There was not a lot of new information on California’s dire fiscal crisis laid out by speakers before an unusual joint session of the legislature yesterday. And from the questions from the floor to Treasurer Bill Lockyer, Controller John Chiang, Finance Department head Mike Genest and Legislative Analyst Mac Taylor, there seemed to be little give in the partisan divide on how to solve the problem.
So where do we go from here?
If the four speakers’ unified message is correct, and no one challenged the numbers directly, then where the state goes from here is down, down, down.
Lockyer probably made the most news revealing that, in less than ten days, he is prepared to cut off funding for infrastructure improvements like roads and highways. Chiang talked about the state’s lack of ability to borrow and the need to pay vendors with IOUs by the Spring. Taylor pointed out that solving the deficit problem by increasing sales, income and corporate taxes would make all three categories of taxation the highest in the nation.
On the other hand, if budget cuts were the solution, he said eliminating the budgets for the University of California, CSU and many social programs would be needed to balance the books. Genest argued that if something is not done soon, the problem would get worse exponentially.
The panel argued that both tax increases and budget cuts would have a negative effect on the economy. A toxic mix, Controller Chiang called it.
So what to do? Were seeds of compromise heard in the rhetoric over the course of two hours? Perhaps, but only if you see drinking glasses as half-full and wear sunglasses on cloudy days.
Listening to the discussion, here’s where a deal might come down.
In response to questions from legislators, it is clear that if a population-and-inflation spending cap that built a reserve fund were in place over the last decade, the current fiscal crisis probably would have been prevented. In addition, experts on the panel acknowledged that reforms suggested by the California Performance Review, which was abandoned in 2005 by the administration and ignored by the legislature, could bring billions in savings. There are many other reforms than have potential savings. For example, Taylor pointed out that, since 1945, the Legislative Analyst’s Office has been suggesting that the state consolidate its tax agencies.
Economic growth is the long-term solution to California’s fiscal problems. That means a friendlier business climate. Some argued that if a state worker loses his or her job or a private worker loses their job, both have a negative effect on the economy. Along those lines, a similar argument was made that if the state takes tax revenue and spends it, the money is still circulating in the economy so there is no net negative effect by having the state spend instead of the taxpayers.
That is simply not true. Productivity growth most often fares best in smoothly functioning markets, something that public sector spending rarely accomplishes. Government spending doesn’t have the same power to create growth and income because it is not guided by market factors. Making a profit leads entrepreneurs to innovations and job creation.
Spurring the economy in business friendly ways is the solution to California’s woes. Joining economic growth reforms with caps on state spending and structural governmental reforms will grow us out of the hole and likely prevent a repeat performance.
But, this will take some time. If the panelists are correct, the state’s fiscal problems are immediate. Temporary tax increases certainly will slow economic growth but bridge the gap to allow the growth and spending measures to take hold. Trying to fix the problem by splitting the baby in half—equal amount of tax increases and spending cuts—is not enough. This formula of taxes and cuts without structural reforms and spending cap discipline will only postpone a long term fix and is not acceptable.
When the economic growth rebuilds the financial core of the budget, temporary tax increases will disappear and the spending restrictions will be in place to control a repeat of the financial disaster.