Friends of mine used to observe that what you see in California at any point in time is what you should expect to see in the rest of the nation 10 years later. I think they must have been correct; California is broke.
The proximate cause of California’s current budget crisis that is forcing the layoff of more than 100,000 workers (20,000 state, 90,000 construction) is a partisan battle in the state legislature over next year’s budget. There’s a projected deficit close to $40 billion, and the legislature is deadlocked over how to address it. California has a budgetary rule that requires a 2/3 majority in the legislature for any budget that calls for tax increases. This gives the Republican minority the power — barely — to insist on spending cuts rather than tax increases. The Democratic majority refuses to cut spending; they love their liberal Utopia projects. Without a budget, California cannot pay its bills.
That’s the immediate cause. The real cause, however, is the rising, structural deficit in California’s budget. How it came about reads like a tribute to Ronald Reagan’s economic policies.
Read this simple analysis from the Summary to the governor’s proposed 2009-2010 budget (emphasis is mine):
In 1998‐99, the state’s budget was balanced and projected to remain in balance. Figure INT‐01 displays General Fund revenue and spending growth since 1998‐99. As the figure shows, one year later, revenues increased by 23 percent, due to a stock market and dot‐com boom that drove unprecedented increases in stock option and capital gains income. These were magnified from a state revenue perspective, because the state’s income tax system relies disproportionately on the very high‐end earners most likely to receive such gains.
The surge in revenues resulted in massive – and unsustainable – new spending commitments. When revenues declined, the state relied mostly on one‐time measures, such as borrowing, to temporarily reduce spending without cutting back underlying program commitments. Thus, the structural deficit was born.
Mind you, the new spending commitments at the turn of the millennium, proposed by Democrats, had the solid support of Republicans as well. This was not a partisan event, but rather an illustration of a rule that our nation’s founders understood very well and President Reagan used to talk about frequently: when you give government money, it expands. Reagan opposed nearly every tax increase proposed by Congress to cover rising deficits on the premise that Congress would not use the money to reduce the deficits, but would instead use the influx of new revenue to support new, permanent spending measures. This is what California did in 1998-99, and it’s what Washington did with its paper surpluses at the same time. When the surpluses vanished — because they were, in fact, mostly just smoke and mirrors — the new programs remained, and they remain to this day. Government never shrinks except through revolution.
The US Congress has just passed a measure containing hundreds of billions of dollars in new, structural spending that will never go away. It didn’t even wait for a surplus; it just responded to an imagined need for spending increases, Keynesians giving them an excuse to do what they’d wanted to do all along. This, too, will never go away, except by revolution.
California’s plight gives us a few more clues regarding what we can expect for the nation.
For one thing, people are leaving California in droves. Decades of nonstop, liberal fantasy-land social engineering has created an environment that is hostile to families and successful entrepreneurs. Despite the sun, sand, and beauty of the west coast. productive citizens are packing their bags and taking their business elsewhere. Listen to this summary of a 2007 study from Laffer and Moore written by the National Center for Policy Analysis:
It takes a lot of public policy folly to persuade people to pack their bags and abandon California’s sunshine, 70-degree weather, scenic mountains, and beaches, but, lately the politicians in Sacramento have proved themselves up to the task, say Arthur Laffer and Stephen Moore in their study, “Rich State; Poor States.”
* The latest Census Bureau data indicate that in 2005, 239,416 more Californians left the state than moved in; this was also the case in 2003 and 2004.
* The native-born outmigration flows have become so systematic that the cost to rent a U-Haul to move from Los Angeles to Boise, Idaho is $2090 — or some six times more that the cost of moving in the opposite direction.
What’s gone wrong with the Golden State? A big part of the story is a tax and regulatory culture in Sacramento that treats rich people as if they were cash dispensing ATM machines, say Laffer and More. The cost for businesses of complying with California’s rules, regulations, and paperwork is more than twice as high as other states. But the real growth killer is California’s steeply “progressive” income tax with 10.3 percent rate applied to high-income residents — the highest in the nation outside New York City.
* The richest 10 percent of earners pay almost 75 percent of the income tax burned in the state.
* Most of these “evil rich” are small business owners, i.e. the people who create jobs.
The study itself confirms that the most productive citizens leave high-tax, high-spending states (like California. New York, and Massachusetts) and move to states with lower taxes and greater liberty; the attempt to redistribute wealth results in an eroding tax base that leaves a greater burden on the poor than before. A recent survey of corporate executives by Development Counselors International confirms Laffer’s and More’s findings.
The following chart from Schwarzenegger’s budget proposal (clipped from Adam Haverstock’s article at The Policy Report) illustrates a huge part of the problem, and the reason for the 2/3 rule in the legislature:
This looks remarkably like what will result nationwide from President Obama’s proposed tax code changes, after which more than 50% of American voters will pay no taxes at all. The difference is, the US Congress does not have the 2/3 rule to prevent the poor majority from using their voting power to soak the wealthier minority. The result in California was unwieldy taxes and the flight of productive citizens; what will be the result in the nation?
Ironically, California liberals demonstrate that they understand the problem perfectly well. They’ve created a set of incentives to attract “green” energy and auto producers — by reducing taxes.
California’s green-friendly atmosphere is encouraging clean businesses from around the world to invest in California, stimulating our economy and contributing to the fight against global warming. According to the California Green Innovation Index by Next10, a non-partisan research organization, in 2006 venture capital investment in energy technology companies in California was just shy of $1 billion, more than double the total from 2005…
Last Wednesday, CAEATFA approved a new program that exempts new ZEV manufacturers [author notes: ZEV = "Zero emission Vehicle"] from paying sales and use tax on the purchase of manufacturing equipment to encourage ZEV manufacturing in California. For Tesla, these incentives will mean millions of dollars in savings when the company invests in building their new plant in California. And if they choose a city that is in an Enterprise Zone, they will save millions more. Tesla will also be eligible for at least $1 million in Employment Training Panel Workforce Development Funds to train employees.
The tactic sounds familiar, no? Californians also pay almost $.50 more per gallon of gasoline than other Americans, thanks to taxes on carbon, another familiar-sounding tactic. California boasts more than 95% of the nation’s solar energy projects, thanks to $2 billion in government incentives, still another familiar-sounding tactic. President Obama is moving in this direction, aiming to tax carbon and create incentives for green energy technology. He claims it will produce hundreds of thousands of jobs. I suppose he has not noticed that this move has not rescued California’s budget, and that tax-paying citizens are leaving by the hundreds of thousands. When your policy destroys a few hundred thousand jobs, the creation of a new hundred thousand jobs does not really compensate all that well; that’s what incentives accomplish when paid for by destructive taxation.
The lesson of California is that the expansive, Utopian dreams of modern American “liberalism” (it’s really a lot closer to Stalinism these days) cannot work. The attempt to create Utopia by taxing the wealthy and forcing social policy down the citizens’ throats creates a massive, coercive, top-heavy, easily corrupted Monarch State that structurally fails of its own weight and drives its most productive and mobile citizens elsewhere. Even if we grant — which I will not, ever — that their Utopian vision rests on morally valid hopes and sound ethics, theirs is a vision that cannot be achieved. In fact, it’s because the vision rests on an improper model of humanity that it cannot be achieved; the power and coercion required to force people into behaviors that run contrary to their legitimate self-interest inherently produces misery, and drives away anyone with the ability and good sense to flee.
Welcome to the Age of Obama. We are SO screwed…