Tuesday, December 4, 2012

Democrats Now in Charge of California

The new California legislature has been sworn in, and the Democratic Party, or at least its elected politicians, are in charge. There are Democratic super majorities in both the State Assembly and the State Senate, and of course Governor Brown presumably stands ready to sign into law anything his fellow Democrats pass. To block any legislation Republicans would have to get at least a few Democrats to join with them.

The Democrats are limited by nothing but reality now. They owe their usual constituencies big time, but how can they pay up? The passage of Proposition 30, which increased income and sales taxes, insures that there should be enough income to balance the budget in 2013. The economy seems to be thawing, which could also boost revenue a bit. But there is little or no room to increase the budget for teachers, other civil servants, or public welfare. This is after four years of fairly drastic cutbacks. Teachers and police remain out of work, medical and dental help for the poor remains cut to the bone. As always, to raise more funds either the economy has to pick up steam or taxes need to be raised.

The Democrats could become real unpopular real quickly if they raised taxes again significantly. Don't expect it.

California is still dealing with two giant legacy issues: bonds and public employee pensions. Ever since the Great Depression, California had been able to depend on growth in population and per person income. In that situation it made sense to fund projects with bonds, since they would be relatively easy to pay off over time. The same with pensions: by promising great things in the future, current wage concessions could be minimized. The bonds carried what seemed to be low interest rates, but for years now we have been in a super-low interest rate environment, making the bonds relatively expensive and hard to pay off.

Pensions were premised on above-historical average returns in the stock market. Need we say more? To keep past promises the state government (and local governments too) would have to gut services and cut into the number of public employees even further.

California might still grow its way out of this mess, but the way forward is no longer clear. We are no longer the state that everyone wants to move to. We no longer have the world's best schools and universities. We have little buildable land that is not protected by environmentalists (and the environmentalists are right!). To the extent the population of California grows it needs to be urban growth, growth in the direction of high rise buildings, not further suburbanization. If the population stabilizes or grows slowly we need to raise wages for the average worker if we want the economy to expand. Yet raising wages can be difficult when globalized manufacturing and services is based on wages that are already lower than are paid here.

Then there is the issue of being part of the United States of America, which now has a debt so vast it is hard to imagine that it can remain solvent in the long run. California would probably be better off becoming its own nation, with its own ability to manage its economy, money, and debt system, but that won't happen. The U.S.A. has an out-of-control military and homeland security complex that is sinking our entire economy. Expect federal taxes to increase, leaving Californians less money to spend near home.

Our own tax mess hardly leaves the sense that California is governed any better than the nation. For many residents real estate taxes are low, since they are based on ancient property values. But many other residents are paying real estate taxes on expensive homes, and inflation is not easing their burden over time. We have compensated with a sales tax that gives many people pause when spending money. If you are lucky enough to have $100 to spend, you can only take $90 or so to the checkout counter, because taxes will eat up the difference. That makes a huge difference both to consumers and to the merchants that service them. Our California state income tax is quite progressive, but makes our state unattractive as a home for many upper income people.

We are short of water. We are well past the point where there is enough water to satisfy fish, farmers, and consumers. Despite having some of the best agricultural land on earth, we have so many residents that we are net food importers.

We used to have steel mills, foundries, and semiconductor fabrication plants. All gone, and unlikely to come back. Even Hollywood makes as many films as possible anywhere but California. We are strong on design, but also need to compete in the national and international markets, providing both services and real goods.

Herbert Hoover handed Franklin Delano Roosevelt a bigger mess in 1933. While economic in nature, it was a different sort of mess than confronts us today. Californians are watching the Democratic Party. Failure to deliver prosperity will almost certainly mean a cataclysm is in our future.