By Ajay Shah, on July 7th, 2009
The Great Recession has induced a unique setting for Indian economic policy. See India in the Great Recession (April 2009) and The setting for the budget speech (May 2009).
These articles emphasise that the dominant story of Indian business cycle fluctuations is the situation with private corporate investment. When this analysis was written (April and May 2009), the problem of a drop in private corporate investment was only a conjecture. Now some data is showing that there is indeed a problem. Here are the two most interesting measures of investment activity, using monthly data. In both cases, I show the average of the four most-recent values of the seasonally adjusted annualised rates (SAAR). This is similar to the familiar year-on-year growth rates of monthly data with one big difference: the yoy growth rate is the average of the latest 12 values while here we’re averaging the latest 4 months so as to pickup the recent action:
| Month |
IIP capital goods |
Capital goods imports |
| May 2008 |
31 |
-13 |
| Jun 2008 |
19 |
16 |
| Jul 2008 |
-18 |
98 |
| Aug 2008 |
8 |
-4 |
| Sep 2008 |
50 |
25 |
| Oct 2008 |
1 |
-16 |
| Nov 2008 |
2 |
-36 |
| Dec 2008 |
11 |
41 |
| Jan 2009 |
-37 |
-37 |
| Feb 2009 |
14 |
-32 |
| Mar 2009 |
-10 |
|
| Apr 2009 |
-21 |
|
This data shows that there is a significant threat of a substantial dropoff in private corporate investment.
Fiscal, financial and monetary institutional reform
FM says he will `return to the FRBM target for fiscal deficit at the earliest and as soon as the negative effects of the global crisis on the Indian economy have been overcome’. Apart from that, there was nothing on fiscal, financial and monetary institutional reform. Pranab Mukherjee said:
Never before has Indira Gandhi’s bold decision to nationalise our banking system exactly 40 years ago – on 14th of July, 1969 – appeared as wise and visionary as it has over the past few months. Her approach continues to be our inspiration even as we introduce competition and new technology in this sector.
Put together, I did not see progress on fiscal, financial and monetary institution building.
Financing of the government
There was no statement on using sale of government assets in order to pay down debt.
The GST is to be implemented from 1 April, 2010. I do get nervous given the immense complexity of that effort and the lack of accomplishment on the ground.
There are five major bad taxes in India: STT, cesses, customs, octroi and stamp duty. The budget speech tinkered with none of these. There was an `abolition’ of the commodities transaction tax (which had never been levied anyway). It is distortionary, having taxation of some kinds of financial transactions but not of others. The `fringe benefit tax’ was abolished.
There was no movement towards fiscal austerity that I could discern.
Put together, I did not see progress on financing of the State.
Core public goods
Core public goods are the genuine business of the State. There seem to be substantial increases of expenditure on defence and home. This might suggest that the fraction of public expenditure on core public goods might have gone up. I am, so far, not able to tell whether this change is significant.
Infrastructure
There seems to be more money being spent on infrastructure. There is little evidence of institutional reform. The Ministry of Finance seems to be keen on building IIFCL, which seems worrisome. It is not clear that IIFCL will not suffer the fate of IDBI / IFCI / etc.
Education
The spending on Sarva Shiksha Abhiyan (SSA) has not risen in nominal terms, which is good, but a new Madhya Shiksha Abhiyan has been created. If this ends up being run like SSA, then we’ll know that there is little interest amongst politicians in actually getting India’s children educated.
Subsidies
There are good noises about fertiliser and oil subsidies, but no action.
The role of the budget speech
Maybe we do wrong in asking for a significant workplan in the highlights of the budget speech. Maybe a lot of good things will get done even though they were not announced. I have an article in Financial Express titled Which type of budget speech is this?.
Fiscal numbers
Here is a spreadsheet (.ods file) where I have a few years of data, with some value added, from `budget at a glance’. This has no corrections for the off-balance sheet stuff.
Tax revenues were at 9.17% of GDP in 2007-08. These dropped to 8.59% of GDP in 2008-09 (RE). The budget projection for 09-10 wisely places this number at 8.07% of GDP.
Non-tax revenues are projected to go up a bit: from 1.77% of GDP in 08-09 to 2.39% of GDP in 09-10. This is primarily on the back of revenues from the 3G spectrum auction.
Put together, revenue receipts are budgeted at 10.45% of GDP compared with 10.36% last year and 11.3% the year before. These projections seem reasonable to me.
