California Budget Woes: Balance the Budget by Gambling and Letting Inmates Out!

It may come as a surprise to you but California is in a deep budget mess. The once rising tide of real estate has shipped off into the sunset with a one-way ticket. Last week, Governor Schwarzenegger was dealt a swift blow to his ill advised universal health care proposal. A budget analysis of the program turns out to put us deeper in the red; not exactly the place you want to be when you are unwilling to raise taxes and create programs from deficit spending. Does anyone ever wonder how we as a nation finance a war, universal health care, or a stimulus package when we are mired in debt? Here is the bottom line. We either raise taxes for these programs or cut spending (i.e., the war) to pay for future initiatives.

The governor has received decent reviews since he ousted Mr. Davis in 2003 in a total recall election. However, any of you who live in California realize that much of our prosperity has been tied directly at the hip to real estate and finance, two industries that are contracting faster than a Lamaze class. When I got out of the industry a few years ago, I realized that this trading homes like commodities game had to end soon. Little did I know how ridiculous things would have gotten. Some told me, “see how wrong you are! You got out when the going was still good! You left much money on the table.” True. But much of these people are now severely in the red since the bottom of the market has fallen out for California. Timing tops and bottoms isn’t an exact science. Yet anyone that has studied even at a cursory level history realizes that we were in a bubble fueled by psychology and consumer behavior.

The current governor benefited much from the epicenter of the housing boom. Folks spent like maniacs remodeling their homes thus increasing sales taxes and government cheese factories. Folks were buying and selling homes like baseball cards. People signed for $500,000 mortgages without flinching. Brokers made money and sent their cut to Uncle Terminator. Agents got a piece and off goes a piece to the Golden State. Banks, builders, construction, and all things real estate sent California’s state economy into the stratosphere. But alas the game has now ended. Take a look at the projected budget:

California Budget

*Click for closer look at absurd spending

In the last few months the budget was revised so many times you would think you were watching the score to a live basketball game. We currently stand at a $14 billion deficit but in reality this figure can wane just as easily given the falling out of the market. How did we arrive at this point? Well look at the chart! As a state, we literally spend each and every penny we get even in good times because for some reason, we operate in this anti-saving world of zero sum budgets where you are encouraged to spend. If you don’t spend, chances are your budget next year will be reduced so it gives governmental units the incentive to spend all that they got. This is fine in good years but as we all know, once the government has something it is very reluctant to let it go. The governor has proposed across the board cuts of 10 percent to many programs. Here is the Pollyanna view of how the budget would look if his plan had already been implemented:

California Budget

*Click for closer look at absurd armchair quarterbacking

Too bad expenditures keep on tracking revenues and never do we give surpluses a chance and 2006-2007 went off the rails into major deficits. What would you expect given Bush who just came to the table with a ridiculous $3 trillion budget? Not only has fiscal responsibility left the lexicon of government, we no longer have any restraint on spending. In fact, we have these “free-market” thinkers talking about protecting tax cuts for the top 5 percent while the remaining 95 percent of the population tries to figure out what in the world is going on. The Republican party no longer holds the fiscal responsibility mantra. So giving tax breaks to hedge funds is productive? And they seem content in keeping us overseas for decades without explaining how they will pay for it. This election is pivotal in the long-term prosperity of the country. Any of the top Republican candidates seems to be echoing a continuation of the war and we simply cannot afford it. I’ll leave the philosophical and political debate out of this but economically we cannot pay for it any longer. How is tax breaks to financial engineering machines good for society especially when they come asking for corporate welfare when things get tough? That is not a free-market. But given that Bush’s right hand man Hank Paulson was formerly from Goldman Sachs, need we say more?

