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California's scary sneak preview

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This column originally appeared in the Sunday business section.

We Californians pride ourselves on the crystal-ball quality of our state. Auto emissions regulations, the tech boom and bust, Ronald Reagan, Hispanic immigration, the anti-tax revolt, the mortgage bubble, the struggle for gay rights, most movies, the popularity of Richard Nixon, the unpopularity of Richard Nixon, plastic surgery, and Tiger Woods's marital problems were all tested in the Golden State before being released to audiences nationwide.

The next likely item on that list is not a happy one, however. California is in a total fiscal crisis. It's had to slash state services to the bone and will have to cut further. It's gutted the University of California and lost its credit rating. David Paterson, the governor of New York, casually mentioned that he thinks California might default on its debt. That's bad enough, as it could drag down the national recovery. But what's worse is that this picture is probably coming to a theater near, well, all of us.

California's fiscal crisis will look sadly familiar to close watchers of the national checkbook. That's because California is not having a fiscal crisis so much as a political crisis. The trigger may have been the recession, but the root cause was written into the state constitution, and it was visible long before the housing boom went bust.

In California, passing a budget or raising taxes requires a two-thirds majority in both the state's Assembly and its Senate. That need not pose a problem, at least in theory. The state has labored under that restriction for a long time, and handled it with fair grace. But as the historian Louis Warren argues, the vicious political polarization that's emerged in modern times has made compromise more difficult.

All of this, however, has been visible for a long time. Polarization isn't a new story, nor were California's budget problems and constitutional handicap. Yet the state let its political dysfunctions go unaddressed. Most assumed that the legislature's bickering would be cast aside in the face of an emergency. But the intransigence of California's legislators has not softened despite the spiraling unemployment, massive deficits and absence of buoyant growth on the horizon. Quite the opposite, in fact. The minority party spied opportunity in fiscal collapse. If the majority failed to govern the state, then the voters would turn on them, or so the theory went.

That raises a troubling question: What happens when one of the two major parties does not see a political upside in solving problems and has the power to keep those problems from being solved?

If all this is sounding familiar, that's because it is. Congress doesn't need a two-thirds majority to get anything done. It needs a three-fifths majority, but that's not usually available, either. Ever since Newt Gingrich partnered with Bob Dole to retake the Congress atop a successful strategy of relentless and effective obstructionism, Congress has been virtually incapable of doing anything difficult because the minority party will either block it or run against it, or both. And make no mistake: Congress will need to do hard things, and soon. In the short term, unemployment is likely to remain high and the economy is likely to remain weak unless Congress can muster another round of serious stimulus spending. The economist Karl Case, co-founder of the famed Case-Shiller housing index, now believes that earlier optimism about our economic recovery -- which he shared -- was misplaced. "The probability is very high of a serious double dip like 1982," he told the New York Times. The housing market seems to be sagging again, and the government's interventions -- not just the stimulus but also relaxed standards at Fannie Mae, Freddie Mac and the Federal Housing Authority -- are set to end.

Further out, the long-term deficit problem, which is driven largely by health-care costs, is startling. The Center for Budget and Policy Priorities estimates that debt will reach 300 percent of gross domestic product come 2050 -- and that estimate might be optimistic. But solutions seem unlikely. No one who watched the health-care bill wind its way through the legislative process believes Congress is ready for the much harder and more controversial cost-cutting that will be necessary in the future.

Similarly, Sens. Kent Conrad and Judd Gregg recently suggested a bipartisan deficit commission that would reach a consensus on the budget and report back to a grateful Congress. On Tuesday, a Wall Street Journal editorial showed the conservative interest in such compromises: Republicans should "agree to a deficit commission only if it takes tax increases off the table," it said, reminding wavering Republicans that "President George H.W. Bush renounced his no-new-taxes pledge and made himself a one-termer."

These two problems get to the essential difficulties confronting the nation: There is no doubt that minority parties generally profit in elections when the unemployment rate is high. But given that reality, what incentive do they have to help the majority party lower the unemployment rate? Further out, there is no doubt that the majority party has an incentive to prevent a fiscal crisis on its watch. But what incentive does the minority party have to sign on to the screamingly painful decisions that will avert crisis?

