Too Late

 

I know everybody likes to poke fun at California, but despite all of its problems, California remains one of the best places in the world to build a successful small business. All you have to do is start with a successful large business.

 

Laugh if you will, but when these policies finish wrecking California, there are still 49 other states we can move to—and I have a strange sense of déjà-vu every day on the House floor as I watch the same folly and blunders that wrecked California now being passed with reckless abandon in this Congress.

 

• We passed a “Cash-for-Clunkers” bill. California did that years ago.

• Doubling the entire debt every five years? Been there.

• Increasing spending at unsustainable rates? Done that.

• Save-the-planet-carbon-dioxide restrictions? I have the t-shirt.

 

To understand how these policies can utterly destroy an economy and bankrupt a government, you have to remember the Golden State in its Golden Age. A generation ago, California spent about half what it does today after adjusting for both inflation and population growth. And yet, we had the finest highway system in the world and the finest public school system in the country. California offered a free university education to every Californian who wanted one. We produced water and electricity so cheaply that many communities didn’t bother to measure the stuff. Our unemployment rate consistently ran well below the national rate, and our diversified economy was nearly recession-proof.

One thing—and one thing only—has changed in those years: public policy. The political left gradually gained dominance over California’s government and has imposed a disastrous agenda of radical and retrograde policies that have destroyed the quality of life Californians once took for granted.

The Census Bureau reports that, in the last two years, 0.66 million more people have moved out of California than in. Many are leaving for Nevada, Arizona and Texas. California is blessed with the most equitable climate in the entire Western Hemisphere; it has the most bountiful resources anywhere in the continental United States; it’s poised on the Pacific Rim in a position to dominate world trade for the next century. And yet, people are finding a better place to live and work and raise their families in the middle of the desert. No conceivable act of God could turn California into a less desirable place to live than the middle of the Nevada Nuclear Test Range. Only acts of government can do that. And they have.

You can trace the collapse of California’s economy to several critical events: the rise of environmental Ludditism beginning in 1974; the abandonment of constitutional checks and balances that once constrained spending and borrowing; and the rise of rule by public employee unions. There are other factors as well—litigation, taxation, illegal immigration—but I’ll concentrate on the big three.

 

Three of a kind

Environmental Ludditism began its rise with the election of Jerry Brown as governor, an election that also produced overwhelming liberal majorities in both legislative houses. Like Obama today, Brown lost little time in pursuing his vision of California—an incoherent combination of pastoral simplicity, European socialism and centralized planning. At the center of this world view was a backward ideology that he called his “era of limits,” the notion that public works were growth-inducing and polluting, and that stopping the expansion of infrastructure somehow excused government from meeting the needs of an expanding population.

Conservation replaced abundance as the chief aim of California’s public works, and public policy was redirected to developing incentives for the population to concentrate in dense urban cores rather than settle in suburban communities. Brown infused his vision into every aspect of public policy, and it’s a testament to his thoroughness and tenacity that its basic tenets have dominated the direction of California through both Republican and Democratic administrations since.

He cancelled the state’s highway construction program, abandoning many routes in mid-construction. He cancelled long-planned water projects, conveyance facilities and dams. He established the California Energy Commission that blocked approval of any significant new generating capacity. He enacted volumes of environmental regulations that created severe impediments to construction, empowering a no-growth movement that began on the most extreme fringe of the environmental cause and quickly spread.

This movement reached its zenith with the enactment of AB32 and companion legislation in 2006. This measure gives virtually unchecked authority to the California Air Resources Board to force Draconian reductions in carbon dioxide emissions by 2020. This has dire implications to California’s economy. We were promised an explosion of “green jobs,” but exactly the opposite has happened. Up until that bill took effect, California’s unemployment numbers tracked very closely with the national unemployment rate. Today, its unemployment rate is more than two points above the national rate and at its highest point since 1941.

The second problem is structural: the collapse of the checks and balances and other constraints on government spending and borrowing. The State Supreme Court decision in Serrano v. Priest severed the use of local revenue for local schools and invited the state takeover of public education. AB8 of 1979—the legislature’s response to Proposition 13—essentially did the same thing to local governments generally. Vast bureaucracies have grown up over the service delivery level, wasting more and more resources while hamstringing teachers in their classrooms, wardens in their prisons and city councils in their towns.