Fiscal stress + gloomy revenue projections should have led to belt-tightening on expenditure. This did not happen, partly owing to the 6th pay commission.
Non-plan expenditure rose by 21.8% last year and is projected to rise by 12.6% this year. It will go from 10.59% of GDP in 07-08 to 11.83% of GDP in 09-10.
Interest payments to GDP – a key marker of fiscal stress – continues to be in troublesome territory, from 3.57% in 07-08 to 3.84% in 09-10. This is despite the dramatic collapse in inflation which should have made government borrowing much cheaper.
Plan expenditure is growing exuberantly: from 4.28% of GDP in 07-08 to 5.53% in 09-10.
With sombre revenues and a good deal of spending, we have dire deficits. The revenue deficit jumped from 1.1% in 07-08 to 4.45% last year and is budgeted at 4.81% the coming year. In other words, there is not even an attempt at fiscal correction.
The fiscal deficit was at 2.65% of GDP in 07-08; this went up to 6.02% last year and is budgeted at 6.82% for 09-10.
And finally, we switched around from a primary surplus of 0.92% in 07-08 to a primary deficit of 2.47% last year and are budgeted to have another big primary deficit of 2.98% in 09-10.
There is a caveat on all these numbers when expressed as percent of GDP. Nominal GDP is projected to be up in 09-10 by 8.35% when compared with the previous year. It is possible to think of combinations of real growth and inflation which will get this, but I would have been happier with a somewhat lower projection.
Other interesting comments: See Jahangir Aziz in Financial Express; M. Govinda Rao in Business Standard; an editorial in Business Standard.
Good news
Don’t I have any good news? I do. At NSE, derivatives on Nifty did turnover of Rs.707 billion or $14.7 billion. And, currency futures at NSE did turnover of $1.2 billion. So we’re in good shape on having a strong equity market, and we’re learning how to do currency trading also.
By Eldon Mast, on July 7th, 2009
The Conference Board reported this week that there were 3,294,800 online job postings in June on more than 1,200 major Internet job boards.
The postings between January and May signal an improvement from the decline of 1.2 million postings between August 2008 and January 2009.
“Job demand has definitely stabilized since January,” said Gad Levanon, from The Conference Board. “Although there is some bounce in the monthly numbers, the number of online advertised vacancies has held steady in the last three months.”
Renee Fulton, from the staffing firm Talis Group, said employers these days are looking to hire — and to hire quickly.
She believes that companies needed the help long before now, but they had stopped job orders because of uncertainty in the economy.
As a result, business was slow from November to March.
But her outlook for the rest of 2009 is much more positive.
Recent activity, particularly the placement of engineers in the manufacturing sector, has picked up. Last month the number of job orders for her firm was level with the same time frame last year. She said June 2008 was a very strong month.
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By Bron Suchecki, on July 6th, 2009
Dmitry Orlov recently posted an article titled Definancialisation, Deglobalisation, Relocalisation.
For those not familiar with Dmitry, he is the author of Reinventing Collapse, which is all about “prepar[ing] for life without much money, where imported goods are scarce, and where people have to provide for their own needs, and those of their immediate neighbours.”
In this article, Dmitry has a go at money and suggests barter can do the job but then suggest this is probably a better solution:
One option is to organise as communities to produce certain goods that the entire community wants: food, clothing, shelter, security and entertainment. Everyone makes their contribution, in exchange for the end product, which everyone gets to share. It is also possible to organise to produce goods that can be used in trade with other communities: trade goods. Trade goods are a much better way to store wealth than money, which is, let’s face it, an essentially useless substance.
I can’t say I share Dmitry’s belief in this socialist nirvana. The catch for me is “everyone makes their contribution” bit. Anyway, my main beef is with his belief that trade goods are a better way to store wealth and that money is essentially useless. Now I’m not going to discuss why money is better than barter (either between individuals or “communities” it doesn’t matter), as I think most people reading this get it. I’m more interested in why Dmitry would be so negative on money given its obvious efficiency it brings to exchange. The explanation is in this statement later in the article:
When we use money, we cede power to those who create money (by creating debt) and who destroy money (by cancelling debt). We also empower the ranks of people whose area of expertise is in the manipulation of arbitrary rules and arithmetic abstractions rather than in engaging directly with the physical world.
This has to be one of the best examples of the infiltration of the idea of fiat into society. This guy’s whole shtick is about radically challenging society yet he can’t conceive of money as anything but debt, so much so that he proposes returning to barter rather than retaining the benefits of money, but money which is directly engaged with the physical world – gold.
