Mish's Global Economic Trend Analysis

Brown Seeks 10% Pay Reduction For State Employees, Unveils $12.5 Billion Spending Cuts; Suggestions to Eliminate the Gap
Steve Keen: The Credit Impulse
Australia's "Tulip Mania" About to Crash; 44% Jump in Property Listings Proves the Proposed Housing Shortage is Gargantuan Myth; Playable Actions
Campaign To Recall Illinois Governor Pat Quinn Underway

Brown Seeks 10% Pay Reduction For State Employees, Unveils $12.5 Billion Spending Cuts; Suggestions to Eliminate the Gap

Posted: 10 Jan 2011 02:50 PM PST

Governor Brown has a budget shortfall of $28 billion. He seeks to get $12.5 billion from spending cuts. That is 44.6% of what needs to be done.

Please consider California's Brown Unveils $12.5 Billion in Spending Reductions

California Governor Jerry Brown's budget will cut spending by $12.5 billion, including as much as a 10 percent pay reduction for most state employees, aides said.

The largest U.S. state by population faces a $25.4 billion budget gap over the next 18 months, Brown said in a statement. The 72-year-old Democrat, who took the oath of office last week, has vowed to reach a budget agreement with state Legislators over the next 60 days.

"These cuts will be painful, requiring sacrifice from every sector of the state, but we have no choice," Brown said in the statement.

His plan will chop an amount equal to 10 percent of the current year's $125.3 billion in spending. Cuts include $1.7 billion from Medi-Cal, the state's version of the Medicaid program for the poor; $1.5 billion from CalWorks, a welfare-to- work program; and a combined $1 billion from the University of California and the California State University systems, which together serve 663,000 students.

Additional cuts will be made to prisons and the courts. Spending on kindergarten through 12th-grade education will be spared, Brown said.

Voters will be asked to extend increases in sales and income taxes as well as vehicle license fees in a special election in June, Brown said.

Eliminate Waste Not Just Reduce It

The Governor should plan on 100% of what's needed to come from cuts, better yet 150%. I have not seen any proposals to eliminate unneeded departments.

I talked about that in California Budget Balancer Interactive Map from LA Times Misses the Mark. Here is a repeat of that post for convenience.

I just took the interactive LA Times California Budget Balancer exercise.
I vehemently protest.

This was a blatant effort to force people into accepting a need to raise taxes. To balance the budget I made every possible program cut offered. It was not enough. To balance the budget I had to raise sin taxes and gas taxes.

There are worse solutions of course, like hiking income taxes or corporate income taxes.

Exercise Misses the Mark

Where was a proposal to privatize the prison system using non-union labor?
Where was the proposal to eliminate prevailing wage laws?
Where was the proposal to eliminate defined benefit plans for all government workers?
Where was the proposal to virtually privatize every conceivable government job to the private sector?
What about programs that could be eliminated entirely?

California Agencies

Look at this disgusting list of California Agencies.

I sorted out some but not all of the more ridiculous ones.

Does the state need a ....

Acupuncture Department
Office of AIDs
Air Research Board
3 different agencies for alcohol and beverages
2 Apprenticeship Councils
Art Council
Asian Pacific Islander Legislative Caucus
Bureau of Automotive repair
Barbering board
Biodiversity council
Calvet Loan program
Climate Change Portal
Coastal Commission
Cool California
4 Delta agencies
Digital Library
Bureau of Electronic and Appliance Repair
Employment Training Panel
Energy Commission
Equalization Board
2 Fair Employment agencies
Film Commission
Flex Your Power
Healthy Family Program
Hearing Aid Dispensers Bureau
Home Furnishings Bureau
Humanities Council
Independent Living Council
Indoor Air Quality Program
Economic Development Bank
Interagency Ecological Program
Labor and Workforce Development
Latino Legislative Caucus
Learn California
Little Hoover Commission
Maritime Academy
Managed Risk Board
Museum for History
MyCali Youth Portal
Native Heritage Association
Natural Community Planning Program
Naturopathic Medicine Community
Outreach
Peace Officer Standards Board
Postsecondary Education Commission
Prison Industry Authority
Privacy Protection Office
Psychology Board
Railroad Museum
Recovery Task Force
Refugee Branch
Regents of the U of C
Save Our Water commission
Smart Growth Caucus
Status of Women Commission
Take Charge California
We Connect
Wetlands Information System
Workforce Investment Board

California does not need ANY of those. Moreover I assure you I missed dozens more that could be cut back if not eliminated entirely. What the heck do those cost? And how much can be saved by my suggestions above.

