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States of Denial

California has drawn national attention for a proposal to raise fees at the state’s renowned universities and for Gov. Arnold Schwarzenegger’s push to divert money from prisons to schools. Yet California is far from the only state forced to consider such measures because of declining tax revenues. Consider this: Every state save Montana and North Dakota is facing a fiscal deficit, and over the next two years the cumulative gap is projected to reach $350 billion. The challenges confronting legislators are made all the more complex by state constitutions that mandate a balanced budget and by the drying up of federal stimulus money.

In most states, tax increases are not being considered, either for reasons of principle or practicality. In Oklahoma, where lawmakers face an 18-percent shortfall, a tax hike can be approved only by a voter referendum or a super-majority of the legislature. In Idaho the Republican governor has vowed not to increase the size of state government and has instead proposed a 4-percent cut in education spending. To deal with its budget gap, Arizona is expected to close 13 state parks, and Iowa legislators are considering a government reorganization bill that would cut off funding to 11 juvenile detention centers.


Another round of stimulus money could temporarily solve the states’ budget woes, but that politically unpopular solution is unlikely. A more radical solution seems called for: a fundamental rethinking of the costs of citizenship. For too long the mantra of low taxes—small government has fed the chimerical idea that the social services we all rely on can be sustained with little personal financial sacrifice. It appears the day of reckoning is at hand.

Does Ben Bernanke Get It?

The chairman of the Federal Reserve Bank, a highly trained economist with expertise in the Great Depression, may have helped to save the world economy from total meltdown last year. True, Ben Bernanke made some colossal blunders—for example, helping to engineer the plan to lavish pots of money on banks without any marching orders other than to “spend it.” They did, but not where it counts: in loans to average Americans. Still, Mr. Bernanke’s smarts probably helped avert an even greater financial catastrophe. But smart or not, it was dispiriting to hear Mr. Bernanke, in a speech to the American Economic Association in January, outline the reasons for the economic crisis without once mentioning the Fed’s unique role. He still seems confident in the Fed’s “unparalleled expertise,” as he told Congress in December.

What does the Federal Reserve do? Essentially, it manages the country’s monetary policy by regulating the availability and cost of money (through interest rates) to banks. (This contrasts with fiscal policy, which is driven by government spending, borrowing and taxing.) The Fed was founded in 1913 specifically to combat financial panics and runs on banks. When the economy is overheated, as it manifestly was during the subprime mortgage boom, the Fed could have regulated interest rates to dampen the banks’ ardor for mortgages. It did not. Now some wonder whether the Fed should be brought under Congressional control, a disastrous idea that would tie interest rates to political whims. A better idea would be for Mr. Bernanke to push for immediate reforms in the banking industry, specifically the reinstitution of the regulations of the Glass-Steagall Act, which limit financial speculation by bankers. That would really be smart.

Divided in Gaza

The Egyptian government is building an underground barrier along its border with the Gaza Strip. Its alleged purpose is to prevent the smuggling into Gaza of arms and other prohibited items, like drugs and alcohol, through as many as 1,000 tunnels. But once completed, the underground steel wall may also prevent Gaza’s residents from receiving needed food and medical supplies transported though the existing tunnels between Egypt and Gaza. The present tunnel system thus serves a humanitarian purpose.

An extensive tunnel smuggling operation expanded when the Islamist movement Hamas won the Palestinian elections in 2006. Efforts by border guards to close off the tunnels have largely failed because new ones are constructed as others are shut down. Hamas in effect licenses the tunnels, providing electricity and imposing a tax on smuggled goods. The United States and other Western countries regard Hamas as a terrorist organization.

Made of steel assembled in a jigsaw pattern to make it more difficult to penetrate and extending over 50 feet down into the sand, the six-mile-long barrier is expected to take a year-and-a-half to complete. The U.S. Army Corps of Engineers is assisting in its construction. Early in 2008, the United States gave $23 million in aid to the Egyptian government to stop the use of existing tunnels, which were intended to circumvent Israel’s economic blockade of Gaza after Hamas assumed power. The underground barrier portends increased suffering for the people of Gaza and is a further deterrent to peace efforts.

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9 years ago

I lived in Berkeley for 10 years. My experience was that Californians like nice public goods. They just don't want to pay for them. I don't blame them. Who does? Howard Jarvis told them they had the right to a large free lunch. They took him at his word. The rest is history. A salutary lesson for the Federal government. If we don't get our fiscal house in order, this train wreck is coming to a budget near you, probably within the next 20 to 25 years, if not sooner.

Oh, like Mae West once said, goodness has nothing to do with it.

