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Let California Go!

Or maybe don't. Not yet...
RECENTLY there has been talk of allowing Blue States like California to secede, writes Nathan Lewis at New World Economics in this post first appearing on Forbes.
Mostly, this has come from Leftists who want free rein for their big government daydreams. Some on the Right think this might not be a bad idea.
I think we should definitely not break up the United States. Are you really ready to have an independent country, potentially hostile, potentially nuclear-armed, potentially allied with geopolitical rivals – let's put it bluntly: potentially with military bases with tens or hundreds of thousands of Chinese troops, including air power and missiles – also claiming most of the West Coast of the Continent, with some of the best farmland in the world, with the largest and most prosperous cities west of the Appalachians, with major ports, plus all the other nice things about California?
Look at Ukraine today for an idea of how that might go.
Also, we should not assume that Californians are really so different than Americans elsewhere. It's true that certain people in Berkeley have been bonkers for a long time. But, according to election data seized by U.S. special forces from servers in Germany, in the 2020 Presidential election, the Republican candidate won. California is a Red State.
Fans of the "Fourth Turning" predictions of William Strauss and Neil Howe are not surprised that the United States appears to have entered a Crisis Era, catalyzed (but not caused) by the Covid outbreak this year. This could go a number of different ways.
Looking at this, I figured that a beneficial outcome of this process could be a return to the Federalism explicitly defined in the Constitution. Basically, the Federal government restricts itself to the Enumerated Powers. This amounts to foreign policy, including the military, foreign trade, immigration and naturalization, and foreign relations. All domestic policy remains the business of the States.
This is a nice idea, and has been little more than a daydream for decades among Conservative intellectuals dismayed by the nonstop growth of Big Government. But, in this Crisis Era, I think it might become an actionable item.
I expected this to come about primarily due to fiscal reasons. At some point, the Federal government will have to stop running deficits, and printing money to fund them. One quick and easy way to do this (and it will have to be quick and easy, since we won't have years and years to work it out), is to simply cancel all Federal welfare-type programs, including all healthcare, education, needs-based welfare programs, and so forth (with the possible exception of Social Security). State governments, which already administer most of these programs, would be free to implement whatever domestic programs they like, and impose taxes appropriately to pay for them.
A slimmed-down Federal government like this could be financed with a low, simple tax, like a Federal sales tax or VAT of about 10%. No more Federal payroll or income taxes. (State taxes might be higher, however.) This kind of major tax reform is necessary. Besides all the practical benefits, you can't take away such a huge pile of socialist goodies, without giving something even better in return.
But, the crisis of Federalism might not come from the fiscal side. Perhaps a secessionist movement in California becomes a hot revolution. In that case, a solution could be reached: the California State government can manage its own internal affairs. It already has all the legislative, executive and judicial apparatus to do so. The Federal government would simply provide military defense and a unified foreign policy, and charge a modest tax (a 10% VAT perhaps) to pay for it. This would either quell the secessionist movement, or delegitimize it. If all that is not enough to make you happy, then you were probably Communists to begin with, and should be treated as such.
Again, it has to be a simple, effective plan that can be enacted in a matter of weeks, or perhaps days.
If California got such a sweet deal, it would probably not be long before other States asked for the same.
In The Magic Formula (2019), I figured that it was still too early to bring up the idea of eliminating the income tax not only at the Federal level, but across the States as well. "Uniformity" of taxation is part of the original Constitution. This means: one tax rate for all people. Sales taxes, VATs and payroll taxes (assuming no upper limit of income) have this characteristic. I thought that we might have to leave that for future generations to figure out, the hard way.
But, we are already seeing States destroy themselves with excessive taxes – what I called the Spiral of Decline. If this Spiral goes on much longer, we will have some once-prosperous States – California, Illinois and New York – looking like burnt-out ruins, and all the economic activity and prosperity in a few other States that have got the right idea, notably Texas and Florida. This pattern would be best as...a learning experience...not a long-term solution.
Normally, you would think that governments would be able to see where this is going (just follow the long lines of U-Haul trucks), and change their ways. But, as has happened to so many governments in the past, States have shown little ability to reform themselves.
Part of these reforms may be to impose, at the Federal level, a requirement of Uniformity in taxation upon the States. Basically, this would limit the States to one-rate flat taxes, including Sales taxes, VATs and payroll-tax-like taxes.
You could still have a big government with socialist welfare programs, using this system. I estimated that, if France eliminated all of its personal and corporate income taxes, it would still generate 35%+ of GDP in tax revenue from its other "uniform" taxes.
But, a better solution would be similar to that of Singapore, where tax revenue/GDP is under 15%. Singapore uses an extensive "mandatory provident fund" program, with mandatory contributions to privately-owned accounts for healthcare and retirement. It seems to work very well.
We all know the Federal Government is not going to reform itself, until it needs to. But, that time may not be that far off. Breaking up the United States is not a solution; just one step in a larger disaster. We have a much better plan. It was all written out 231 years ago.

Formerly a chief economist providing advice to institutional investors, Nathan Lewis now runs a private investing partnership in New York state. Published in the Financial Times, Asian Wall Street Journal, Huffington Post, Daily Yomiuri, The Daily Reckoning, Pravda, Forbes magazine, and by Dow Jones Newswires, he is also the author – with Addison Wiggin – of Gold: The Once and Future Money (John Wiley & Sons, 2007), as well as the essays and thoughts at New World Economics.

See the full archive of Nathan Lewis articles.

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