Thursday, November 8, 2012

Craven spin on Prop. 30

Here's how the WSJ reported the passage of California's Proposition 30:

In approving a ballot measure sought by Gov. Jerry Brown to raise taxes for several years, Californians took a step toward improving the state's fiscal situation and avoiding education cuts.
The approval is a significant victory for Mr. Brown, a Democrat, who has staked his governorship on a campaign to raise taxes to ease the effects of the state's budget crunch.
"Last night, Californians made the courageous decision to protect our schools and colleges and strengthen the California dream," Mr. Brown said in prepared remarks. "The people of California have put their trust in a bold path forward and I intend to do everything in my power to honor that trust."

Here's the real, unvarnished truth:

In approving a ballot measure sought by Gov. Jerry Brown to raise taxes for several years, Californians relieved their governor of the need to impose much-needed fiscal discipline. 
Californians made the "courageous" decision to seize yet more money from upper-income earners, who already shoulder most of the burden of taxes, and give it to the educational system, which consumes unprecedented quantities of money yet delivers miserable results.

Yes, as Milton Friedman once said:

There’s been one underlying basic fallacy in this whole set of social security and welfare measures, and that is the fallacy - this is at the bottom of it – the fallacy that it is feasible and possible to do good with other people’s money. That view has two flaws. If I want to do good with other people’s money, I first have to take it away from them. That means that the welfare state philosophy of doing good with other people’s money, at it’s very bottom, is a philosophy of violence and coercion. It’s against freedom, because I have to use force to get the money. In the second place, very few people spend other people’s money as carefully as they spend their own.

It's hardly courageous for the majority of voters to decide to take money from a minority and spend it on another minority. Instead of patting ourselves on the back, we should be ashamed of our cravenness.  Will no one stand up to the teachers' union?

In any event, it should come as no surprise to supply-siders if, in fact, the money that Prop. 30 promises to raise fails to materialize. Prop. 30 is likely to encourage even more of the "rich" and small business owners to join the ongoing exodus from California to states with lower tax burdens and a more friendly business climate.

53 comments:

Jake said...
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marcusbalbus said...
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marcusbalbus said...
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Scott Grannis said...

I'm tired of snide remarks and insults. If you can't disagree in a respectful, thoughtful manner, please stop wasting other people's time.

Dave said...

Scott I am sorry for how people are acting. Please know there are many serious investors who benefit from your wise counsel. Please do not let the few spoil it for the many who understand how good your input is.

John said...

Nice to see Scott not taking crap from rude posters. He has been much more tolerant than I would be.

Public Library said...

I couldn't believe all the different types of people (including the affluent) who voted for this boondoggle. I spoke with many to try and persuade them otherwise. California does not have a revenue problem. That is the fallacy!

Dr William J McKibbin said...

The California fiscal mess is front of mind for me -- I remain more shell shocked from the election results in California than I am from the national election results -- while our Congressional leaders lament how to deal with the "fiscal cliff" ahead (and as far as I am concerned, I am fine with going off that cliff), the California budget crisis has the potential to crash down upon Washington DC with a loud "thud" -- in my opinion, the Democratic "victory" in California this week marks the beginnings of a national-state crisis that will make Afghanistan and Iraq pale in comparison -- I hope and pray for the best along our nation's West coast -- said another way, the California budget crisis is likely to become a national challenge sooner rather than later, and will likely carry Constitutional implications for the nation -- for the record, I as a Pennsylvanian am not the least bit interested in bailing out California -- fighting a war overseas is one thing, but the prospects of an East-West war here at home terrifies me -- moreover, the risks of political unrest here at home will hammer down stocks and equities in a way that fiscal and monetary policy are not designed to handle -- again, let's hope California will act responsibly to deal with its fiscal challenges as a state rather than flopping the problem down at the feet of the USA...

Benjamin said...

"Will no one stand up to the teachers' union?"--Scott Grannis.

Actually, public school teachers are paid by local school districts, though they contribute to Calstrs, a state pension system.

