Sunday, January 21, 2007

state of Illinois Finances

Over the almost four years of Governor Blagojevichs administration, Illinois financial conditions have gotten worse and worse. In the first year of his administration, the state budget deficit declined but since then it has increased each year and now it has reached over 3 billion dollars. The first reason for this has been the continued growth in state government spending on existing programs and addition of new state programs, the cost of these programs has out striped the growth in state government revenues. Another causes is that in order to keep his pledge not to raise to taxes but in attempt to increase state revenues the Governor put into a place an increase in the states business fees that cost business in Illinois 300 million dollars a year and along with that he eliminated 160 million dollars with of sales and income tax exemptions and raised the state minimum wage to well above that in our neighboring states. The end results of this is that Illinois is less competitive than other state when it comes to attracting new business and jobs and this in turn has lead the state of Illinois to add fewer new jobs each year than other states, the rate of job growth in Illinois is the 8th worse in the nation. This in turn reduces the amount of revenue that the State Government could be taking in from the state income tax, since if the employment in the State had been growing at the nation average there would be thousands of more workers paying state income tax each year and along with that sales tax and other tax revenues would rise to.
The long run financial status of the State is even worse, because the state hasn’t been full funding its pension or insurance liabilities and with the debt accumulated by the increased borrowing the Governor has down in order to fun some of his pet programs, the state has incurred 106 billion dollars in debt. The end result of this is that Illinois has the worse deficit of any state in the country and this is beginning to adversely affect the ability of the state to fun need capital improvement project and since the state takes a long period of time to pay it Medicare expenses and then under pay health care providers, the poorest citizens in the Illinois have a hard time finding doctors and receiving medical treatment. This leads them to delay getting medical treatment until their health become very bad, which raised the cost of treating them.

Illinois need to act now in order to fix up our financial house and a tax increase is not the answer, since it would make the state of Illinois even less attractive to business and hurt job growth. What we need to do is bring government spending back into line, we need to cut back on needless program and wasteful pork filled projects that the state CAN NOT AFFORD and slow the spending growth of existing programs. The state need to begin fully funding its pension system and move new employees from the existing system, a defined benefit one, to a defined contribution one, like 401Ks, and we need to bring our Medicare cost in line by making it managed care system, Illinois is currently the only state that doesn’t used managed care Medicare system. We also need to roll back the increase in business fees and use the increase in the national minimum wage as a way to bring our state minimum wage in line with minimum wage in neighboring states so that we will be more competitive when it comes to attracting new business and jobs. This in turn will help raise the amount of revenue that the government receives from the state income tax and then when the state budget is back in line and we are running a surplus, the state need to use those funds to invest in capital projects. These capital projects will improve the states infrastructure and makes us even more attractive to business looking open up or relocate. This in the long run is how we can both fix Illinois budget problems and improve the states economy.

Tuesday, January 16, 2007

Minimum wage Vs. A Negative Income tax rate and Obama for President

It now seems all but certain that the minimum wage in the United States and in the state of Illinois will be raised which will be bad for the economy in the long run. There are a couple of reasons that a minimum wage hike is bad for the economy and will not do much if anything to help the poor in the United States. First it does nothing to address the main causes of poverty in the United States which are problems with the educational system and cultural failings. Any increase in the minimum wage that was large enough to left the people on it out of poverty would also cause a massive increase in the unemployment rate in the United States, similar to what you see in more socialized European countries that tend to have higher unemployment rates, like France rate of 9.9% or Germany's of 11.9%, particularly among low skilled and young workers. Even the proposed increase of the US minimum wage to $7.25 will raise the unemployment rate in the United States and in the long run encourage companies that can to replace low skill workers with automation when ever possible. The reason for this is that by raising the price of labor to higher than its economic value it price compared to capital, ie automation, is changed and if it becomes relatively more expensive then capital then companies will replace low skilled labor with capital when they can. If Illinois raised it minimum wage to even higher than the national one, then we lose jobs as companies that are reliant on low skilled labor will relocate out of Illinois if they can and we will be less competitive when it comes to attracting new low skilled jobs.

The reason that a minimum wage hike attracts all the support that it does despite it problems is that for the vast majority of people it will have no direct effect on their day to day lives. The only effect that it will have is indirect from higher prices and possible inflationary consequences. Many people in the general public are by in large unaware of many of the basic economic laws, thou they themselves follow them each day. Along with that many Unions support a minimum wage increase because some of the contracts that they sign have pay scales that are based off the minimum wage rate and an increase in the minimum wage raises their member’s salaries. It also easy to scape goat the opponents of the minimum wage by scape gloating them as being greedy corporation that are to cheap to pay there employees a "living wage", which ignores the fact that the minimum wage hike has the least effect on corporation that can absorb the cost or replace low skilled workers with automation, and has the most effect on small businesses. Along with that the group that it has the largest negative effects on young low skilled minority workers who will see there unemployment rates rise the most.

Expanding the Earn Income Tax rate into a full scale negative income tax is a better way to help the working poor. This way they would pay nothing in taxes and would see there real income increase from the negative income tax that would be paid to them up until the point they are above the poverty line at which point the negative income tax would cut off. If it was structured so that the payment they receive doesn’t decline by one dollar for each additional dollar that they earn, instead declining by 50 cents, it would also encourage them to work more, since the more that they worked, the more their real income would increase. It would also have a smaller impact on the unemployment rate and could actually lower it.

Today Barack Obama announced that he was forming an exploratory committee to run for President, for the moment ignoring my ideological disagreements with him, does any one real thing that he is ready to lead the country after serving less than one term in the United States Senate and only a few years in the Illinois Senate?