The California Syndrome

Attempts to build a serious rainy day fund have failed badly. The political economy of California’s budget has taken the progressive tax-and-spend experiment to the breaking point, threatening the state’s ability to fund basic services, from prisons and parks to education and health care, even those aimed at helping its most vulnerable citizens.

California’s government rarely manages to satisfy the balanced-budget requirement in the state constitution. It winds up borrowing temporarily with short-term debt; then, as borrowing accumulates, it is refinanced with longer-term securities. Spending is temporarily reduced and taxes raised, but the long-run structural deficit remains, a pattern now repeated in many state capitals and the primary reason for the current political turmoil over budgets and public sector unions.

Many other strains are also self-inflicted. From federal water shutoffs, in the name of protecting a tiny fish, which have decimated agriculture and left tens of thousands unemployed, to severe local zoning restrictions that drive home prices higher, California now has a wide array of problems begging for solutions.

Illegal immigrants perform a substantial share of the state economy’s menial and physically demanding work. Absent a sensible guest-worker program, they remain in the shadows, and they and their children crowd public services. (In one school in Los Angeles, a teacher reported 70 kids who came and went during the year in a class of 25, and more than a dozen languages are spoken in some school districts). The state’s extensive environmental and energy regulation, including micromanaging carbon emissions, in combination with globalization, has driven away much of California’s manufacturing and many of its middle-class jobs.

Among US states, California still ranks first in technology, agriculture, and entertainment. But it also stands at or near the top in deficits, tax rates, prison inmates, and, by a wide margin, welfare recipients relative to population. It ranks last or near the bottom in business climate, housing affordability, and state bond rating (below even the US territory of Puerto Rico). It’s a complex picture, but at its core is a high-tax welfare state run amok.

No one should write off California; it still has great strengths. And it can turn some of its short-term problems, such as the pressures arising from ethnic and linguistic diversity (the state is now 37% Hispanic and 13% Asian) into long-term strengths in the global economy. But its political class will have to confront some hard realities and face up to the fact that Californians who pay no income tax (almost half the workforce) will have to start paying for services, and that services will have to be more carefully targeted.

A healthy democracy cannot have half the population paying taxes and the other half collecting benefits. Relying on ever-higher taxes to fund payments to an outsized population of benefit recipients is a recipe for exporting prosperity elsewhere. That is one California trend that others emulate at their peril.

Michael Boskin, currently Professor of Economics at Stanford University and a senior fellow at the Hoover Institution, was Chairman of President George H. W. Bush’s Council of Economic Advisers, 1989-1993.

Copyright: Project Syndicate, 2011.www.project-syndicate.orgFor a podcast of this commentary in English, please use this link:

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