In another system of government, that wouldn't much matter. In our system of government, which requires a supermajority in the Senate for most projects, it matters a lot. On Jan. 20, for instance, the Senate is expected to vote on raising the debt ceiling. Generally, this is a bipartisan vote, as the debt is a bipartisan creation. This year, Senate Minority Leader Mitch McConnell reportedly told Majority Leader Harry Reid that if he wants an increase in the ceiling, he owns it and needs to find the votes for it. That's the sort of budgetary brinkmanship that brings us back to California.

The lesson of California is that a political system too dysfunctional to avert crisis is also too dysfunctional to respond to it. The difficulty is not economic so much as it is political; solving our fiscal problem is a mixture of easy arithmetic and hard choices, but until we solve our political problem, both are out of reach. And we can't assume that an emergency, or the prospect of one, will solve the political problem for us. If you want to see how that movie ends, just look west, as we have so many times before.

Photo credit: Ministry of Foreign Affairs of Denmark via Getty Images.

By Ezra Klein  |  January 4, 2010; 9:00 AM ET
Categories:  California  
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Comments

California has a massive budget mess at the current time.

What will happen to this State's budget mess, and many other States, when the mandates of the health care bill take effect is even more frightening!

Read page 3 of today's Wall Street Journal to see what is happening to Illinois, which is following in the footsteps of California and Michigan.

Posted by: mwhoke | January 4, 2010 9:35 AM | Report abuse

I always find it interesting that California's fiscal debacle is always blamed on those mean ole Republicans who won't vote to increase taxes. No mention of the fiscal ineptitude of the Democratic majority in the legislature or the massive state government spending increases during the last boom. How about the idiotic initiative process that allows the voters to redirect state spending to special interest projects. California has been languishing for years with businesses abandoning the state for other states with lower taxes and less onerous regulations. Californina won't even get a new congressional seat after the next census since the only population growth they get these days is illegal immigration. Yeah, raise those taxes California. Other states will love getting your businesses and high income taxpayers. Pretty soon the only ones left will be illegal immigrants.

Posted by: RobT1 | January 4, 2010 9:44 AM | Report abuse

The whole country is bankrupt. Not just California. I don't know why no one is admitting that. Nation of fools, I suppose, and now this year we are about to re-elect more of the thieves and saboteurs (from the GOP) who bankrupted us in the first place.

In 2000 and 2001, Arnold S' sat on the sidelines and cheered Bush and Ken Lay as they robbed in broad daylight states like California of $100s billions. That's right, California had surpluses until Enron and other energy companies set their greedy eyes on it.

Arnold, a close friend of Ken Lay, was one of the people who publicly insisted during the thievery that the fed gvmt ought not intervene to stop the energy price gouging that was bleeding western states of their surpluses almost overnight. Not too long afterward he then somehow became the governor of that ravaged state. Now go ahead and tell me that it doesn't pay to be a saboteur.

Posted by: Lomillialor | January 4, 2010 9:52 AM | Report abuse

California - I do not believe things are going to change there. That State is bound to create national level problems. Unless National Leadership gets involved, whole nation is griped with that issue; it is unlikely Californian people themselves will solve their Political impasse. Meg Whitman of GOP, Jerry Brown and other sundry Dem Governor candidates do not have 'core over haul ideas' needed to 'reboot' California. Not that Governor as a single person can do anything, but that election is expected to be a rally cry for the wholesale changes with a blue print to alter the constitution. Meg is only focused on cosmetic changes on Economy side, what we need is change in Californian Politics. With Dem candidates - they are all beholden to Labor Pandering with no interest whatsoever to solve core issues. Hence, there is no hope. No matter how many times Time publishes glowing account of California, we are Third World in that State (and I cannot leave it because my house is underwater or barely at water mark!)

At national level, in normal course, one would say go for National Government. If Barack Obama had had a good vacation, he will realize that unless he addresses the problem Ezra rightly explained here (broken political system); he is not going to get anything nor America's problem are going to get solved. Other wise we are all going to have those pessimistic predictions peddled this week in Atalanta - barely 2% growth for the entire next decade.

We do not do National Government in USA. But even if Obama was to invent some such contraption in Washington DC it is a non-starter unless GOP leaves the religion of Tax Cuts. If GOP insists on that, we will go for Civil War either ways.

Posted by: umesh409 | January 4, 2010 10:12 AM | Report abuse

OK, so our political system makes it hard to make tough fiscal (and other) choices. But who is responsible for that situation?

The two-thirds majority requirement for CA tax increases was passed by voter initiative. It was the people of California who decided they wanted a supermajority and who gave the minority the power to stop fiscal legislation. And now some of those very same people are screaming about budget and service cuts even though they made it harder for the legislature to act responsibly.

We live in a representative democracy. And if too many people still want a free lunch--maintain services, but don't tax us--it should be no surprise that elected officials vote to accommodate their wishes. And this problem exists whether or not there is a supermajority requirement.

I'd like to see elected officials demonstrate more leadership and remind people of their responsibility for their own government. I'd like to see them ask their constituents what they are willing to do to help solve the problem, instead merely what they want other people to do that asks nothing of themselves. But that approach entails political risk. It's easier to indulge the popular fantasy that one can get something for nothing and get reelected while allowing fiscal crises to fester.

In the end, the locus of political power rests with the people. Californians could repeal the supermajority provision but have not yet done so. Perhaps it's because too many still don't want to make the hard decisions themselves that they want their politicians to make for them. And as we've seen, that's not a sustainable form of government.

But the only way to fix it is if we take responsibility for it and back our politicians up on the hard choices that we know will have to be made. Government isn't "them," it's "us," no matter how much we want to pretend otherwise.

Posted by: dasimon | January 4, 2010 10:38 AM | Report abuse

The intransigence of the Republicans is just a symptom of the constitutional system under which California operates. And that system was created with California's over-reliance on the proposition system and illogical constitutional rules (a simple majority need to make a constitutional amendment to tell the government to spend more or to restrict them from raising taxes, but a two thirds majority is needed to raise taxes).

The problem won't be solved until California scraps the constitution rewrites it with a set of rules that is inline with its peers.

Posted by: constans | January 4, 2010 10:38 AM | Report abuse

RobT1, I see you point, but Ezra has in previous posts talked at length about the problems created by the initiative process. He doesn't specifically chastise Democrats, but he does mention "polarization", which does imply to me some level of intransigence on both sides. Still, I think he's got a good point that in modern US politics, minority parties have decided that it's better for them to be a constant and perpetual thorn in the majority's side than to do any actual governing.

Posted by: MosBen | January 4, 2010 10:39 AM | Report abuse

The Democrats' biggest failing was to fail to tell people the hard truth that taxes are the price we pay for the services we want, the price we pay for civilized living, as Oliver Wendell Holmes said. Instead of defending a vigorous public sector, Dems tried to be "GOP-lite" for way too long.

Schwarzenegger has been a disaster for CA. A man who never went to college has presided over the dismantling of a public higher education system that was once the envy of the world. And why? To save himself and his pals tax dollars so they can have more hummers and vacation homes. That's the sum total of his philosophy. Not just greed, but ignorance about what it was that made California so prosperpous--an educated and talented population that drew other educated and talented people who created whole new industries and the whole tech boom.

What we have lost in the years since Reagan metaphorically declared that greed is good is any sense of community. No one wants to pay to educate anyone else's children, even though those are the workers and citizens of tomorrow. Today's rich, and especially the the cyberselfish, all think they did it all on their own and won't help pay the bill.

There are many things worse than higher taxes, and an ignorant populace, crumbling infrastructure, third-world public services and widespread despair are just some of those things.

Posted by: Mimikatz | January 4, 2010 11:13 AM | Report abuse

Hmm, Mimi, that would explain why you have the 6th highest taxes in the country and the 2nd highest income taxes? In your "Golden Age of California" the State budget was an inflation adjusted $34.9 billion in 1968. In 2006, the budget was an inflation adjusted $125 billion, a roughly 400% increase. BTW, population increased 80% during that time, from 20 mil to 36 mil. roughly.

