Friday, September 04, 2009

Michigan Budget Nonsense


With all of the crises at the national level... the economy, the war in the Middle East, climate bills, cap and trade bills, EPA mandates, health care de-privatizing... it is sometimes easy to forget that individual states are struggling.

California certainly had its share of headlines with payment by IOUs and various overstretching. Florida's housing bust was epic. North Dakota was generally spared.

Here in Michigan we grabbed headlines with the General Motors and Chrysler bailout and bankruptcy. Behind those headlines was the collapse of the housing market... a result of 15% unemployment and uncertainty about the viability of GM and Chrysler and maybe even Ford Motor Company. Nevertheless, despite all of these problems, the state government pretty much went on as if little was changed.

For the Fiscal Year 2007, the state's budget was $42.9 billion. That was before the real damage was done to the Michigan economy. Now that the state is in shambles and population is declining, the governor has a Fiscal Year 2010 budget of $44.1 billion. FY08 was $43.6 billion; FY09 was $44.8 billion [source - see page C30 at the end of a very long and verbose document] so I guess this is the government's version of sacrificing.
Now there probably is some smoke and mirrors as well as Federal stimulus money in there, but it appears that the state has taken its cue from the Federal government... money is no object.

So, when I received the following email from Phyllis Browne, Communications Manager, Michigan House of Representatives [the Republican side?], my reaction was "lots of talk followed by lots of talk followed by another big budget."

Calling today's 11th-hour marathon budget session a step in the right direction, Senate Majority Leader Mike Bishop and House Republican Leader Kevin Elsenheimer today invited the governor and House Democrats to make their outline to balance the budget public and demonstrate their sincerity by moving it through the legislative process.

Bishop said his caucus already sent House Democrats and the governor their plan to balance the budget without raising taxes, noting a clear difference in priorities between Republicans and Democrats.

"The Senate Republicans have a public plan that has been vetted through committees and passed by the full Senate," said Bishop, R-Rochester. "We are looking forward to a budget process that is transparent and clear, not held behind closed doors with unaccountable and unelected mediators. As we close in on the Oct. 1 deadline, we are also looking for expedient action from the House and governor."

Elsenheimer noted the House Republican plan to Reinvigorate, Reinvest and Reform Michigan was introduced 43 days ago on July 22.
The House Republican plan creates jobs, balances the budget without raising taxes, and preserves stimulus dollars to jumpstart the state's economy.

"Republicans have a plan to solve the budget crisis without raising taxes - and we're ready to balance the budget today," said Elsenheimer, R-Kewadin. "The GOP plans are on the table, before the public, ready to go. I'm disappointed that the state is in the shadows of another government shutdown after the House Democrats' summer vacation, and when the ideas proposed today start to move in the form of legislation, then we'll know they are serious."

Show me less money.... Meanwhile, if it sounds too good to be true, it probably is. Detroit's economic problems alone will siphon off billions from state coffers given the reluctance of state government to eliminate programs that aren't working and take some creative steps toward solving intractable problems.

The budget number for 2010 should be considerably less than the peak-economy number in 2007 [after adjustment for one-time Federal funds]. If it isn't, nothing has changed except government has grown while the rest of the state has shrunken. It looks as if we will tax our way to prosperity. That should drive business our way... or is is away?


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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
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Tracking Interest Rates

Tracking Interest Rates


SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)