Another example of this misguided thinking is his statement that a lack of money “makes it more difficult to hoard wealth”. Professor Fekete has often debunked this demonisation of hoarding. Dmitry himself is confused on this matter – he thinks it is OK to hoard wealth in the form of trade goods, but not money.
I considered replying to Dmitry’s article on these matters, but thinking about how brainwashed (I can think of no better word) he is on money, I considered it a futile task. I could see a stereotypical negative perception of gold as some goldbug doom and gloom eccentricity. I see a need to condense Professor Fekete’s work into an easy (and quick) to understand case for sound money. Another one for the to-do list.
By Ajay Shah, on July 6th, 2009
Microsoft has long faced by a credibility gap in getting into mission critical, enterprise settings. One initiative they embarked on was the `TradElect’ system which did trading at London Stock Exchange. This trading system was built by Microsoft and Accenture who were keen to prove that it could work. It utilised a series of Microsoft technological components. It was used in ad campaigns by Microsoft who claimed that if they could handle London Stock Exchange then they are ready for Serious applications [example, until they take down the page].
This is not as much of a big deal as meets the eye. The London Stock Exchange is a famous and well known brand name, but it’s not particularly a big exchange by world standards. That is, it’s not a really demanding IT problem. Here’s some data, from the June newsletter of the World Federation of Exchanges. At page 39, they show the number of trades through order matching that are seen on all member exchanges for Jan-May 2009, a period of five months. I have added one column where I translate this into trades per second under the assumption that there were 110 trading days in these five months and trading took place for six hours a day.
| Exchange |
Million trades (Jan-May 2009) |
Estimated trades/s |
| NYSE Euronext |
1403 |
590 |
| Nasdaq OMX |
1167 |
491 |
| Shanghai |
794 |
334 |
| NSE |
602 |
253 |
| Shenzhen |
456 |
191 |
| Korea |
371 |
156 |
| BSE |
222 |
93 |
| Taiwan SE |
108 |
45 |
| London SE |
72 |
30 |
| NYSE Euronext (Europe) |
70 |
29 |
| Hong Kong Exchanges |
53 |
22 |
This shows NYSE and NASDAQ at 590 and 491 trades per second, which is a challenging IT problem. The two big Indian exchanges — NSE (rank 4) and BSE (rank 7) — are also difficult problems at 253 and 93 trades per second.
These are averages for the system load; in this business there is an extreme peak-to-average ratio. E.g. NSE routinely exceeds 1000 trades/s and occasionally does a lot more. There are days when half of the days activity happens in the last 30 minutes. So the IT challenge is much bigger than the average trades/s seems to suggest.
In this ranking, London Stock Exchange is not that big; it’s ranked 9th in the world and does an estimated 30 trades per second on average. So it was a good choice for a certain kind of vendor who tries to make a point using a toy problem which does not sound like one.
The story seems to have gone badly wrong for Microsoft. LSE consistently failed to match rivals like Chi-X, which run Linux, in becoming a credible choice for algorithmic trading. Then there was a day when the trading system collapsed (9 Sep 2008).
This played a role in the CEO of LSE, Clara Furse, getting sacked. The new CEO, Xavier Rolet, is said to have decided to dump TradElect. Here’s the story, by Steven J. Vaughan-Nichols.
To be sure, complex engineering projects can fail for many reasons. But it’s ironic that the marquee adoption at an exchange, that was advertised by Microsoft as proof that they had arrived, should have flamed out like this despite direct staff involvement from Microsoft.
By Eldon Mast, on July 6th, 2009
On June 1 we pointed to three clear markers that signified the beginning of US economic recovery. As we enter July more and more economists are also reflecting on the signs that the US economy as a whole is returning to growth.
On Tuesday, Rebecca Wilder in her excellent blog “News N Economics,” reflected, “The labor market is almost surely the key to this recovery.” She goes on to illustrate the “lagging peak” in initial jobless claims and it’s correlation to the end of the recession. Robert Gordon published that back in April and we also pointed to his article in early May. Gordon’s striking association between a GDP contraction trough and the final peak in unemployment claims for a recessionary cycle seems increasingly likely at this point in history as well.
Wilder highlights more encouraging signs: “once claims do peak, they tend to fall rather quickly. Therefore, history suggests that [jobless] claims should start to drop off sharply in the second half of 2009 (coming months).”