I propose the LA Times re-do their preposterous exercise meant to convey the idea that taxes have to be raised. They don't. In fact, I bet they could be lowered.

Here is the LA Times Discussion Thread on California Budget Balancer

For more ideas on how to Fight California Tax Hikes please visit the Howard Jarvis Taxpayers Association

Screw The Tax Hikes

Until the governor gets serious about eliminating waste, not just cutting it, there should not be any discussion of tax hikes.

California voters should tell Governor Brown to "go to hell" on those tax hikes. In the meantime, I would like to see the legislature agree to those $12.5 billion in spending cuts. Then after voter rightfully reject his proposals to hike taxes, Brown can try again to find the remaining $15.5 billion.

Here are some suggestions

Eliminate defined benefit plans for all newly hired state workers
Increase the required contribution rates for existing members of defined benefit plans
End collective bargaining of public unions
Eliminate prevailing wage laws
Privatize the state prison system
Eliminate dozens of useless California Agencies in the list above

If the governor does all that, he can cut taxes not hike them.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Steve Keen: The Credit Impulse

Posted: 10 Jan 2011 12:04 PM PST

In response to Australia's "Tulip Mania" About to Crash; 44% Jump in Property Listings Proves the Proposed Housing Shortage is Gargantuan Myth; Playable Actions Steve Keen added this comment to the blog.

Spot on as always Mish. One factor that I'm following closely in all this is what Biggs, Meyer, and Pick called "The Credit Impulse".

This is the change in the change in debt, expressed as a percentage of GDP, something I've covered in a couple of recent posts:

A Fork in the Road?

Deleveraging, Deceleration and the Double Dip

It follows from my argument that aggregate demand in a credit-driven economy is the sum of GDP plus the change in debt, since it also follows that change in aggregate demand is the sum of the change in GDP plus the acceleration of debt.

Australia got out of the crisis in 2009 by exploiting the upside of this factor: if you can encourage people into debt, then aggregate demand grows as debt accelerates--so even slowing down the rate of deleveraging gives a positive boost to demand (this stuff is a bit hard to get one's head around, but it's correct and aligns with the impact of inventories on aggregate demand).

That's how the USA looked a bit better in recent months--you slowed down deleveraging. But since Australia went from marginal deleveraging to releveraging, the acceleration in debt was all the more extreme--and we had a apparent boom.

That appears to be ending now, since though the Credit Impulse is still positive on a yearly basis, it's turned negative in the last few months. So this should be a leading indicator of an "unexpected" (don't you love that word from the mainstream?) slowdown in Australia.

Thanks Steve

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Australia's "Tulip Mania" About to Crash; 44% Jump in Property Listings Proves the Proposed Housing Shortage is Gargantuan Myth; Playable Actions

Posted: 10 Jan 2011 08:36 AM PST

For years I have been hearing about a housing "shortage" in Australia. That myth has been shattered by latest stats that show a 44% jump in property listings.

The property market could be set for early-year price falls due to a build up of unsold properties, with new figures by property research company SQM Research showing the number of listings swelled 44% over 2010.

Managing director Louis Christopher says overall the huge number of listings means prices are now hanging by a thread and a market downturn is imminent.

"It's still very clear to us that they are now at levels that would suggest a downturn in the housing market, although the stock levels have fallen seasonally. The overall number is up now by 44% across the nation."

"I wouldn't like to see another interest rate rise anytime soon – it will accelerate the downturn."

The new figures suggest that the shortage has been overblown. Residential property listings were 328,270 during December, representing an increase of 44.9% over the year.

"In Surfer's Paradise, for instance, I know there are now over 2,000 properties on the market in one postcode – just one. That area is really struggling at the moment, and it is now the equivalent of Florida in the United States."

