A Governor With Some Stones

While some governors are talking tough about cutting spending, Gov. Tim Pawlenty (R-MN) is walking the talk. Given that he’s a Republican governor in a very liberal state (Minnesota), I have my skepticism, but I’ll give him credit on this matter, as credit is due. This, from WSJ columnist Kimberley Strassel:

‘Minnesota nice” comes in two forms: the first, gracious hospitality; the second, smiling stubbornness. Republican Gov. Tim Pawlenty this week delivered his spendthrift legislature a humiliating taste of the latter. You betcha.

If Republicans are looking to get back their conservative groove, they could do worse than study Minnesota’s budget brawl. Mr. Pawlenty deftly (and amusingly) outmaneuvered his Democratic opposition, not only saving his state from huge tax increases but clearing the way to cut government spending. Call it a refreshing break from the financial-crisis norm.

Like most states, Minnesota has been facing a huge budget shortfall — an estimated $4.6 billion over two years. These dire financial straits didn’t deter the DFL-controlled legislature (the DFL is Minnesota’s chapter of the Democratic Party), which got to work on big new spending bills. Included were not just the usual increases in appropriations but gems like $1.2 million in grants for TV and film producers and $200,000 for a youth environmental education program. Recession? What recession?
[A Governor and His Veto Pen] Associated Press

Minnesota Gov. Tim Pawlenty.

To fill in the hole they’d blown in the upcoming fiscal budget the DFL then proceeded to float every tax hike known to Garrison Keillor. A short list: A new top income tax rate of 9% (the fourth highest in the nation); across-the-board income tax increases; sales taxes on Internet downloads; the end of the local property tax cap (enacted only last year); alcohol taxes; cigarette taxes; eliminating the deduction for an organ donation (no joke); and killing the home mortgage interest deduction.

Throughout this spectacle, Mr. Pawlenty kept voicing three simple principles. “Number one, we must have [because of the constitution] and should have a balanced budget,” he told me. “Number two, the state government needs to live within its means, just like everybody else. Number three, we shouldn’t raise taxes in the worst recession in 60 years.” Minnesota already has one of the highest tax burdens in the nation.

The DFL wasn’t listening. As the clock wound down (the session ended at midnight this past Monday), the legislature sent Mr. Pawlenty one large spending bill after another. The assumption was he’d veto them, be forced to call a special session, and then be negotiated into tax hikes. That’s when the governor got Minnesota nice.

Upon receiving the last spending bill, he announced that he would exercise the power of “unallotment,” which has been on the books since 1939 and which has been used four times. Under it, the governor is allowed to “unallot” (take away) any state spending for which there is no money to pay. Panicked, the DFL passed tax legislation to cover its blowout spending bills, 10 minutes before the session’s end. Too late. The governor said he’d veto the bill and would not be calling back the legislature to do any more mischief.

Mr. Pawlenty is now free to strip $2.7 billion from state spending to balance the budget. Tax hikes are dead. He tells me this will be one of the first times in modern Minnesota history that the state will reduce the size of government in real terms, not just slow its rate of growth. “The correlation in recent history has been between job growth and states that have reasonable government cost structures,” he says. These cuts, he says, will position Minnesota to take advantage of the recovery when it comes.

A red-faced DFL is lecturing the public to be angry at the governor — and the governor alone — for any cuts in government services. Pawlenty critics have accused the governor of grandstanding, readying for a possible presidential run.

And? Voters elsewhere might wish for a little more such show. Mr. Pawlenty’s hardball has earned him glowing praise from the state’s job creators, in particular small businesses, who are relieved to be spared additional tax burdens in today’s economy. The governor’s message — that it is simply “inappropriate” for state legislators to keep spending like lunatics and raise taxes in a recession — has resonated with cash-strapped voters.

That sort of tax-and-spend governance is precisely what has now pushed California to the brink of insolvency. California voters revolted this week, defeating five budget ballot initiatives. “The sky isn’t going to fall,” Mr. Pawlenty told reporters on Tuesday, just because Minnesota has to trim 3% to 4% from a $34 billion budget. Oh, to hear such words from a California pol.

The Minnesota episode is also a lesson that leadership inspires. At one point in the session, Mr. Pawlenty did receive a tax bill, which he vetoed. The DFL has an override majority in the Senate and is only three votes shy of that in the House. Yet minority Republicans stuck with their governor to uphold his veto. If they hadn’t, the rest of this story would be moot.

Congressional Republicans — the ones who got tossed because of their embrace of spending and earmarks — might start looking for a message up north. Fiscal responsibility? “It is the fundamental tenet of our party, and the conservative coalition more broadly,” says Mr. Pawlenty, nicely. “If we don’t have that, we are nothing.”

The “Cluster of Errors” Illustrated

While Vox Day provides a scathing–albeit accurate–assessment of this story, I would also point out that it is a micro-level example of the “cluster of errors” phenomenon that results from misguided monetary policy.

What is wrong with the picture? A number of things:

(1) The new vehicle inventory–financed at $3 million–is a malinvestment that was encouraged by low interest rates. This is because low interest rates tend to stimulate an increase in financing (i.e. borrowing) for capital goods, causing demand for such things as vehicles and houses to spike. This causes businesses to forecast expected demand based on that spike, which leads to such malinvestment in inventory.
(2) The parts inventory–$300,000–is also a malinvestment that was encouraged by low interest rates.
(3) The multimillion dollar renovation is also a malinvestment forced on them by the parent company, which was under pressure from competition that was also adjusting their competitive strategies against the monetary landscape.

That malinvestment would not be catastrophic if the level of debt was serviceable by the prevailing level of demand. Trouble is, the greater the gap (the higher the boom) in the two, the harder the bust is.

I am not happy to see the family get hammered as they are being hammered. That their assets are being taken without compensation, and redistributed, seems grossly unfair.

On the other hand, the borrower is a slave to the lender. If they did not have the debt load that burdens them now, then they would be in a viable position to fight it out.

Still, given their experience–and otherwise good business abilities–they will live to fight another day. Cases like theirs are why we have a bankruptcy code.

The Mother of All Shots

I’m not a Georgia Tech fan, but I’ve long considered James Forrest’s turnaround 3-pointer–with 0.8 seconds left–for the comeback victory against USC in the 1992 NCAA tourney as the best clutch shot of all time. I say that because so many things had to go right. He caught the ball with his back to the rim, rotated and jumped, shot at just the perfect angle as his body was rotating. Nothing but net.

Oh, and Forrest was a freshman!

Well, LeBron James is no freshman–he’s been an NBA star long enough. Still, consider that:

(1) His team had blown a 23-point lead.
(2) His team was down by 2, courtesy of a clutch play by Orlando.
(3) His team had already blown a big lead in game 1.
(4) LeBron was not having a good 4th period.
(5) There was only 1 second left.
(6) Everyone on the court knew LeBron was going to get the ball.

He caught the ball from behind the 3-point arc–while moving away from the basket. He was guarded closely. He fired a high, arcing jumper.

This will be LeBron’s signature moment: