Archive for January 11th, 2011
The future of the United States may be seen in microcosm in California. Like California, the US is in deep debt, having engaged in unsustainable economic practices. But California, like the US, cannot be written off. The resources, economic capacity and technological infrastructure is strong, and the state is not going to collapse into bankruptcy and chaos.
In this time of crisis Californians turned to a former Governor and one time Presidential hopeful, Jerry Brown. Brown was last governor of California from 1975 to 1983, an era with a deep recession and an oil crisis. He’s had experience in this kind of situation. When he came into office Brown quickly got the reputation as a fiscal conservative, cleaning up excesses left by his predecessor, Republican Ronald Reagan. For all his rhetoric, neither as Governor nor President was Reagan a fiscal conservative!
Brown opposed proposition 13, which cut taxes and dramatically reduced California’s state revenues. But when it passed he implemented budget cuts and used the surplus he had garnered in his early years ($5 billion) to keep California viable. He was respected by California fiscal conservatives, but not so much by social conservatives. Seeing where the culture was headed before others, he appointed openly gay judges and officials, and pushed ahead on environmental issues, arguing that damaging the planet could have long term unintended consequences. He also pushed for alternative energy, realizing that going from oil crisis to oil crisis would ultimately not be a healthy way to run California or the country.
Brown would run for President in the Democratic primaries a number of times, focusing on balancing the budget (he wanted a balanced budget amendment), exploring alternative energy sources, and repositioning the economy for a more high tech future. In hindsight, it’s clear Brown had foresight. Perhaps if he had been elected in 1980 the budget would not have spiraled out of control as it did in that decade.
So now Brown returns to California, no longer the balanced budget state he left when he moved out of the Governor’s mansion. (Oh wait, he choose not to live there, and had a modest residence instead). Now, he faces daunting challenges.
If California were a country, it would have the 8th largest economy in the world. Yet it is heavily in debt, and its bonds are rated as just above junk (a distinction shared by Illinois). California’s debt is about $100 billion ($80 billion in bonds issued, but another $40 billion of bonds have been authorized). This year alone there is an expected short fall of $25 billion. To cover that through borrowing would be very expensive due to the low rating of California’s bonds, meaning that they have to pay a high interest rate to borrowers.
Many are comparing California to Greece, saying that the state will default, and the collapse of California could have ripple effects throughout the US economy. And, to be sure, that all could happen. Arnold Schwarzenegger, elected to clean things up in California, tripled the debt during his tenure, setting up this crisis. Yes, the housing boom hid the inherent weaknesses in the economy; Schwarzenegger was caught up in economic bubble like so many others, and he didn’t get much cooperation in trying to address budgetary problems. Still, this leaves Brown with a herculean task — to save California, and perhaps by extension, keep the US economy from entering an even deeper crisis.
This solution is painful. First, temporary tax increases are to be kept in place another five years. Brown is smart enough to know the simplistic logic that “cutting taxes increases revenue” is wrong. It can under certain conditions, but most of the time if you cut taxes, you cut revenue. Second, Brown is proposing extensive budget cuts. State workers, usually protected in such times, will be asked to take cuts of 8 to 10% of pay. That is significant, but the state workers’ unions recognize its necessary. He will also force workers to take furlough days — unpaid time off — to help cut costs. A third of California’s budget is for state worker salaries.
Another $3 billion will be cut from state health care ($1.7 billion) and and the state’s “welfare to work” program ($1.3 billion). The University system will also see $1 billion cut. Despite this, Brown wants to start a rainy day fund, and significantly shift authority and money to local governments. This is potentially the most important and dramatic of Brown’s moves. Not only will the tax increases mentioned above go directly to local governments, but more and more Brown wants to decrease the scope of state government. Local governments can better decide how to spend money, and perhaps what can be cut.
If Brown can get California’s democratic legislature to swallow these cuts (and at this point they’re in no mood to do so), California will show investors that it has its budget under control. Not having to sell bonds this year to finance a budget shortfall will itself save billions, meaning that as painful as these cuts are, not making them only creates more pain down the line. Brown also doesn’t want a federal government bail out. He knows that the feds would be reluctant, given what this would signal to other states (and the jealous distaste many Americans have for California), but he also knows it would be the wrong thing to do. California has to develop a sustainable economy on its own.
If it works, then not only is California poised to rebound, but Brown will have given the country a model of how to get out of this mess. Not only can California demonstrate that deep budget cuts can be digested, but the idea of decentralizing power as a means to do so more effectively could alter the way this country is covered. Brown always had a talent for paradox — he could demonstrate that in an era of globalization, the key to reviving the economy and becoming sustainable is to decentralize governmental power.
Another paradox: Republicans talk a good game of decentralizing power and “states rights,” but while governing they do the opposite. If a Democratic governor could convince a Democratic legislature to go along with this, that would show the Democrats capable of fiscal conservatism and of decreasing centralized power.
California is worth watching. If Jerry Brown can pull this off, he may be able to do more for his country than he could have done as President. A politician once consigned to trivia questions and jokes may emerge as a true leader, helping blaze a trail into the new world of 21st century politics.