Christopher also says he is concerned about Darwin, which recorded the largest increase out of all capital cities at 57.3%. Listings increased in Brisbane by 59.4% and Perth by 54.8%. Melbourne followed closely with a 42.7% rise, although Canberra recorded a rise of 46.5% as well.

The region with the highest growth in stock levels was North Queensland, with an increase of 216.3%. The region with the highest month-on-month stock growth was Launceston, with 18.1%.

Australia Heads For Economic Crunch

The Daily Telegraph reports Australians sinking under debt burden

AUSTRALIA is heading for an economic crunch as family finances collapse under the burden of record debts, rising interest rates and utility bills.

With banks warning they will be forced to raise mortgage rates by 0.50 per cent in 2011 and Sydney rents forecast to rise by between $160 and $190 a month, according to analysts Residex, householders look set to suffer.

Repossessions and tenant evictions are expected to rise sharply. "It's going to be tough" said Shane Oliver, chief economist at AMP Capital.

According to the Reserve Bank, Australians have added almost $220 billion to household debt levels since the beginning of 2008, taking our borrowings to a record $1.3 trillion.

"Unlike the rest of the world, Australia has slipped back into its old habits," said Steve Keen, professor of economics at the University of Western Sydney.

"We're spending ourselves right back into trouble. With so much extra debt to service, we don't need interest rates to reach anything like the 9.6 per cent they hit in 2008.

Mr Oliver has estimated that debt will become unmanageable for many households when mortgage rates rise from 7.80 per cent to about 8.50 per cent.

"At that stage homeowners could hit a wall," he said.

Economists are forecasting three 0.25 per cent rate hikes for 2011, taking the typical mortgage rate to 8.55 per cent.

Australia's Tulip Mania

I rather doubt those interest rate hike are coming. I would guess there is one more hike at most. Then at some point there will be panic cuts by the Reserve Bank of Australia.

History suggests it will not matter one bit once.

Remember the housing "shortage" in Florida? People stood in lines overnight and entered lotteries for the right to buy condos. Others were going door to door making offers on homes that were not even for sale.

From that aspect, it sure looked like there was a shortage. There wasn't. It was nothing more than a speculative mirage much akin to the shortage of quality tulip bulbs in the year 1635 during Holland Tulipmania.

So anxious were the speculators to obtain them that one person offered twelve acres of building ground for the Harlaem tulip. That of Amsterdam was bought for 4600 florins, a new carriage, two grey horses, and a complete suit of harness.

Housing mania did not get as far out of hand as tulip mania. Nonetheless, many lives were ruined in Florida, Las Vegas, Phoenix, and dozens of places in California and elsewhere in the US.

Until the bubble pops, speculative manias always make it appear as if there are shortages and infinite demand.

Playable Actions

The day of reckoning has finally arrived for Australia. A day of reckoning awaits Canada, China, and the UK as well. It's too late now to do much of anything except

Exit the Australian stock market
Get out of the Australian dollar
Pick up some popcorn
Stay on the sidelines and watch the collapse unfold

Addendum:

Steve Keen added this comment to the blog.

Spot on as always Mish. One factor that I'm following closely in all this is what Biggs, Meyer, and Pick called "The Credit Impulse".

This is the change in the change in debt, expressed as a percentage of GDP, something I've covered in a couple of recent posts:

A Fork in the Road?

Deleveraging, Deceleration and the Double Dip

It follows from my argument that aggregate demand in a credit-driven economy is the sum of GDP plus the change in debt, since it also follows that change in aggregate demand is the sum of the change in GDP plus the acceleration of debt.

Australia got out of the crisis in 2009 by exploiting the upside of this factor: if you can encourage people into debt, then aggregate demand grows as debt accelerates--so even slowing down the rate of deleveraging gives a positive boost to demand (this stuff is a bit hard to get one's head around, but it's correct and aligns with the impact of inventories on aggregate demand).

That's how the USA looked a bit better in recent months--you slowed down deleveraging. But since Australia went from marginal deleveraging to releveraging, the acceleration in debt was all the more extreme--and we had a apparent boom.

