Solving California's deficit... (Sacramento, El Centro: sales, credit, loan)

[antibes]

Great article. Food for thought.


California's economy is in free fall. This appears to be of little concern to Governor Schwarzenegger, who instead prefers to focus his energy, attention and political capital on the ballooning state budget. So much time has he -- the economy seems not to require his attention -- that he regularly retires to a tent adjoining his office in Sacramento. Here he smokes pricey cigars with colleagues and gives interviews to, for example, the Financial Times about the state's budget deficit. From this lofty perch he recently announced that "The state and its people have to make major sacrifices. There are no two ways about it."

The state budget has not escaped the impact of the crisis. As everyone with an Economics 101 knows, unemployment implies a loss of wages, and therefore cuts in tax payments. According to Governor Schwarzenegger's budget, personal tax payments made up 38% of the state's revenues in the past. A collapse in these payments -- unsurprisingly -- has led to a budget crisis. Because millions of Californians can't afford to shop on the scale they did before, the budget is also losing revenues from sales taxes. These make up nearly 30% of the state's projected budget income. Company bankruptcies mean that corporation tax revenues are falling too -- and these make up 10% of proposed budget income.
The obvious answer to the budget crisis would be to boost revenues -- and increase state income. This is best done by creating employment.


Now Mr. Schwarzenegger is on the right path. But instead of going to the employees and suppliers of the state of California to ask for credit (or tax increases), he should go to the banks. Prompted by the Federal Reserve, the banks should be obliged to provide the state of California with credit -- at a cost no higher than their own minimal administrative costs -- say the cost of the computer into which the number is being entered, and the cost of paying staff for marking up the state of California's account. These costs are minimal, so interest on the loan should be no higher than say, 1%.


Ann Pettifor: Suffering in El Centro: Cigars in Sacramento