Thinking back to my last trip to the magnificent Greek islands, I’m a little shocked to realize it was almost two decades ago. How can that be true when there is still a vivid picture in my mind’s eye of the blue waters surrounding Santorini and its ancient city of Akrotiri, and, yes, the topless black-sand beach.
In Athens, we hired a private taxi to take us to the usual breathtaking spots: the Parthenon and the Temple of Athena. With some imagination back then, I could almost picture Socrates sipping the hemlock at the birthplace of modern democracy. Yet today this ancient guiding light of the modern world is teetering on the precipice of financial ruin.
A stifling, overregulated government bureaucracy has made starting new businesses time-consuming and extremely expensive, delaying and even killing job creation. Sky-high taxes have resulted in a significant underground economy and widespread tax evasion. Greece’s admission into the European Union was contingent upon market-based reforms of the socialist regime that never fully occurred. While the country might seem attractive to developing new markets, these barriers have kept foreign capital away. Government debt was thought to be about 5.5 percent of the budget, but by using some clever manipulation, they managed to hide an actual 12.5 percent debt. How can smart, civilized people cause this many problems for their citizens year after year, you might ask?
Californians would do well to just look in the mirror, because similar actions have taken place here. The former gleam of the golden state is tarnished by a gray patina. Our government has more than three hundred boards and commissions, eleven agencies, and seventy-nine departments, many of which have overlapping, duplicative, and conflicting assignments, according to Insurance Commissioner Steve Poizner, a gubernatorial candidate. According to a study from California State University in Sacramento, it’s estimated that regulations cost the state $492 billion a year. The study estimates that this cost accounts for 3.8 million fewer jobs, $211 billion less in worker pay, and an annual tax on each small business of over $57,000. If someone were sitting on the tilting deck of the Titanic and concocting hands-free cell phone regulations and large screen TV laws, you’d think they’d lost touch with reality. Our state is staring down into the swollen throat of disaster, and our legislature is dabbling on the fringes of government power with new regulations and new taxes for businesses that will discourage employment and compound the problems. Focusing on minor issues while the big picture is ignored is like re-arranging the deck chairs on the great ship just before she plunged below the icy surface.
Okay, let’s cut the lawmakers a break. After all, the world is in the biggest recession since the Great Depression, and we all have to come together to work our way out of it. Unfortunately though, the problems didn’t start with the current economic downturn. For two decades the state has spent more than it should. A mere seven years ago, Governor Schwarzenegger swept into office on the rage of an electorate that tossed Grey Davis to the wolves for egregious budget transgressions. But the problem didn’t stop with a new governor.
According to Investors.com, total spending grew at a rate of 5.9 percent per year over the last eighteen years, while the general rule of thumb based on population growth for states would call for 4.4 percent budget growth for California. The lower rate would have resulted in a double-digit, billion-dollar surplus instead of the perennial deficits that have actually occurred. The message for California is the same one as the one for Greece: you can’t spend on every whim, emotion, or even every real need if it breaks the bank. The problem with government coming to the rescue on every perceivable need is that the cost of overhead in the form of bureaucracy always mushrooms out of control—how do you say that in Greek?
Another problem that tax-paying citizens have is that some government programs are antiquated, serve very few, and are hard to eliminate. The Nobel Prize–winning economist Milton Friedman made the point that an entrenched constituency builds up around these programs, and they create a life of their own. In order to have an efficient government, lawmakers need to make sure the government serves the people’s current needs while not letting the government become merely an employment bureau for thousands. Numbers are swirling around that something like 60 percent of Greeks are employed by government. No wonder they are filling the streets with protests against government austerity.
Back home, students have filled the streets to protest rising tuition and cutbacks for higher education in state schools. Of course, the time to protest was a decade ago when the systems were drifting away from sound financial management. And to the protestors, many would say that the problem is spending, not revenues. As reported in this column last year, California has the nation’s highest personal income tax, the highest gas tax, the highest state sales tax rate, and the highest corporate tax in the western United States. In spite of Proposition 13, passed in 1978, the state’s property taxes are at the national average.
It’s not all bad news here, however; there are investment opportunities. How should investors approach this situation in our state? The state’s municipal bonds are not taxed by the state or the Federal government, making them attractive for high tax–rate investors. The state, as well as cities and agencies, issue bonds for projects that may be built today and paid for over time loosely representing the life of the project. It generally could be said the projects are paid for by the people that get the use from them. Recent research indicates that the California state bonds have sufficient revenue coverage to maintain interest payments. In addition, water, sewer, and electric systems in established areas should make sound investments.
Bonds investors ultimately need to know how they will be paid back both in Greece and California, as well as around the world. That means that governments have to be held accountable for financial management. In representative governments, such as our state and even the birthplace (Greece, that is) of the whole system, voters have to step up and understand what the solutions are and elect people who will institute them, not those running who continue to distract you with minor hot-button partisan issues.
Rick Glaze is the president of Glaze Capital Management in Los Altos, an investment management firm. In addition, he is a General Securities Principal offering securities through First Allied Securities, member FINRA/SIPC. His first novel, The Middle Fork, was published in 2009.
