Blue States On The Path To Economic Suicide

Who says that political polarization is a bad thing -- at least in a federal republic like ours?  In the old days of much less political polarization -- say 10 or 20 or 30 years ago -- there was more bipartisan governance out in the states than there is today.  The Dems would regularly control one or both legislative chambers and/or the governorship in Republican-leaning states, and vice versa.  That does still occur (for example, Illinois and Massachusetts have Republican governors), but it diminishes with every passing year.

In the federal arena, government closely divided between people of highly polarized political visions leads to ever-escalating anger and to gridlock, as we all can see on a daily basis.  Out among the states, it means something very different:  red states increasingly come under the full control of ideological Republicans, while blue states increasingly come under the control of highly ideological Democrats.  Each group then has the opportunity to enact a more pure version of its side's governing vision.  On the Republican side (at least in the economic policy sphere), that means keeping government spending and taxes relatively low.  For example, Florida, with a population now larger than that of New York, has a state budget only about 60% as large.

But for today, let's focus on what is going on over on the blue state side of the divide.  As the progressive wing of the Democratic Party gains power, there is less and less resistance to the imperative to solve all of the people's problems right now with a big blowout of spending and coercion.  Does anybody here recognize that resources are not infinite?  If anybody does, they just get shouted down.  Let's consider a few examples of recent developments:

  • Single payer health care.  As I reported here just two weeks ago, four states (Vermont, Colorado, New York and California) have had so-called "single payer" (fully socialized) health care proposals advance far enough in their state law-making process to have fairly concrete cost numbers attached to them.  In all of the four cases, the incremental costs of the new program -- above and beyond all existing state government health care expenditures including things like Medicaid -- came in at more than the revenue raised from all existing state taxes.  So, enacting the program would have required more than doubling of existing state taxes.  

Do you think that the quantification of the enormous costs of moving to a single payer system would lead the progressive movement to back off, or maybe slow down, on efforts to enact the system?  According to the New York Times over the weekend, it's the opposite.  The headline of the big front-page article on Sunday is "The Single-Payer Party? Democrats Shift Left on Health Care."  Excerpt:

[A]s Democrats regroup from their 2016 defeat, leaders say the party has plainly shifted well to the left on the issue, setting the stage for a larger battle over the health care system in next year’s congressional elections and the 2020 presidential race. Their liberal base, emboldened by Senator Bernie Sanders’s forceful advocacy of government-backed health care last year, is increasingly unsatisfied with the Affordable Care Act and is demanding more drastic changes to the private health insurance system. . . .  Party strategists say they expect that the 2020 presidential nominee will embrace a broader version of public health coverage than any Democratic standard-bearer has in decades.

The article notes that in polls some 60% of Americans respond that they support some form of "universal" health care.  It does not mention that when Coloradans became aware of the costs, a single payer proposal that previously seemed to be leading suddenly lost in a referendum by an astounding margin of about 80-20.  But isn't there infinite free government money?  In California they think there is, and the "single payer" proposal out there continues to advance.

Hey, California, go ahead and give it a try!  Your citizens are so rich that nobody will even notice when the 13% top marginal income tax rate goes to 26%!

  • Paris Climate Agreement.  With President Trump's announcement that he is exiting the Paris climate agreement, it's dead, right?  Not so fast!  Last Thursday, Governor Jay Inslee of Washington put out an announcement that he is joining with the governors of New York and California to form something called the United States Climate Alliance to harness efforts at the state level to combat "climate change."  It seems that these states think they can meet on their own the proposed 26-28% reduction in "greenhouse gas" emissions by 2025:

New York, California and Washington, representing over one-fifth of U.S. Gross Domestic Product, are committed to achieving the U.S. goal of reducing emissions 26-28 percent from 2005 levels and meeting or exceeding the targets of the federal Clean Power Plan.

Do they know that Germany has succeeded in getting electricity production from renewables all the way up to 30% of the total -- but in the process they have also succeeded in roughly tripling residential electricity rates?  When asked about its progress on energy transition to renewables, Germany likes to point out that its greenhouse gas emissions are down some 40% since 1990 -- conveniently omitting that almost all of this reduction represents gains from closing down the inefficient East German industrial sector in the 90s.  In recent years, Germany has hit a wall in reducing GHG emissions.  Here is a chart of its year-by-year emissions changes 1990 to 2016:

Looks like they haven't gained any net ground at all since 2010.  So, Washington, California and New York, how do you plan to avoid Germany's "renewable energy paradox":  covering the countryside with windmills, and then watching electricity bills triple while GHG emissions stay steady or decline hardly at all?  Believe me, Inslee, Cuomo and Brown don't have a clue about what technology is supposedly going to make this happen.  They will just order it to happen, and of course it will then happen!  Good luck, guys!  And don't worry -- tripling the electricity bills will not at all affect the capacity of the people to pay for, as an example, single payer health care.  After all, taxpayer money is infinite.

  • Government employee pensions.   If you are a blue state, you believe that government employee unions are a good thing.  And the number one priority of government employee unions is generous defined benefit pensions.  The problem of massive underfunding of government employee pensions is very largely, although not quite entirely, a problem of the blue states.

My favorite measure of the employee pension underfunding issue is dollars of underfunding per household in the state.  Here is a state-by-state chart from ZeroHedge as of December 2016:

Not meaning to excuse red Alaska, but they are a very small state and a special case.  After them, it's a who's who of deep blue:  California, Illinois, Connecticut, Hawaii, Massachusetts, New Jersey, New Mexico, Oregon.  At some $92,000 per household, California all by itself is well over $1 trillion in the hole.  The ZeroHedge article at the link points out that CalPers has been under pressure to lower its interest rate assumption from 7.5% to 6% -- which would have the effect of raising that $92,000 to more like $150,000 per household, and the $1+ trillion to well over $1.5 trillion.  No problem, California.  Might as well go for single payer health care while you are at it.

The process of economic self-destruction is not a fast one.  It took Venezuela 19 years from the election of Hugo Chavez in 1998 to get where it is today.  None of the blue states is engaged in anything nearly so extreme as the Venezuela program.  On the other hand, Connecticut has definitely hit a wall of declining population and declining tax revenue.  See Friday's Wall Street Journal editorial here (behind pay wall).  California has great weather and many great industries.  But if they try hard enough, they can definitely set their economy into decline.  Lots more states are lined up to follow.