C Walter Mattingly
8 years 12 months ago

My understanding is that state income taxes in California for high wage earners are the highest or second highest in the nation. High taxes have already driven out many of the most talented to other western states. Would further increases likely help the situation? If so, the middle class and upper middle class will have to see their taxes rise significantly. Enough high level talent has deserted the state already.

The last time Barney Frank instructed Fannie and Freddie to extend mortgages to those who according to sound banking practices could not afford to repay them, this economic malfeasance resulted in the collapse of Fannie and Freddie directly and Washington Mutual indirectly. It also played a large part in our current mortgage debacle. Is it any wonder that now when the administration tells banks to lend more money that they consider to be unsound loans they are hesitant to do so again? We already are on the hook for over half a trillion dollars as a result of the original commandments Barney gave these institutions, now largely defunct.

Mike Evans
8 years 12 months ago

I am a Californian. The state taxes we pay are really chump change in the grand scheme of things For the record, Fannie and Freddie did not take on loans that were substandard, except in the amount of down payment required. Those loans were subject to mortgage insurance. The takeover of Fannie and Freddie was to satisfy other non-regulated lenders who felt their responsible lending practices were too much competition. And then, it all blew up in their faces with the AIG bailout. I would gladly endorse a 10% income tax surcharge to help get our state budget back in balance. I would not endorse the end of social and health programs that serve our most vulnerable brothers and sisters. Can we not be like the unwise and foolish who expect God to perform miracles they themselves cannot endorse?

TM Lutas
8 years 12 months ago

A new multi-year study has come out documenting how much Head Start actually helps children as opposed to making adults feel good about children. It's a failure that has eaten up $166B in tax dollars over the life of the program with nothing to show for it. Can we agree on halting that spending? 

We regulate and strangle businesses and are surprised that we do not grow rich enough, fast enough, to support our desired level of public services. I would like a pony too but I know that work is required. Like many an aging actor, rock star, or boxer, we have woken up and found out that our entourage has been whispering lies in our ears that we can afford everything and no restraint is called for. 

Face the truth. We cannot afford what we've been told we can afford. We must climb down from this unsustainable position or our creditors will do it for us, catastrophically. If that happens, we haven't even begun to see the suffering our profligacy will cost. 

Regarding Gaza, you are ignoring the plain fact that if Egypt wanted to, it could simply stop the tunnels by opening the border. Egypt is punishing Gaza no less than Israel for electing a terrorist movement as its government. The US is aiding Egypt in making its own sanctions against Gaza more effective. Egypt's current hypocrisy of punishing Gaza while permitting tunnels is ending. An honest assessment of the Egyptian government position would be helpful. 

Ultimately, the choice is in the hands of Gazans, whether they want to remain tied to a government committed to genocidal violence but very incompetent at it.  

Stanley Schardon
8 years 12 months ago
I would be very interested in a non-biased study on the growth of governemnt versus the private sector. This study should include the growth of unions in the public sector. Is it in the unions self-interest to increase taxes to support higher wages?

Do we need to fund expensive stadiums and other facilities for school atheletes? Do we need to pay college coaches hundreds and some millions of dollars? Where should our priorites be?

I think that there are many areas in the public sector that can be made more efficient and productive before saying we need to raise taxes.
John-Otto Liljenstolpe
8 years 12 months ago

The Obama Administration's continued support of the inhumane Israeli siege of Gaza, not to mention Israel's illegal occupation of the West Bank is unconscionable.  Not only does it put the current administration in the same moral category as the preceding administration, but it renders the United States incapable of operating as a credable peacebroker in the Middle East.

Elaine Tannesen
8 years 12 months ago

Sometimes it looks like the goal of Israel, with United States tax money and support, is to bomb and starve those in the Gaza strip until all that exists is a pile of sand. Any voice of criticism of Israel here in the US is met with a storm of outrage. However, the rest of the world is aware of the brutality of the situation. 

Sadly, this immoral violence and cruelty only contributes to the long range insecurity of the Israeli people.  You cannot kill and steal and expect the families of the injured to forget.  The only steps towards lasting peace will include steps towards justice for the Palestinians.

Charles Erlinger
8 years 11 months ago

I wish that  you would apply the thought contained in your sentences: "A more radical solution seems called for: a fundamental rethinking of the costs of citizenship. For too long the mantra of low taxes—small government has fed the chimerical idea that the social services we all rely on can be sustained with little personal financial sacrifice. It appears the day of reckoning is at hand" to your previously expressed thoughts on universal health care.  The idea that universal health care can be shoe-horned into the insurance business model is just not possible.  Sure, it can be legislatively mandated, but it can't be sustained in real life. Outside of the legislative language that it may be depicted in,  there is no economic rationality to sustain it.  If we want it , we pay for it.


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