The Seditionist

Watching Fox, I came across one of their short filler pieces that boiled down the self-destructive nature of modern economic politics.

The piece focussed on one of the many shitty, run-down, impoverished U.S ex-manufacturing cities. I think it was Detroit (in many ways the show-piece of absolute and total economic failure) but there are plenty of other cities inside and outside the U.S that would work just as well.

Detroit cut taxes on the film industry by 40%. As a result, Hollywooders flocked to Detroit, and the city increased its income from the film industry from 2mio to >120mio annually. That’s a 6000% rise in profits. Wow! Free-market Capitalism does work! How could I argue with these numbers?

Here’s how: Detroit used to be one of the most prosperous cities in the U.S. Solidly working-class, it produced cars for the world. Then the globalisation game began, and industry started fleeing to tax havens, both national and overseas. Today Detroit has an official unemployment rate of 30%, compared to the ~14% rate in the U.S overall. The much-vaunted service industry employs a good chunk of Detroit’s population, but of course providing services cannot fill the gap left by the actual production of things people need.

It also has a post-hollywoodisation budget deficit of ~300mio dollars with a budget of 1.5 tri. dollars that is already insufficient to run vital public services. How’s it going to get fixed? Not by raising taxes, obviously. That’ll just speed up the big-business exodus. Not by cutting the budget, because there’s nothing left to cut. Not by federal intervention, because the federal government is even broker than Detroit.

What can Detroit do? Cut taxes and hope that it undercuts some other struggling city to gain a temporary boost in revenue. ’cause the dirty little secret of that extra 118$ mio. in Hollywood income is that it’s not magic money. It’s not money Detroit is making. It’s money that Detroit is sucking from other cities. How will other cities respond? By lowering taxes some more. Ca-ching, more money. That leads into another round of tax-lowering and incentivising. Where will it all end? It’ll end with a 0% tax rate and added incentives. How will the politicians spin this as a victory? Well, they’re losing the city a bit of money but they are creating jobs, and that will provide a net benefit to the community (and increase the size of the budget hole. Shhhh!). It’s exactly the same cycle that produced tax-free zones in developing countries (sweat shops, anyone?) , which means that no industrial area imposing any kind of social tax burden can compete. The result? A world of Detroits.

The precursor is with us today. California is the world’s fourth largest economy, and it is also essentially bankrupt. The Terminator went into the governorship with the brilliant idea of lowering taxes to spur economic growth. Guess what? The taxes were all lowered out. There’s no economy left to grow. The budget deficit is perfectly capable of growth, though. Interest rates on debts mean that even standing still would mean falling behind. And of course California is not standing still. It is charging full-force into total bankruptcy.

Being the strongest horse on the U.S apple cart, it’s doing an A-grade job of taking the rest of the U.S with it. California has a population of 38mio and a yearly budget deficit of 40bio. That means per resident, California is losing 1052$ a year. On the other hand, Michigan has a population of 10mio and a budget deficit of 1bio. That means Michigan is losing 100$ a year a person. Huh? The miracle child of economic success in the U.S is losing 10x more money per person a year than the economic basket case? How’s that possible? That makes NO SENSE. None whatsoever. It’s insane. The more economically successful in terms of gross state product, the less successful the state is in terms of not losing incredible amounts of money a year. And we’re ignoring the fact that compound interest compounds the problem inexorably.

Basically, economic guidance for governors should be: have as small an economy as possible, that way you will have the greatest economic success. Why is politics going the other way? Living standards. California has sky-high living standards built on the powerful economic base which provides good jobs for its residents. Michigan has high unemployment and crappy jobs, and hence blossoming slums.

Of course nobody wants to talk about the fact that this difference in living standards is built entirely on public borrowing, since it would probably be a somewhat unpopular political move to declare a program of increasing unemployment to combat public debt. Unfortunately this political expediency does not make the California model any more sustainable. The truth is, the more business you do with big business, the poorer you will be. And there’s no long-term way to win this game. It’s just a race to the bottom, and the fittest horse will get there first.

What awaits us at the bottom? Complete privatisation? A Great Chinese Buyout? A break-down of government followed by anarchy of the Darwinian kind? A revolution of angry citizens? Nobody knows the answer to that question, and I certainly don’t want to put my money on a positive outcome.

This entry was posted on Sunday, January 24th, 2010 at 2:32 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.