Wednesday, February 22, 2006

They never heard of paying off the "public debt"

When a private individual gets a sudden influx of cash, the prudent thing to do is pay off any loans, like credit cards or mortgages. It's unwise to save that money when your expected rate of return is less than the interest you pay on outstanding loans, like a mortgage or auto payment, and especially credit cards. If you earn an x% annual return on an investment but owe more than x% on an equal or greater amount of principal, you're losing money.

When governments run a surplus, what do they do? Most of them start planning how to spend it.
Flush With Cash, States Make Pricey Plans

- Tax cuts, new cash to health care programs, blueprints for new roads and schools states have jumped into 2006 with ambitious plans to spend the money pouring into their coffers, a windfall that's just in time for governors and legislators as they start re-election campaigns.

The spending spree is the clearest proof yet that the gloomy days of cuts and budget-tightening that dominated the first half of the decade are over, even as some urge caution and others say states have yet to fully recover from the downturn.

Lawmakers are arguing for tax cuts in Alabama, Arizona, Hawaii and New York. California is looking at sweeping road improvements. Property taxes are being targeted in Maryland and Florida.

"It's a lot better having extra, let me tell you," said Massachusetts Gov. Mitt Romney. "My first few weeks in office we had to find immediate savings to avoid a financial crisis ... The last two years have seen a billion dollar-plus surplus."

Romney, a Republican who is exploring a presidential run, wants to invest in education with laptop computers for 500,000 students to cost $54 million over two years; to cut the state income tax from 5.3 percent to 5 percent over two years; and to invest $200 million toward implementing a universal health insurance program in the state.

Massachusetts is one of many with ambitious spending plans:

Florida: With $3.2 billion in higher-than-expected revenues, GOP Gov. Jeb Bush is pushing for $1.5 billion in tax cuts, including a rebate for homeowners, elimination of a tax on stock and bond holdings and repeal of a tax on alcoholic beverages sold by the drink.

Oklahoma: Democratic Gov. Brad Henry wants to pour most of the extra money into education, with scholarships and raises for teachers. He also wants to cut taxes on retirees, fix bridges and fund high-tech research.

California: GOP Gov. Arnold Schwarzenegger proposed a stunning increase in spending, including a record $54.3 billion for K-12 education; $170 million over two years to get health care for 300,000 uninsured children; and a big boost in funds for highway improvements. The state estimates $7 billion in higher-than-expected tax revenues over two years....

[Arizona Gov. Janet Napolitano, a Democrat] has already signed a Republican bill providing a healthy pay raise for state employees and is pushing for a raise for K-12 teachers, complete funding for all-day kindergarten and $100 million for border-related law enforcement....
So instead of redeeming some of the bonds they've issued, many states instead want to go on spending sprees. Even Mitt Romney wants universal health care, paid for by the surplus. Once upon a time, his fellow Republicans almost universally assailed the concept of "socialized medicine," whether at the state or federal level. So what happened to the GOP in the 13 years since they began attacking "HillaryCare"? What happened to them in the 11 years since their "Contract with America" and its promise of a return to limited government?

Schwarzenegger famously said in the first debate of California's 2003 governor race, "The politicians make a mistake, they keep spending and spending and spending, then when they realize they made a mistake and spent money they don't even have, then they go out and go tax, tax, tax." Raising taxes is not his preferred way to balance California's budget, but Schwarzenegger warned that will be necessary if spending isn't cut. However, and maybe because all his propositions were defeated last November, he's become the enemy he criticized. California will spend over $54 billion on education, and for what? Very soon it just might, as I mentioned in my previous entry, hand out diplomas regardless of the students' academic achievement, because the students learned they can just sue in lieu of passing the high school exit exam.

Tax cuts are a good incentive for economic growth, to a point. Lowering tax rates makes a state more friendly to businesses, as New Mexico has seen in the last few years, so as the Laffer Curve predicts, a government can cut taxes, to a point, and the expanded tax base will make up for the lost revenue. The problem, however, as we've seen with Congress since President Bush first entered office, is that it's easy for a spend-happy government to cut taxes and tout the benefits thereof, which is not a bad thing, then increase spending by even more than the drop in revenue, which is a bad thing.

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Blogger Carlos Williamson said...

In all honesty I do not believe that this is what Mitt Romney is wanting to do. It is about the same as requiring everyone to have car insurance. Except that if you are "on welfare" the state will pay for your insurance. In California the state uses cigarette tax revenue to buy health insurance for uninsured children. Romney is alot alot more able to make fiscal analysis and decisions than nearly anyone I know. His plan will have private insurers paying the cost of care for low income folks instead of the taxpayers paying for everyone or nearly everyone who gets care and doesn't pay the bill.

Wednesday, February 22, 2006 2:16:00 AM  

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