Monday, October 06, 2008

The Bill Comes Due

Here is The Financial Times on Arnold Schwarzenegger’s request from the federal government of the United States for money:

Arnold Schwarzenegger, California’s governor, has told the federal government that upheaval in the credit markets could leave his state in need of an emergency $7bn loan to pay for public services such as law enforcement, hospitals and firefighting.

California taps the credit markets around this time every year to raise “revenue anticipation notes”, which tide it over until tax revenues arrive in spring. But with credit markets frozen, it does not expect to raise sufficient funds from investors this year, leaving it short of cash. It needs the money by the end of October.

In a letter, Mr Schwarzenegger said: “Absent a clear resolution to this financial crisis” the state “may be forced to turn to the Federal Treasury for short-term financing”.

Note first that it is a measure of California’s desperation that it is going to Washington for money. If it were forced to raise money in normal universe (although it doesn’t), the federal government would know that it has no money.

California is not alone. Massachusetts is contemplating the same strategy. These of course are two of America’s most, um, “generous” states, who dole out money liberally to prison guards, for health care, etc. This mess demonstrates a critical difference between public- and private-sector decision-making. Businesses are constrained by the market right now, and the market is ruthless. Those who must acquire their resources only by consent have to take account of the costs, not just now but well into the future, of their decisions. For politicians, who have the power to change the rules to extract new sources of revenue, at least until the well runs dry, the relevant time horizon is much shorter – the next election at the latest. And so costs can be kicked down the road to some future politician.

Despite my admonitions, the bailout bill is now law. If there is any silver lining here, it is that the immense sacrifice required of taxpayers will at least temper the demand for ever more spending on ever more “programs.” That, according to this account in the LA Times from 2004, is what happened in Orange County, CA after its bankruptcy in 1994. If we are lucky (and we will have to be), the huge burden about to be imposed on future taxpayers will make clear to Americans that government spending has consequences. But I am not optimistic. I suspect, particularly if the Democrats control the White House and Congress after November, that Govs. Schwarzenegger and Patrick (and who knows how many others) are going to get their money. From you, and me.



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