Why States with Democratic Leadership Have Failed Economically

When you discuss Red State/Blue State, you are essentially making reference to a political dichotomy here in the US. And understanding what the definition of a Red State or Blue State represents is important. It is not whether today, a State has a Republican Governor, so it is RED, or that today, a State has most recently voted for a Democratic President which makes it BLUE. A consistent governance from the left, with legislatures and/or a governor historically Democratic, that is what makes a state blue. We are used to looking at the Presidential map, but what matters is how state government governs – from the left or from the right. The further left, the deeper the blue.

Putting things in red and blue makes it crystal clear: what we have learned in the last few weeks, years and months, as debt and spending have become the daily headlines across America, is that States governed by Democrats are ostensibly bankrupt. That’s right, where one looks at a map and sees the color BLUE, or Democratic leadership, you will also find red-ink to infinity.

Consider: California, New York, New Jersey, and Michigan all face budget crises that may not be resolved. They are in danger of defaulting on their obligations. California ONLY survived in 2009 thanks to Obama stimulus funds – in other words, a Federal bailout (a bailout with tax dollars means you and I, living elsewhere, had our money taken from us and given to people who can’t count). In New Jersey, a Republican governor has spent the last year starting to clean the mess by demanding changes in union contracts and how the State spends money. Thanks to those efforts, New Jersey may be stepping back from the brink, but they are far from being out of the woods.

The mismanagement in New York is nothing new. The city itself faced bankruptcy in 1975 through 1977. New York was known for rolling blackouts, high crime, and failed governance. Mayor Abraham D. Beame had actually filed the bankruptcy paperwork, using the law firm of Weil, Gotshal & Manges, on the date of October 17, 1975. Beforehand, the city had gone to the Federal Government for a bailout, and President Gerald Ford had said no. Citing concerns about moral hazard, and the unintended consequences, Ford represented a bygone era of accountability and responsibility. A famous New York Post headline became iconic: “Ford to City – DROP DEAD.” (contrast with Democrat Jimmy Carter’s Chrysler bailout, Clinton’s bailout of Long Term Capital Management [LTCM was the first of the hedge fund bailouts, largely unknown, and the original TARP program], and you see that Ford was right).

New York survived that initial crisis when Albert Shanker, President of the United Federation of Teachers, agreed to use Union Pension funds to underwrite loans to the city to pay its creditors. An unholy alliance and a very telling one: the pension funds were underwritten by public money in the first place! Not the first government to borrow from itself, and certainly not the last.

Critics will contend that current crisis is different – state tax revenues are being affected by the worldwide financial collapse. True, and quite possible, but why are Blue states affected moreso than Red States? Especially New York and California, whose economies (thanks to tourism and global trade) should be the least affected by a global downturn?

The answer is quite simple: left-of-center economics does not work. Here is the prescription for disaster:

1) Pensions for public service employees. How does one square this circle? You pay for public servants to receive pay checks larger than yours, and benefits larger than yours, and retirements which exceed what they made while working.

The simple basic mathematic facts are stubborn indeed. In a bygone era, you worked for government as a way to give back, to serve the public, because of patriotic duty, or it was simply the only job you could get. You understood, implicitly and explicitly, that it paid less because you worked for the people. Somewhere along the line, that has changed. Budgets will not rebalance until it changes back!

2) Teacher’s Unions. (Full disclosure, I have educators in the family). Most states have lavish benefit plans for teachers. As Chris Christie, the new Conservative governor has told his teacher’s union members – if you don’t like the cuts, you can work somewhere else.

Like the public service employees, we have fundamentally gone off the rails in how we compensate our public servants. No doubt teachers are extremely important for our children, and the future of society as a whole. But lacking competition, innovation and reform, an industry that works 9 months out of the year cannot possibly be paid as if they worked 15 months in a year. Again there is a need for balance. Start with the simple question – has education improved during the time that these benefits have expanded exponentially?

But don’t stop there. State government’s have largesse throughout. Lavish salaries to extraordinary perks, state budgets have massive shortfalls and not much to show for them.

3) State Government Employment. (Full Disclosure – I have state government employees in my family) Not just the salaries and benefits but the number of people working for state government is up 16% over the last decade (8/5/10 “The Coming Catastrophe,” by Dick Morris). It doesn’t matter if someone’s job is important, it only matters in two areas: A) Is it necessary; and, B) can we afford it?

4) HIGH Taxes. People are fleeing California and the businesses they run with them. One Arizona realtor commented, which is in a state hit heavily by the 2008 banking collapse: “I am going to send a thank you to California’s government because they are making me a very rich man.” High tax rates and unrealistic (and in many cases “Twilight Zone”) levels of regulation has taken what was once the Gold Coast and is turning it into a 3rd World country.

Blue states have followed the traditional liberal big-government model of taxing, borrowing and spending, and then giving to….government? That’s right – all that you have been told regarding how liberals help the poor has not led to the eradication of poverty, or the job creation for single mothers. It has simply transferred wealth from the middle class, and borrowed from future workers, to give to unions. When standing in line at the DMV waiting to be served, how do these facts appeal to you?

Blue State Bankruptcy is a big problem for the current administration: do nothing and you will severely damage the fragile fiscal and budgetary outlook for these states. Do something and face Republican defiance and public scorn. It is a part of the 2012 drama as well – does Obama take unspent TARP funds and by-pass Congressional oversight? That seems a guarantee of defeat in 2012, since public outcry would most likely exceed the town hall anger of the Health Care debate. And perhaps the biggest problem associated with blue state bankruptcy is ideological: the foundation of big government liberalism has once again (and with no great surprise) failed.

“Socialism is great until you run out of other people’s money” – Margaret Thatcher.

Hello, McFly?!? If you haven’t figured it out yet, the money has to come from somewhere. Guess where – you and me, the taxpayers. Bailout after bailout = bankruptcy. And that is where we find ourselves in some of the bluest of states.

The Blue State budget mess was a choice and it was avoidable. At some point, and my guess is the voting public recognizes that we are there right now, you must only spend what you take in; that you can’t expect to retire early and earn more in retirement than what you did while working; and you certainly should not expect such benefits if you are serving the public.