With time and money running out for California, Gov. Arnold Schwarzenegger declared a fiscal emergency today and called legislators into a new special session that won't end until they agree on a way to trim the state's $11.2 billion budget deficit. He compared the growing deficit, which could reach $28 billion by 2010, to an avalanche gaining momentum, and he slammed the Legislature, Democrats and Republicans both, for not coming up with any solutions during a special session that ended Nov. 25. "Unfortunately for California, the legislators did not seem to appreciate the severity of our crisis," Schwarzenegger said. "In an emergency like this, we have to take quick action to avoid even worse problems, even if they include decisions we don't like."- SF Gate

Dominant Social Theme: The American political process encourages prudence after all.

Free-Market Analysis: The current economic crisis will hit American towns and cities hard and it will be interesting to see how much Federal largesse will trickle down to the states and the local level. The infection of the graduated income tax, which became law on a federal level in 1913, has infected states over time, so some states have such a tax and some do not. The ones that have such taxes are probably in even worse shape than ones that do not, as the political economy is not like the real economy.

A political economy utilizes capital only for spending purposes. It is not reinvested to create income or jobs. Funds create "programs" that then need additional funding, which is why the more money a political entity receives the more it spends. The only way to reduce expenditures is to cut the revenue that the entity receives. The idea that a political entity can balance its books once it receives additional indeterminate income streams is a fantasy. The more money the entity receives or is promised, the more it spends.

America's federal, state and local governments disburse trillions of dollars to a variety of enterprises, causes and programs. Some of the money goes to the private sector and some to the public. But the symptoms of over-spending in America are everywhere and can be seen most prominently in the growth of the public sector and its compensation. Those who work in the civil military, putting out fires or policing localities (fire-men and the police) can retire in their 40s with generous pensions and health care. Public school teachers can retire early as well with similar benefits. The political class itself is highly compensated with perks, pensions and other benefits.

Another symptom of economic distortion is the disbursement of funds themselves. It is the central banking system, with its ability to print more money than the system itself would produce that creates great gouts of revenue during banking manias. Inevitably such funds fatten state and local governments and produce significant revenues.

It is thus a little noted but significant fact that central banking does not only distort the private economy, it encourages the sprawl of the political economy as well. In ordinary bad times, recessionary events that have the hallmarks of mild rather than savage retrenchments, the political economy copes at the expense of the private sector. Taxes may be raised, debt ceilings enlarged and other revenue streams called upon to keep the spending going. But in a more severe retrenchment, such as the current one, it is difficult to see how American states and localities will find the revenues to maintain the perks and programs of the political class. The "governator" of California is right to be alarmed – or at least to present that emotion as a public face.

Great republics die in stages – and the American republic was once the world's mightiest. But with a gigantic military industrial complex, a huge and consolidated "Homeland" intelligence operation, a mighty central bank and an aggressive graduated income tax, the current United States does not bear much resemblance to the land of its forefathers. And these trends are hard to reverse. The larger the political economy gets the more powerful it becomes. In the case of America, and Europe, too, established political economies will stagger along, engorging at the expense of the private economy. That will be the solution in California and elsewhere once the shouting is done and some level of layoffs or attrition is agreed upon.

The public sector has the uncanny ability to survive even when the private economy, on which it depends, is in severe disarray. Zimbabwe comes to mind as a good example of extreme rot. The country itself is paralyzed and the corruption of its leader Robert Mugabe has effectively shut down that country's private sector. Hyperinflation, violence and starvation have caused the emigration of millions. Yet still Mugabe hangs on by extending the tentacles of the ruinous political economy to every sector of private enterprise.

Of course America is not Zimbabwe, but the trends that are writ large in Zimbabwe can be detected in many third world countries, and America, and in the European Union as well. As countries turn away from private enterprise, for whatever reason, the political economy comes into prominence and can be noted by an emphasis on militarization, increased taxation and bureaucratic solutions to hitherto private problems. The results are as predictable as they are gloomy.

The political economy is not productive and never can be. It produces no revenue and, through lack of competition, is never fully constrained. It is often marked by an increase in inflation and a decrease in private sector opportunities. Survival in such states, may call for public sector involvement by the individual, but at the lower levels, public sector involvement, especially in a collapsing state, is not necessarily lucrative. Those who have other options, such as emigration, consider them. The purchase of silver and gold – honest money – during the process of political engorgement is prudent as well.

As the political economy extends itself, money inevitably loses value and taxes rise. Those who are prudent enough to purchase precious metals in various forms, physical or paper, and secure them in places where they cannot be confiscated are often planting the seeds of survival and continued profitability. Their families benefit from their foresight and they achieve some level of independence from the destruction occurring around them.