Friday, November 19, 2010

Bankruptcy: The Salvation of Califrancia

The bad news is that California is bankrupt. The good news is that California is bankrupt. More on this in a moment.
One of the great virtues of the capitalist free market is that the inevitable failures have a tendency to be revealed and resolved rapidly, before they metastasize into society-wide disasters. It is only with the intervention of government – imposing wage and price controls, propping up politically favored firms or classes of people at the expense of others, manipulating interest rates and even the value of the currency itself, forecasting revenue based on optimistic political methods – that the information signaling impending failure can be suppressed and distorted for so long as to allow problems grow orders of magnitude greater than they would otherwise have gotten before an inevitable collapse.
California’s total debt is somewhere around $78 billion (compared to an $87 billion budget), and the unfunded public employee pension liabilities reach above $500 billion. Now it turns out that this year’s deficit will be at least $6 billion greater than previously reported, over $25 billion. Some people are surprised by this. Other people understand that there are natural, immutable laws of economics that politicians cannot overrule any more than they can the physical laws of gravity.
The coming bankruptcy of California is inevitable as long as the Sacramento government machine continues to suppress the productive sector, raise tax rates, impose increasingly irrational regulatory burdens on unfavored businesses, protect state monopolies like education, and bind children, grandchildren, unborn fetuses, frozen embryos and gleams in their parents’ eyes to unsustainable (to say nothing of unconscionable) contracts of liability that they are not competent to read, much less sign.
So what can we – citizens without political power -- do? The worst-case scenario is that the inevitable day gets postponed so long that the compound increase in liabilities grows to a yet greater order of magnitude. Our task is to act to make the day of reckoning come as soon as it can, the sooner to resolve it with the least pain.
Productive citizens and residents should simply act in their own rational self-interest, seeking to pay the least taxes possible and avoid being subject to the most onerous regulations, taking care of their own families, churches, mosques and synagogues as best they can. Those who find opportunities beckoning beyond our borders should take them and move out, sooner rather than later.
A capital strike – physical, financial and intellectual – will accelerate the decline in tax revenue to Sacramento. The reflexive reaction of the political class, especially the current one-left-party regime, will be to double down on higher taxes and more micromanagement. If the voters still go along with the politicians, revenue will plummet again and the debt-to-assets ratio will become increasingly acute. Sooner or later, a critical mass of citizens and officials will be forced to recognize that a fundamental shift of direction is required.
The word bankruptcy invokes negative connotations. But in fact, bankruptcy is a brilliant invention of Western civilization, permitting debtors to get a second chance and creditors to be fairly compensated within the constraints of circumstances. The founders of the United States were wise to incorporate it into the Constitution (Article I, Section 8).
Consider the alternative: debtor’s prisons! And if you think that’s just a joke, look up Dubai; some supposedly modern and ‘capitalist’ countries don’t have bankruptcy laws, and indeed do incarcerate people who can’t pay their debts.
So let’s all get over our bankruptcy-phobia. It’s a golden opportunity to void out unsustainable promises and start over clean.
Bankruptcy can be avoided if our elected (and unelected) officials recognize the counter-productive nature of hiring unionized teachers at a rate faster than the growth of student enrollment, and promising unmatched defined-benefit pension plans to public employees without regard to portfolio performance.
But if bankruptcy must come, let it come before the entitlement culture turns us into France, where the youth unemployment rate among the children of immigrants is triple the already high general rate and unions paralyze the country and hold the citizens hostage at the mere suggestion that the retirement age be raised from 60 to 62.
There are many challenges to making this work, not the least of which is getting politicians to acknowledge that there’s a problem that politics-as-usual won’t fix, and then to act without prejudice (see: takeover of GM by the Obama Administration) to resolve it.
Put another way, California is not (yet) bankrupt, and that’s both the good and the bad news.