California doesn't have a "tax problem" it has a spending problem. I find it hard to imagine a "more vigorous public sector" than California today. What has happened is that instead of making investments in infrastructure and useful things, California has made investments in sinecured public employees and pensions. And the result, Mimi, is you get the best of both worlds, higher taxes, AND "an ignorant populace, crumbling infrastructure, third-world public services and widespread despair."

Apparently, this is all somehow republican's fault.

Posted by: sgaliger | January 4, 2010 12:03 PM | Report abuse

California has high taxes per capita in absolute dollars per capita paid. That makes sense: California and its people are much wealthier than "low tax" states like Alabama. As a *percentage* of per capita income, California's overall tax burden is relatively in the middle, being in the top 40 states.

One major problem is that California, because of its patchwork of propositions demanding that some money be spent, but other money not be spent and other different governments not tax, things get distributed much less efficiently, and the legislatures have little flexibility to adjust spending or raise revenue until a crisis hits.

Posted by: constans | January 4, 2010 12:19 PM | Report abuse

Sorry, I meant that california's tax burden is in the top 20 states (I was thinking "top 40%")

Posted by: constans | January 4, 2010 12:20 PM | Report abuse

Actually, Constans, that is wrong. California on a percentage (as opposed to absolute) basis was the 6th highest state in the nation when including all state and local taxes (actually better than 2007, when it was 4th highest). Say what you want, but California's problems is not taxation being too low.

http://www.taxfoundation.org/taxdata/show/443.html

Posted by: sgaliger | January 4, 2010 1:04 PM | Report abuse

in California the goal has been and remains, as dictated by the Grover Norquist wing of the Republican party—the nihilist, "shrink government so it is small enough to drown in the bathtub" wing—is maintain paralysis and drive the state to calling for a constitutional convention.

The Grover Norquist wing of the GOP in California considers what is occurring in California a desired outcome of their strategy.

Why compromise when your strategy is working?

Posted by: teoc2 | January 4, 2010 1:19 PM | Report abuse

We need GOP to be stopped on insisting 'tax cuts' at National Level. We will need taxes at Federal Level or even wholesale over haul like VAT.

However, at California State level, as many commentators have pointed; indeed we need less taxes. Look at Texas, they can manage reasonably with lesser taxes.

Yes, Public Sector and Pensions, that is the nemesis of California. Look at the city government of Vallejo in Easy Bay. The city filed bankruptcy because it's burden of Pension and Public Employee salary could not be sustained. Or how about Arabian Nights like stories of how California Public Employees 'milk' the State fund:
- A shipping clerk apparently earns $135K or more at New Port Beach doing 'manifest' of ships. (SJ Mercury News)
- A nurse in Napa goes on paid leave during day time and then do the 'night' overtime paid at higher rate. Doing so, the nurse earns additional $700K in 6 years. (State Audit Report, news SF Chronicle)
- CA State paid $1 Billion in over time (fraud in many cases) for workers. (State Audit Report, news SF Chronicle)
- San Jose Police insist that they would monitor 'road works' many on over time charges even when none is needed. (SJ Mercury News)
- San Jose Police person retires and after two weeks received around $250K check of 'leave en-cash'. (SJ Mercury News)

So yes, CA is totally ruined by Labor Pandering in addition to 'proposition politics' and 'two third requirements' to pass budget.

It is all big mess and to start with substantial part of the constitution needs to be rewritten.

But no more taxes needed there.

Posted by: umesh409 | January 4, 2010 1:28 PM | Report abuse

sgaglier, perhaps there is a difference in what we are looking at. The same data that the tax foundation claims puts California at number 9 in 2005 was determined to put California at #20:

http://money.cnn.com/pf/features/lists/taxesbystate2005/

In short, California tax rates are in line with the rates in other wealthy, developed states.

