Economists, pundits, and politicians would write and say much wiser things if they would take a few minutes and consider the trajectory of California’s richest companies. Think corporations like Alphabet, Nvidia, Meta, Intel, Qualcomm, Uber, and so many more.
Back when the corporations mentioned were private, and still reliant on venture capital funding, none had debt of any notable amount. That they had no debt was a statement of the obvious. It’s the business model of VCs to invest in companies pursuing the obscure or impossible precisely because those same companies offer investors the best chance of stupendous gains if they succeed against long odds. Companies with high odds of failure can’t take on debt. There’s no interest rate high enough to compensate VCs for the risks they’re taking. Investment in California’s private technology companies is equity finance, all the time.
Fast forward to the present, those same companies mentioned up top are now public, and carry enormously high valuations. In which case economists, pundits, and politicians would be wise to look up just how much debt each carries. No surprise, each has billions in debt. Another statement of the obvious: when investors put a high valuation on your company it’s no longer necessary to exchange equity in return for capital. High valuations enable borrowing at low interest rates. As a company’s future prospects become brighter, the cost of borrowing logically falls.
Apply these basic truths to the state of California and its debt. About what’s about to be written, please don’t mistake it for an endorsement of California’s big government policies. It’s nothing of the sort. Whatever government imagines it can do, the private sector can do exponentially better, in more innovative fashion, and much more cheaply.
At the same time, it should be said that there’s no mystery as to the why behind California’s tens of billions of debt. The latter is not a consequence of too little taxation as hopelessly confused left wingers imagine. Just the same, it’s not a consequence of California’s politicians misunderstanding the Laffer Curve such that they’re failing to implement the proper tax rate necessary to maximize tax revenues. The previous viewpoint is popular among supply-side types who are almost as confused as their opposites on the left, and who have perverted Arthur Laffer’s genius.
The cause of California’s nosebleed debt is too much tax revenue now, and worse, the expectation of exponentially more tax revenue in the future. Whether individuals, companies or governments, their ability to borrow is a function of market expectations about their capacity to pay monies borrowed back. Precisely because California is so dense with immensely rich individuals and corporations, its capacity for borrowing is enormous.
Please keep this in mind as California’s braindead left wingers bruit a “wealth tax” to shrink the state’s debt, and almost as braindead supply-siders draw tax-revenue maximization graphs meant to reveal how lower rates would gift the Golden State with even more revenue. Neither scenario will reduce the debt, and they won’t simply because the debt is yet again a consequence of too much tax revenue now, and the expectation of much more in the future.
In short, California already has a wealth tax whereby it arrogates to itself far too much of the fruits of rich people and rich company production. There’s the cause of the debt. Simple stuff.
Republished from RealClear Markets