On Wednesday, James D. Hamilton (Professor of Economics at the University of California, San Diego) examines an excellent paper by James C. Morley, Associate Professor, at the University of Washington. Summarizing the Morley paper, Hamilton notes in his Econbrowser blog that “often a sharp economic downturn is followed by an equally sharp economic recovery.” Hamilton continues, “So why would anyone predict anything other than a robust rebound? Will we see a robust recovery? I can’t rule it out.”
And on Wednesday we heard what was likely the most positive news from Scott Grannis reporting on corporate layoffs. Scott observes that “layoffs have all but vanished.” Layoff levels are essentially back to those observed during the growth years of 2004-2007.
Meanwhile the beginnings of recovery in real estate continued this week. “Lower mortgage rates are helping to support the housing market,” said Freddie Mac Chief Economist Frank Nothaft. “The 30-year fixed-rate mortgage rate peaked this year over the week of June 11 and is now around a quarter-of-a-percentage point lower this week.” The Mortgage Bankers Association reported an increase in mortgage applications even though refinancing activity is at its lowest level since last fall. That means that significantly more applications are now being originated for home sales.
That trend was further corroborated by the National Association of Realtors who reported a modest rise in pending sales of existing homes last month. Pending home sales now show a sustained uptrend, rising for four consecutive months through May.
And as we noted earlier in the week, commercial real estate sales are also showing renewed signs of life.
By D H Smith, on July 6th, 2009
As one of the large number of Americans who depends on a positive business and investment environment for his prosperity, I regarded the election of Barack Obama as president with Democrat majorities in the House and Senate with considerable concern.
But more than the usual number of my fellow businesspeople and investors supported them, contrary to their own interest as it always seemed to me. Of course many of these unlikely Obama voters were as eager for hope and change anyone else. If they gave consideration to the implications of Democrats supermajorities led by Obama for the economy from which they draw life and livelihood, they allowed their desire to believe to outweigh more sober analysis.
Obama took them in totally with the charisma, the gaseous uplift, and the promise of racial reconciliation; they convinced themselves that the redistribtionist, high-tax, anti-business, anti-capital policies to which he rallied his party constituted red meat for their base, not a program for governing.
This misapprehension survived the election, and permitted modest financial market recovery through the end of December 2008, followed by modest declines through Inauguration Day. On Inauguration Day, President Obama delivered a speech that any fair-minded listener would have to admit was far less than a rhetorical tour de force, and far more evocative of class envy and racial struggle than was expected.
Financial markets tanked that day and kept tanking for weeks, pressured further by the stimulus package that offered little real economic stimulus, but a shocking grab bag of packages to traditional Democrat constituencies and not the merest nod to the rights or concerns of the minority.
We experienced headlong collapse from Inauguration Day through first week of March. Obama Democrats in the business and investment community awoke too late to the realization that the Democrat program now encompasses nationalization of vast swathes of industry on the pretext of emergency (autos and banks) or necessity (health care); that owners’ property rights are provisional and expendable; that the ideological attachment of our rulers’ to the green agenda trumps their duty of care to the free-market economy; and that they mean to bleed the productive sectors of the economy to feed the non-productive to the full extent that they can get away with.
So far, so bad. But then something interesting happened — we had a dramatic bounce in stock markets from March through early May. Some of this is probably pricing out the possibility of a 1929-37 depression; some might even be what I regard as an unrealistic pricing in of a rapid economic recovery, when what we still have in prospect is a deep and long recession as in the 70s and early 80s.
But some of the bounce is almost certainly due to the business and investment interest of this country re-assessing President Obama’s grand and ambitious schemes and concluding that they represent impossible over-reach. Rightly or wrongly, they came around to the view that he has expressed extreme initial positions as a negotiating tactic to get more than he could with conventional bipartisanship, but less than he asks. Republicans and responsible Democrats in Congress will push back on the crazier ideas. The American people will not go along, will resist with mute passive aggressiveness and loud argumentation, once the full implications are clear. And if it is not just a tactic, if Obama really insists on every bit of what he says, Republicans will gain enough seats in 2010 to apply the brakes, if not an outright majority. On this view, one way or another, the entire Obama agenda can be resisted.
