Can the 'Governator' save California?
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Associate Editor
David Stevenson May 22, 2009
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Give me more money or the prisoners go free
California is the world's eighth biggest economy. But it's now in a big mess. Why? And can Arnie fix it? David Stevenson reports.
What's wrong with California?
Californians should be among the most prosperous people in America. The state contributes 13% of US GDP, over 50% more than any other state. Taken by itself, it's the world's eighth-largest economy, bigger, for example, than Spain, Canada, Brazil and Russia. Yet the so-called Golden State is in a mess. It has one of the most depressed housing markets in the US (with one in 54 householders facing foreclosure), a jobless rate of 11.2% – the highest ever recorded and well above the 8.5% national average – and a state government in dire financial straits. A potential $42bn budget deficit – the gap between revenue and spending – has ensured that bonds issued by California's government are now the lowest-rated of the 50 US states. Governor Arnold Schwarzenegger – desperate to restore some financial credibility – has even threatened to cut costs by releasing up to 19,000 undocumented immigrants from state prisons. But things are already so bad that, as The Economist puts it, whatever steps are taken, "a good outcome is no longer possible".
How have things got this bad?
"Californian politicians have operated for years as if the purpose of government isn't to provide reliable low-cost public services, but to feed public employee unions," says The Wall Street Journal. Since 1970, state spending per head has doubled, adjusted for inflation. Raising taxes to match spending is a tough call – California is already a "high-tax" state. By 2005/2006, the state's fiscal revenues per head were already 12.5% above the national US average. "This drives away entrepreneurs and high-income taxpayers, which in turn leads to lower revenues," argues The Wall Street Journal. "The Golden State now ranks worst, or second-worst, on most ratings of state business climate." Income tax receipts are now coming in far below expectations, and "a reckoning for liberal tax and spend governance may finally be arriving". But taking the steps to reform state spending isn't easy, largely due to California's political structure.
What wrong with Californian politics?
"The list is long," says The Economist. California's brand of democracy is "unique in extent, complexity and misuse". Tax policy and budgets, for example, are determined separately, and each must pass both houses of the state legislature with a two-thirds majority, so it's very easy for spending plans to be derailed. Further, only a minority of Californians vote, and they tend to be old, white and rich, says Steven Hill at the New America Foundation. So with voters having "self-sorted" into "highly partisan districts", says The Economist, the state legislature "is full of mad-eyed extremists". That's why, says Jim Wunderman, president of the Bay Area Council association of corporate bosses, agreement on sensible and timely budgets has become almost impossible.
Is that all?
No. That's just half the problem. Although 24 US states permit referendums and other "voter initiatives", California has the only legislature that can't override them. This "direct democracy" means that voters decide many policies directly, such as limiting legislators' terms in office, determining criminals' prison terms, and even deciding how much is spent on sewers and whether Indian tribes should be able to run casinos. As a result, a large chunk of California's budget revenues are spoken for before official budget negotiations even begin. In 2003, direct democracy reached a new extreme when Californians replaced their elected governor Gray Davis with Schwarzenegger (see below). This week many of the same voters who brought him in "resoundingly rejected" his latest budget proposals, notes the Los Angeles Times. In short, California's governance is "fundamentally broken".
What next?
"Another moment of truth has arrived for California," says Kevin O'Leary in Time. Facing a full-blown financial crisis, and with his budget proposals rejected, Schwarzenegger must now slash state spending. That will mean education and social-service cuts, which may include ending healthcare for 225,000 children, and laying off 5,000 state workers, including teachers, and firing firefighters. The sale of some of the state's leading landmarks, including San Quentin State Prison, is also an option. California won't officially go broke because the federal government will backstop its money-raising bond sales. But with swingeing service cuts, Californians will start to realise the budget is more than just "an abstraction", says the Los Angeles Times. The financial crisis is about to have "serious consequences".
What difference has Arnie made?
Arnold 'Governator' Schwarzenegger was a headline writer's dream when he was elected in 2003 as a Republican with well-defined, right-wing views. But although he enjoyed some early success in his quest to "end the crazy deficit spending", he has met with mounting opposition from the powerful state unions. "In everything he has done, from his dazzling ascent into office to his most dismal defeats, he has relied on a simple credo: 'follow the will of the people, and restore their trust in government'," says Michael Rothfield in the Los Angeles Times. But this is now working against him. "Schwarzenegger, who said he would take [California] back from the politicians, has in the eyes of many become one of them instead". After his latest budget defeat, "it's time to start looking for an ambassadorship someplace warm".
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