Saturday, August 30, 2008

How To Ruin A State Economy In One Easy Step - Another Lesson

Back in May I wrote a cautionary tale about how easy it is to ruin a state's economy. The tale highlighted Michigan's efforts to drive the final nail in the coffin of their economy, raising taxes again and again to bolster falling revenues only to see revenues fall even further, widening an already horrendous budget deficit. Pro-labor/anti-business legislation didn't help things either. These things have had the effect of seeing twice as many people moving out of Michigan as are moving in, not something anyone in state government wants to see.

More than one state has fallen into that trap in the past and present. Some have done that more than once, proving Santayana right: ”Those who ignore history are doomed to repeat it.”

Connecticut is starting to feel the strain, as is Massachusetts, with incipient tax revolts brewing even as both states continue their profligate spending. Massachusetts should know better, having suffered through economic self-immolation back in the 1970's. But Governor Deval Patrick and the Massachusetts House and Senate seem bent on ensuring a return to those dire times. They've forgotten the lesson.

California is also in a mess, with a deficit measuring somewhere around $15 billion (that's “billion” with a “b”). Raising taxes will only deepen their problems, and businesses and taxpayers will soon start voting with their feet. It doesn't help that Republican Governor Arnold Schwarzenegger and the Democratic-controlled Assembly are at loggerheads, with neither side willing to budge on spending cuts and tax increases.

But the best object lesson anyone can offer is the state of New Jersey, which was once considered one of the most business friendly states because of its low tax burden. But those days are long gone. Between one of the highest tax burdens in the nation and more restrictive business laws and regulations making it more difficult for businesses to survive, is it any wonder the Garden State is turning into an economic basket case?


Jersey’s decline has been rapid and astonishing. Back in the 1960s, one study judged it among the country’s ten most business-friendly states because of its light tax burden, which allowed it to attract a steady stream of businesses and residents from New York. Though there were occasionally signs of trouble over the years—like the pension shenanigans of Governor Christie Whitman, in which government shirked its long-term obligations—the state’s real decline started with the election of Jim McGreevey and a Democratic-controlled legislature in 2001.

In the middle of a recession, McGreevey and the legislature raised taxes and fees an astonishing 33 times to raise $3.6 billion. The state also passed a heap of labor-friendly, antibusiness laws that rapidly worsened conditions. The McGreevey administration hammered an executive at one of the state’s biggest employers, Federated Department Stores, for announcing that the new taxes would force the company to reevaluate future growth plans in Jersey. In 2002, the Beacon Hill Institute rated Jersey 26th among the states in overall competitiveness, but by 2004 Jersey had plummeted to 44th, the largest decline of any state, noted the institute, which also ranked Jersey’s government performance next to last among the states—in case you were wondering what prompted the decline.

Yet Jersey’s leaders have learned little. In 2006, the state enacted several billion dollars of new taxes. And Governor Jon Corzine recently signed into law one of the most astonishingly anti-growth and simply foolish (there is really no other word for it) pieces of state legislation in memory. The new law requires towns hosting private-sector commercial or residential development to build subsidized affordable housing as well. Towns say that they will have to tax developers and raise property taxes to pay for this. If you knew nothing about New Jersey, you might assume that the state was prospering and that its developers were rolling in money. But the state’s commercial vacancy rate is a whopping 19 percent (by contrast, Manhattan’s is about 7 percent), and prospects for filling up that empty space are slim, considering that a recent national survey of corporate executives ranked Jersey as one of the least attractive places to expand. A state in desperate need of business just made doing business even more expensive.

It's always a recipe for disaster, pissing off the folks that actually create jobs by stealing even more cash from their wallets while at the same time tying their hands when it comes to how they will run their businesses. You'd think that no one in New Jersey government had ever taken (and passed) an economics course. If the state government can't get its act together, cut spending, cut taxes, and shake off the influence of organized labor and other special interests, businesses and taxpayers will leave the Garden State in droves, heading to more business and taxpayer friendly states that will gladly welcome them.

Is it a coincidence the states suffering the most from these kinds of problems are controlled by Democratic majorities in their legislatures? Is it any coincidence most of the states having the biggest problems of this type also have Democratic governors? It's something to think about as we approach Election Day this November.

These examples should be, if nothing else, a warning to New Hampshire legislators, the governor, and every working man and woman in the state. Should New Hampshire go down the same road as the others we can kiss our jobs, homes, and way of life goodbye. The Democrats in the state see the Triple Crown (majorities in the New Hampshire House and Senate, as well as the governorship) as a license to spend like there's no tomorrow. They already managed to increase state spending by 17.5% for the current state budget without figuring out a way to pay for it. Their revenue estimates were overly optimistic even before the economy softened and the housing bubble deflated. Because of that we face a $200 million deficit.

The governor has already taken steps to cut back state spending and instructed department heads to prepare two budgets, one that is zero-change from their present budget, and one that cuts back from their present funding level. The question is whether the department heads will comply, and whether the legislators will comply to the wishes of the governor (and the taxpayers). Hopefully they will be held in check and will not be able to send us down the path to economic ruination as has happened in so many other states.

If I were more cynical than I already am, I'd say this budget crisis was created solely for the purpose of forcing a broadbased tax upon the people of New Hampshire by those licking their chops at the prospect of being able to push forward their liberal agenda and all the control over people's lives it will gain them. After all, we not among the Anointed aren't smart enough to make decisions for ourselves. At least, that's what they'd like us to believe. But the rest of us know better, don't we?

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