The Price of Federalism

Saving Federalism from itself will apparently require deep economic sacrifices and austerities from states, cities, towns, small businesses, and families – such is the price of Federalism…

The Capitol Building

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Federal Reserve Bank Smugness

Capitalism or Federalism...?

Celebrating Twelve Years in Private Practice

This year I am celebrating my twelfth year in private practice -- my plan is to go at least a dozen more...

Federal Reserve Bank Smugness

The Federal Reserve Bank of San Francisco published a strikingly smug assessment of the fiscal challenges now being confronted by states across the US:

The current fiscal crises that most states are facing are generally the result of a severe macroeconomic downturn combined with a limited ability of the states to respond to such shocks. States are facing increased demand for public services at the same time revenue is falling. Federal stimulus support for state budgets is winding down over the next two years. Rainy-day funds are all but exhausted. Thus, state fiscal crises aren’t likely to go away soon and will probably get worse before they get better. The solutions states employ to close projected budget gaps will have painful effects on state residents and businesses but pose a more modest risk to the national recovery. Historically, the health of the national economy determines the health of state finances, not the other way around. Sustained improvement in the national economy is essential for states to grow their way out of their current problems and improve their fiscal conditions.

Clearly, state governors and legislators can expect little sympathy or support from the Federal Reserve any time soon...

Source: Gerst, J & Wilson, D (2010, June 28), Fiscal Crises of the States: Causes and Consequences, FRBSF Newsletter.

Sharing Economic Hardships

Gov Arnold Schwarzenegger has proposed that all state workers in California be paid only the minimum wage until Sacramento legislators come up with a balanced budget -- interesting. Indeed, Gov Schwarzenegger's proposal may be instructive for other states or even the Federal government. Solving the nation's budget crisis would be much easier if the economic hardships were shared by everyone...

A Dire Warning...

A dire warning for the world by Prof Paul Krugman:

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending....

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy....

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

I tend to share in Prof Krugman’s views and concerns for the future. I maintain that monetary contraction (as in austerity measures) risks deflation and depression. Conversely, monetary expansion (as in "printing money") risks inflation and recession. Given an opportunity to choose between these two risks, I would choose monetary expansion and the risk of inflation.

Source: Krugman, P (2010, June 27), The Third Depression, NY Times.

The G20 Toronto Summit Legacy

The Europeans assume that the world is going to go along with their austerity planning. However, the US cannot turn its back on California and New York the way that Germany and France can shun Greece, Spain, and Portugal. Monetary expansion in the US is immiment, whether Europeans like it or not. The European Union is blundering and may very well force the world into a deeper recession, or even depression...

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Depression or Inflation...?

Capitalism or Federalism...?

California's financial crisis will be an interesting test for Washington and the future of Federalism. Here's my question: How can Washington deny California after saying yes to General Motors, AIG, and dozens of banks?

Comments welcome...

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Greece: What Economic Austerity Looks Like

How Would Californians React to Economic Austerity...?

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Threat of Another Economic Stumble Is Real

According to Dr Norman J Ornstein of the American Enterprise Institute for Public Policy Research, the global economy remains in a state of great uncertainty:

We are nowhere near out of the woods. The danger of deflation is still there. The risk of another stumble in our economy is real, including the continuing fragility of community banks over commercial real estate loans. The global economy remains fragile, with Greece the leading edge of what could become a set of dominoes toppling in Europe as creditors become nervous and raise the premium on loans from several shaky countries, adding to their woes and endangering the euro zone and by extension the rest of us.

In the mean time, the political debate over austerity measures versus monetary expansion remains as real today as it did during the 1930's...

Read more

Protestors at the G20 Toronto Summit

Source: Ornstein, N J (2010, June 23), Threat of Another Economic Stumble Is Real, American Enterprise Institute.

Of Karma...

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Of Fate and Destiny...

Risk and Uncertainty

Of Fate and Destiny...

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Of Karma...

Risk and Uncertainty

The Coming Inflation

As reported by Bloomberg:

Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of US GDP. “States are going to have to cut back spending and raise taxes the same way Greece and Spain are,” says Dean Baker, co-director of the Center for Economic and Policy Research in Washington.... State leaders won’t be able to ride out this cycle the way they have in the past. The budget holes are too large. For the first time since 1962, sales and income tax revenue fell for five straight quarters, through December 2009, according to the Nelson A Rockefeller Institute of Government at the State University of New York at Albany.... If they fail to act, state fiscal positions will steadily erode and hurt the US economy through 2060, according to a March 2010 report prepared for Congress by the US Government Accountability Office.

Of course, the US cannot turn its back on its states the way that the EU can turn its back on its members. Assuming budget cuts fail at the state level (as I predict they will), the US will have no recourse but to rout government spending and indebtedness through monetary expansion and inflation. In my opinion, an inflationary economic surge is a foregone conclusion regardless of which political party is in power.

Source: Robinson, E (2010, June 25), States of Crisis for 46 Governments Facing Greek-Style Deficits, Bloomberg.

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The United States is not the European Union

Greece: What Economic Austerity Looks Like

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The European Union is not the United States

German Chancellor Angela Merkel's recent agitations for global austerity measures should be kept in perspective by the deficit hawks in the US. For example, it is quite easy to imagine Germany turning its back on Greece in her hour of need. However, I doubt seriously that the US would be able to turn its back on California or New York should these states fall into default. The European Union is not the United States.

Germany (green) and Greece (orange)

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On Postmodernization

Prof Herman E Daly and Dr John B Cobb Jr (1994) argue that postmodernization entails “redirecting the economy for the sake of human beings and the whole biosphere” (p. 361). When combined with pluralism, postmodernization rings a bell that is hard to argue with…

Source: Daly, H E & Cobb, J B Jr (1994), For the Common Good: Redirecting the Economy toward Community, the Environment, and a Sustainable Future (2nd ed), Boston, MA: Beacon Press.

Soros on German Austerity Planning

German Chancellor Angela Merkel unveiled austerity plans earlier this month for 80 billion euros ($107 billion) in national budget cuts over the next four years. Chancellor Merkel’s planning proposal prompted this ominous response by George Soros regarding the future of the European Union:

German policy is a danger for Europe; it could destroy the European project… Right now the Germans are dragging their neighbors into deflation, which threatens a long phase of stagnation. And that leads to nationalism, social unrest and xenophobia. Democracy itself could be at risk.

The larger lesson here for the world is that monetary contraction and austerity carry political risks that may be worse than the risks of monetary expansion and inflation. The austerity hawks are real, as are the political risks…

Source: Carrel, P & Brown, S (2010, June 23), Soros Says Germany Could Cause Euro Collapse, Reuters.

The Need for Postmodernization Strategies

Given the string of calamities suffered by enterprise and society over the past several years, the need for sustainable postmodernization strategies has become increasingly evident...

PS: I stopped adding photographs after reaching a dozen...