A Case Study in Economic Policy

June 14th, 2010 by Whitey Leave a reply »

What economic policies lead to greater economic health? And what political policies will lead to better economic outcomes? These are complex questions, and can be difficult to test scientifically. However, it is useful to look at case studies in an effort to understand what policies work and what policies lead to disaster. Let’s take a look at the Golden State.

California has a $24 billion budget deficit. Unlike other states, California’s constitution requires a two-thirds majority legislative vote. This means the that minority Republicans—making up almost 40% of the state congress—have significant power to block legislation and budget plans that could avert further financial disaster. Because Republicans are against tax increases, the state is struggling to fix their current budgetary woes brought on by the global economic situation. When liberal social policy meets a policy of anti-taxation—and this combination is personified by Governor Schwarzenegger—we end up with exactly what California is facing today: A large budget shortfall, high unemployment, large numbers of foreclosures, and general economic sluggishness. Modest increases in tax revenues, effective utilization of federal stimulus dollars, and cutting costs are the obvious short-term solutions. But California’s budget crisis had been unstable from well before the global recession had an impact.

Although it is the eighth largest economy in the world, it suffered a significant energy crisis in 2001, and has struggles to stay on top of its financial obligations for years. Policy debate must, therefore, look beyond the current recession, and address long-term solutions to these economic trends. One way to determine a viable long-term solution is to look at what has worked in the past.

California Governor Ronald Reagan, a New Deal Democrat prior to 1962, did not always stick to his later mantra that “government is the problem.” Salon.com reports:

Governor [Ronald] Reagan pushed through the largest tax increase in the state’s history to pay for government services. It was during these years…that the infrastructure that allowed California to grow was built — an infrastructure Californians are still living off today…This is a state that was built with government programs, financed by massive federal military and aerospace spending and state funding of local projects.[4]

Large government spending helped California become the economic power that it is today. If government investments have helped build its powerful economy, then this same “Keynesian” intervention should work now. Outside of common sense cuts (which should not include education!) to avoid a further crisis, this is exactly what Democrats are suggesting as a solution. But again, when Republicans block efforts to increase tax revenues, it makes such inventions very difficult.

Immigration

Conservatives would tend to blame the budget crisis on illegal immigrants—or immigration in general— and over-spending by the Democratic controlled legislature. They blame immigrants for increases in crime, healthcare costs, and loss of tax revenues. They blame government spending on what they see as unnecessary policies that protect the vulnerable, the environment, and provide infrastructure that allows the economy to function.

What many conservatives won’t consider is that it is their corporate donors that hire and exploit illegal aliens, Republican policies that make citizenship more difficult for struggling immigrants, and when it comes to avoiding taxes, it is corporations and the wealthy—not “illegals”—who use offshore tax havens to avoid paying taxes.[5] But many Republicans don’t mind these loopholes when it is the rich; it is only an issue when illegal immigrants are not paying income tax–even though they pay sales taxes, and get few of the benefits. And Republicans do not mind when binge spending involves areas such as military spending. It is a sad state of affairs when legislators have to consider cutting education, healthcare, and welfare for children, [6] while at the same time our nation spends almost as much on military spending as the rest of the world combined.[7]

How true is it that immigrants are as big of a problem as Republicans would argue? It is true that California has a large prison population, and they will likely have to free many who have been convicted of low-level crimes. But it may have only a small connection to immigration. The Public Policy Institute of California reports that immigrants are

“…less likely than the U.S.-born to be involved in criminal enterprises…Immigrants are underrepresented in California prisons compared to their representation in the overall population. In fact, U.S.-born adult men are incarcerated at a rate over two-and-a-half times greater than that of foreign-born men.”[8]

However, this doesn’t mean that immigration is not a factor in the budget crisis. Without question, healthcare costs and state services are affected by the influx of immigrants. Also, it is likely that immigration impacts dropout rates in California, which, in 2008, were between 15 and 30 percent.[9] But if we accept that it is an American value that we welcome “your tired, your poor, your huddled masses yearning to breathe free,” and if we accept articles 13-15 of the UN Universal Declaration of Human Rights, then we must accept that immigrants are welcome, and shift policy accordingly. Indeed, if we believe in democracy, we will accept this reality—even when it might mean higher taxes.

Advertisement

2 comments

  1. pausleal says:

    Great information! I’ve been looking for something like this for a while now. Thanks!

Leave a Reply