Some California Government Failure

WSJ's POLITICAL DIARY:

"A canary in this coalmine is the Northern California city of Vallejo, now in bankruptcy court and trying to rip up labor contracts with police and firefighters. Like the auto and steel industries and Social Security and Medicare, local governments around the country have committed to paying (in present value) $1.7 trillion in retiree benefits beyond the ability of their tax bases to fund them. In California alone, the share of city budgets going to these costs has more than doubled in just the last eight years to 26%. A lawyer for municipal unions laments the shape of things to come: 'Other cities are now saying they could just do a Vallejo.

Yup -- setting the stage for a generation's worth of political warfare. There are two choices: Either we can boot-strap our way out or inflate our way out.

You won't be hearing about any of this from the presidential campaigns, of course. Boot-strap means stripped-down tax and regulatory policies that allow the economy to grow faster -- what Barack Obama and Joe Biden continually anathematize as "deregulation." It also means some brutal revoking of promises to workers and retirees -- as Vallejo is trying to do. (Can't happen? Ask airline and steel and auto workers.) What's the alternative to the boot-strap approach? To pile on taxes even at the cost of economic stagnation, with the Fed increasingly under pressure to run the printing press to create an illusion of rising incomes.'"