There was quite for a few months on the economy – somehow all eyes where on holiday sales as the last bastion of hope. That is until the past few months. The credit crunch was more than a mere reaction to the housing market. It was a reaction to a consumption mentality that was miring our country and many other’s into crushing debt. The reality is finally setting in that you cannot spend more than you earn. Looking at the above budget, you realize that as a state we simply cannot control ourselves. Now hard decisions will need to be made. With such a crushing amount of debt, there may be no other option but to raise taxes since cutting means eliminating jobs and currently unemployment in California is soaring. Just take a look Los Angeles County numbers:

LA County Employment

In the last year we have jumped a whopping 1 percent and are facing a fiercer trend going forward. The way unemployment numbers are calculated, we are vastly understating the problem due to part-time workers, those underemployed, and many who simply have stopped looking for work. Many economist put too much faith on cooked numbers and don’t realize shadow numbers are much worse. Like those folks who didn’t take a visual tour of Real Homes of Genius in working class cities. All they needed to do was take a quick glance and would have realized that we had a major problem on our hands. But that would have burst the bubble and it was better to turn the other way and get a check in the mail at the sake of long-term stability. What of the massive decline in immigrant construction day laborers who didn’t register anywhere? We can track this number by seeing the major decline in remittances. There are ways to see that the economy isn’t all roses. We really have to confront the mentality that money does not grow in the California plains. That somehow, we can bulldoze strip malls and convert them into an unlimited supply of apt/condo conversions. Yet in the vein of really smart ideas, we now approach genius ideas for balancing the budget that would make MENSA members shed a tear.

Balance on Inmates and Gambling

I wish I were kidding about these proposed plans but these have been circling about. You never know the leadership or character of someone until things get tough. California only until last year, took a major hit in real estate and as it turns out we have been a one trick pony living off our ever-increasing real estate prices. Let us take a look at one proposal to help the budget:

“Here is a sample of the reaction to state budget proposals announced Thursday by Gov. Arnold Schwarzenegger, which included across-the-board cuts, early release of more than 22,000 prisoners, some fee increases and state park closures:…”

“The governor’s budget recognizes that the only way to cut prison spending is to reduce the number of people in prison. The next step is to make permanent changes and to reduce the number of prisons in the state, not build 53,000 more cells as envisioned in (legislation Schwarzenegger signed last year). — Debbie Reyes, California Prison Moratorium Project.”

The only way to breath is to inhale. The ocean is wet. In the world of the obvious, we are told that in order to save on prison spending we need to cut down on the inmate population. The better question should be, why in the world do we have such a large inmate population?

California Inmates

Projections go on to tell us that we can expect 193,000 inmates by 2011. To show you that politics is a fluid game, the releasing of inmates is in sharp contrast to the governor’s 2006 proposal:

“In January, Schwarzenegger proposed building 83,000 more cells – some in county jails, some in state lockups – with bond sales totaling $13.1 billion. But that idea, part of his sweeping public works plan, stalled in the Legislature, and corrections officials are scrambling to create bed space.”

So that 193,000 projection may never happen given that we may be letting out folks early. Another prudent idea to balance the budget. Maybe we can convert some of those strip malls into prisons? We’re chasing criminals in Afghanistan and Iraq trying to capture them and here in California we are letting them out. Try figuring that one out.

Next, we have the governor campaigning for the Indian Gambling propositions 94 through 97. What do these propositions do? Well they allow for more slot machines:

Proposition 94: “Ratifies amendment to existing gaming compact between the state and Pechanga Band of Luiseño Mission Indians; amendment would permit tribe to operate 5,500 additional slot machines.”

Proposition 95: “Ratifies amendment to existing gaming compact between the state and Morongo Band of Mission Indians; amendment would permit tribe to operate 5,500 additional slot machines.”

Proposition 96: “Ratifies amendment to existing gaming compact between the state and Sycuan Band of the Kumeyaay Nation; amendment would permit tribe to operate 3,000 additional slot machines.”

Proposition 97: “Ratifies amendment to existing gaming compact between the state and Agua Caliente Band of Cahuilla Indians; amendment would permit tribe to operate 3,000 additional slot machines.”