CHP employees, are, of course, state employees.

"California Highway Patrol officers operate under a retirement plan that rewards them for their years of service coupled with their advancement through the ranks. Current CHP officers can retire at age 50 with annual benefits calculated as 3 percent of their three highest-paying years' average salaries, multiplied by their years of service, up to 90 percent of the average of their three highest-paying years. For example, an officer who served for 30 years with an average pay of $75,000 for the highest three years would take 3 percent of $75,000, or $2,250, and multiply it by 30 for an annual retirement benefit of $67,500."

That age requirement for retirement has been lifted to 55. The CHP has too many applicants for the number of jobs open.

Scott may want to think about pension programs for public uniformed employees, which are the best in the world---for the employees, but not the taxpayers.

Dr William J McKibbin said...

@Behjamin, many California Highway Patrol officers earn over $250,000 annually -- more at:

http://wjmc.blogspot.com/2011/04/top-california-highway-patrol-salaries.html

California pays its public workers outrageous salaries -- likewise, so does my state of Pennsylvania -- but, my state is nothing like California -- yes, the cost of living is higher in California, but that's not completely persuasive -- my view is that the very high public worker salaries have created their own inflation that has increased the cost of living in California for everyone.

California is not a model for other states, and if California does become the model for other states, then the USA will collapse under the weight of government spending.

What America needs is an immediate 40% cut in government spending -- 40% essentially balances the budget -- I really do not care where the cuts are applied -- but cuts of at least 40% are definitely required to sustain the US.

Unfortunately, the big government Democrats and military-industrial Republicans currently in the US Congress will not cut government spending on their watch.

Regretfully, I predict that Americans are likely to experience declining living standards over the coming decades and probably the balance of the 21st century -- the only recourse that the 99% club has is to invest and join the 1% club -- everyone else is in for troubles -- and yes, California may very well lead the nation into the hardest times ever...

steve said...

Love Freidman! Miss him so much. Amen to that!

marcusbalbus said...

9afraid of the criticism? don't post then. if you want a public forum for your idea, you must suffer the withering criticism, otherwise you're just another tyrant.

Gil Rodveltz said...

Scott your economic and finance posts are superb...Politics is even more dismal and less of a science than economics. Good to stay away.

Scott Grannis said...

Unfortunately, politics and economics are intimately bound together. You cannot understand the economy and the financial markets if you don't also understand the political forces at work.

Gabriela said...

Marcusbalbus, there are many fine posters who disagree with what Mr. Grannis writes about, and the discourse is always civil and instructive. But it's unacceptable when people are rude and disrespectful in their comments. It a waste of everyone's time.

Jake said...
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Benjamin said...

This is one of the best blogs anywhere, and I often disagree with Scott Grannis.

So what?

Since when do people of other political parties or different economic perspectives become "the bad guys"?

This is one of the dispiriting aspects of our age.

Thank goodness, Scott Grannis does not subscribe to the "you disagree with me therefore you are a bad guy" school of intellectual duncery.

Rob said...

Scott u say politics and ecoomics bound tgether. Well, read the following article and u mayvtart to realise that your love ofvfcts andcsttistics when it comes to economics deserted you in the political sphere. As the piece makes clear, the outcome of the election was all too clear if only people had paid more attention to the facts and less to the pundits, propagandists, windbags and entertainers.

Hope this comment passes your new snide-test.

Rob said...

Whoops, writing this on a wonderful iPad. That shouldve said "u may start to realise ... of facts and statistics ..."

Here is the article:

http://www.bbc.co.uk/news/magazine-20246741

Scott Grannis said...

Rob: I fail to see how this has anything to do with my assertion that politics, economics, and finance are intimately bound together.

Rob said...

Scott u admitted to being surprised by the elction result. Indeed, u made a very bullish Republican call the day before.

Therfore it appears hat u like many others were guilty of ignoring the facts, as supplied by the poll aggregators, in the months prior to the election.

