The views expressed in any article published in this blog are the author's own and do not necessarily reflect the views of Joseph Foster or Bob Lupoli.

Tuesday, November 30, 2010

California v. Texas & California Budget

California v Texas
America's future
An intriguing, much more equal rivalry out West. But both California and Texas can learn from each other
ECONOMIST  Jul 9th 2009

AMERICA’S recent history has been a relentless tilt to the West—of people, ideas, commerce and even political power. California and Texas, the nation’s two biggest states, are the twin poles of the West, but very different ones. For most of the 20th century the home of Silicon Valley and Hollywood has been the brainier, sexier, trendier of the two: its suburbs and freeways, its fads and foibles, its marvellous miscegenation have spread around the world. Texas, once a part of the Confederacy, has trailed behind: its cliché has been a conservative Christian in cowboy boots, much like a certain recent president. But twins can change places. Is that happening now?

It is easy to find evidence that California is in a funk (see article below).. At the start of this month the once golden state started paying creditors, including those owed tax refunds, business suppliers and students expecting grants, in IOUs. California’s governor, Arnold Schwarzenegger, also said that the gap between projected outgoings and income for the current fiscal year has leapt to a horrible $26 billion. With no sign of a new budget to close this chasm, one credit agency has already downgraded California’s debt. As budgets are cut, universities will let in fewer students, prisoners will be released early and schemes to protect the vulnerable will be rolled back.

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They paved paradise and put up the parking taxes
Plenty of American states have budget crises; but California’s illustrate two more structural worries about the state. Back in its golden age in the 1950s and 1960s, it offered middle-class people, not just techy high-fliers, a shot at the American dream—complete with superb schools and universities, and an enviable physical infrastructure. These days California’s unemployment rate is running at 11.5%, two points ahead of the national average. In such Californian cities as Fresno, Merced and El Centro, jobless rates are higher than in Detroit. Its roads and schools are crumbling. Every year, over 100,000 more Americans leave the state than enter it.

The second worry has to do with dysfunctional government. No state has quite so many overlapping systems of accountability or such a gerrymandered legislature. Ballot initiatives, the crack cocaine of democracy, have left only around a quarter of its budget within the power of its representative politicians. (One reason budget cuts are inevitable is that voters rejected tax increases in a package of ballot measures in May.) Not that Californian government comes cheap: it has the second-highest top level of state income tax in America (after Hawaii, of all places). Indeed, high taxes, coupled with intrusive regulation of business and greenery taken to silly extremes, have gradually strangled what was once America’s most dynamic state economy. Chief Executive magazine, to take just one example, has ranked California the very worst state to do business in for each of the past four years.

By contrast, Texas was the best state in that poll. It has coped well with the recession, with an unemployment rate two points below the national average and one of the lowest rates of housing repossession. In part this is because Texan banks, hard hit in the last property bust, did not overexpand this time. But as our special report this week explains, Texas also clearly offers a different model, based on small government. It has no state capital-gains or income tax, and a business-friendly and immigrant-tolerant attitude. It is home to more Fortune 500 companies than any other state—64 compared with California’s 51 and New York’s 56. And as happens to fashionable places, some erstwhile weaknesses now seem strengths (flat, ugly countryside makes it easier for Dallas-Fort Worth to expand than mountain-and-sea-locked LA), while old conservative stereotypes are being questioned: two leading contenders to be Houston’s next mayor are a black man and a white lesbian. Texas also gets on better with Mexico than California does.

American conservatives have seized on this reversal of fortune: Arthur Laffer, a Reaganite economist, hails the Texan model over the Gipper’s now hopelessly leftish home. Despite all this, it still seems too early to cede America’s future to the Lone Star state. To begin with, that lean Texan model has its own problems. It has not invested enough in education, and many experts rightly worry about a “lost generation” of mostly Hispanic Texans with insufficient skills for the demands of the knowledge economy. Now immigration is likely to reconvert Texas from Republican red to Democratic blue; Latinos may justly demand a bigger, more “Californian” state to educate them and provide them with decent health care. But Texas could then end up with the same over-empowered public-sector unions who have helped wreck government in California.

Second, it has never paid to bet against a state with as many inventive people as California. Even if Hollywood is in the dumps, it still boasts an unequalled array of sunrise industries and the most agile venture-capital industry on the planet; there is no prospect of the likes of Google decamping from Mountain View for Austin, though many start-ups have. The state also has an awesome ability to reinvent itself—as it did when its defence industry collapsed at the end of the cold war. Perhaps the rejection of tax increases will “starve the beast” and promote structural reform. A referendum on a new primaries system could end its polarised politics. Mr Schwarzenegger’s lazy governorship could come to be seen not as the great missed opportunity, but as the spur for reform.