So let me get this straight, since many people are cash strapped and mismanaging their own personal balance sheet, we want to add more slot machines in our neck of the woods to take money from people? Brilliant! Nothing says financial responsibility like slot machines. I hope we get the lucky gold miner machines because those really payout nicely and also make really cool sounds. Yes, the state gets more revenues but as we have just shown, they will simply spend it all once again. More stimulus and short-term fixes. At least one thing is being admitted at this point without any pretense; we are living in the biggest casino of them all called California.

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19 Responses to “California Budget Woes: Balance the Budget by Gambling and Letting Inmates Out!”

  • Hey I don’t see what’s wrong with more slot machines. I don’t gamble and people will just gamble the money away in Nevada anyway.

    The only question is how much money they are bringing to the table for the state.

    More inmates get out or more slot machines, simple choice for the latter. Too bad we can’t have more slot machines and less inmates unleashed.

  • Another good post Doctor.

    You are one of the few I follow with such blogs. Most out there are Johnny-come-latelys to the housing crisis and the accompanying sub prime debacle. MISH is another. I do not have your mastery of the English language, but might I offer a little criticism.

    It is not just the Republicans, not just Arnold, nor just the rich that have been getting a free ride. Bill Clinton as I remember was the one that opened the flood-gates to China for cheap goods we just had to have. Greenspan served during his tenure as well if memory serves.

    My point is that we all benefited from the housing boom. “A rising tide lifts all boats”. the last 10 or so years have been very good to me, and I include the recent 30% loss in value on my house in that statement. I am by no means rich, but until now have managed to have lived the American dream. Traveling and working abroad as I do, I see America for what it is; a great nation of great people.

    But now, as a nation, need to pay; Republicans, Democrats, Independents, the rich and the poor. Blaming special interests, the banks, Wall Street, house flippers, the rich ect. won’t help. We are all going to have to make sacrifices for our past indulgences of living off the savings of others. I just hope we Americans still have the fortitude for it.

    Again, thanks for the great post

  • I think the prison population will increase even faster than projected, given the recession and the economic hard times that are coming. The current prisoner release may end up just being a drop in the bucket.

    You’re right, the whole situation is insane.

  • Here’s something to think about

    Read this twice.
    Read it now and read it again right before you

    This is too true to be funny

    The next time you hear a politician use the
    word ‘billion’ in a casual manner, think about
    whether you want the ‘politicians’ spending
    YOUR tax money.
    A billion is a difficult number to comprehend,
    but one advertising agency did a good job of
    putting that figure into some perspective in
    one of its releases.

    A. A billion seconds ago it was 1959.

    B. A billion minutes ago Jesus was alive.

    C. A billion hours ago our ancestors were
    living in the Stone Age.

    D. A billion days ago no-one walked on the earth on two feet.

    E. A billion dollars ago was only 8 hours and
    20 minutes, at the rate our government is spending it.

    While this thought is still fresh in our brain, let’s take a look
    at New Orleans . It’s amazing what you can learn with some simple division.

    Louisiana Senator, Mary Landrieu (D), is presently asking the
    Congress for $250 BILLION to rebuild New Orleans . Interesting number, what
    does it mean?

    A. Well, if you are one of 484,674 residents of
    New Orleans (every man, woman, child), you
    each get $516,528.

    B. Or, if you have one of the 188,251 homes in
    New Orleans, your home gets $1,329,787.

    C. Or, if you are a family of four, your family
    gets $2,066,012.

    Washington, D.C. HELLO!!! … Are all your calculators broken??

    Tax his land,
    Tax his wage,
    Tax his bed in which he lays.
    Tax his tractor,
    Tax his mule,
    Teach him taxes is the rule.
    Tax his cow,
    Tax his goat,
    Tax his pants,
    Tax his coat.

    Tax his ties,
    Tax his shirts,
    Tax his work,
    Tax his dirt.

    Tax his tobacco,
    Tax his drink,
    Tax him if he tries to think.

    Tax his booze,
    Tax his beers,
    If he cries,
    Tax his tears.

    Tax his bills,
    Tax his gas,
    Tax his notes,
    Tax his cash.

    Tax him good and let him know
    That after taxes, he has no dough.