This blnkereeness - o wilful blindness - contrasts with your love of facts in the economic sphere ... Or maybe u just love facts which reinforce your thesis ?

You also admitted in the past that as an investor u can get carried away by your enthusiasms. Well, that same Achilles Heel seems to have marred your ability to correctly call the election.

I dont think I can put it any more clearly than that.

Rob said...

Or maybe I can ? There is the world as we might want it to be and the world as it is. Being an economic "optimist" assumes that your self-interest is aligned with everybody else's, or at least the majority.

But since u acknowledge the intimate connection between economics and politics u should have given more weight to the possibility that, from a political perspective, your interests were perhaps *not* aligned with the majority.

After the fact u now acknowledge this but still in a rather disparaging way, writing off e majority of the electorate as too left ing and economically illiterate.

That is why I quoted the full title of the book, The Wisdom of Crowds. Perhaps if u show a little more respect for the reality of your compatriots rather than your preferred *theory* u will not be surprised again.

Dr William J McKibbin said...
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Gil Rodveltz said...

Scott...you are confusing political opinion with Analysis.

http://www.businessinsider.com/this-is-paul-krugmans-massive-presentation-on-the-welfare-state-and-the-us-economy-2012-2#-6

Here is another Nobel prize winner with a different version than Milton Friedman. So who is right?
and based on what undisputable rationale?

marcusbalbus said...

gabriela: you're another reactionary scolder. don't blog and dont read if you don't want to hear strident disagreement. we could argue the merits of my comment being rude, but mr grannis deleted it.

Jim said...

"California Highway Patrol officers operate under a retirement plan that rewards them for their years of service coupled with their advancement through the ranks. Current CHP officers can retire at age 50 with annual benefits calculated as 3 percent of their three highest-paying years' average salaries, multiplied by their years of service, up to 90 percent of the average of their three highest-paying years. For example, an officer who served for 30 years with an average pay of $75,000 for the highest three years would take 3 percent of $75,000, or $2,250, and multiply it by 30 for an annual retirement benefit of $67,500."

That is not how the game is played, but thanks for the example.

Most LE will push for extreme overtime so that the top 3 years are well into 6 figures. This is how the system is gamed, and why most of the pensions are underfunded in California.

Already San Bernandino has not payed 5 million into Calpers.

Brown is a certifiable idiot. The legislation in this state with Mr. Moonbeam are going to kill this state. His high speed rail program is next to idiotic with a state that is completely broke. They will want a handout from the FED, but I bet Obama tells us to stand in line when the crap hits the fan.

Boghie said...

Scott,

I am not in the top 1% - 2% that is taking the huge hit on this boondogle, but I am in the top 10%. My time is coming - Winter is Coming!!!

Anyway, using the Heritage webapp www.taxballoon.com, I found what I will pay in extra property and sales tax and will take steps to Zero It Out.

End result, about $2,000 will be taken out of the economy to buy me a new boat in my golden years. That $2,000 will zero out my tax increase and will result in a cut of about $500 for the Federal government.

To President Obama - bring it on. If the Republicans don't starve the beast I will!!!

Dr William J McKibbin said...

Sacbee is reporting that Gov Brown sees tax hikes sweeping America as a movement lead by California (http://t.co/EfGHWV5N) -- I suppose this is the Gov Brown's way of shedding guilt -- afterall, if the rest of America is raising taxes, why not California (!?!?) -- as I have been saying for some time, as California goes, so does America -- tax increases are insidious, especially when all of the money goes to teacher salaries -- I understand that teachers in California can expect to earn in excess of $100k annually during their careers -- perhaps the rest of the nation's public workers should index salaries to those of California public workers -- I would love to see public workers bickering with other public workers over who is not being paid enough -- sadly, we in Pennsylvania, West Virginia, and Ohio will have to expose our public workers to this dark controversy, probably leading to sharp tax increases here as well -- I am very discouraged about the prospects for tax increases on private sector workers...

