Market Talk

University of Maryland economics professor Peter Morici takes both parties to task over the issue of budget reform, saying neither side is facing up to the reality of the situation and the challenges. His last line is actually the most telling (we journos would say he buried the lede): “Americans really need adults to govern but few can be found on either side of Pennsylvania Avenue.”

Ain’t that the truth?

The Budget Follies: Demagoguery and Sophistry Reign

Federal finances are in shambles, and Americans should be amused if not disgusted by the explanations and solutions both political parties offer.

The President’s budget plan issued in February projects a $1.6 trillion deficit for 2011 and a cumulative shortfall of $11 trillion through 2021.

Things may get worse, as additional revenue and cost savings from health care reforms don’t materialize and the 4 percent growth assumed by the President’s budget for the next four years proves Pollyanna.

Time and again, House Democratic Leader Nancy Pelosi and President Barack Obama have demagogued the problem, blaming two wars and tax cuts instigated by President Bush and the Great Recession.

To set the record straight, in 2007, the year before the financial crisis, with wars in Afghanistan and Iraq at full tilt and Bush tax cuts in place, the federal deficit was only $161 billion. In 2011, with the economy in its second year of recovery and TARP money returning to the Treasury, the deficit is ten times larger and greater than $1.4 trillion notched in 2009, the pit of the recession.

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I’ll tell you what, my bus pass going up by 25% is annoying, but I sure am glad I’m not poor and living in California:

Proposing a budget that would eliminate the state’s welfare-to-work program and most child care for the poor, Gov. Arnold Schwarzenegger on Friday outlined a stark vision of a California that would sharply limit aid to some of its poorest and neediest citizens.

His $83.4-billion plan would also freeze funding for local schools, further cut state workers’ pay and take away 60% of state money for local mental health programs. State parks and higher education are among the few areas the governor’s proposal would spare.

You think Schwarzenegger ever thought he’d have to draw up a budget like that? But that’s what you have to do when you have a $19 billion budget gap that you have to by law balance and you don’t have a currency to debase. In fact, if California didn’t have the implicit backing of the United States government, you can bet it’d be in the same boat as Greece, Spain and Portugal. And even after cutting off welfare and daycare, the state’s still going to need what amounts to a bailout from the federal government to close the gap.

Personally, I’d close the parks before I’d cut off the schools, but still, didn’t California go through this same thing last year? Yes, they did, and the fix then was widely seen as a band-aid, and this year’s budget is proving that.

None of this is rocket science. The problem that’s plaguing the developed world is too much debt, and the more we tried to work around that, through second mortgages, or off-balance sheet accounting, or just taking out a fourth, and a fifth, and a sixth credit card, or by governments that just continuously roll over their debt but never pay it off, the deeper we dig our own graves.

The credit crisis that first splashed across the globe in 2008 hasn’t gone anywhere. The debt is just moving up the food chain. Greece, Europe and California are proving that.

Opportunity knocks.

Look, times are tough, right? Governments from California to New Jersey are struggling to plug budget gaps. And from Philly to Manhattan (hey, when you live in Jersey, that spans your world,) politicians and would-be politicians are coming up with all sorts of novel fixes.

How about this one, out of the city of brotherly love and sent up to us from Dinah Brin, one of the reporters in our Philly bureau:

Philadelphia Mayor Michael Nutter would like the city to tame its, um, bottom lines, both fiscal and physical, with a 2c-an-ounce tax on sweetened beverages. The city faces a budget crisis, and in his budget address today, KYW reports, Nutter proposes the new beverage tax and a trash-collection fee to generate $184M annually and save city services. The drink tax, which could raise $77M of that amount, would cover sugar-sweetened beverages such as soda, sports drinks, chocolate milk and non-100% fruit juices, media reports say. The Pa. Beverage Association and a Teamsters local criticize the move.

Let’s get this straight: they want to tax soda, and charge a fee for a service for which residents already pay. That’s pretty desperate. Of course, if Nutter really wanted to raise some serious cash, he ought to tax cheesesteaks, although that might not go over so well. The point is, as was made rather effectively by New Jersey’s new governor, budgets have been frayed past the point of breaking, and some really, really new – or really old – ideas are needed to fix these problems.