    If he hollers,
    Tax him more,
    Tax him until he’s good and sore.

    Tax his coffin,
    Tax his grave,
    Tax the sod in which he lays.
    Put these words upon his tomb,
    ‘Taxes drove me to my doom!’

    And when he’s gone,
    We won’t relax,
    We’ll still be after the inheritance TAX!!
    Accounts Receivable Tax
    Building Permit Tax
    CDL License Tax
    Cigarette Tax
    Corporate Income Tax
    Dog License Tax
    Federal Income Tax
    Federal Unemployment Tax (FUTA)
    Fishing License Tax
    Food License Tax
    Fuel Permit Tax
    Gasoline Tax
    Hunting License Tax
    Inheritance Tax
    Inventory Tax
    IRS Interest Charges (tax on top of tax),
    IRS Penalties (tax on top of tax),
    Liquor Tax,
    Luxury Tax,
    Marriage License Tax,
    Medicare Tax,
    Property Tax,
    Real Estate Tax,
    Service charge taxes,
    Social Security Tax,
    Road Usage Tax (Truckers),
    Sales Taxes,
    Recreational Vehicle Tax,
    School Tax,
    State Income Tax,
    State Unemployment Tax (SUTA),
    Telephone Federal Excise Tax,
    Telephone Federal Universal Service Fee Tax,
    Telephone Federal, State and Local Surcharge Tax,
    Telephone Minimum Usage Surcharge Tax,
    Telephone Recurring and Non-recurring Charges Tax,
    Telephone State and Local Tax,
    Telephone Usage Charge Tax,
    Utility Tax,
    Vehicle License Registration Tax,
    Vehicle Sales Tax,
    Watercraft Registration Tax,
    Well Permit Tax,
    Workers Compensation Tax.

    Not one of these taxes existed 100 years ago,
    and our nation was the most prosperous in the world.
    We had absolutely no national debt, had the largest middle class
    in the
    world, and Mom stayed home to raise the kids.

    What happened? Can you spell ‘politicians!’

    And I still have to ‘press
    1’ for English.

    I hope this goes around THE
    USA at least 100 times

    What happened???

  • California has a serious problem that budget reform will not cure: it is rapidly filling up with Hispanics who are disproportionately 1) criminal and 2) academic failures.

    Per capita income in state is expected to sink over 20 years

    Californians’ per capita income will drop 11 percent over the first two decades of this century unless the state closes the educational gap of its expanding Latino population, a nonpartisan research center forecast in a report released today…Latinos are the fastest-growing segment of the state’s population and work force, and among the least-educated, said the National Center for Public Policy and Higher Education…According to 2000 census figures, in the 25-to-64 age group, 52 percent of Latinos lacked a high school diploma, compared with 8 percent of non-Latino whites, and 12 percent of Latinos had a college degree, compared with 46 percent of whites…If those rates persist as the population continues to change, the report said, the state’s average educational level will decline through 2020 and drag down per capita income.

    Very politically incorrect, I know; some facts/truths are more convenient than others.

  • Doctor HB,
    Your posts are no laughing matter, and the situation is far from funny but somehow every time I come to this site I get in a good mood.
    Any way, slot machines lottery tickets etc are bascially taxes on the poorer people, some even call it a a tax on stupidity, I think it’s a tax on desperation.
    There is a lot of responsibility to go around for this mess but one group of people who should be taxed through the nose to pay at least in part it are the financial insititutions who lent money in such irresponsible ways and who want to be bailed out by govmt when the going gets tough

  • Your blog is always so informative and so spot-on. However, I believe the class you speak of is a Lamaze class. I too have given up the real estate industry, thank goodness I had other skills. Keep up the good work. jj

  • @Scarecrow – so do you propose to simply end taxation? Even if possible, what alternative do you propose? Should there be no services whatsoever? Even in your “golden age” of 1908 taxes existed (including several on your list.) I’m fairly certain that some areas of Afghanistan are ‘governed’ by warlords who only exact ‘tribute’ in exchange for not killing the populace. Thanks, but I’ll take the inept and fallible system here in the US, and try to work towards a more equitable balance as time goes forward. Living in the past seems to be rather pointless.

