Monday, August 6, 2012

How Facebook could (help) bankrupt California

I wrote briefly last week about the troubles over in Facebookland (I shed no tears for Mr. Zuckerberg) and the company's incredibly shrinking stock price. Unfortunately for some of us—especially the California schoolteachers among us—there's some collateral damage here (isn't there always?). Per Bloomberg:
Facebook Inc. (FB)’s declining price may cost California “hundreds of millions of dollars” in revenue expected from taxes on capital gains, the state’s fiscal analyst said.
The owner of the world’s largest online social network, touched $19.82 today, the lowest price since the Menlo Park, California-based company first offered shares to the public at $38 on May 17.
The most populous U.S. state’s $91.3 billion budget, signed by Governor Jerry Brown in June, counted on $1.9 billion in income-tax revenue from company insiders such as Chief Executive Officer Mark Zuckerberg exercising options or sell shares, assuming an average price of $35. Facebook, which touched $45 May 18, has averaged $29.49 on the Nasdaq stock market.
“Facebook share prices have fallen far below levels assumed in the state’s revenue projections,” the nonpartisan Legislative Analyst’s Office said yesterday in a report. If “the lower share prices persist through November and December, hundreds of millions of dollars of income-tax revenue assumed in the state budget plan are at risk.”
Perfect. Let me put this as simply as possible—if your budget is only "balanced" based upon assumptions of one-time revenue streams from viciously overvalued assets (whether those assets are internet stocks or McMansions or marijuana farms or whatever else), then your budget isn't actually balanced and you need to go back to the drawing board. That's true whether you're an individual, a corporation, a credit union, a babysitting co-op, or the world's largest local government. Math doesn't care who you are, and it can't be fooled (or manipulated) for very long.

The simple and uncomfortable truth is that this is why our nation has developed the unprecedented culture of bailouts and financial market manipulation that we now have, a culture that's robbing us all of our prosperity by warping and manipulating the underlying infrastructure of our economy. We've all been led to believe by any number of politicians and economists that deflation is our enemy, and that we need inflation (and $5/gallon gas) in order to prosper. This is, of course, obvious bullshit, but the party line actually makes a lot of sense when you dig a little deeper.

Simply put, almost every government in our country—whether local, state, or federal—depends upon high asset valuations in order to maintain anything in the ballpark of a balanced budget. Property taxes, capital gains taxes, sales taxes, even excise taxes, all of these are significantly higher when asset prices are inflated. When the housing bubble burst in 2007-08, it blew a gargantuan hole in state and local budgets nationwide, a hole that still hasn't been adequately plugged. Politicians will be damned if they're going to let this happen again, even if their actions guarantee that the next bubble will be bigger and uglier than the one that preceded it.

For more than a decade, governments made overly rosy assumptions about current and future tax revenues—and therefore made overly aggressive financial commitments—entirely because they believed that house prices could never decline. Then they did, significantly, and tax revenues dried up, but the financial commitments remained. Oops. And despite all of our government's best efforts, we haven't been able to reflate that housing bubble, so here we remain, in a position of constant stagnation.

When a state like California has its budget riding on Facebook's stock price, is it at all far-fetched to assume that California politicians will do whatever is necessary to prop up that stock, unintended consequences be damned? Of course not, and that's why we've got the system we've got. It sucks, but thousand of California pensioners now "need" Facebook's stock to rally. So won't you be a good neighbor and buy a few thousand shares?


P.S.- For another cute example of how individual taxpayers end up on the hook to effectively (or directly) subsidize the corporations in their communities, check out these two recent posts from Deadspin, showing how the Kansas City Chiefs and Royals have been oh-so-cleverly using taxpayer dollars to pay ordinary operating expenses. This is yet another reason why we should never have conceded to the concept of taxpayer-funded stadiums and arenas. We pay for the company's expenses (as taxpayers), and then we pay for the company's product (as fans). Sweet business, huh? Beats stealing cardboard.

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