That appears to be ending now, since though the Credit Impulse is still positive on a yearly basis, it's turned negative in the last few months. So this should be a leading indicator of an "unexpected" (don't you love that word from the mainstream?) slowdown in Australia.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Campaign To Recall Illinois Governor Pat Quinn Underway

Posted: 10 Jan 2011 02:37 AM PST

I have exciting news this morning. I am launching a campaign to recall Illinois governor Pat Quinn.

This is not a frivolous effort. It is a serious undertaking and one in which I intend to see to the end. It will take hard work and lots of volunteers but we will be successful.

I need volunteers to ...

Gather signatures
Talk to state legislative representatives to get them on board
Provide legal help
Design a website
Help with advertising

I will pay for website hosting and domain names.

We need to be successful because Governor Quinn has plans that will destroy Illinois.

Massive Tax Hikes Will Drive Businesses Out Of Illinois

The Chicago Tribune reports Governor Quinn has reached a deal with top Democratic lawmakers including Senate President John Cullerton to ....

Hike the state income tax by 75%, from 3% to 5.25%
Hike the corporate income tax rate by 75% from 4.8% to 8.4%
Hike the cigarette tax by $1 a pack
Use the tax hikes to borrow more money to fund pension plans

The Tribune notes "As a measure of how desperate state government's finances are, Cullerton said the state would use the income-tax hike to borrow $12.2 billion. Of that, $8.5 billion would pay overdue bills and $3.7 billion would cover a government worker pension payment lawmakers skipped when putting together the current budget, he said."

Raising corporate and personal income taxes to borrow $12.2 billion is not "desperation", it is fiscal insanity. It will drive businesses out of Illinois and push many struggling taxpayers into bankruptcy.

Quinn is unlikely to get all of those measures passed, but it does not matter. Those are his intentions and they they show his blatant incompetence and disregard for both taxpayers and businesses. Moreover, he will try again.

Enough Is Enough

John Tillman at the Illinois Policy Institute says ...

Amazingly, the deal will also hike the corporate income tax rate. Combined with the personal property replacement tax and the federal corporate tax, Illinois would have one of the HIGHEST corporate income tax rates in the world. You don't have to be a rocket scientist to figure out this means bad news for job growth in Illinois.

With high property taxes, high sales taxes and now high income taxes, the flight to low-tax states will only pick up speed.
Enough is enough.

Indiana Governor Mitch Daniels On Quinn's Plan

The Illinois Policy Institute is not the only one who thinks Governor Quinn's proposal would be horrid for Illinois. So does Indiana Governor Mitch Daniels according to The Northwest Times of Indiana.

"We already had an edge on Illinois in terms of the cost of doing business, and this is going to make it significantly wider," Daniels said.

The Tax Foundation, a nonpartisan tax research group in Washington, noted if the proposed corporate tax hike becomes law, Illinois businesses will pay the highest combined national-local corporate tax rate in the industrialized world.

That is the wrong course for Illinois to take, Daniels said.

"It does show that you can make very different choices, and the contrast between the choice we've made and the one they have is stark," he said. "Obviously I think ours is wiser, but self-governance means people get what they vote for."

Indeed, people get what they vote for, but how did Quinn win?

Governor Quinn Bought The Election

Governor Quinn barely won the election against a very weak opponent in spite of an amazing 85% vote turnout for Quinn in Chicago. Sadly, Mayor Daley did nothing to stop this, although the mayor is complaining mightily now about the Governor's proposals.

"It's worth remembering that Governor Quinn only found one program—out of thousands—to veto outright when he signed this year's spending bill in July. Had he taken a closer look at structural spending reforms and not agreed to politically motivated "no layoff and closure" deals with public employee unions, we could be on the path back to recovery instead of being stuck in ever-mounting debt," noted John Tillman at the Illinois Policy Institute.

Those "no layoff" agreements bought Quinn votes. So did other union-pandering deals. It did not matter that Illinois could not afford those deals. Quinn did what he could to get elected, taxpayers be damned.

There still is no serious discussion from Quinn as to how to rein in exorbitant taxpayer giveaways to public unions. His only "solution" is to raise taxes.

Four Big States - Four Big Problems

California, Illinois, and New York all have massive fiscal problems. They all have other things in common.