    @Eh – The key element of your quote is “clos(ing) the education gap”. Close that gap and the median income won’t decline according to the logic presented in the article. Second, agriculture is paramount to California’s economy and wages in that field (pun intended) will always remain low in order to keep food prices down. Last I checked, there aren’t too many non-Hispanics working the fields. Third, your article was published in 2005. I’d hazard a guess that the implosion of the the real estate industry has caused the median income to drop substantially, and I’d venture to guess that most of those in the RE field were not high school dropouts. So should we blame Hispanic immigrants for that loss of median income, too? Every immigrant wave in this nation’s history took time to assimilate, and every wave contributed back to the nation. The same will be true here.


    Rising tides? Tsunami’s have a non-discriminatory destruction pattern. Doc has talked at length about them, perhaps review his post from last year about the 2nd wave of Option ARM resets and foreclosures coming soon to a shore near you. I agree that we all need to assemble together to address the issues at hand. And if we want to examine history and the Presidency, let’s not forget that Reagan repealed tax incentives for alternative energy that Carter had put in place. Imagine if you will 28 years worth of invested technology in solar, wind, geothermal, and who knows what else, had the money been there at the very beginning of the computer age? Think we’d be in Iraq right now? Oh, right – Cheney was in both Ford’s and Reagan’s administrations. Back to reality.

  • I believe that 30-40% of all prison occupants are actually illegal aliens. Send them home?

  • Smurf
    DR HB
    ALL excellent posts.

    Keep in mind ending our Iraqi deployment is only a drop in the bucket. we still have to pay all those military salaries, which happen to be MOST of the military cost, no matter where the troops are doing manuvers. There is some increased logistic costs with far-off deployments, but this is pale in comparison to the overall federal spending, of which LESS Than 20% is military spending, including equipment, logistics, and Military personell. Most of your tax dollars go to entitlements.

    Funny that Arnold’s verbatum sales-pitch for additional slot machines is “Increased Revenues.” Nothing is being produced, just gamblers giving up their money to the State. Sounds like communism to me.

    HERE is something I COPIED this past year, printed it out and hung it on my wall:

    About the time our original thirteen states adopted their new constitution in 1787, Alexander Tyler, a Scottish history professor at the University of Edinburgh, had this to say about the fall of the Athenian Republic some 2,000 years earlier: “A democracy is always temporary in nature; it simply cannot exist as a permanent form of government.” “A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury.” “From that moment on, the majority always vote for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.” “The average age of the world’s greatest civilizations from the beginning of history, has been about 200 years. During those 200 years, those nations always progressed through the following sequence:

    1. From bondage to spiritual faith;
    2. From spiritual faith to great courage;
    3. From courage to liberty;
    4. From liberty to abundance;
    5. From abundance to complacency;
    6. From complacency to apathy;
    7. From apathy to dependence;
    8. From dependence back into bondage”

  • Not that I am a fan of government spending, Democrats or Barny Frank but he has been out front in discussing the impact the housing crash will have on state governments. A good case could be made that the quickest most stimulative measure the federal government could take right now would be, not to hand out 150 billion to consumers, but to hand it out to state and local governments.

  • Arnold should simply turn the prisons themselves into casinos (“prisinos”) via newly-discovered powers, i.e., Governator Executive Order.

    Prisinos would have no limit on the number of slot machines and other forms of gambling, such that multitudes of “free” lower and middle class citizens outside the prisino system would happily visit and contribute to prisino funding via the already well-entrenched “gambling is a highly-profitable, high-class, sophisticated activity for real winners like me” mindset. The prisinos would hold yearly poker tournaments (with the requisite celebrity appearances) to further draw in the sheeple crowds. New fast-food and lodging establishments would be constructed near the prisinos, thereby reducing unemployment and further “contributing” to the economy.

