Friday, October 28, 2011

Cutting Down Trees With Sticks

A good lesson in free market economics was my professor’s story about a hundred workers chopping down a tree with sticks. Along comes someone with a knife, and then the question now becomes whether keeping the workers employed is more important than introducing a sharp metal object that would empower one man to do the job of a hundred.

The Governor’s budget proposal attempts to swing a hundred sticks without much in the way of lumber production. That is the point after all. The Governor believes government "continues to be a safe haven" for employment, while the Treasurer refers to the ASG payroll as his "top priority". It's a failure of leadership to not introduce a knife to this budget.

The semi-autonomous agencies have followed in lockstep. The only restraint on their personnel costs has been the ASG’s inability to meets its subsidy obligations. Their only sense and purpose of profit is continual bureaucratic expansion.

Meanwhile, tax revenue is expected to decline. Overall tax collection looks to be $800k less than FY11. FY10 income tax collection is a whole $2 million more than what they expect to collect next fiscal year, largely attributed to the federal funds that followed into the territory following the tsunami. The Governor 2% wage tax increase can only account for a projected $600k increase from FY11 to 12, and that’s if the ASG is lucky.

The economy went from bad to worse since FY10, and that’s just the point. The worse the local economy gets, the worse tax collection becomes – no matter how much you raise rates. And economists argue that raising those rates would only discourage the economy even more.

Then, if we distribute next year’s projected number of locally funded ASG workers through Mrs. Langford’s breakdown of the current workforce and average salaries, it will take all $46.5 million in projected tax revenue to cover their payroll. In exchange, other needs such as repairs for elementary schools, expansion of the prison facility, simple road repairs, hospital referrals, etc. go unfunded.

That is the fallacy of maximum employment as an economical goal. Think of the worker with the knife who displaces the hundred using sticks. Employment in the short-term may be hampered, but his production now allows more lumber for the displaced workers to make homes, furniture, paper and all sorts of products made out of wood.

We cannot hide or deny the current economics that portend a national trend towards austerity. We need to consider reforms already out there to get ahead of game locally. Like tying the local workforce to 5% less than what’s projected to be collected or shifting emphasis of revenue collection from taxation (currently 70%) to fees and charges for service (11%).

The Heritage Foundation found that the most prosperous countries are the most economically free. Their “Index of Economic Freedom” evaluates how much of a country’s government spending is a percentage of its GDP. In their view, “excessive government spending runs a great risk of crowding out private consumption, thereby thwarting the choices of individuals”.

Hong Kong’s (ranked #1) government spending is only 18% of its GDP while American Samoa (whose GDP was $537 million in 2007 according to the BEA) is looking to spend close to 90% with the Governor's budget proposal.

We can see which country is benefiting more using a knife rather than sticks.

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