Now, we’ve been getting emails this past week from somebody running for New York governor on a sort of peculiar agenda, but the more I read about stuff like the Philly soda-tax, the more I think this madam may be on to something.

“Women’s rights advocate Kristin Davis, a former Madam who supplied call girls for Eliot Spitzer and did time for her crime, announced her candidacy for Governor of New York on a reform platform of legalization and taxation of prostitution and marijuana.”

Hey, why not have a governor who’s already been convicted of a crime? Kind of get it all out of the way up front. That’s novel, right?

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- Apple’s (AAPL) iPhone shipped 8.7 million iPhones in 4Q, almost double the year-earlier figure and 18% higher than previous quarter’s gains. Impressive, except for the fact that the device’s market share actually slipped a bit from previous quarter. But don’t read too much into the decline, as claiming 16.6% of a market  it had no presence in three years ago is “astonishing,” Digital Daily blogger John Paczkowski says.

- As controversy swirls around Tim Geithner and his tenure as Treasury secretary, former IMF chief economist Simon Johnson offers a plausible successor: Tom Hoenig. He’s been a “beacon of clarity” throughout the past year and would appeal to both “sensible” Democrats and Republicans, Johnson says.

- AOL expected to report 4Q results tomorrow morning, marking first quarterly report since becoming newly independent company in mid-December. Shares are essentially unchanged since going public, reflecting investors’ “widespread wait-and-see attitude,” BoomTown blogger Kara Swisher says.

- There’s no way around the sense that President Obama’s budget proposal is “a tremendous comedown from the hopes of a year ago,” Paul Krugman writes at Conscience of a Liberal. “What we’re witnessing is an awesome national failure.”

- Here’s a deep concern plaguing Gannett (GCI): steep EBITDA decline throughout last few years suggests publisher is “running out of ways to trim expenses as ad sales decline,” Newsosaur blogger Alan Mutter says.

- Google’s (GOOG) expanding its research agenda, devoting $5.7 million to a dozen research projects. Money’s earmarked for four areas: machine learning, the use of mobile phones as data collection devices, energy efficiency in computing and privacy.

- TechCrunch says Google already has Apple’s iPad in its sights. Blog points to a series of photo mock-ups showing what Google’s Chrome operating system might look like on a tablet form factor.

- YouTube’s first attempt at charging customers to watch Web video wasn’t exactly a roaring success, netting about $10,700. But YouTube’s payoff isn’t just in cash. “The good news: some people paid up,” MediaMemo blogger Peter Kafka says. “And from YouTube’s perspective, that’s all that matters.”

- Amazon (AMZN) shares continue dropping in aftermath of a dispute with major book publisher about e-book prices as well as the prospect of increasing competition from Apple’s iPad. “What I will say is that every schoolboy learns that you sell the Christmas plans before Christmas, not in January,” Josh Brown writes at The Reformed Broker. “Amazon’s a classic example of why.”

- And the battle between Amazon and Macmillion is still raging, NYT’s Bits blog reports, as some, but not all, titles have been creeping back onto Amazon’s site.

- Paul Volcker continues pushing for bank limits. He said large commercial banks engaging in proprietary trading or private-investment activity are creating “strong conflicts of interest” and should be restricted.

It looks great, until you're drowning in it.

We’ve been saying for some time now that the budget problems in the states is at some point going to be a big problem, like a tornado-just-blew-my-house-away big. With the wife and kids in it. And the dog.

The 50 states currently face collectively a roughly $140 billion budget shortfall, and while California’s problems have been the most prominent, the Golden State is far from alone.

“The same pressures that drove (California) toward fiscal disaster are wreaking havoc in a number of states, with potentially damaging consequences for the entire country,” the Pew Center said in a fresh report. The report looks at the 10 states in the worst shape: California, Nevada, Arizona, Oregon, Michigan, Wisconsin, Illinois, Florida, Rhode Island and <snif!> my beloved (and often concurrently reviled) New Jersey.

It’s a gathering storm, to be sure, being held back at present only by federal stimulus largesse, as the Journal reported yesterday:

Once stimulus funds have been accounted for, states still face a combined deficit of $142 billion for fiscal 2011, up from $113 billion for the current fiscal year, according to the Center on Budget and Policy Priorities.

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