Monthly Archives: August 2012

California, the Great Power?

Glenn and I are planning to include a chapter on California. Is the golden state a Great Power?  We think so for a couple of reasons. First, if it were a country, California would rank in the top 10 in terms of raw GDP, world-leading industries (Hollywood, Silicon Valley), and even firepower thanks to military bases in San Diego alone. Second, it gets at the very nature of the USA, which is more a union of states than a nation (check the Constitution: the word nation doesn’t appear).

We’ve found some good essays about the California budget crisis, but would appreciate more.  Any suggestions for papers or reports with hard numbers?

Our reading so far includes the failure of Governor Brown to make significant pension reform happen as of yesterday (see the LA Times) and this nice essay by Sara Glakas that pointed us to a Pew study on the “state dysfunction scale” (where California sets standard). Hoover assembled an interesting task force on the topic as well but I cannot find the link just now.  Will try to update after getting your comments.  Thanks!

Is the U.S. Closer to BALANCE? Not really.

A key point we make in our introductory essay in BALANCE is that the ratio of U.S government debt to GDP departed from its historical pattern – rising in wartime, falling in peacetime – with rise of the welfare state and burgeoning deficits from unfunded ‘entitlement’ spending.  A common reaction we have gotten to our core conclusion that different budget rules of the game are needed to right the fiscal ship is a crisp: At least it’s not so bad as in Europe.

Not so fast.  Total government spending relative to GDP in the United States is close to levels in Spain or even Sweden.

But we’re ahead of Europe on pro-growth policy to help manage the burden of debt, right?  Again, be careful.  Newly elected French President Francois Hollande proposed large tax increases on high-income individuals, a corporate tax increase, and subsidies to government-favored industries – an anti-growth, fiscally damaging brew, to be sure.  But U.S. President Barack Obama proposed large tax hikes on high-income individuals, a minimum tax on corporations, and subsidies for manufacturing as a government-favored industry.

Stay tuned.

Polarized People says Pew – not so says Pew data

The Pew Research Center published a study in mid-2012 that claimed increased polarization among the American public along political party lines. This summary claim, reported widely in the press, is true only based on a flexible definition of WHO counts as polarized, and the underlying data seem much less certain. Consider the summary paragraph alone:

Americans’ values and basic beliefs are more polarized along partisan lines than at any point in the past 25 years. Party has now become the single largest fissure in American society, with the values gap between Republicans and Democrats greater than gender, age, race or class divides. The parties also have become smaller and more ideologically homogeneous over this period.  Continue reading

What does a ‘balanced approach’ mean?

Glenn and I wrote an essay that was published by Politico.com this morning  to launch the blog. Our aim is to frame the way policymakers and citizens should think about the word “balance.”  For the record, we’re both in favor of balancing the budget (see our Politico essay from LAST year).  Glenn likes to invoke the phrase “glide path” to budgetary balance. But that is a means to and end.  Read the essay here before this becomes an essay on its own:

The talk in Washington about a balanced approach to the U.S. federal budget deficit reminds us of the Old Testament account of Solomon’s Judgment. Two women who shared a house in Israel, sisters-in-law, approached King Solomon, each claiming to be the mother of the same infant and calling the other a liar.

“Fetch me a sword,” Solomon said, according to 1 Kings 3:24. Then, “Divide the living child in two, and give half to the one, and half to the other.” One of the women, spiteful and bitter in the heat of the argument, agreed to the split. The other cried out and begged Solomon not to slay the child, rather give it wholly to the other woman, who been revealed as the false mother. King Solomon gave the child to the one who truly loved the infant after the truth had been tricked into the open.

Today, Washington faces a similar dilemma. Instead of a baby, it fights over an ailing economy. …

Read the whole thing here. (And thank you, Politico!)

Battle of the Supermodels (State edition)

Sovereign entities are a collection of economic institutions which compete against others in a race for prosperity. A real-world collection of institutions can be thought of as an economic supermodel (in contrast with theoretical models). So when one nation prospers while another fails, we should pay close attention to that supermodel’s features.

The same logic applies to the 50 “laboratories of democracy” known as states. Steve Malanga suggests that the Wisconsin supermodel has lessons for California:

Californians should understand those fiscal pressures. Average annual pay for a local government employee in the state rose by 60%, to $61,185 (excluding benefits), between 1999 and 2008, according to the Little Hoover Commission on California State Government Organization and Economy. That’s about 70% more than the increase in private sector wages in the state over the same period. Average pay for cops and firefighters climbed 69%, to $89,056, again excluding benefits, in the same period. Benefit costs have soared even more than wages. The annual cost of funding pensions in California’s 20 largest municipalities has grown from $1.3 billion in 1999 to $5.1 billion last year, according to a study by Stanford University professor Joe Nation. That’s an annual growth rate of better than 11%.

Faced with such increases, municipalities in California haven’t had nearly the flexibility to mend their budgets that officials in Wisconsin have.

The link is here http://www.latimes.com/news/opinion/commentary/la-oe-malanga-wisconsin-california-bankruptcies-20120717,0,5879241.story

Beginning Balance

Welcome to Balanceofeconomics.com, a blog that Tim Kane and I are launching to share ideas about America, world history, and the concept of economic power. The blog is meant to help us brainstorm as we write a book together that is tentatively titled Balance: Why Great Powers Lose It and How America Can Regain It that will be published by Simon & Schuster in early 2013. Tim and I realized that if we are sharing ideas with one another then we might as well as share them with you. It must be said that what is written here is on our own behalf – individually – and does not represent the ideas of our employers, other associations, or even one another.

We were inspired (book and blog) in no small part by Paul Kennedy’s Rise and Fall of the Great Powers which coincidentally is celebrating its 25th anniversary. Our core theory is the economics is at the heart of great power growth and decline, and secondly that political stagnation leads to economic imbalance. Imbalance happened to Rome. Imbalance happened to Ming China. It is happening to Europe, to Argentina, to Japan, to California, and may be coming to a superpower near you. We’ll explore topics such as power accounting, the role of political institutions, and the lessons history has for the current American institutional model. We will update the blog regularly leading up to and beyond the release of Balance, and hopefully will have shed some light on America’s economic paradox (and learned a thing or two from readers).