A Case Study in Economic Policy

The Cause of the Crisis

It is not immigration or Democratic policies that are sinking California’s economic ship. Instead, it is the polarizing political climate of California’s legislature, tax-cut obsessed conservatives, and irresponsible corporate behavior that have played a much larger role in the financial mismanagement of the state and its efforts to mitigate the effects of the recession.  We will look at just a few examples.

It seems that over time, conservatives become more and more religious in their economic theory of tax cuts for the rich, welfare for corporations, and stagnated income for the poor and middle class. Time Magazine reported that, “Republican leaders insisted on a $1 billion tax break for large corporations, believing it will encourage companies to expand their workforces in California.”[10] Such tax breaks add to the crisis of declining tax revenues, and do not decrease unemployments or improve wages. It’s just more welfare for executives and stockholders.

We can also assign blame for the housing crisis in California to “greedy sellers, greedy realtors & corrupt mortgage brokers making predatory sub-prime loans.”[11]

Greedy corporations played a significant part in the state’s earlier struggles with its energy crisis. As California’s economy was beginning to tailspin, The Nation reported in 2003,

It is disingenuous for California Republicans to now blame [former Governor] Davis rather than their man [President] Bush for the state’s economic problems. Only last week, the Republican-dominated FERC banned Enron from selling electricity as punishment for having severely distorted Western energy markets. Enron and 60 other companies were ordered to show why they should not be forced to return their illegally gained profits.[12]

Deregulation was most disastrous for California’s energy market, in which a crisis cost jobs and threw the world’s fifth-largest economy into long-term disruption. This was not the normal workings of the market but the result of market manipulation by officials of Enron and other energy companies.[13]

ISR also reported,

Back in 1996, energy companies and big businesses showered millions of dollars on California politicians, convincing them to vote unanimously to “deregulate” the publicly owned and managed state electrical utility system. The state would no longer set prices and supervise the industry. In exchange, the energy companies promised Californians lower prices and cleaner power brought on by free-market competition. Instead, a handful of energy profiteers have made a killing, while millions of Californians suffer higher rates and the harmful effects of power outages. The results of the power crunch have been devastating to ordinary people.[14]

Energy costs ended up rising 1,000%. At the time the legislature was Democratic-controlled. It seems that whenever California Democrats follow conservative economic principles—deregulation, privatization, and tax cuts—they ended up leading the state into financial instability. At times, Democrats could rightfully be blamed for being too Republican in their policy choices, which tend to lead toward disaster. Democrats have their fair share of blame in this regard. If they had been consistent with liberal policies, they would likely have avoided the magnitude of the crisis now faced by the state of California. In their defense, however, gaining a two-thirds vote with their Republican colleagues on anything is very difficult. Like so much watered-down legislation,  some compromises can be damaging.

The pro-business publication, The Economist, summarized the cause of the crisis:

The immediate cause of the budget crisis can be traced to Wall Street. California depends on income taxes for almost half of its revenues…In 2006 the top 1% of earners paid 48% of all income taxes. Since the wealthy derive much of their income from bonuses, capital gains and stock options, the state’s fortunes rise and fall with the markets. California’s economy is as wide and deep as the ocean, but much of its revenues come from froth. That froth has simply blown away.[15]

When Wall Street takes irresponsible risks, the wealthy take home less, tax revenues go down, and conservatives blame the government for spending on “entitlements.” Viewed from a conservative lens, Democrats should not be taking care of the vulnerable in the first place. Instead, we should “starve the beast” of government. Liberals might say, let’s raise taxes. Both approaches need to be part of the ultimate solution. (Though, a better solution would be to restructure the system in a way that increases democracy in business–more on that in a forthcoming post.)

Wall Street takes some blame for the loss of tax revenues, but voters (rightfully) and conservatives (ignorantly) are also to blame for California’s spending decisions:

It was voters who by means of ballot initiatives insisted that the state spend more money on schools and stem-cell research. That is how the system needs to work. The people decide. And they could have afforded these important programs if it were not for pet conservative causes that have also forced up spending. For example, because of Republican policies, in the past 20 years the number of state prison inmates has risen from fewer than 80,000 to more than 170,000.[16]

As a results, Republicans have not choice but to  increase taxes:

The other alternative is for the Republican Party to stand firm on its no-tax pledge and solve the crisis by only cuts and shutdowns. George Skelton of the Los Angeles Times recently pointed out that the no-tax solution offers two dire options: fire all the state workers and shut down the University of California and the state colleges, or eliminate all state money for health care and social services — all the monies that help the blind and disabled, aged, homebound, poor, mentally ill, those on welfare, those in emergency rooms, etc. Either way, without a tax hike, the wheels come off the bus and California’s government. [17]

Governor Schwarzenegger is a fiscal conservative but a social liberal. It is hard to offer liberal social services while at the same time promising “no new taxes,” or even pushing for tax cuts. The governor is not the only one who wants to spend and deliver tax cuts at the same time.

Some citizens generated support for Prop. 13 and other anti-tax measures. So on the one hand, we have voters passing ballot initiatives on stem-cell research and school funding; and on the other hand, the right-wing portion of the voting population helps pass anti-tax policy. It seems that everyone wants to have their cake and eat it too. There is this inconsistency on the part of politicians and voters, mixed with a toxic political atmosphere, which explains much of the problem. But these may be symptoms of a larger political current at work on a national level.[18]

The Nation reported:

The cause of California’s, and almost every other state’s, predicament is an economy ruined by deregulation policies that were secured by the lobbying efforts of Wall Street…Bail out the banks, but not the 500,000 poor families with children served by the CalWorks program, which will be dismantled, or the 928,000 children covered by the Healthy Families program, slated for oblivion.[19]

Both the energy crisis and the budget shortfall were created by deregulation and tax-cutting by Republicans.[20] Deregulation has become a top priority for most Republicans and some Democrats. These worshippers of Milton Friedman economics (“supply-side,” “trickle-down,” “Reaganomics”) are largely to blame for the current economic crisis. Even the Ayn Rand disciple and former Federal Reserve Chairman, Alan Greenspan, had to finally admit that “he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending.”[21]

In spite of these crippling conservative decisions, California remains a relatively liberal state in most of its policies.

So how does liberal California compare to other states? California is not the only state with a budget gap. In fact, there are only five states that do not currently have a budget gap. As a percentage of gross state product, California’s gap stands at 35.5%. Compare this with Republican-controlled Arizona, leading the States with a budget gap at 36.9%.[22]

It may not be fair to compare California to another state. It may be more instructive to compare it to a country. Then again, there may be too many differences between California and, say, Germany. After all, California is not a sovereign Nation. If it was, deficit spending would be an option, and the budget gap would not be as much of an issue. To use a fair comparison in the United States, we will use Texas. Texas is one of the five states not facing a budget gap, as of June 2009. By comparing the two largest states—with California being mostly Democratic controlled, and Texas mostly Republican controlled—we might be able to understand how conservative and liberal political policies play out in the real world. Let’s see how they stack up.