Paul Volcker is one of the real heroes of the modern economic profession. During the late 1970’s and early 1980’s he conquered the “Great Inflation” by taming the growth of the money supply. Interest rates rose to levels unprecedented in modern American history. During my time in charge of cash management at AIG, I bought and sold money market securities yielding 20%; today similar instruments yield less than 1%. His efforts led to President Ronald Reagan’s “Morning in America” and a renewed attention to monetary policy. His success, as painful as it was, gives him lots of “street cred.”
The Volcker Alliance recently published an analysis of the budgets in three states: California, Virginia, and New Jersey. The results will be surprising to many. He gives kudos to California and Virginia, and holds a dim view of New Jersey, home of Republican presidential wanne-be, Chris Christie.
Standing alone, California would be the world’s eighth biggest economy with domestic output equaling US$2.1 trillion. Under Democratic Governor Jerry Brown, the Golden State’s credit ratings have been raised multiple times by the rating agencies. Under his leadership, voters have approved some temporary tax hikes, increasing budget reserves and improved funding for pension liabilities of teachers and other government employees. According to Volcker, California’s outstanding debt has been reduced by approximately US$10 billion in three years.
The Old Dominion comes in for praise by the former Fed Chairman. In an interesting comment he states that the budget professionals in Richmond serve for many years while the Governor is restricted to one 4-year term. Budget cycle planning, which takes as long as 6 years, removes some of the politics out of Virginia’s budget process. Virginia’s unfunded pension liability of US$ 3,436 per employee is only a few dollars more than that of the Golden State.
New Jersey, home of Gov Christie, leaves much to be desired according to the former Fed Chairman. Volcker’s analysis paints a messy picture of the Garden State’s fiscal condition. Volcker lists myriad accounting and financial tricks that have been employed to balance the home of the Jersey Boys: these do include not using the proceeds of bond sales for their stated purposes. Frequent use of non-recurring revenues for operating purposes. And diverting tolls from the turnpike from their stated use to maintain that highway.
It is a shame that Volcker did not include Kansas in his analysis. Governor Sam Brownback, a Tea Party favorite, has enacted a budget cutting, tax reducing program that only a “fauxconomist” like David Bratt would endorse. The budget deficit has ballooned, school systems in some detracts have closed early due to lack of funding, and a liberal website reports today that the Kansas Gov has threatened to cut off funding for the judicial system if it does not rule in his favor should a court challenge arise to his policies.
— D. Leslie Schreiber
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