Out of Control Policy Blog

California's Fiscal Death Spiral: Is D.C. Watching?

In a Washington Post op-ed on Monday, Robert Samuelson offers a must-read, prescient warning that every American taxpayer should read—stop growing the federal government, or risk a California-style fiscal death spiral (emphasis mine):

California's budget debacle holds a lesson for America, but one we will probably ignore. [...]

California has reached a tipping point. Its government made more promises than its economy can easily support. For years, state leaders papered over the contradiction with loans and modest changes. By overwhelming these expedients, the recession triggered an inevitable reckoning.

Here's the national lesson. There's a collision between high and rising demands for government services and the capacity of the economy to produce the income and tax revenue to pay for those demands. That's true of California, where poor immigrants and their children have increased pressures for more government services. It's also true of the nation, where an aging population raises Social Security and Medicare spending. California is leading the transformation of politics into a form of collective torture: pay more (higher taxes), get less (lower services).

Make no mistake: The spending cuts and tax increases the state enacted to bridge its budget deficits are not cosmetic. In February, the Legislature agreed to a penny increase in the state sales tax, bringing the total -- including local sales taxes -- to about nine cents or more. Top income tax rates, already among the highest in the country, were raised. So were motor vehicle registration fees. Spending cuts approved in February and July are deep. Together, the cuts equal almost 30 percent of the general revenue fund and will affect schools, prisons, colleges and welfare. [...]

National parallels again seem apparent. Federal budget deficits -- reflecting the urge to spend and not tax -- predate the recession and, as baby boomers retire, will survive any recovery. Amazingly, the Obama administration would worsen the long-term outlook by expanding federal health insurance coverage. There's much mushy thinking about how we'll muddle through.

California has pioneered this sort of delusion. The presumption was that a dynamic economy would pay for expansive government. But California's relative economic performance has actually deteriorated. In the 1980s, the state's economy grew much faster than the national economy; annual growth averaged 5.1 percent vs. 3.1 percent nationally. In the present decade, the gap is smaller -- 2.9 percent versus 2.3 percent -- and much of the state's advantage reflects the unsustainable housing boom, of which California was the epicenter.

On paper, the state could solve its budget problems by raising taxes further. But in practice, that might backfire by weakening the economy and tax base. California scores poorly in state ratings of business climate. In a CNBC survey, it ranked 32nd overall but last in "cost of business" and 49th in "business friendliness." Information technology (Intel, Google, Hewlett Packard) and biotechnology remain strengths, but some traditional industries are struggling. High costs, as well as tax breaks from other states, have caused movie studios to shift production from Southern California. In 1996, feature films involved 14,500 production days in the Los Angeles area, says FilmL.A.; in 2008, the figure was half that.

So California is stretched between a precarious economy and a strong popular desire for government. The state's wrenching experience suggests that, as a nation, we should begin to pare back government's future commitments to avoid a similar fate. But California's experience also suggests we'll remain in denial, prisoners of wishful thinking, until the fateful reckoning arrives in the unimagined future.

Samuelson could not have offered a more timely warning. If you want to preview where the federal government is headed, just look west to a California mired in political gridlock, aversion to seemingly any sensible reform, labor-centric politics that encourage government sprawl and, of course, a seemingly perpetual fiscal crisis that has tanked its credit rating and left it reliant on accounting gimmicks, tax hikes and poaching local government funds to balance $20 billion-plus deficits every few months. California is heading south, and fast.

Is D.C. really that different? We're staring at a $1 trillion federal deficit this year, folks. We've issued mounds of stimulus and bailout-related debt that will be an economic albatross on future generations. We're facing trillions in long-term, unfunded Social Security and Medicare obligations that no one in D.C. seems serious about touching. They're too busy developing yet another massive, long-term obligation in what could become a new government health care system we cannot pay for.

Self-delusion inevitably reveals itself over time as crippling. From the federal level on down, what we need are policymakers that aren't deluding themselves about the inherent fiscal unsustainability of government. More importantly, they need to also have the gumption to do something about it (see Louisiana Gov. Bobby Jindal and Queensland (Australia) Premier Anna Bligh).

» Reason Foundation's Privatization Research and Commentary

Leonard Gilroy is Director of Government Reform


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