Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. Until the 99% understand the need for deficits, the 1% will rule. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

The federal government, being Monetarily Sovereign, has the power to pay any bill of any size. It never can go bankrupt. The states, counties and cities, being monetarily non-sovereign, do not have this power, so many are in financial difficulty.

Has Vallejo, California found a solution?

Washington Post
Vallejo, Calif., once bankrupt, is now a model for cities in an age of austerity
David Paul Morris/Bloomberg

After becoming the largest city in America to declare bankruptcy in 2008, Vallejo, Calif., began to reinvent itself.

The first couple of years were ugly. . . crime and prostitution surged as the police force was thinned by 40 percent. Firehouses were shuttered, and funding for libraries and senior centers was slashed. Foreclosures multiplied and home prices plummeted.

But then this city of 116,000 began to reinvent itself. It started using technology to fill personnel gaps, rallying residents to volunteer to provide public services and offering local voters the chance to decide how money would be spent — in return for an increase in the sales tax. For the first time in five years, the city expects to have enough money to do such things as fill potholes, clear weeds, trim trees and repair tennis courts.

Our states, counties and face a common problem. They cannot create dollars. So, for instance, if they run a balanced budget, and suddenly any expense — meaning ANY expense — increases, they must obtain dollars from the residents or from outside their borders.

But if residents work inside the city’s borders, the same dollars merely recirculate, and eventually the residents become impoverished trying to support their government. This is exactly the same problem residents of Greece and the other monetarily non-sovereign euro nations face.

A rule in economics: To survive long term, a monetarily non-sovereign entity must have money coming in from outside its borders. This money can come from a higher entity — i.e. cities can get dollars from the state — or from exports. But, of course, all states, counties and cities cannot be net exporters, so dollars much come from a higher entity — ultimately from the federal government.

The nation’s cities are weak links in the U.S. economy and, if they collapse in large numbers, it could knock the country’s recovery off course. Cuts at the federal level are being pushed down to the states, which in turn are passing the problems to their cities.

Which demonstrates, yet again, the suicidal foolishness of federal budget cuts.

At least three California cities — Stockton, Mammoth Lakes and Montebello — have declared that they are exploring the (bankruptcy) option. And at least 100 of the state’s 482 cities are on track to face a similar predicament by the end of the year, according to Barbara O’Connor, a professor at California State University at Sacramento.

Economists warn that a number of large bankruptcies of cities, concentrated over a short period of time, could have a devastating effect on the national economy.

Vallejo, about 35 miles northeast of San Francisco, became the poster child for the failures of municipal budgeting in 2008 when its cash reserves dwindled to zero and it was unable to pay its bills amid falling property tax revenue and the soaring cost of employee compensation and pensions.

For Vallejo to survive, two city council members — Marti Brown, 46, a redevelopment worker for the state, and Stephanie Gomes, 45, a legislative specialist for the U.S. Forest Service — decided that the city needed to study best practices from around the world and bring some of them to California.

The police went high-tech, investing $500,000 in cameras across the city that allow officers to monitor a larger area than they could before. The department deputized citizens to participate in law enforcement by sharing tips on Facebook and Twitter.

Gomes, whose husband is a retired police officer, focused on public safety. The couple went neighborhood to neighborhood setting up e-mail groups and social media accounts so people can, for instance, share pictures of suspicious vehicles and other information. “There have been countless cases where ordinary people have stopped crimes this way,” Gomes said.

This is a close relative of the “spy-on-your-neighbor” approach used by many totalitarian governments, and supported by the National Rifle Association. Think: George Zimmerman, neighborhood watch captain, killing Trayvon Martin — an “ordinary person” stopped a crime.

The number of neighborhood watch groups jumped from 15 to 350. Citizen volunteers came together monthly to paint over graffiti and do other cleanup work.

So in addition to paying more taxes, the citizens paid with their time.

And the city council struck an unusual deal with residents — if they agreed to a one-penny sales tax increase, projected to generate an additional $9.5 million in revenue, they could vote on how the money would be used.

In return for paying higher taxes, the citizens would be allowed to vote on how that money could be used. Of course other money could be switched over to other uses.

[In Illinois, lottery money was supposed to support education. So the crooked politicians merely switched away the money that formerly supported education. A perfect scam.]

As the 2012-13 budget season kicks off in California, Vallejo’s neighbors are looking at severe cuts, in part because of reduced support from the state. Gov. Jerry Brown (D) this month revealed that California is facing a crushing$16 billion deficit because of a shortfall in tax revenue. As a result, the state is diverting billions that had been earmarked for redevelopment or housing assistance away from cities that were already under fiscal stress.

As the old saying goes, sh*t flows downhill. The federal government cuts support to the states, so the states cut support to the counties and the cities. All this hardship falls on the people, because the debt hawks say the federal government should live within its non-existent “means.”

The state capital, Sacramento, which is expecting an $18 million deficit for fiscal 2012-13, has proposed cutting 286 full-time jobs, including police and firefighters, a move that would probably leave the city unable to respond to home burglaries and car accidents and lengthen the response time for 911 calls in all but the most dire cases.

Vallejo is in a markedly different situation. While it still faces some serious challenges — crime continues to be a problem

I guess “spy-on-your-neighbor” hasn’t worked too well.

. . . and the housing market remains depressed — the city’s finances are doing so well that a federal judge released it from bankruptcy in November.

Assistant City Manager Craig Whittom, who has worked in Vallejo since 2003, said the bankruptcy may have been the best thing to happen: “It was effective at helping us re-create ourselves and change the culture so that we could restart from a stronger financial footing.”

So all is well, right? Wrong. The fundamental problems remain:

1. Vallejo still is monetarily non-sovereign.
2. The debt-hawks in Washington still push for budget cuts.

So with no changes in #1 or #2, Vallejo again will crash against financial realities. Residents will tire of providing free services, and no amount of neighbor spying or graffiti overpainting will save the city.

Vallejo again will run out of money, thanks to the debt-hawks in Washington.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports