Within the last week the stock market has reached an all-time high. But wasn’t it just weeks ago that the market suffered a one-day decline of over 400 points the worst since the 9/11 attack?
The higher stock values have memory-challenged market watchers making happy talk crediting low inflation and interest rates for a healthy economy and booming stock prices.
However when pressed even the most Pollyanna-ish among them recommends that investors diversify. "They don’t provide advance warnings of a market correction" lightly cautioned one prominent investment counselor as if it were a mere footnote required by his attorney to ward off litigation.
Sadly recent history shows that one class of potential investors is easily swayed by talk of an endless bull market. When given opportunity members of the California Legislature behave like an insomniac with a credit card watching all-night infomercials. But these vulnerable investors do not risk their own money; they "invest" the public’s now-and-future tax dollars by committing to ever larger state budgets based on the "certain knowledge" that increasing stock prices will provide a prodigious permanent stream of capital gains tax revenue.
When Gray Davis came into office and he and his legislative allies were confronted with billions of dollars of unanticipated revenue from the dot.com bubble they donned party hats and began to spend like there was no tomorrow. When it turned out that many of the Silicon Valley firms that powered the market were based on nothing more than fantasy and the capital gains tax revenues dried up the very real spending by the Legislature and compliant governor left taxpayers holding the bag.
While Davis was fired by the voters and many of the wheeler-dealer lawmakers of his era have been shown the door by term limits they have been replaced by representatives who were elected in the same gerrymandered districts that guarantee election of those who are generous with government dollars.
Most Legislators are constantly on the alert for opportunities to spend especially if they represent a significant number of constituents who rely on transfer payments. They are called transfer payments because through government programs they transfer income from those who earn it to those who do not. What better way to assure reelection than to give those who receive government handouts a raise? To guarantee these raises lawmakers must spend more and they often justify spending increases based on self-serving overly optimistic projections of future tax revenue. Six weeks remain for the Legislature to meet the constitutionally mandated deadline to approve a budget and between now and then claims regarding the magnitude of future revenue could get outlandish.
A second corollary to the rise in the value of stocks is that it may believe some pressure on those institutions that invest public employee retirement funds. Currently these programs face billions of dollars in unfunded liability or more to the point liability that must be made up by taxpayers. If the market continues its bullish ways it may provide state and local representatives the excuse they need to postpone coming to grips with a crisis that has the potential to bankrupt some government entities.
Yes it is easy to see why thoughts of increased revenues that flow directly or indirectly from an expanding stock market can have an intoxicating effect on elected officials. But budgets based on wishful thinking are a recipe for disaster. "If wishes were horses beggars would ride" and free spending lawmakers may very well envision themselves astride noble steeds. But if the economy sours leaving taxpayers facing higher taxes and reduced services voters are likely to give these politicians a rude ride out of town on a rail.
Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest taxpayer organization — which is dedicated to the protection of Proposition 13 and promoting taxpayers’ rights.