Thread: Lessons from California's meltdown

Lessons from California's meltdown

Robert J. Samuelson
NEWSWEEK
2:00 a.m. August 3, 2009

California's budget debacle holds a lesson for America, but one we probably will ignore. It's easy to attribute the state's protracted budget stalemate, now temporarily resolved with about $26 billion of spending cuts and accounting gimmicks, to the deep recession and California's peculiar politics.

Up to a point, that's true. Representing an eighth of the U.S. economy, California has been harder hit than most states. Unemployment, now 11.6 percent (national average: 9.5 percent), could top 13 percent in 2010, says economist Eduardo Martinez of Moody's Economy.com. Meanwhile, the requirement that any tax increase muster a two-thirds vote in the Legislature promotes paralysis. Democrats prefer tax hikes to spending cuts, and Republicans can block higher taxes.

All this produced the recent drama: plunging tax revenues and the state's resulting huge budget deficits; endless negotiations between Gov. Arnold Schwarzenegger and legislative leaders; the deadlock that led the state to issue scrip (in effect, IOUs) to pay bills; and a final agreement on a 2009-10 budget. But there is also a bigger story with national implications.
California has reached a tipping point. Its government made more promises than its economy can easily support. For years, state leaders papered over the contradiction with loans and modest changes. By overwhelming these expedients, the recession triggered an inevitable reckoning.

Here's the national lesson. There's a collision between high and rising demands for government services and the capacity of the economy to produce the income and tax revenues to pay for those demands. That's true of California, where poor immigrants and their children have increased pressures for more government services. It's also true of the nation, where an aging population raises Social Security and Medicare spending. California is leading the transformation of politics into a form of collective torture: pay more (higher taxes), get less (lower services).

Make no mistake: The spending cuts and tax increases the state enacted to bridge its budget deficits are not cosmetic. In February, the Legislature agreed to a penny increase in the state sales tax, bringing the total – including local sales taxes – to about 9 cents or more. Top income tax rates, already among the highest in the country, were raised. So were motor vehicle registration fees. Spending cuts approved in February and July are deep. Together, the cuts equal almost 30 percent of the general revenue fund and will affect schools, prisons, colleges and welfare.
Some welfare benefits will be cut by half. California's student-teacher ratio, now about a third above the national average, will probably go even higher. The University of California system lost 20 percent of its state payments. It's raising tuition and student fees 9.3 percent, imposing salary reductions of 4 percent to 10 percent on more than 100,000 workers, and delaying faculty hires.

National parallels again seem apparent. Federal budget deficits – reflecting the urge to spend and not tax – predate the recession and, as baby boomers retire, will survive any recovery. Amazingly, the Obama administration would worsen the long-term outlook by expanding federal health insurance coverage. There's much mushy thinking about how we'll muddle through.

California has pioneered this sort of delusion. The presumption was that a dynamic economy would pay for expansive government. But California's relative economic performance has actually deteriorated. In the 1980s, the state's economy grew much faster than the national economy; annual growth averaged 5.1 percent versus 3.1 percent. In the present decade, the gap is smaller – 2.9 percent versus 2.3 percent – and much of the state's advantage reflects the unsustainable housing boom, of which California was the epicenter.

On paper, the state could solve its budget problems by raising taxes further. But in practice, that might backfire by weakening the economy and tax base. California scores poorly in state ratings of business climate. In a CNBC survey, it ranked 32nd overall but last in “cost of businessâ€

More things we can thank the illegals population for........one state down and 49 to go.


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