s heartbreaking,” said Ashley Robbins, president of Citizens for Progressive Transit, one of dozens of organizations that worked for the referendum. She predicted a loss of valuable young workers to the region’s economy. “If Atlanta’s not the region that we want, the young energetic people that drove these campaigns are going to leave.”
Exactly. Behold all the thousands of 20-somethings in Atlanta now sitting at their neighborhood Starbucks, sipping their lattes, declaring with one voice that “if we don’t get to ride a light rail or a natural-gas powered bus to work, then we’re all packing up and moving to Seattle.”
Yeah, that’s very credible, Ms. Robbins.
Results were still pending Tuesday night in the state’s other 11 regions. The Transportation Investment Act of 2010, which set up the referendum, was touted to raise as much as $19 billion if approved district by district. Leaders with the Metro Atlanta Chamber, which pushed to create the referendum in the Legislature and then poured millions into a campaign to pass the tax, did not immediately return telephone calls.
If the Chamber of Commerce in metropolitan Atlanta thinks this is such a good idea; if their member businesses are so desperate to build more mass transit; then why in God’s Green Georgia don’t they cough up the money and fund it themselves? If they think that all it takes is a one-percent charge on all sales-tax covered consumer spending in the region, then why not take the equivalent out of their own business revenues?
Shirley Tondee, a Brookhaven Republican, thinks the region must do something to solve constant transportation woes. But she voted against the T-SPLOST anyway. “I just don’t trust that government is going to take the money and do what they say they’re going to do,” the retired sales representative said outside her precinct. Robert Williams, a 59-year old electronic technician and a Decatur Democrat, is skeptical too. But in the end he voted yes. “It was a struggle,” he said. However, “we need to be able to grow. Traffic is one of the things that employers do take into consideration when they’re thinking about where to bring jobs.”
Let me, again, remind everyone of Cato Senior Fellow Randy O’Toole’s excellent research on the history of mass transit. He has firmly established that mass transit worked a lot better when it was in the hands of private businesses. It is time to return it there, to the hands of those who know how to make it work, how to make it profitable without tax funding and how to make commuters and other travelers happy.
Again, congratulations, Atlanta.
It is time to start collecting candidates for this year’s Fahrenheit 459 award. This is the award we here at The Liberty Bullhorn give out to the government entity that has demonstrated a particularly strong ability to exercise its power with an absolute minimum of intelligence and purposefulness behind its actions. As I am sure you know, the temperature -459F is the point where the thermal energy of matter vanishes. Thermal energy is the sign of motion. When a government official stops thinking intelligently, the thermal energy produced by his or her thought processes will also vanish. Hence the name of the award.
Today we can announce the first of this year’s candidates. As explained in this excellent little video from the Mackinac Center (a free-market think tank in Michigan) zoning official in Holland, Mich., bravely shut down a young entrepreneur by rigidly enforcing the city’s zoning laws:
So first the city of Holland, Mich., raises the taxes on certain downtown businesses to build heated sidewalks on some streets but not other. Then they ban competition to those businesses in order to protect their higher tax revenues.
Government causes more government.
The solution is not to issue special permits to this young entrepreneur. The solution is for the city to sell the sidewalks to the store owners and remove all competition-stifling regulations. But that aside, all this zoning official would have had to do was to ask this young entrepreneur to move his hot dog stand a tiny little bit to outside of the zoning restriction – or talk to one of the restaurants if they would be happy to give this guy a chance at selling his hot dogs.
There are times when I really don’t like being able to say “See I Told You So”. But when it comes to the European crisis, it is particularly painful to point to my own predictions and to what is now unfolding. After the Greek elections, it has become mainstream in Europe to vote for authoritarianism: in the June 15 Greek elections a shocking 39 percent of the votes went to parties that have little or no commitment to parliamentary democracy. A very thin line now divides a frail, status-quo democracy from a kind of government that we thought would be gone from Europe with the fall of the Berlin Wall. If nothing changes for the better in Greece – and so long as they cling to their welfare state we have very good reasons to believe nothing will improve – the current government will lose the last of its credibility with voters. At that point there are Communists, Nazis and Hugo-Chavez style radical socialists waiting in the hallway to form a government of their own.
Since Greece is not the only country with a welfare state in deep trouble, the threat to democracy is not isolated to Greece. There is now rising fear that the Spanish democracy might be in danger. But before we get there, let’s get the latest from the crisis battlefront. Here is how the British newspaper Daily Mail summarizes the situation as of today, June 25, 2012:
- Fears panic will spread from Spain to Italy and tear the Eurozone apart
- British taxpayers could be dragged into a bailout of stricken Spain
- FTSE 100 index of leading shares down 2% as Spain bans short-selling of shares to stem stock market losses
- French and German markets down 3%
- Italy heads towards bail-out with nearly £1trillion public debt
- Spanish sovereign borrowing costs soar to crisis levels: 10-year bond yields at 7.5%, unsustainable in medium term
As horrifying as this escalating crisis is, it has by no means been unpredictable. See this thread of articles for my analysis of the European crisis since the beginning of the year.
