Portugal, Illinois and Caterpillar

I've been watching the anti-austerity protests develop in Portugal. If you haven't been keeping up, the Portugese Prime Minister recently resigned when his austerity budget was voted down. Portugal is insolvent and about 6-9 months away from bankruptcy. Portugal has a massive social spending problem; they don't have the industries to generate anything like the kind of money they spend. The Portugese have decided to protest against mathematics and are having the kind of success you'd expect as their borrowing costs continue to rise.

Closer to home, Illinois has the same problem as Portugal. Illinois' businesses have nowhere near the profits to support their massive public sector spending. Instead of taking the austerity tack and reducing spending to match income, they decided to raise taxes. Now one of their largest companies, Caterpillar, who employs over 23,000 people in Illinois, is threatening to leave.

In January, the state's General Assembly passed a (Governor) Quinn-supported bill imposing a four-year increase in income taxes designed to reap $6.8 billion in added revenue and help the state balance its budget. The legislation raised the flat rate for personal income taxes to 5% from 3% and for corporate taxes to 7% from 4.8%. In 2015, both taxes are set to decline but remain above the prior rate.

(Caterpillar CEO) Mr. Oberhelman enclosed letters (in his own letter to the Illinois governor) from governors or other officials in Texas, Nebraska, Virginia and South Dakota, all citing the recent Illinois tax increase and urging Caterpillar to invest in what they described as more business-friendly environments.

"If Illinois doesn't want your business, Texas does," wrote Rick Perry, the governor of that state.

The governor of Nebraska, Dave Heineman, wrote: "In Nebraska, we balance our budget by controlling spending, not by raising taxes."

An official in the South Dakota governor's office chimed in: "In South Dakota, you make a profit, and you keep your profit."

This isn't something new for either Portugal or Illinois. Both have been losing businesses for quite some time as they've favored social spending over profits. Some pundits are making the comparison between Illinois and Portugal, but they're making the mistake of placing Portugal farther along the evolutionary scale of such developments. In fact, Illinois might be ahead of Portugal. Consider these facts:

• Portugal just had a parliamentary vote against austerity; Illinois had a public election against austerity months ago.


• Portugal's borrowing costs have been rising; Illinois is already paying one of the highest rates in the US.


• Portugal is still able to pay their bills, albeit with borrowed money; Illinois has hundreds of creditors who are no longer being paid.


• Portugal can solve some of its problems in the very near term by nationalizing businesses that threaten to leave; Illinois doesn't have the nationalization option.


• Portugal can appeal to the European Central Bank who has shown the willingness to print money to cover government debts in order to save the EU. Illinois has no such leverage with the Fed.

Shockingly, it may well be that Portugal is in better shape than Illinois. Whatever the case, this timeline is only going to end one way: bankruptcy, austerity and the collision of reality with the childish, fantasy world of endless social spending.

In the meantime, let's all march and chant and hope that arithmetic goes away.
Update: An Instalanche! Yay! Thanks, Glenn.