Central Planners are the Reason Why the US Economy is Broke

Bloomberg reports:

‘California Highway Patrol division chief Jeff Talbott retired last year as the best-paid officer in the 12 most-populous US states, collecting $483,581 in salary, pension and other compensation.

‘Talbott, 53, received $280,259 for accrued leave and vacation time and took a new job running the public-safety department at a private university in Southern California. He also began collecting an annual pension of $174,888 from the state…

‘While more than 5,000 California troopers made at least $100,000 in 2011, only three in North Carolina did, the data show. Talbott’s $483,581 in total pay – adding six months of his $174,888 annual pension, based on his June 30, 2011, retirement date – is almost four times as much as the $122,950 collected by the top-paid officer in North Carolina, a commander, the data show.

‘Talbott declined a request to be interviewed, said Patty Zurita, communications manager at the University of the Redlands in Redlands, California, where he now works.’

Nice gig. Retire at 53. Get a pension of $174,000. And then get another job in the same line of work.

Mr Talbott is probably a decent fellow. He probably does a good job. But he has been zombified. What he gets no longer matches up with what he deserves. In other words: he consumes more resources than he really earns.

Why are we making so much of zombies? Is this some kind of joke?

Nope, ‘fraid not.

If you don’t understand zombies, you’ll never really understand what is going on in the Great Correction. The Fed is printing $85bn a month…governments are running trillion-dollar deficits…and zombies are getting all the money…

Since 2008, the US economy and much of the world has been paying down and defaulting on debt. This is just natural. People make mistakes. Especially, when central banks give them far too much credit. They borrow too much.

Then, they realise they have to downsize. That’s what the private sector has been doing since the collapse of subprime debt in 2007.

So what if people make mistakes? Exactly! Who gives a damn? When an individual person or an individual company makes a mistake, it is self-correcting. Suppose, for example, a person drinks too much.

If he keeps drinking more and more, the problem will take care of itself. He’ll either go on the wagon… or he’ll get delirium tremens and crack up. He’ll get what he deserves. So too, a company that is severely mismanaged will get the heebie jeebies and go broke. Soon, it will not exist. Problem solved.

Even if the entire private sector goes off its head and borrows too much… so what? Don’t worry about it. That’s what corrections and depressions are for.

But there are some mistakes that are self-reinforcing, not self-limiting; they get worse, not better. And there are some victims who are the not the same people who made the mistake.

When central planners make a mistake, the harm often falls on everyone but the central planners themselves. And when they’ve gone too far… they just keep going!

Why is that?

It’s because of the peculiar perverse feedback loops in centrally-planned systems.

First, as systems become larger and more mutualised it becomes harder to tell what’s really going on. Ben Bernanke and Larry Summers can tell us that we are in a period of ‘demand shortage’. What the hell? Maybe they’re right.

And when they apply their fixes, we can’t really know what will happen either. Maybe the economy really will run better. And maybe their fixes could help. What do we know?

Second, the fixes almost always mean more money to someone who hasn’t earned it. One company gets bailed out. A whole industry gets recapitalised and subsidised. The Fed prints and the federal government is able to continue its free-spending ways…with more employees, more disabled people, more contracts, more food stamps and so forth. All of these people are zombies.

They consume. They produce little or nothing of value. Then, the zombies push for more spending…bringing forth more zombies! At least Mr Talbott works. Many zombies don’t bother to lift a finger. Pretty soon, half the country is living at the other half’s expense.

The Fed buys US Treasury debt and mortgage backed securities with new cash. What do the financial institutions do with it? They need to put it to work. The private sector isn’t borrowing. So that leaves government – state, local, and national. And since governments can finance their deficits with this easy money, it is easier for them to continue spending rather than cut back.

Remember how Leszek Balcerowicz, Poland’s central banker, put it: they ‘get a lot of cheap financing to finance bad policies.’

What do they spend it on? Zombies. They pay police officers four times what they’re worth, for example.

But wait, sure zombies cost money. But don’t we get a better economy when we spend more money? Don’t we get more and better services when more people are on the government payroll? Buffett, Krugman, Obama et al are clamouring for higher taxes. Doesn’t better government cost money? And don’t places that pay more get more?

Not on the evidence.

‘States that Spend Less, Tax Less – And Grow More’ begins an article in the Wall Street Journal last week.

The US states are good places to observe the effects of tax and spending policies. They all have more or less the same sort of people, same culture, same national economic and trade policies and so forth. But they have very different tax systems…and they spend very different amounts.

The American Legislative Council studied the data. Did it show better services in the high tax/high spending states? Did it find faster GDP growth where state governments ‘stimulated’ the economy with high levels of taxation and spending?

Education is the top item for most states. But spending on education ‘has no relationship to outcomes’, the researchers concluded. Per pupil spending varied from a high of $18,126 per student per year to a low of $8,507. The difference in output as measured by standardised testing? Negligible. The extra ‘investment’ of resources was wasted.

Nor did the higher tax states show stronger GDP growth. The study’s conclusion:

‘States without an income tax have significantly better growth in private sector GDP (59% versus 42%) over the last 10 years. They increased the number of jobs by 4.9% while jobs in the rest of the states declined by 2.6%. States without an income tax gained population (+5.5%) from domestic migration (US residents moving in and out of states) while all other states as a whole lost 1.3% of population between 2000 and 2009.’

Grover Norquist is right. Higher taxes (and/or Fed money printing) merely enables higher spending.

Don’t feed the zombies!


Bill Bonner
for Markets and Money

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The Price of Risk in the Stock Market
12-12-12 – Murray Dawes

Recessions the World Over
11-12-12 – Dan Denning

A Victory Over the Zombies!
10-11-12 – Bill Bonner

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

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Less Taxes, less government, less overpriced unproductive services……whats not to like

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