FUNDAMENTAL TRUTH #45: “The bluest of cities in the bluest of states have the most activist governments, the deepest recessions and the most abject poverty.” -Old Pithy

Posted by PITHOCRATES - December 21st, 2010

Blue States Bleeding Red

We call it the Great Recession.  It started with the subprime mortgage crisis.  Then the dominoes started falling.  And unemployment rates started to climb.  So many people lost their jobs that it wasn’t only banks and auto companies staring into the abyss of bankruptcy.  Our city and states were, too.

But not all our cities and states.  Some were hanging in there during the Great Recession.  There was a pattern.  Sure, it was a rule with some exceptions, but a general rule all the same.  And if you looked at one of those red/blue electoral maps, you could see the states (and the cities) having the biggest financial troubles.  You just looked for the blue.

The blue states are the ‘Democrat’ states.  The red states are ‘Republican’.  And the states that are in the news with financial troubles tend to be the blue states.  The New England States.  The Mid-West states.  And the West Coast states.  The rate of business failures and high unemployment rates have hammered these states.  Taxable income plummeted.  Without the income to tax, tax revenue plummeted.  And these blue states are bleeding red.

Blue States and Unionized Public Sector Employees

These are the Big Government states.  Home for most of the nation’s liberal democrats.  Although liberal democrats make up only about 20% of the national population, most of them live in these states.  And when you pack a lot of this 20% into these small areas, their influence can reach a majority.  And they can control these cities and states.  And do.

These liberals are the guilty rich (anti-capitalist inheritors of great wealth).  Crony-capitalists (anti-capitalists who eschew the free market and bribe politicians in exchange for governmental favoritism).  Big Union (anti-capitalists who eschew the free market and seek legislation that favors them).  The celebrity rich (anti-capitalist movie stars, musicians, painters, artists, etc., who don’t live in the real world).  University professors (anti-capitalists who still have posters of Che Guevara up in their classrooms).  The mainstream media (anti-capitalists who want to shape opinion instead of practicing journalism).  And, of course, the poor and government-dependent.

And then you have public sector employees.  Unionized public sector employees.  And their ranks are growing.  They don’t work very hard.  But boy are they paid well.  And talk about fat benefits.  Pension plans that most can’t even imagine.  They have made themselves a privileged class.  And with their boss having the power to tax, that privileged class will be remaining privileged for a long time to come.  Unless a Great Recession comes along.

Much of Flyover Country not having any Budget Crises

What is flyover country?  It’s that are area of the country liberals fly over when traveling between the West Coast, the Big Union Mid-West, New England and, of course, Washington D.C.  It’s that area in between.  The red states.  You see, liberals fly over the red states because they don’t like them.  Or Republicans.

Because America is a center-right nation, and the liberals have concentrated in the blue states, that has left most of ‘fly over’ country conservative.  And what do conservatives NOT like?  Big Government.  So liberals don’t go where they’ve not welcomed.  For Big Government is the heart and soul of liberalism.

So the red states don’t have Big Government.  They don’t have masses of government-dependent people.  And they don’t have large public sectors.  Or public sector union employees.  Which means they don’t have huge Big Government budgets.  Or budget crises.

The Public Sector Out Paces the Private Sector in the Blue States

But the blue states do.  Their Big Cities are packed with government-dependent people.  And they have a huge public sector to cater to these people.  And a public sector union that pays this public sector very well.  They have pay and benefit packages that are to die for.

Of course, a public sector doesn’t make anything.  They have no goods or services that they can sell in the free market.  They have but one source of income.  Taxes.  And when times are good, taxes are good.  But when times are poor, so are taxes.

Part of the liberal democrat’s strategy to remain in power is to get as many people as possible dependent on government.  This helps make Democrat voters (people who vote Democrat because they are afraid of losing their government benefits).  And justifies their huge government budgets.  So they keep adding people to the public dole.  And keep growing their budgets.  It’s a foolproof plan.  As long as the private sector grows along with the public sector.  So the private sector can keep paying the taxes to support the public sector.  And the privileged class.