Complaining about republican intransigence or the minutia of whether California is #6, #9, or #20 when the states ranked #1-#5 aren't facing anything similar is just ignoring the fact that California has systemic and structural issues causing this crisis. People with hobbyhorses about taxes think that taxes are California's problem. People who are obsessed with what they regard as the scourge of Latino immigration blame that for California's problems. People who think the biggest problem is gridlock blame that for California's problem. sgaglier, you're just projecting your personal Norquistian obsession onto California when the actual problems are much larger and, let's face it, a problem CAUSED by the anti-tax crusaders who have leveraged the proposition system to the hilt in order to ruin the state.

Posted by: constans | January 4, 2010 1:53 PM | Report abuse

A large part of California's problems are uneven taxes. People who have owned property for decades pay very low property taxes as compared to people who bought more recently. Commerciaol property, which changes hands much less frequently, is taxed at low rates for that reason. Income taxes are lower at the top than they6 were in the 1980s, yet look at the wealth created in the '90s. Sales taxes, which are regressive, are very high, approaching 10% in some locales.

And as for living in Texas, by all means move there if you want poor schools, scandalous prisons, and inadequate health care. Of course, you can live anywhere if you don't really care about other people and how they live.

Posted by: Mimikatz | January 4, 2010 2:25 PM | Report abuse

Constans, two points.
1. You don't have to be an anti-tax zealot to feel that, even if taxes don't need to be dropped, increasing them further is not the solution. Businesses are, in general, leaving the state. More taxes is going to exacerbate that problem.

2. Its not just how much people are taxed, its also the tax structure. California has relied on high taxes for high earners and businesses. Such taxes are very unsteady. If you have a bad year (which CA has), then the rich people don't earn as much, and neither do businesses. The result is a big drop in revenue.

Of course, this really goes back to what dasimon says above. California is the manifestation of what people "want". Big government services and low taxes. In boom times that might be possible (though CA still didn't have low taxes, it at least had ENOUGH revenue). In tough times its impossible.

Posted by: WEW72 | January 4, 2010 2:35 PM | Report abuse

"sgaglier, you're just projecting your personal Norquistian obsession onto California when the actual problems are much larger and, let's face it, a problem CAUSED by the anti-tax crusaders who have leveraged the proposition system to the hilt in order to ruin the state."

That just makes no sense. Again, look at the CA budget #'s from 1968 to 2008 http://www.sen.ca.gov/budget/budgethistory.pdf and show me where any beast is being "starved." CA problem is overpaid state employees combined with leveraged useless pet projects (remember $2 Billion (or was it $4 billion) for stem cell research? $10 Billion for HSR? All paid on credit!)

I personally don't live in California and could give a fig what they do with their taxes, but it won't make any difference, because their spending is out of control and has been for the last 20 years. Democrats control things there and prefer to spend money on public civil servants rather than a sustainable state. Now the chickens have come home to roost and your bond rating is slightly above a third-world country. Dan Walters has been predicting this for 20 years, and all the D's do is give out more goodies to their union friends.

Posted by: sgaliger | January 4, 2010 2:54 PM | Report abuse

WEW72, I guess my thoughts are in line with Mimikatz's: California's system creates a situation where you have a hodge-podge of taxes earmarked for a hodge-podge of state spending requirements, and this occurs because the proposition system has made everything so inflexible. Certainly a different tax *structure* is warranted. But, "they should just cut taxes and stop spending!" is not a rational response to the crisis. I've lived in Maryland and Massachusetts, never known as particularly low-tax states, and those states have never faced the apocalyptic problems faced by the California state government.

If you give someone a choice between spending without raising taxes, cutting spending, and spending with raising taxes, they're going to go for the first choice EVERY TIME, because that's the easiest, especially when you have to get buy-in from people who are pathologically obsessed with never raising any taxes of any kind and have a vested interest in an implosion of the government. But the people want it that way: the constitution of california passed amendments, by simple majority votes by proposition, that it spend money and that taxes never be raised except by a 2/3rds majority vote, and they have a republican minority that threatens any of their members who collaborate with the majority.