Dr William J McKibbin said...

Scott, here is an honest question -- what do bond yields, monetary policy, and fiscal policy have to say about California -- the only news that I see is the prospect for a horrific economic depression on a scale that exceeds the Great Depression and closes in on the economic conditions witnessed during Irish Potato Famine or even the Dark Ages -- I understand that some in California hope to see public salaries equalized with those of movie stars and professional athletes -- might teacher salaries be tripled or quadrupled in the coming years given the Democratic supermajority in the California Assembly -- I have no idea how to factor California into the macroeconomy at this point, but the effects are likely to be horrific by any measure.

The good news is that political instability only makes scare skills more valuable on the global economy -- also, political instability usually drives down equity prices (I suspect land is cheap in Greece, Libya, and Syria these days) -- the 1$ crowd will live like kings, while everyone else will be huddled in their basements listening for drones from every other country in the world -- heck, US states should probably begin acquiring attack aircraft, including drones, to defend themselves from the gangs of marauding motorcycle gangs that will be invading communities and homes in search of food, weapons, and women -- a home in Nairobi, Kenya is staring to sound interesting at this point -- perhaps a home in Oslo, Norway...

Dr William J McKibbin said...

I remain absolutely terrified of big government Democrats and military-industrial Republicans...

Jim said...

Watching the liberals run the country is like seeing a bad episode of Kitchen Nightmares.

Restaurant Owner, "Yes, my food is great. Everyone compliments my dishes"

Gordon Ramsey, "You are joking right? Are you a twit? You are almost in bankruptcy and you think you are a cook?"

mmanagedaccounts said...

Scott, it has frequently been said that the 2008 financial crisis created the worst recession since the Great Depression. President Obama has made that claim numerous times, Joseph Stiglitz and others have echoed the same claim. I'm not convinced. What about 1973-1974and 1981-1982. I may not have my dates exact, but we had some extremely difficult economic times in the 1970s and early 1980s. Can you shed some informed light on this repeated claim?

Unknown said...

There have been 2 big tax cuts in California, prop 13 and then Arnold's Car Tax Cut.

Yes California spends a lot of money, but if neither of those tax cuts had passed, there would be little or no budget deficit today.

We live in a world where one party likes to pass tax cuts, and then turns to the other guy and says "now go find some spending to cut, and I'll take 3 more aircraft carrier task groups please".

California's prop 13 was the first of these big tax cuts, and it swept the nation. Huge deficits have been the result of these cuts wherever they were enacted. Reagan sign multiple tax increases when president, after the red ink started flowing. The more honest of the tax cutters have admitted that the deficits are a way of trying to choke the government.

The only guy who ever really was honest about any of this was Clinton. he raised some taxes, there were some spending cuts and there was a giant surplus. Then Bush/Cheney arrived and blew that up. So much for republicans being the party of responsible policy.

Bill said...

If raising taxes is such a good idea, why didn't the Democratic majority do it in 2009 or 2010 when they had the votes? They said the economy was too weak then, even though it was actually growing faster than it is now. If it was too weak then to sustain tax cuts, it's certainly too weak now to raise taxes.

randy said...

Rob said..."But since u acknowledge the intimate connection between economics and politics u should have given more weight to the possibility that, from a political perspective, your interests were perhaps *not* aligned with the majority."

I hate to admit it but in this Rob has a point. Rather than exclaiming "it's all over" and hunkering in survival shelters, conservatives should recognize this election shows the electorate wants government to help them navigate this new normal world. Republicans would do better to deal with reality by offering a better product, a better (and honest) vision of what government can do for society. A very doable thing up to this election. Grand initiatives on energy and immigration for example could have easily turned the el tion results in conservatives favor. Now those are left for Obama to build a second term legacy. For myself, I will spend more time reading the ideas of today's winners. P.S. that's no swipe at
Scott's economic analysis, which I continue to be grateful for his sharing.