Big Government – The Road to Bankruptcy

But it doesn’t always work.  When businesses fail they don’t have any income.  So they can’t pay any income taxes.  And when a business fails people lose their jobs.  And their incomes.  So they don’t pay any income taxes either.  But it doesn’t end there.  Without any income, they can’t buy anything in the free market.  So other businesses see their sales decline.  And have to lay off employees.  And these laid-off people can’t buy anything in the free market.  So more businesses see their sales decline.  And they lay off people.  And on and on it goes.  Where does it stop?  Usually in a bad recession.  Or even a great one.

You add all of this up and what do you get?  Big cities with growing budgets (and growing pension obligations).  And shrinking tax revenue to pay for it.  Costs exceed revenues.  Ergo, bankruptcy.

And some of the states with the most generous public sector pay and benefits are California, Illinois and New York.   Some of the bluest of blue states.  And coincidentally, these are the states facing some of the biggest budget crises.  Actually, it’s no coincidence.  It’s the ultimate consequence of Big Government.  Bankruptcy.

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The Costs of European Socialism Bankrupting the EU?

Posted by PITHOCRATES - December 6th, 2010

European Socialism – Voting yourself the Treasury

The Left loves European Socialism.  They want it here.  They’ve been trying to get here.  All the while the Europeans are trying to move away from it there.

Socialism doesn’t work.  Once people learn they can vote themselves the treasury, they do.  It’s been the death knell of all democracies.  As those state benefits get bigger, they entice more people.  They say, “Work?  But why?”  Because many can live comfortably without working, many do.  And they sign up for those generous state benefits.

The problem is that there is no ‘secret stash’ of government money.  Everything they spend they take from us.  Those who work.  So taxes go up.  Working people get less.  And the government-dependent grows and becomes an important voting demographic.  And they vote.  They vote themselves the treasury.  And why not?  It’s not their money.  Not yet, at least.

The EU, the Euro and the ECB cannot Fix the Fundamental Flaw of Socialism

Eventually, the number of working people decrease.  And the number of those not working increase.  More and more people receive benefits.  And fewer and fewer people pay taxes to fund those benefits.  So they keep raising the taxes on those who work.  To pay those who don’t.  But they can only raise them so far.  Because people simply won’t work for free so their neighbor can live a better life.

And how is that European Socialism working?  Much like the people collecting those generous benefits.  It ain’t working either.  To compete against the economic power of the United States, they’re trying to become like the United States.  They created the European Union (EU).  A European Central Bank (ECB).  And a common currency (the Euro).  Because they thought bigger was better.  Because the United States is a big economic zone.

But the Europeans have a problem.  They’re still social democracies.  And the trends continued after the union and the Euro.  More people collecting benefits.  Fewer people paying taxes.  Some of these countries are going through debt crisis.  And as these countries implode in their financial crises, the affects are felt throughout the European Union (see Euro’s Worst to Come as Trichet Fails to Calm Crisis, Top Forecasters Say by Anchalee Worrachate posted 12/5/2010 on Bloomberg). 

The 16-nation currency’s [the Euro] first weekly gain against the dollar since Nov. 5 may prove short-lived amid mounting concern that more nations will need rescues. European Central Bank President Jean-Claude Trichet delayed the end of emergency stimulus measures last week and stepped up government-debt purchases as “acute” market tensions drove yields on Spanish and Italian bonds to the highest levels relative to German bunds since the euro started in 1999.

“We’re going to get a continuation of the problems that Ireland, Portugal, Spain and others are suffering,” said Callum Henderson, Standard Chartered’s global head of foreign-exchange research in Singapore. “The fundamental issue is these are countries that have relatively large debts, large budget deficits, large current-account deficits, they don’t have their own currency and they can’t cut interest rates. The only way they can get out of this is to have significant recessions.”