After stock price gains of over 30% from March to May, markets have stalled since then, and fallen into a few air pockets. The public policy problems for the markets at this point remain the administration’s apparent readiness to overturn our carbon energy-based economy and radical intentions toward the 15% of the economy that health care represents. But the overarching sentiment problem comes from a second reassessment among business people and investors: even if the entire Obama agenda can be resisted and its worst effects rolled back later, on this view a tremendous amount of violence can still be done to the U.S. economy now. In the meantime, we are still losing jobs at a sickening pace while Obama and the Congress wastes unimaginable sums of money on projects lacking any other point beside paying off their friends and allies. In the background the Chinese, our principal creditors, are objecting more and more forcefully to American fiscal unsustainability and the debasement of the U.S. Dollar that this portends.
At the very least, these mid-year movements call upon investors to review their portfolio allocations with care. My own view is currently defensive on U.S. Dollar assets, and seek for growth in Chinese stocks.
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By Bron Suchecki, on July 3rd, 2009
Below is a short commentary on mortgage rates I received from Jackarine Ludwig of Aggregated Awareness:
The Mystery Behind the Parabolic Yield Curve is a nice report by Gary Dorsch, an American chartist I follow. Rarely does Australia get a mention in his reports. It is good that he’s done so now. His charts a good, because they tie in with political & economic events.
Although I don’t see the rise in the Australian yield curve as a mystery. And whether Wayne Swan wishes to call it the fault of the ‘bond vigilantes’ in the US Debt markets or not is irrelevant. Fact is, China is the biggest foreign holder of bonds, both from the US and elsewhere, including Australia. It is obvious that they are the ‘bond vigilantes’ which Swan refers to.
Regardless, it makes perfect sense from a fundamental supply/demand equation, that more supply would reduce prices, so I don’t know what Swan is complaining about? Under his, Ken Henry’s & Kevin Rudd’s command, the Treasury is going into record setting hock mode for the foreseeable future. By 2012, this government has projected a total deficit of A$300 billion. You read that right, that’s billion with a B. What did he reckon was going to happen? Bond Prices to rise & yields fall when he was getting involved in issuing more bonds? HaHaHaHa…What a fool. It is obvious to anyone with a brain, that more Australian bond supply would reduce bond prices & subsequently increase yields. Nothing conspiratorial there Mr. Swan.
If you wish to follow the short & long end bond yields of Australia, US & UK, may I suggest this site. It is updated daily.
Now if you didn’t think bond yields are important, then you have obviously never borrowed any money or paid any taxes. If you have borrowed money or paid taxes, then I can say that the yields on 3 year Aussie Treasury bonds, sets the mortgage rate for 3 year adjustable rate mortgages, and the 10 year Aussie Treasury bond sets the rate for longer term mortgages, the 7 year, 10 year or 15 year fixed rate mortgages. And these yields are the interest paid by your tax dollars toward those creditors who have purchased these bonds, both domestic & foreign.
For mortgages, the normal rule of thumb is that banks add 2.5% to the price of these bonds to come up with the mortgage rates. Although lately, because of the rising bond yield, and the fact that it’s politically unpalatable to raise home loan rates at the moment, the banks have been copping the bond rate increases and not passing it onto retail borrowers. Therefore, in the past month, banks have not been adding 2.5% to bond yields to calculate their mortgages, but more like 1.7% for the 15 & 10 year fixed mortgages. But I read a story yesterday that said that CBA were looking at raising rates again, but having just gone to their site we can see that they haven’t raise them yet.
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By Winton Bates, on July 2nd, 2009
“Reflexivity can be interpreted as a circularity, or two way feedback loop, between the participants’ views and the actual state of affairs. People base their decisions not on the actual situation that confronts them but on their perception or interpretation of that situation. Their decisions make an impact on the situation … and changes in the situation are liable to change their perceptions … . The two functions operate concurrently, not sequentially” (George Soros, “The New Paradigm for Financial Markets”, 2008, p 10).
“Many critics of reflexivity claimed that I was merely belabouring the obvious, namely that the participants’ biased expectations influence market prices. But the crux of the theory of reflexivity is not so obvious; it asserts that market prices can influence the fundamentals. The illusion that markets are always right is caused by their ability to affect the fundamentals that they are supposed to reflect. The change in the fundamentals may then reinforce the biased expectations in an initially self-reinforcing but eventually self-defeating process” (Soros, op cit, p 57-8).
Does George Soros know what he is talking about? The fact that he has operated successfully in financial markets for a long time suggests to me that he might have a few clues about how they work. But I struggle to understand him.