Unknown said...

to Mr. Bill:

I'm not really saying that raising taxes right now is 'good'. Because raising taxes usually does hurt.

I'm saying the state would be a lot better off if the taxes had never been cut in the first place. Or if the guys who cut the taxes took credit for the fantastic deficits they created, or actually tried to cut some spending, which no one of either party typically ever really does try to do. Most of the time they just try to cut programs that will hurt the other party - just a game.

Two of the best moments from the recent losing struggle by Mitt Romney was in the debates. The first one was when he was bragging that Massachusetts had the highest grade school scores. Massachusetts spends $14,000 per pupil, California spends $9,000. All of the red states spend less than that. The second was bragging on the Massachusetts Health Law AKA Romneycare, and then going on to say how bad Obamacare is, and he was going to repeal it and replace it with... uh... Completely Incoherent.



Dr William J McKibbin said...

For those who believe the tax increases coming to California will be "enough", far from it -- watch and learn -- Gov Brown is one of the biggest spending liberal governors in history -- the Democratic supermajority in California will soon require the supermajority of California's private wealth in order to fund existing and new state spending programs.

Scott Grannis said...

The primary cause of deficits in California and at the federal level is excessive spending, not prior tax cuts.

Dr William J McKibbin said...

OK, I have cleared my head with a new focus on making money...

Bloomberg is reporting that austerity I (i.e., government spending cuts) is dead both in Europe and the US -- I believe what we are seeing now is austerity II (tax increases) taking shape in the US, however I believe that austerity II will also fail (there is simply not enough money delivered via tax increases to address the budget deficit and new spending) -- thus, if we assume that austerity is failing in both the US and Europe, monetary policy is left with the grim choice between: a) monetary expansion and inflation; or b) outright default on the national debt -- I doubt the default route will shape up, which means [drum roll please] all roads lead to monetary expansion and inflation -- feedback requested please...

PS: Making money during times of inflation is easy -- own rent-earning real estate...

Dr William J McKibbin said...

PPS: The Bloomberg article is here:

http://t.co/cSHm1Uya

Scott Grannis said...

Re " it has frequently been said that the 2008 financial crisis created the worst recession since the Great Depression." I think that is a true statement. In addition, it is true that the recovery has been the weakest.

Rob said...

Scott, but I think your blindspot is that you still see the old model as fundamentally intact, ie there are recessions and there are recoveries ... I think John Mauldin is much closer to the truth when he talks about the "debt singularity", ie that we are at an extremely rare moment in history following a gigantic "debt supercycle" that has encompassed not just one country but much of the entire developed world.

For this reason Mauldin says there is now a "new normal" in which investing does not work as it used to - there is simply too much fog, too many unknown unknowns (as Rumsfeld would have out it).

You, Scott, are waiting for a revert to "normal" trading but it has not happened as you expected. EG US government treasuries falling to miniscule yields, and staying there. It's the equivalent of keeping "cash under the mattress" and in the new normal people might take some risk with their investments but they will stubbornly hold onto this "cash under the mattress" until the fog and the fear lift.

But with the almost bottomless pit of global indebtedness, the fog just aint gonna lift for years and years and years.

Dr William J McKibbin said...

@Rob, the markets are acting "normally" -- we are in a window of maximum pessimism, which spells B-U-Y, especially dividend and rent-earning equities -- this "normal" has occurred many times in world history -- I believe that those who invest for the long-haul (30-years plus) in the coming year will be tomorrow's tycoons -- I urge everyone to not miss this opportunity to get rich -- also, world-class skills are earning ever higher premium wages globally -- again, another opportunity in the form of converting scarce high-demand skills into premium wages to be converted into equities -- now is the time to work two jobs, to have your spouse working, and to ensure your children are working, and to invest those earnings -- the losers of this century will be those who fail to acquire world-class skills (which only takes effort these days) and cheap dividend and rent-earning equities -- for the record, the same was true in the 1930's, the 1890's, the 1870's, the 1840's, and the first decade of the 1800's -- the world is unfolding just as it should -- long-term investors in skills and equities will be the usual winners -- thanks for the opportunity to comment...