Once upon a time Europe was ablaze in war. The growth of nationalism brought nations into conflict with each other over land, food and resources.  They redrew their borders in blood.  Nations did not give up their national sovereignty without a fight.  Which makes the European Union that much remarkable.  What they fought to the death to prevent they now give up voluntarily.  Of course, when your nation is on the brink of bankruptcy, what have you got to lose?  Having someone else bail you out of your financial mess?

Can the Euro and the ECB Survive European Socialism?

A weak currency helps a nation to export goods.  The more they export the more economic activity they have.  And the more jobs.  And the more people to tax.  So a weak currency can be a good thing.

But a weak currency also carries some baggage.  If a nation is ‘printing money’ to pay for excessive state benefits, that will not only make the currency weak, it will also increase prices; it’ll take more of those weak dollars (or Euros, or Pounds, or Yen, etc.) to buy things.  Even government benefits.  This is counterproductive.  People have less purchasing power.  And the government has to tax, borrow or print more because they, too, have less purchasing power.

The United States debased its currency.  Which helped the Euro gain some strength.

Just a month ago the euro reached $1.4282, the strongest level since January, as traders sold the dollar on speculation the Federal Reserve would debase the greenback by printing more cash to purchase $600 billion of Treasuries in so-called quantitative easing.

But the Euro wasn’t getting stronger.  The dollar was just getting weaker.  Both currencies are losing value.  And with more member nations in the EU getting weaker, the stronger ones may bail to save themselves.

Taylor [chairman of FX Concepts LLC, the world’s biggest currency hedge fund] predicted some nations may leave the common currency. Stronger members “have to say ‘enough, you guys, get out of the euro,’” he said. “The risk that Spain and Italy will get into trouble is going to cause the euro to get quite weak.”

Spain and Italy follows Ireland.  Which followed France.  Which followed Greece.  Nations are struggling under the weight of their debts.  Is there a limit to how much the ECB can help?

The ECB will keep offering banks as much cash as they want through the first quarter over periods of as long as three months at a fixed interest rate, Trichet said. That marks a shift from last month, when he said that the ECB could start limiting access to its funds.

Time will tell.  The trends are going the wrong way, though.  And there are more countries that can fail.  And they don’t have their own currencies.  So they need the ECB.  And the ECB needs to save them.  To save European Socialism.  Much like the Soviet Union tried to save Soviet communism.  Which, of course, they didn’t.

The problem with the Soviet Union was Soviet communism.  And the problem with the EC is European Socialism.  Great big governmental bureaucracies fail.  Always have.  And always will.

The Europeans know what they need to do, though.  And they are doing it.  Cutting their spending.  Despite the rioting and the burning of some of their cities.  Even with all of that, they are NOT increasing their spending.  Or trying to reduce their deficits by increasing taxes.

As the euro region’s most-indebted nations cut spending to bring their deficits under control, a weaker euro will be needed to cushion their economies, said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, the fifth most accurate forecaster.

Of course, they want a weaker Euro for their exports.  So the EU can sell their export products cheaper than the domestic products of the import countries.  Which those import countries will not welcome with open arms.  Because they’re trying to grow their economies, too.  But that’s a whole other story (if you’re interested you can read about how international trade wars brought about the Great Depression).

It’s European

Meanwhile, on the other side of the pond, we’re having our own financial problems.  Large debts, large budget deficits, large current-account deficits.  Just like the Europeans.  Only difference is that the Obama administration is trying increase taxes and spending to fix our problems.  The Left calls this economic stimulus.  Rational people just call it stupid.

The political Left likes all things European.  In fact, they want to be European.  So I say let’s be European.  Let’s cut our spending like the Europeans.  I mean, if the Europeans don’t want to be like us (tax and spend), perhaps we should be like them (cut spending).  After all, if it’s European, even the Left should find it the fashionable thing to do.

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