That Voodoo That You Do So Well

Before the Motion Picture Academy handed out its latest awards, and before the legislature passed the alleged budget fix, the reviews were already coming in on California. They are less than stellar but well worth attention.

“California makes Washington, DC, look like a model of fiscal probity,” ran the sub-head in the February 21 The Economist, under the headline “The Ungovernable State.” The article notes that under the budget deal then pending, Californians “will suffer a mood-lowering rise in their sales and income taxes. They will pay almost twice as much to register their cars, and 12 cents per gallon more to fill them up.”

“The Decline of California” headlined the February 18 lead editorial in the Wall Street Journal, which blames “two decades of chronic overspending, overregulating and a hyper-progressive tax code that exaggerates the impact on state revenues of economic boom and bust.” The editorial notes the outflow of California workers and business and that “the tax increases will continue to chase even more productive people out of the state.” The Journal describes the budget deal as “loaded with short-term gimmicks,” such as $5 billion of borrowing from future lottery receipts and $10 billion from the federal stimulus, and decries the reality that California “is becoming less economically competitive.”

Gimmicks, coupled with detachment of actions from consequences, is best described as voodoo economics. Journalists are fond of using that term for supply-side theory, any reference to Adam Smith’s “invisible hand,” or simply the open market, but it applies to none of these. One subdivision of voodoo economics is “trickle-down theory,” also frequently misapplied as a defect of capitalism. In that version, government supposedly hands all kinds of goodies to “the rich” in the hope that some will trickle down to the working masses.

Trickle-down better applies to grandiose gimmicks such as the federal stimulus package and all massive handouts fueled by borrowing. This is supposed to solve all problems, after trickling down to the masses through multiple layers of bureaucratic sediment. In the market, by contrast, wealth is the product of innovation, entrepreneurship, and plain hard work. The wealth created in these conditions does not trickle down. Rather, it surges upward and government is one of the beneficiaries.

A tax cut, by the way, is not a gift from government to individuals, though politicians seem to think so, with much support from the media. Allowing individuals to keep more of what they have already earned does not constitute a gratuity. Under current conditions, it should be recalled, government gets workers’ money before they do. Like employer-based health care, this is a legacy of World War II, which ended more than six decades ago.

The purpose of taxes is to pay for government services not to bail government out of a jam largely of its own creation. A government that gets a piece of every transaction in California, from a new Bentley all the way down to a pencil sharpener, plus property taxes, income taxes, car taxes and multiple fees and assessments, should be able to pay the bills and balance the books. And if some government department gets a budget increase of 12 percent instead of 17 percent, that is not a “cut,” as in the bureaucratic lexicon of Sacramento and Washington D.C.

Voodoo economics, trickle-down policy, and evasive language may make politicians feel good about themselves but can’t benefit California and the nation in the long run. Without economic growth there will be no recovery. California needs to reduce its tax burden, adopt tighter spending controls, and expand the economic freedom that generates prosperity for individuals and revenue for the state. California currently ranks 47th out of 50 states, according to PRI’s U.S. Economic Freedom Index, so there is much room for improvement.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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