Collective Bargaining
Prevailing Wage Laws
Illinois, California, and New York are NOT "Right to Work" states

In essence, Public unions own Illinois, California, and New York.

New Jersey Governor Chris Christie is starting to turn things around. Wisconsin and Ohio also have newly elected governors willing to take on public unions.

In Illinois, Governor Quinn remains beholden to public unions, not taxpayers, in spite of massive voter rejections nationally of tax-and-spend policies.

Organized labor contributed mightily to his campaign, and Governor Quinn wants to pay them back. His proposals will do that by taking money out of your pocket so that the public unions get wages and benefits that most taxpayers will never see.

Quinn bought the election, even if barely.

Constitutional Amendment To Recall Governors

Last November, Illinois voters were presented a chance to vote on a constitutional amendment allowing governors to be recalled. I am pleased to report the Illinois Governor Recall Amendment Passes With Two-Thirds Of Vote.

The Illinois constitution was changed last night, with an amendment swept in by a wide margin.

Over two million voters approved a process for the public to recall governors during their term, giving the measure well over the 60 percent of voters required for its passage. The amendment is widely viewed as a reaction to the corruption charges against former Governor Rod Blagojevich.

What Does A Recall Effort Take?

A voter has to file an affidavit stating his or her intent to circulate petitions to recall the governor. The affidavit cannot be filed until after the governor has served six months in office.
Permission from lawmakers: The affidavit has to include the signatures of 20 members of the Illinois House and 10 members of the Illinois Senate. Half of the signatures from lawmakers have to be from Democrats and half from Republicans.
Petitioners have to gather signatures equal to 15 percent of the number of people who voted in the last gubernatorial election.
Of those signatures, organizers would have to get at least 100 signatures in each of at least 25 different counties. Petitioners would have 150 days to get them and the State Board of Elections would have 100 days to certify them.
When would the recall election be held? No later than 100 days after the State Board of Elections certifies the signatures.
Passage: A majority of voters have to vote to recall the governor in order for him or her to be removed.
Who becomes governor: If the governor is recalled, the lieutenant governor becomes acting governor until a special election is held. If there is no lieutenant governor, the attorney general becomes acting governor. If there is no attorney general, the secretary of state becomes acting governor.
Special election: A special election to select a new governor has to be held within 60 days if the governor is recalled. That process starts on the day of the recall election if multiple candidates from the same political party file for the office. If that's the case, a special primary election would be held on the same day of the recall election. Candidates must gather 5,000 signatures in order to run in the special election. The new governor will serve for the unexpired portion of the recalled governor's term.
The Better Government has noted that nothing in the amendment prevents the recalled governor from running in the special election after he or she is recalled. It also noted that the amendment does not require grounds for recall.

The above bullet points are from the State Journal Register.

Note that the amendment does not require grounds for a recall, but we have them: Blatant fiscal incompetence and vote buying.

The state House of Representatives consists of 118 representatives elected from individual legislative districts for a two-year term with no limits. The Illinois Senate is consists of 59 senators with staggered two- or four-year terms.

Thus, getting approval from 20 members of the Illinois House and 10 members of the Illinois Senate (half from Democrats and half from Republicans) is not a prohibitive task.

Governor Quinn Supports Recalls

It is a fitting sense of irony that Governor Quinn Trumpets Recalls.

"I think the ultimate way to get ethics in Illinois is have the power of recall in our constitution," Quinn said.

I could not possibly agree more with Governor Quinn. It is perhaps the only major political stance he has taken that I can endorse 100%.

Will You Stand Up To The Injustice?

We have to wait six months to file, but there is no sense in waiting. There are many tasks to be performed and I will need volunteers from every county to gather signatures. I estimate we need about 520,000 signatures. My goal is to get 700,000.

If you can volunteer, time, web design, advertising, legal help, or any kind of general assistance, I would appreciate it. We need to put a stop to Quinn's proposals that will drive businesses and jobs out of the state and massively raise your taxes as part of the bargain.

Please email Recall Governor Pat Quinn Today (RecallQuinnToday@gmail.com) and lend your support to the effort to save the state of Illinois from Quinn's fiscal recklessness. Please let me know what you can do to help.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Monday, January 10, 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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