*More taxes is going to exacerbate that problem.*

Look, what the heck do you mean by "more taxes"? A change in the way property tax is calculated? A change in the structure of the marginal income tax rates? Changes in sales taxes? What? Would these be more, fewer, or less taxes? Here is the thing: in California you are not allowed to discuss changing the tax system to pay for the services. In fact, you are not allowed to discuss the disbursement of services, either, because all of those are decreed by dozens of propositions that say what gets spent where.

Posted by: constans | January 4, 2010 3:07 PM | Report abuse

sgaglier, California's raw tax rates are not unique. Their propensity for spending on lots of services is not unique. What is unique to California is its messed up political structure. If California's high taxes and spending are the problem, why aren't Connecticut and Hawaii facing similar implosions? The reason is that the political culture and structure of the state is much different and there are severe systemic problems with the legislature. Saying that California should follow prescriptions that follow your personal policy obsessions is not a solution-- because they're just that: YOUR personal policy obsessions. I've lived in and had experience with many states with relatively high tax rates and relatively robust services. Only California faces this implosion. It is reasonable to assume that California's problems stem from its distinctive features, not the features that it shares with almost a dozen other wealthy developed states.

Posted by: constans | January 4, 2010 3:12 PM | Report abuse

California's budget mess has basic root causes: First, the sock the rich tax structure worked when the tech boom bent the revenue curve way up. Second, while the Department of Finance warned that the revenue hike was transitory Governor Davis and the legislature built it into the budget with such things as excessive pay packages for prison guards. Third, the statewide data bank gave legislators the tool to pick their constituents results in ideological districts right and left. Where are the legislators from competitive districts who is the past were the reason and sanity in the legislative process? Why compromise -- and legislating is the art of compromise -- when compromise means certain defeat. Oh for some statespersons.

Posted by: fjsays | January 4, 2010 5:57 PM | Report abuse

Let's get back to the process issue. Some people think raising taxes is necessary. Some people will never support raising taxes. Either way, why should raising taxes (a not terribly popular move to begin with) require a supermajority?

If most people don't want a tax hike, they can tell their representatives to vote no. Yet we have the very strange situation where the people who complain about their government being unable to make hard choices are the people who made it hard for their government to make hard choices.

The two-thirds requirement was approved by initiative because most people apparently don't like paying taxes. But taxes are the way we take responsibility for what we say we want from our government. If more people were responsible about what they want, then we should be able to live by majority rule. If that upsets people who don't want to pay higher taxes, I can understand it. But then it should be their burden to convince a majority that taxes should not be raised, not block it with 34% of the vote.

Posted by: dasimon | January 4, 2010 8:54 PM | Report abuse

This article completely ignores the root cause of California's fiscal debacle. When you increasingly tax (and demonize) the producers in order to take their money and give it to the nonproducers, the producers leave. You then have a populace that produces little but demands much. Unfortunately, Obama, Reid and Pelosi seem hell-bent on doing to the rest of us what California did to itself.

Posted by: Chippewa | January 5, 2010 4:54 AM | Report abuse

I think Chippewa's argument is flat-out wrong. There are (or were) plenty of examples of fiscally solvent high tax states and low-tax states, and fiscally insolvent high-tax states and low-tax states. New York has high taxes, but few "high producers" have left because those taxes help provide an environment that they want to be in. And if Chippewa's argument was correct, low-tax states in the South would be hotbeds of "high producer" activity, which they presently are not.

No, the root cause of California's inability to make hard decisions is that a minority can block responsible fiscal action.

As for Obama, Reid, and Pelosi, Chippewa seems to ignore that most of our current fiscal problem is attributable to the Bush tax cuts that were not accompanied by any spending cuts. Indeed, we got increased expenditures with two wars and the Medicare drug benefit. Unfortunately, it's now been left to Obama, Reid, and Pelosi to clean up the mess. It will require tough decisions, probably in the form of both higher taxes and reduced spending. But to blame them for the problem is to deny, well, reality.

Posted by: dasimon | January 6, 2010 12:52 AM | Report abuse

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