    Each prisino would establish a special inmate tournament (e.g., keno, blackjack, or poker), by which several inmate winners would gain their “release” from the prisino. This release would be promoted as the “chance of a lifetime,” but in actuality, the inmate winners will simply be transported to Iraq, Afghanistan, or one of many other flashpoint destinations for a role in another installment of “Survivor: Global Hotspots” (contestants monitored at all times by GlobalHawk UAV and RFID implants to ensure appropriate loyalties are maintained).

    Whitman, Price, and Haddad, indeed.

  • @Exit
    Actually, it was an e-mail that I thought was amusing and just wanted to pass it along.

  • “In fact, we have these “free-market” thinkers talking about protecting tax cuts for the top 5 percent while the remaining 95 percent of the population tries to figure out what in the world is going on. The Republican party no longer holds the fiscal responsibility mantra. So giving tax breaks to hedge funds is productive? And they seem content in keeping us overseas for decades without explaining how they will pay for it. This election is pivotal in the long-term prosperity of the country. Any of the top Republican candidates seems to be echoing a continuation of the war and we simply cannot afford it. ”

    Interesting data out of the IRS and Treasury the past few month.

    From 2003-05, the top 1% (incomes of $520,000 and up) saw their after-tax incomes go up by 43.5%. The bottom 90% ($120,000 and down) saw their after-tax incomes go up on average 3% – way less than the rate of inflation during that time.

    The top 2% households receive 50% of ALL income in the US. The other 98% get the other 50%.

    The Bush tax cuts distribution was equally disparate. 32.5% of the tax cuts went to the top 1%. 53% went to the top 10%.

    Heavn forbid they actually tax the income of hedge fund traders as the earned income it is instead of letting it slide by as unearned capital gains. Real simple test shows that it is earned income and they should pay more: Did they have to show up and work at a place to get the money? Answer yes, then it is earned.

    Why Republicans are considered ‘fiscally responsible’ is beyond me. They haven’t paid attention to spending and deficits since 1980 when spendiing like a drunken sailor started with the senile-actor Ronnie.

    I wouldn’t let the Republican be in charge of running a lemonde stand with just some lemonade concentrate, acard table and chair out in the front yard. They woud find a way to end up in debt.

  • Why not release criminals? A huge proportion (majority?) are there for non-violent drug crimes. Release anyone with a minor maurijauna (and maybe ‘harder’ drugs too’) related crime, like possession with no intent to sell, chill out, and pocket massive budget savings. Then direct the AG not to pursue criminal charges for such minor offenses to avoid the problem in the future by directing drug users to state-provided treatment over prison. This is vastly cheaper and helps reduce the drug problem instead of compounding it by churning out thousands of (drug-using) people who are unemployable due to a prison record leaving them with little recourse but crime (like, say, drug sales) to survive.

  • I love the IRS data AnnScott points out. Those bottom 90% will be receiving their $600 checks this year. That is a tax-cut, or just another govt spending scheme it cant afford, and borrows against our future to pay? Cut spending!! Oops scary words…lets call it “Balance the buget” instead, like Slick Wille had last decade. All these polititcains SPEND too much, I dont care what party affiliation. Similar to an individual speculating on a real home of genious, and finding themselves upside down!

  • We should outsource our jails and send prisoners to Mexico, Russian Syberia, China, Thailadnd, name it. It will have at least two positive effect: cut spendings and prisoners will afraid to do something bad and then go to Gulag.
    Who’s going to pay me for this great idea?

  • The prison population in California has a large percentage of illegal aliens. I’m not sure what the per capita yearly figure is on these wonderful individuals “who just want a better life” but I do know its ridiculous. When we figure the cost of the police to catch and process them, the cost of their crimes, the cost to the court system, the cost to build the prisons, the cost to maintain the prisons, the cost of the state employee pensions, etc. it is staggering.

    I’m pretty sure that if given the actual figures, plus those of other public services being overrun (healthcare, education, etc.) any logical person would likely pay more for their fast food and lawn care or choose to do those thing themselves.

  • Begin a good-time for coupon-clipping and adhere to your schedule to help make the follow a practice.

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