As is the case with many other problems of understanding, I think my problem in this instance relates to definition of terms. What does Soros mean by fundamentals? If a process is eventually self-defeating then it seems to me that this means that it is inconsistent with the fundamentals of the real world – i.e. it is inconsistent with what we know to be true about such things as resource availability, technology or human nature.
When Soros suggests that market prices can influence the fundamentals he may have something less fundamental in mind such as widely accepted perceptions of investors and credit providers about particular markets or the wider economic situation. It seems plausible that a widespread view that housing was a very safe investment, for example, could be reinforced if house prices began to increase more rapidly and if credit providers perceived that this made lending more secure. Under some circumstances that might, perhaps, result in a self-reinforcing process of increases in house prices that would eventually become self-defeating, for example because increasing numbers of people might decide that they would be better off renting rather than owning a house.
If this is what Soros means by reflexivity, does it help to explain the current financial turmoil? In explaining his super-bubble hypothesis Soros writes:
“The belief that markets tend toward equilibrium is directly responsible for the current turmoil; it encouraged the regulators to … rely on the market mechanism to correct its own excesses. The idea that prices, although they may take random walks, tend to revert to the mean served as the guiding principle for the synthetic financial instruments and investment practices which are currently unravelling” (Soros, op cit, p 102).
It seems to me that the second part of that statement, relating to synthetic financial instruments, may help to explain the current financial turmoil. With the benefit of hindsight it is apparent that the world economy is suffering from, among other things, the development of a self-reinforcing belief system which led many financial firms to over-value synthetic financial instruments.
However, the first part of Soros’ statement doesn’t make sense. Regulators have not relied on the market mechanism to correct its own excesses. The current turmoil is partly a consequence of a history of financial firms being bailed out by regulators on the grounds that they were too big to be allowed to fail. George Soros is on much firmer ground when he recognizes that most reflexive processes involve an interplay between market participants and regulators (p77).
Hopefully, the regulatory environment that emerges from the current turmoil will recognise that participants in financial markets are human. It should not surprise anyone that when financiers are given incentives to behave imprudently they tend to act accordingly.
By Eldon Mast, on July 2nd, 2009
On Wednesday the Institute for Supply Management published its manufacturing report for June 2009. It’s overall index (PMI) bumped up for the sixth straight month and stood at 44.8%. The reading suggests, “the overall economy grew for the second consecutive month” in June.
The reading also shows the overall manufacturing sector still on track for a return to growth in the fourth quarter of this year.
Norbert J. Ore, chair of ISM’s Survey Committee was quoted as saying “Manufacturing continues to contract at a slower rate, but the trends in the indexes are encouraging as seven of 18 industries reported growth in June. Most encouraging is the gain in the Production Index, which is up 12.1 percentage points in the last two months to 52.5 percent. Aggressive inventory reduction continues and indications are that the de-stocking cycle is at or near the end in most industries.”
The overall manufacturing trend continues to collorate well with the several manufacturing graphs we’ve published and tracked earlier in the year.
With the June ISM index we have yet another concrete indictor that recovery has begun for this cycle.
By David Barr, on July 1st, 2009
Sometime in the next couple of months The Federal Government is going to give the state of California a lot of money. After lavishing more than a trillion dollars on Banks, Insurers and Auto Companies, there is a 0% probability that the government will sit back and let the largest state fail.
There real question is how do we go about propping up California. Whether we like it or not, California will set a precedent for the rest of the country. Believe it or not, California is not the only State struggling to keep its head above water. Congress and the administration need to have a strategy ready before Arnold comes crawling cap in hand to Washington.
Rather than putting together an ad-hoc plan for California, we should develop a national strategy for dealing with insolvent states. The plan that I am proposing is simple, non-intrusive and will ensure that Federal Government gets back every penny that it spends bailing out the states.
Federal loans should be made available to any state that chooses to accept them. In exchange, the state will be required to levy a 1% sales tax, whose revenue would be directed to the Federal government until the loan is repaid.
While, no one would enjoy paying the extra tax, it wouldn’t be nearly as devastating as the massive budget cuts currently facing states across the country. By securing a dedicated revenue stream, the loan would be risk free for the Federal Government. Furthermore, enacting a national policy would assure investors that state bonds were a safe investment, reducing borrowing costs for every state.
The greatest advantage of this plan would be in avoiding the political circus of negotiating a special bailout for every state in need. My plan would not solve the underlying problems facing California, but that is intentional. It is up to voters and politicians in California to find a long term solution to the state’s budget crises. Allowing Washington to interfere in the fine details of the State budget would be far worse.
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