Next, constitutional constraints on fiscal excesses began to fall. In 1983, Governor George Deukmejian approved legislation to remove the governor’s ability to make mid-year budget corrections without having to return to the legislature. The loss of this provision exposed the state to chronic deficit spending by removing the governor’s ability to rapidly respond to changing economic conditions.

In 1989, Deukmejian sponsored Proposition 111, which destroyed the Gann Spending Limit, which had held increases in state spending to inflation and population growth. If that limit had remained intact, California would be enjoying a budget surplus today. The disastrous tax increases by Pete Wilson in 1991 and Arnold Schwarzenegger this year were made possible by this tragic blunder.

Finally, we’ve watched our constitutional budget process, which had produced relatively punctual and balanced budgets for nearly 150 years, collapse in favor of an extra-constitutional abomination called the “big five.” That new process, which began under Wilson and has culminated under Schwarzenegger, bypasses the entire legislative deliberative process in favor of an annual deal struck between the governor and legislative leaders behind closed doors and handed to the legislature as a fait accompli. This short-circuits the separation of powers that’s designed to discipline fiscal excess, and it bargains away the line-item veto authority of the governor. It’s a process that lets legislative leaders extract concessions from the executive branch that wouldn’t be possible if the separation of powers were maintained.

With the checks against excessive spending broken down, borrowing became the preferred method of public finance. The Constitutional requirement that all taxpayer-supported debt be approved by voters began to erode in the 1930s, when a depression-era Supreme Court decision let the state run a temporary deficit as long as the shortfall was addressed in the following fiscal year. The Wilson administration began using this to justify spreading out a single year’s budget deficit over several years.

During the 1980s, Governor Deukmejian began employing a legal fiction called a “lease revenue bond” to circumvent constitutionally required voter approval. Although Proposition 13 still protects property owners from unsustainable increases in their property taxes, most other fiscal constraints are now gone, and California has entered a period of unprecedented public debt.

The third factor is the radical transformation of the nature and power of the state’s public employee unions. Until the 1970s, state law prohibited public employee strikes and collective bargaining or closed shops. During the Jerry Brown era, a series of collective bargaining acts handed all the rights and powers of private sector unions to public sector unions—but without any of the natural constraints on private sector unions.

The unions soon brought these newly won powers to bear to elect hand-picked officials to state and local office. Today, political expenditures by public employee unions exceed all other special interest groups, while they hold compliant majorities in the state legislature and most local agencies. The result has been radically escalating personnel costs and deteriorating performance.

The impact on governmental services has been devastating. Despite exploding budgets, firing incompetent teachers has become a virtual impossibility, and essential services can no longer be performed because labor costs have made it impossible to sustain those services.

Ignoring dire warnings, Governer Schwarzenegger and legislators from both parties earlier this year imposed the biggest state tax increase in American history. In the first two months after the tax increase took effect, state revenues plunged 33 percent. Sadly, California has reached the terminal stage of a bureaucratic state, where government has become so large and so tangled it can no longer perform even basic functions.

 

Road to recovery

Fortunately, we have a model that works. A generation ago, it produced a high quality of public service at a much lower cost. It maximized management flexibility and required accountability at the service delivery level. It recognized that, only when commerce and enterprise flourish, can we finance the basic responsibilities of government.

Restoring this efficiency will require a governor and a legislature with the political will to wrestle control from the public employee unions, dismantle the enormous bureaucracies that have grown up over the service delivery level, decentralize administration and decision making, contract out services that the private sector can provide more efficiently, rescind the recent tax increases that are costing the state money and roll back the regulatory obstacles to productive enterprise. Alas, we don’t have such leaders—and even if we did, the systemic reorganization of the state government can’t be accomplished overnight. Restructuring will take years before serious savings can be realized.

What Churchill called history’s “terrible, chilling words” are about to be pronounced on California’s failed leadership: “too late.”

A federal loan guarantee or bailout may be the only way to buy time for restructuring to take effect, but the discussion remains academic until and unless the state adopts the replacement structures, unburdens its shrinking productive sector and presents a credible plan to redeem its crushing debt and looming obligations. Without these actions, federal intervention will only make California’s problems worse by postponing reform, continuing unsustainable spending and piling up still more debt. In short, if California won’t help itself, the federal government cannot, should not and must not. And before anyone gets too smug at California’s agony, remember this: Congress is now enacting the same policies at the national level that have caused the collapse of California.

The good news is, there’s still time for the nation to avoid California’s fate. If anything, the collapse of California can at least serve as a morality play…unfortunately in the form of a Greek tragedy.