Newcorn: Counting on boom cycle sank our economy

By Claudia Newcorn

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Welcome to the Great Recession — fueled largely by credit card mentalities at the state, city and personal levels. Somewhere in the past 25 years, we forgot about how to run our lives and governments like businesses, and instead developed a speculative spending mind-set that has finally toppled us into a quagmire.

By credit card mentality, I refer to the concept that we buy things for which we don't have the money under the assumption the money ultimately will come in because it's supposed to, and then we'll have the funds to pay for our purchases. And if not, we'll just borrow and pay interest until the money does arrive. Call it open-ended borrowing.

Take a look at Modesto, pruning $9 million from the budget, chopping everything from parks to fire equipment. Why? Because of a "prolonged drop in tax revenue."

The same words echo in our Legislature. Parks, programs for the poor and health services all are being cut back. How could this happen? Answer: Flawed cash flow assumptions.

A smart business each year does a series of what-if scenarios as part of the budget planning process. There's the worst-case, best-case and likely versions that map out cash flow potential — not just for the current year, but several years forward. Then, the scenarios are evaluated in the context of past performance, as well as ongoing and future probabilities.

Finally, the really smart business starts off conservatively in its spending, massaging the plans as needed, depending on actual cash flow. In other words, it goes with the middle scenario, with back-up plans if things go wrong or right. If it doesn't do it right, the price tag is failure.

Such a harsh reality does not hang over our city and state governments, fostering a tendency toward best-case scenario spending — planning based on favorable cash flows, which hopefully will occur.

And pardon my cynicism, but since I've yet to see government leaders living from paycheck to paycheck, most don't directly experience the penalties of their overly optimistic spending habits. That falls on the shoulders of those who lose programs they really need — elder care, dental insurance, the list goes on.

Don't you wonder what happened to all the county tax revenues generated during the "flipping" phase of the real estate boom? As homes churned to new owners, Proposition 13's bindings were released, allowing property taxes to start afresh at the new price point. What happened to those millions? Or the tax revenues from the surge in sales related in everything to furnishing the new homes to increased revenue from businesses enjoying banner years?

A smart business sensibly knows that a boom cycle is not indefinite, and so develops a cash reserve for when the market slumps — as it always will. For people, it's called a savings account.

The tragedy is we're no longer sensible about finances. People shop because they want it. City and state governments spend on programs because constituents expect it. Even businesses run under the belief that consumer spending will always increase. In other words, a credit-card mind-set. Buy now, pay later.

Except that later is now.

The question is, will our governments learn from it, or go through it again, and again and again?

Newcorn is an author and freelance writer living in Modesto. Contact her at columns@modbee.com.