Monday, August 03, 2009

The lessons we should be learning from California's budget woes

Robert Samuelson hopes that people will learn from the mistakes that California has made that has led it to the economic meltdown and budgetary mess it now faces. Sure there are idiosyncratic laws in California that make it hard to reach a budget agreement, but the basic problem remains: Californians want more than they can pay for and they don't like paying high taxes. So the legislature has blithely gone along increasing the budget without figuring out what to do when all the bills come due.
California's budget debacle holds a lesson for America, but one we will probably 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 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 revenue 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 revenue 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).
Every year, California approved new and expanded programs to provide more services for citizens whether it was mandating smaller classes or health care for immigrants. All worthy programs, but programs that must be paid for by a citizenry that opposes tax increases. How different is that from the federal government which keeps expanding programs and now, under Obama and the Democrats, we are seeing an expansion of federal spending way beyond the scope of anything we've seen before? The federal politicians want to do on a national scare what California has already shown will result in a total failure.
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 vs. 3.1 percent nationally. 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.
And all that remains are tax increases which is why Larry Summers and Timothy Geithner are already making noises about breaking Obama's no-tax-increase-for-the-middle-class pledge. Everyone who understood anything knew that there was no way to pay for all that Obama wanted to do by merely taxing the really wealthy or by the mythical money saved from health care reform. Now we're beginning to see hints that taxes will indeed to go up.

And if California has admonitions for us, Ross Douhat recommends that we look to Texas for another lesson on what works.
Consider Texas and California. In the Bush years, liberal polemicists turned the president’s home state — pious, lightly regulated, stingy with public services and mad for sprawl — into a symbol of everything that was barbaric about Republican America. Meanwhile, California, always liberalism’s favorite laboratory, was passing global-warming legislation, pouring billions into stem-cell research, and seemed to be negotiating its way toward universal health care.

But flash forward to the current recession, and suddenly Texas looks like a model citizen. The Lone Star kept growing well after the country had dipped into recession. Its unemployment rate and foreclosure rate are both well below the national average. It’s one of only six states that didn’t run budget deficits in 2009.
During this economic collapse we've seen how well liberal economic approaches work out in the states.
But in state capital after state capital, the downturn has highlighted the weaknesses of liberal governance — the zeal for unsustainable social spending, the preference for regulation over job creation, the heavy reliance for tax revenue on the volatile incomes of the upper upper class.

....And it also helps explain Obama’s current difficulties. The president is pushing a California-style climate-change bill at a time when businesses (and people) are fleeing the Golden State in droves. He’s pushing a health care plan that looks a lot like the system currently hemorrhaging money in Massachusetts. His ballooning deficits resemble the shortfalls paralyzing state capitals from Springfield to Sacramento.
When I cover the concept of federalism with my government classes, we talk about the advantages and disadvantages of having such a system of government. And one of the advantages is that the states can experiment and other states and the federal government can learn lessons from what works and what doesn't in individual states. So let's apply that advantage that we have in the United States and learn from the mistakes that states like California have made and then study what has worked in states like Texas that are not suffering as much from this recession.

Unfortunately, we have in power a federal government that seems bound and determined to repeat the mistakes of California and to ignore the lessons we should be learning.