Government fiscal policies show telltale signs of subprime 2008 meltdown

The State of Illinois is still paying off billions in bills that it got from schools and social service providers last year. Arizona recently stopped paying for certain organ transplants for people in its Medicaid program. States are releasing prisoners early, more to cut expenses than to reward good behavior. And in Newark, the city laid off 13 percent of its police officers last week.

from Mounting State Debts Stoke Fears of a Looming Crisis, New York Times December 4th, 2010

It seems appropriate that the month of December is dedicated to the release of Dr. Jackie Black’s new book “Couples & Money:  Cracking the code to ending the #1 conflict in marriage,” especially since financial challenges are not limited to the realms of the matrimonial home.  Perhaps there is a version of the book geared towards governments?!

As the opening paragraph of today’s post would seem to indicate, government and in particular those who oversee the coffers at the State and Municipal levels are, as the lieutenant governor of New York Richard Ravitch implies, prone to the same short-sighted, easy out decisions of its citizenry.  Specifically, and while empathetically recognizing that  “Ninety-five percent of them didn’t understand what they were doing,” their motives  were nonetheless skewed in that “they did it because it was easier than taxing people or cutting benefits.”  In short sacrifice mid to long-term stability in favor of here and now expediency.

What makes the current situation even more troubling is the propensity on the part of officials to use the elasticity of accounting rules in much the same way that dot.com companies used Generally Accepted Accounting Principles or  “GAAP” just before the implosion that shook the markets in 2001 to hide the true extent of their losses . . . nothing like a 10 year expense capitalization slight of hand to water down the debt load!

It is the “hidden, off the book debts” that similar to my 3 year old son’s belief that if he covers his eyes in the middle of the room the fact that he can’t see us must mean that we can’t see him, that distorts the real level of indebtedness and in the process mutes the true seriousness of the situation.  A scenario that has the experts worried in that it is eerily similar to the lower and inaccurate estimates associated with the mortgage-related debt that ultimately led to the most recent market meltdown.

Perhaps part of the problem is that spending taxpayer money is similar to making purchases using your personal credit card in that you are dealing with virtual funds versus cash in hand, where there is a physical element that actually shows something flowing out.  Whatever the reasons, in the end one always and inevitably has to pay the piper so to speak, and while bankruptcies at say the municipal levels, which haven’t happened since the Great Depression, may not materialize in the present, we are likely to see significant cutbacks in government services as a result of the growing fiscal shortfalls.

It is at the point that these cutbacks manifest themselves in the form of real-world impact that will invariably stir the masses and with it the public discontent that lead to big election losses for the incumbents.  The irony of course is that political interests taking precedence over fiscal responsibility in the form of making short-sighted decisions will lead to the very election losses that the majority of those in power wanted to avoid in the first place.  A kind of you can pay me now, or pay me later scenario.

In this chicken and the egg dance, the public of course must bear a certain degree of responsibility in that politicians are put in a no win situation that makes expedient decision-making the order of the day.  Think about it for a minute, if a politician runs for office on a platform of increasing taxes and cutting services what is the likelihood that they will be elected?  Even after getting to office, how many are likely to be re-elected providing a similar revelation?  So the dance goes . . . where the public is content to be left in the dark, while the politicians are all to happy to introduce fiscal policy that is tantamount to a ticking time bomb.  It is just a matter of time as to when the thing (in this case the economy) will go off.

Nothing like living on borrowed time . . . I can hear it now, tick – tick – tick . . .

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Comments
3 Responses to “Government fiscal policies show telltale signs of subprime 2008 meltdown”
  1. fielding dent says:

    I enjoy how you tie the micro and macro economics together. The electorate will grow weary of this intent, most hopefully. In my social discourse I am surprised at the level of ignorance and apathy concerning things of such importance. Please continue opining on this subject. There are still some of us who are vigilant and rebuke bad economic policy.

  2. fielding dent says:

    If in our personal lives, If we were buttressed with endless coiffures of money and apathetic participants on a smaller level…the responsible would attempt to remedy this at once. On this level they have the electorate to answer too…that may be,-unfortunately…some are too busy earning a living and dealing with personal matters to keep a Hawks eye on important matters such as this. In the end….it’s the responsibility of the tax payer and good folks to hold their proverbial feet to the fire. They ought to be subjected to the same laws that the working individual is in such matters…ostensibly they are…however…not many know or even care…how sad this is indeed. Keep up the good work!

  3. Paul says:

    It amazes me that the people can’t actually see this. They want lower taxes. They want more services. And some charlatan politicians actually sell this message. Even last week tax cuts in the US were extended in return for keeping unemployed people on benefits. Huh? When you start borrowing money to go to war you have completely lost the plot.

    But what is happening. In the UK they are raising university fees but not actually raising the taxes of the rich. If they did the latter by just 1 percent it would more than cover the money they are getting by taxing education. In the US they extend tax cuts to the rich, who are not “trickling down” with the money, thus there is no benefit to anyone but the, um, rich.

    I am not advocating a socialist system of taxing the heck out of the well off, but since Reagan we have seen nothing but continued tax cuts for the rich and no real benefit for anyone else. And now, as we struggle to pay it off, the one sector that seems exempt from doing anything is surprise, surprise, the rich. What a perverted logic that is.

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