It could be green shoots

Or it could be a lot of hot air:

Oct. 15 (Bloomberg) -- U.S. state tax collections tumbled the most in almost half a century in the second quarter as the economic recession curbed levies on incomes and sales.

The 16.6 percent plunge was the biggest since at least 1963, the Nelson A. Rockefeller Institute of Government said today. For the 12 months to June 30, the fiscal year for most states, revenue declined 8.2 percent, or $63 billion, about twice what states got from the $787 billion U.S. economic stimulus package, the institute said.

One of the raps so-called "perma-bears" get is that they are misanthropes who cheer bad news only for the joy of seeing others suffer. And while I'm not a perma-bear*, I do think the accusation carries with it a bit of a misunderstanding, for it presumes that falling tax revenue is a bad thing**. I happen to think it's a very good thing. I have long said that the only saving grace in big government is that it's inefficient: we should all be thankful we're not getting all the government we pay for. And since I want less of it, I'm perfectly satisfied to pay less for it.

Government is like aspirin. We do not have to choose between taking none or the whole bottle. While we do need a little, taking more is not going to help us, and taking too much is just going to give us ulcers or make us bleed profusely whenever the eventual cut or scrape comes along. In today's government there is this idea that we need to take all the aspirin we have, and the more the better; well, if we're going to do that, then I think it's better for us if we have less than a full bottle on hand.

But be that as it may, with the Dow crossing and re-crossing a big-round number this week, the financial press is full of "the recession is over" stories. Stocks are going up. The economy is growing. Happy days are here again. State governments say that's not true. Not only is it not true, it's not even close to true.

If one wants an excellent proportional measurement of economic activity, it's hard to find one better than sales tax revenue. Consumer spending is something like 70% of the economy, and state governments generally*** take a cut of every dollar. That's real money proportional to real sales, not mythical money like owner-imputed rent or hedonic adjustments. Real revenues are down 16% quarter to quarter and 8% year-to-year. In short, they are decreasing at an increasing rate. There is no way that if 70% of the economy is shrinking that fast, the entire economy is growing. Hot air about green shoots aside, it's just not happening.

But the big question is, is that a bad thing? Traditional economists think it's a bad thing. Politicians think it's a bad thing - but then again, they are the ones who get more play money when revenues rise. Permabears are presumed to think it's a bad thing (which is why they are so happy about it). I don't think it's necessarily a bad thing at all. It may be a bad thing or it may be a good thing. We'll have to see how it works out.

The thing about depressions - and have no doubt, we are in one - is that they do not end just because spending goes up in this quarter or that. Depressions hang around until the economy they are depressing adjusts to a new reality. When banks started lending hundreds of thousands of dollars to strawberry pickers to buy new houses on 125%, no-doc, no-money-down, adjustable-rate mortgages, that was a sign that the consumer economy was terminally ill. It had grown as old and big as it was likely to. Sales tax revenues falling in double digits is proof that it has died. It's all dead - Miracle Max cannot help us now - and something new must rise in its place.

That something could be good, or it could be very, very bad, and much of that decision will rest upon how hard governments cling to the corpse of the dearly departed.

* I just play one on the internets. If I hope certain markets drop - they will drop or not, regardless of my personal preferences - it's only because at some point I hope to get back in.

** It also presumes that those who say something bad will happen *want* it to happen, Therefore the Surgeon General wants you to get lung cancer. It says so on every pack.

*** Yes, a few states exclude items like food and clothing, but not enough to change the game unless we are going to argue that Price Chopper is somehow making up all that revenue that GM is losing.