Fifty laboratories, one magic formula
The truth is that both states could learn from each other. Texas still lacks California’s great universities and lags in terms of culture. California could adopt not just Texas’s leaner state, but also its more bipartisan approach to politics and its more welcoming attitude towards Mexico. There is no perfect model of government: it is America’s genius to have 50 public-policy laboratories competing to find out what works best—just as it is the relentless competition of clever new firms from Portland to Pittsburgh that will pull the country out of its current gloom. But, to give Texas some credit and serve as a warning to Mr Schwarzenegger’s heir, at this moment America’s two most futuristic states look a lot more like equals than ever before.

California's budget crisis
Meltdown on the ocean
As the state’s finances disintegrate, for many so does the California Dream
Economist Jul 9th 2009
ALTHOUGH one would hardly know it from the antics of its politicians—or from its newspapers, which all this week were fixating on Michael Jackson’s funeral rites—California is in as serious a condition as an American state can be. Legally unable to declare bankruptcy as a company would, the state has begun paying many of its bills with IOUs instead of cash. One of the three big credit-rating agencies, Fitch, this week downgraded the state’s bonds, already the lowest-rated such bonds in the country, to BBB, within spitting distance of “junk”. Government offices are closed on some days, as state workers take involuntary and unpaid furloughs. Taxpayers are still waiting for refunds. Poor people are afraid of losing their state-funded health insurance. Parents, fearing ever shabbier public schools, have another reason to think about moving out of state.

Meanwhile, the governor, Arnold Schwarzenegger, and the leaders of the legislature have been frantically scoring points off each other in Sacramento, the state capital. As the previous fiscal year drew to a close on June 30th, Darrell Steinberg, the Democratic leader of the Senate, and Karen Bass, the Democratic leader of the Assembly, were proposing some stopgap measures that would have saved a dollop in the new fiscal year and averted the issuing of IOUs. But the Republican governor, claiming to insist on all or nothing, said no. Overnight, the budget gap swelled to a staggering $26.3 billion and now grows by an estimated $25m each day.

Mr Schwarzenegger, affecting insouciance as he smoked his trademark stogies, got his team to prepare a mocking YouTube video with footage of a committee hearing about whether cutting cow tails for udder hygiene was inhumane. “Right now, in the midst of a budget crisis, they are debating about cow tails, and I think that this is inexcusable,” Mr Schwarzenegger sneered, even as he chucked new reform proposals into the negotiations that are entirely unrelated to the current budget crisis.

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Exasperated, Ms Bass, who had already backed off from any idea of raising taxes, muttered something about the lame-duck governor worrying more about “fixing his legacy” than the budget. On July 6th, she boycotted a meeting, demanding that Mr Schwarzenegger restrict the talks to just the budget crisis. As The Economist went to press, there was still no deal in sight.

California thus seems to be doing its level best to come to ruin and, as the nation’s largest economy, to drag the country’s hopes for a recovery down with it. The recession was the trigger but not the cause of the current malaise, which stems, as Fitch put it when explaining its downgrade, from “the state’s continued inability” to balance its budgets.
But what exactly does a crisis look like for an American state? “Falling off a cliff” is the usual metaphor but not an appropriate one, according to Ross DeVol, chief economist at the Milken Institute, a think-tank in Santa Monica. Instead of death on impact, he says, it is a matter of “who suffers in what order and how much?”

With luck the IOUs, officially called “registered warrants”, will turn out to be more symbolic than apocalyptic, provided that banks accept them and that a budget deal arrives soon. The last time California paid with IOUs, in 1992, Bank of America was dominant in the state and kept order. This time many banks must play along, and several suggested this week that they would accept the IOUs only until July 10th. If that practice becomes widespread, bearers may have to wait until October to get their money. For some suppliers this may mean bankruptcy; for students, uncertainty over their college tuition; for consumers without tax refunds, austerity.

And if all this leads to more downgrades, California’s borrowing costs will increase and the budget gap will further widen. But this does not automatically threaten the owners of California’s “muni” bonds, since the state constitution dictates that schools be paid first, bondholders second and then everybody else.

It does, however, increase the pressure to balance the budget. New taxes are no longer being discussed, because California requires a two-thirds majority in both houses of the legislature to pass them, and the Republican minorities are large enough, and partisan enough, to block them altogether. This means that the budget must be balanced by cuts alone.

The largest part of the budget, and thus the biggest target for cuts, is education. Mr Schwarzenegger has proposed suspending a spending formula that voters explicitly chose at the ballot box. In response, the powerful teachers’ union sent a gesture, in the form of 10,000 protesting postcards, to one of Mr Schwarzenegger’s branch offices. But teachers and schools will suffer, which hurts children and thus parents.

The next largest part of the budget is the state’s social safety net, including its health-care programme for the poor. Mr Schwarzenegger wanted to eliminate entire programmes wholesale, but now appears ready to settle for shrinking them. The debate, such as it is, is now about how many children will lose coverage, how many elderly Alzheimer’s patients will stop receiving visits from nurses, whether to treat drug addicts and so forth.

The pain thus seems likely to flow to the bottom of the social hierarchy. But all Californians will notice. Their parks may close, their neighbourhoods may become less safe. “The Californian Dream is at least temporarily suspended,” says Mr DeVol.

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