Back to The Daily Mail:
The Eurozone was back on the brink last night as Spain edged towards a financial disaster that could tear the single currency apart. Analysts said Spain’s huge economy was at a ‘tipping point’ and would inevitably need international aid. In a sign that Europe’s debt crisis is deepening, Italy’s borrowing costs edged higher, Greece was was facing a 1930s-style depression and its austerity measures were said to be faltering.
Additionally, ratings agencies threatened to strip Germany of its gold-plated credit rating because of the risk of the crisis spreading.
Which is why I warned a couple of days ago that other, smaller European countries with less problems than Greece and Spain might get out of the euro before the fiscal disaster zones are expelled. And left to fend for themselves. As the Daily Mail explains, that group could even include Italy:
Sources close to the government were reported as saying that Spain would need a loan to avoid ‘imminent financial collapse’ facing the country when it has to cover a further £22billion of debt in October. The Eurozone was further shaken by ratings agency Moody’s threat to downgrade the AAA credit ratings of Germany, the Netherlands and Luxembourg. Factory output in Germany and France fell at the fastest rate for more than three years. The euro tumbled against the pound and shares from Madrid to Milan went into reverse. Borrowing costs in Italy also soared as the financial markets bet that it will be the next domino to fall. City analyst Gary Jenkins said … Italy is widely seen as too big to save.
About the Spanish crisis:
Spain has already required an emergency loan package of up to £80 billion to bail out its banks but that has done nothing to quell concerns about its ability to pay its way. The country is crippled by a property crash and recession and the highest rate of unemployment in Europe. Spain’s crucial ten-year bond yield – the interest rate the government pays to borrow and a key indicator of a country’s financial health – hit a new euro-era high of 7.6 per cent. That is deep in the danger zone and well above the 7 per cent level that triggered bailouts in Greece, Ireland and Portugal. Spain is now paying more to service its debt over six months than countries such as Slovakia and the Czech Republic pay to borrow over ten years.
As I have explained numerous times, the bank crisis has very little to do with the current state of affairs in the Spanish economy. Government debt has exploded over the past few years, and according to Eurostat more than half of that debt is owned by – you guessed it – the banks. By completely mismanaging its budget, the Spanish government has robbed banks of one of their strongest low-risk investment opportunities: the treasury bond.
In other words, the welfare state crisis vastly overshadows any property-related crisis that the banks may have brought upon themselves through irresponsible lending.
In a related story, the Daily Mail also reports that:
In Spain, the disruption on the financial markets has triggered a series of public protests on the streets. These threaten to pose the biggest challenge to the country’s democratic system since the death of the dictator Franco in 1975, which ushered in a period of modernisation, prosperity and free elections.
A major reason for this is that the spending cuts executed by the national governments under EU-imposed austerity programs have already hurt large layers of the population. Dependency on government is a lifestyle under the welfare state, and when the welfare state keeps taxing and regulating but still can’t raise enough money to honor its spending commitments (all welfare states get there sooner or later) people are left with nothing. When, on top of that, local governments run out of money, the crisis really hits home. Local governments in Europe, much like here in America, are responsible for schools and social services, but also for a good part of the government-run health care system. As a result, vital parts of every-day services that government has socialized, which as the Daily Mail story explains, puts these services in grave danger:
The truth is the monumental scale of the problems facing the beleaguered nations in euroland is moving to a new, dangerous level. Instead of being merely a problem for banks and central government, the economic woes are now starting to affect the countries’ grassroots. Across the so-called ClubMed nations (the deeply indebted Greece, Spain, Portugal and Italy), regions and municipalities are fast running out of money and are seeking rescue from their central governments. … After the [Spanish] Valencia region disclosed last week that it was appealing to Madrid for a bail-out, the Murcia region also demanded one. Catalonia is also said to be in financial difficulty. Italy’s regions face similar catastrophe with reports suggesting that as many as half the provinces are in serious financial difficulty. Several local authorities have warned that some schools may not be able to re-open after the summer because there might not be enough money to pay teachers as a result of austerity measures already taken.
The economic and social situation in Europe is deteriorating rapidly. It is now at a point where it is hard to predict the precise development from one week to the next, but we do know this: the mechanisms that have brought Greece, Spain and Italy to the brink of economic collapse and totalitarianism, are not unique to those countries.
Unless the Europeans give up their welfare state, they will have to give up democracy.