Dr William J McKibbin said...

PS: Now is not the time to invest for growth, which is unlikely to return in the near to mid-term -- note that dividend payout ratios have declined from 90% plus in the 1930's, to less than 30% today -- more at:

http://en.wikipedia.org/wiki/Dividend_payout_ratio

Everyone is yearning for "growth" when what we should be demanding are dividends -- higher dividends and rents are what will return the US economy to Main Street vice the current array of overpaid and spoiled executive management teams in essentially ever firm on the NYSE and NASDAQ.

To fix our nation's economy, the public should be demanding higher earnings (dividends) from their stocks, and higher rents from their real estate -- that culture change is what is missing in the current macroeconomic calculus, which focuses exclusively on growth, employment, and inflation.

The investment world we live in today is value-based rather than growth-based -- to get rich, read this previous sentence again and again -- past it on your walls -- think value and get rich -- this is valuable advice that I know most will not grasp, and some will reject -- for those who will take this advice, the future looks bright, better wear shades...

Dr William J McKibbin said...

PPS: The US Treasury rally indicates a flight off the fiscal cliff -- more at:

http://bloom.bg/PQJLm7

Bring it on (though I still believe the big government Democrats and military-industrial Republicans will come together to avoid that cliff)...

Scott Grannis said...

Rob: Re a "new normal." I have been around long enough to have lived through several episodes of "this time it's different," or "this time things have changed fundamentally," or "this time the laws of economics have finally changed." I might be wrong of course (did I ever say I would always be right?), but I think this is another one of those episodes. I don't think my model of how the economy works is broken.

I have been very successful being long equities, corporate bonds, and real estate in the past 4 years, even though the economy hasn't been as strong as I thought it would be. I attribute my success to the realization early on that Obama's "stimulus" policies would retard growth, rather than help it, and to my reading of the key indicators such as swap spreads and Treasury yields, which told me that the market was extremely pessimistic about the future, and to my reading of the economic tea leaves, which told me that the economy was improving, albeit slowly.

John Mauldin, by the way, has been so spectacularly wrong for the past four years (his main fund has trailed the S&P by orders of magnitude) that it is hard to believe. He might be a better target of your criticism.

randy said...

Fwiw, I came to understand Mauldin is a spectacular salesman who realizes there is a huge market feeding the fears of paranoid investors with witty and pseudo sophisticated analysis. Pretty much trolling for barely accredited investors. Doesn't mean he's wrong, but..... Give him credit for attracting top notch contributors, but then they're all looking for a platform too. I'd give more credibility to the cautions from the pimco crowd. As worried as they are, their big balanced fund is still 65% equities.

Gloeschi said...

I am flabbergasted that in a country with a gini-coefficient (income inequality) higher than Egypt and similar to China some still seem compelled to describe millionaires as "endangered species".

Rob said...

Interesting comment Scott. Obviously when we do well personally we feel more confident in our judgements. But just answer me this: how will the workd ever recover from this level of indebtedness ?! Surely when you look at he numbers, trillions and trillions and no hope of paying down the debt without massive currency devaluation / inflation, how can you in all conscience tell me that this time it is *not* different ? And that is a genuine question, not rhetoric.

Scott Grannis said...

Rob: stay tuned for my next post for answers to your questions.

steve said...

maudlin, hussman, faber all make $ by thriving on fear. pathetic and shameful. when will people learn that trying to make $ SHORT is extremely difficult. there is always a bull market somewhere and I've become quite wealthy pursuing them.

Family Man said...

Scott,

Scandinavian system i.e. capitalism mixed with socialism shows that Friedman in not always right.

Family Man said...

Re: education

Here is a very good article, explaining that process of commercialization of education in US spoils the quality of teaching and cuts off many from that particular human right.
http://www.monde-diplomatique.fr/2012/09/BRUNO/48136