State of Decline

SYNOPSIS: Krugman explains the reasons for California's recent budget problems and their similarities to those of the U.S. federal government

From smog to silicon, from the sexual revolution to the tax revolt, the future has usually arrived in California first. Now the Golden State is degenerating into a banana republic. Can the nation be far behind?

The recall isn't just a case of hardball politics. It's also a grand act of evasion: in the face of a severe fiscal crisis, voters are being invited to focus not on hard choices but on personality. Replacing Gray Davis with someone more likable isn't going to pay the bills.

And California's slide into irresponsibility, in which politicians refuse to acknowledge any connection between the government services the public demands and the taxes that pay for those services, is being replicated all across America.

Thanks to the end of the tech boom and the bursting of the tech bubble with an assist from energy price gouging California's budget has plunged into deficit. State and local governments faced with deficits normally respond with a mix of spending cuts and tax increases. That's what Mayor Michael Bloomberg has done in New York, it's what Gov. Pete Wilson did in California's last fiscal crisis, in the early 1990's, and it's what Mr. Davis proposed earlier this year.

But California's Constitution requires that budgets be passed by the State Legislature by a two-thirds' margin which gives the Republican minority blocking power. And that minority has refused either to vote for any tax increase, or to make realistic proposals for spending cuts.

You often hear claims that excessive spending is responsible for California's budget woes. True, budgets grew rapidly after the mid-1990's. But California began the 1990's by slashing outlays in response to a fiscal crisis, and most of the subsequent growth was simply a return to pre-crisis levels. As analysts at the nonpartisan California Budget Project point out, real state spending per capita was only 10 percent higher in 2002-03 than it was in 1989-90 that is, most of the spending growth was simply a matter of keeping up with the population and inflation.

The key factor in rising California spending has been the effort to rebuild a crippled education system.

Proposition 13, the 1978 cap on property taxes, led to a progressive starvation of California's once-lauded public schools. By 1994, the state had the largest class sizes in the nation; its reading scores were on a par with Mississippi's.

Voters wanted this shameful situation remedied. Indeed, much of the recent growth of education spending was mandated by a rather complex measure called Proposition 98. So when conservatives denounce "runaway government spending" in California, what they're really talking about is the effort to hire more teachers and repair decrepit school buildings.

Still, now the state faces a huge deficit, and spending must be cut. But shouldn't the state also seek more revenue? During California's last crisis, Governor Wilson increased the sales tax and temporarily raised income taxes on top brackets. This time Governor Davis proposed doing more or less the same thing but Senate Republicans refused to go along. Their counterproposal relied entirely on spending cuts but, tellingly, offered no specifics about what, exactly, should be cut.

This week the stalemate was finally resolved, sort of. The budget that was passed contains one significant tax increase, a rise in the vehicle licensing fee for technical reasons, this didn't require a vote. And it uses elaborate fiscal footwork to evade restrictions on state borrowing, passing the problem on until next year. It's better than no budget at all, but it's a monument to political irresponsibility.

Which brings me to the final point: is Washington any better than Sacramento?

Outside the Social Security system, the federal government is now running a deficit equal to a third of its spending worse than California. The administration says it will never, ever contemplate increasing taxes; it says it will narrow the deficit through spending restraint, but has never said what spending it intends to restrain.

If the federal government isn't in crisis, that's only because unlike state governments it isn't obliged to balance its budget each year. And so far bond markets have been willing to give the feds the benefit of the doubt.

But the people now running the country are every bit as irresponsible as those blocking a serious response to California's crisis. And sooner or later that irresponsibility will have the usual consequences. California, here we come.

Originally published in The New York Times, 8.1.03