Reality vs. Theory

Jerry Pournelle, a multiple PhD, and one of my favorite authors along with a lot of other people who are way smarter than I am think that the way out of the current economic crisis is tax and regulatory relief:

The economic forecasts are gloomy despite the hastily passed stimulus package; and we haven't seen what new regulations are hidden in the stimulus package. I doubt that anyone has read the entire bill even yet.

The best way out of this mess is the German Economic Miracle way: suspend regulations. All regulations. Make it easy to start new companies. Let ingenuity work to allocate capital. Of course we won't do that.

That's the theory and as near as I can tell it is at least as sound as the approach the US is taking.

Here is the reality:

These days, the Golden State leads the nation on economic and fiscal dysfunction, from the empty homes spread across the Central Valley to the highest state budget shortfall in the nation's history. Meanwhile, its political class pioneers denial in the face of catastrophe.

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The budget adopted in a marathon session this week splits the baby, closing the deficit with spending cuts (hated by the left) and tax hikes (ditto the right), all the while largely failing to tackle the state's built-in structural defects.

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Even discounting for the impact of global recession, the most populous state's ills are unique and self-inflicted -- and avoidable. In the last three decades, California expanded the public sector and regulation to Europe-like dimensions. Schools, state employees, health care, even dog kennels, benefited from largesse in flush times. Government workers got 16 official holidays, everyone else six. The state dabbled with universal health care and adopted strict environmental standards. In short, California went where our new president and Nancy Pelosi of San Francisco want America to go.

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The parallels are also disquieting. The French have long experienced the unintended consequences of a large public sector. Ask them about it. As the number of people who get money from government grows, so does the power of constituencies dedicated to keep this honey dripping. Even when voters recognize the model carries drawbacks, such as subpar growth, high taxes, an uncompetitive business climate and above-average unemployment, their elected leaders find it near impossible to tweak the system. This has been the story of France for decades, and lately of California.

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California is in a French-like bind: unable to afford a welfare-type state, and unable to overhaul it. "The people say they want all these programs, then there's nothing they want to pay for," says Hector De La Torre, a Democratic assemblyman. "The schizophrenia in the legislature reflects the peoples'."

source

The article above starts with:

As California goes, says an old cliché, so goes the nation. Oh my.

and we have already seen evidence of that; The Congressional Budget Office predicts that the stimulus package will decrease GDP over the next 10 years, labor and green constituencies are already flexing their muscle by inserting provisions such as "Buy American" and enhanced environmental provisions. We are less than a week into this stimulus and we are already well on the road to:

subpar growth, high taxes, an uncompetitive business climate and above-average unemployment, their elected leaders find it near impossible to tweak the system.

To make matters even better the U.S. is intending to follow in California's winning formula of higher taxes, increased services and decreased discretionary spending with President Obama's first budget.

Recipe for success!