California: Harbinger of Fiscal Doom

What the Golden State's bleak future means for America


California is famously considered a bellwether state for social and political trends, from the positive (hot rod and surf culture, the human potential movement, tax revolts, digital culture) to the regrettable (murderous cults, carbon reduction mandates). With that in mind, a simple—yet terribly difficult for our political class—contemplation of the state's current cash crisis is both instructive and scary for the future of our nation as a whole.

California now confronts a roughly $24 billion deficit. Recent attempts to get voters to approve various fiscal shenanigans and cost-shifts got smacked down at the polls. Gov. Arnold Schwarzenegger is now making a big show of proposing heavy spending cuts that will, we are told by the state's journalistic and political mavens, destroy the state, beggar its sick and young, and leave just enough cash to forcibly keep people out of various state parks, though not to "operate" them.

Of course, nowhere among the "serious options" under consideration is legalizing pot and other controlled substances, which would likely give the state an extra billion dollars a year in tax revenue. That simple act of political sanity would also save the state the $43,000 a year per inmate now spent incarcerating drug criminals, of whom a fresh nearly 19,000 were added in 2008 alone.

Finding places to cut costs without reducing the state to post-apocalyptic squalor shouldn't be such a big deal, of course. As explained in California's political newspaper Capital Weekly last week:

[N]ew revenue estimates released by the Department of Finance this week place the state's general fund revenues at $85.9 billion—nearly $4 billion higher than they were just five years ago.

Even with the depleted funds caused by plunging home prices and a global economic slowdown, Gov. Schwarzenegger's budget is still larger than his first budget in the 2004-05 budget year.

But in that first budget year, state spending was at $79.8 billion. Over the next two years, state spending jumped by more than 21 percent, to more than $101.4 billion in the 2006-07 budget year.

Current revenues, then, would allow for more spending than five years ago, a time in which state parks were open, schools functioned (though, as always, not very well), and the streets were not knee-deep with the neglected sick and poor.

As budget analyst Fred Silva told Capitol Weekly, solving California's budget woes is not as simple as turning back the budget clock to 2004, largely because of locked-in—and crippling—pension and health care spending obligations. Certain cuts in health care, for example, would lead to the loss of federal revenue. And unions and state employees have no intention of making the state's solvency any easier.

Still, education spending has, according to state Sen. George Runner (R-Antelope Valley), writing at the California Policy Report news web site, "increased by $15 billion over the last decade even though there were 74,000 fewer students over that same period." State contributions to the government pension fund have, as Reason Foundation Policy Analyst Adam Summers notes, "jumped from $321 million in 2000-01 to $7.3 billion last year." It costs California nearly twice as much to house a prisoner per year as it costs Florida. Contemplating those facts, it's obvious that the basic survival of the accoutrements of civilized living are not at stake in California's fiscal crisis.

Indeed, living within the current income of the state should not be impossible, nor should it mark the end of civilization. Adjusted for inflation, California's fiscal year 1991 revenue of $38 billion is still $25 billion less than their current revenue. As Summers explains, "If California had simply limited its spending increases to the 4.38 percent average increase in the state's consumer price index and population growth each year since FY 1990-91, the state would be sitting on a $15 billion surplus right now."

The same holds for the United States as a whole: Federal revenues for 2007 ($2.6 trillion) are sufficient to have spent twice as much as federal outlays in 1975, adjusted for inflation, with no deficit at all. While life in these here United States was hellish on many levels in 1975, not least the fashions and food, even those with a much bigger appetite for government than I might agree that a government twice as big as what we enjoyed/suffered that year should be able to manage its necessary functions. (And no, there is no convincing reason that in a growing economy the government's cash grab as a percentage of GDP should remain stable.)

When contemplating California's fiscal present and the U.S.'s fiscal future, it's not quite right to say that where California is now, the U.S. as a whole will follow. The U.S. is already in a deep hole, much deeper than California's, and has been for some time. Even President Barack Obama knows it. He told C-SPAN recently, with wonderfully disarming frankness, "we are out of money now."

The U.S., unlike the state of California, when faced with a dearth of cash, can just make more, which is in essence Obama's plan—for a while, at least. As in his most famous movie role as the Terminator, Schwarzenegger is metaphorically a visitor from a dangerous and unpleasant future that awaits the rest of the United States. The Golden State is absolutely a political bellwether now in the sense that the crisis-induced fiscal seriousness Schwarzenegger is at least pretending to attempt will be essential to the U.S. in the near future—and should be seen as essential this very second.

But while California can hold out hope that the federal government might bail it out of its troubles, the U.S. government, alas, has no higher power to which it can direct its own appeals. The buck stops there. The only problem, as Obama himself claims to understand, is they are all out of bucks.

Senior Editor Brian Doherty is author of This is Burning Man (BenBella), Radicals for Capitalism (PublicAffairs) and Gun Control on Trial (Cato Institute).