Brown’s California Budget Proposals: a Big Step in the Right Direction

I admit it. I had low expectations for Jerry Brown’s third term as governor. After seeing his budget proposal, I’m ready to reconsider my expectations. I think it is a great effort, and it deserves the support of all of us tired of seeing our state reduced to laughing stock.

Being an economist, I first went to the Economic Outlook section of the Proposed Budget Summary. This is where governors put in rosy expectations and forecasts, thus enabling a multitude of fiscal sins. I was shocked to find a realistic and sober economic analysis. In fact the U.S. and California GDP projections were lower than ours, and we are among the least optimistic forecasters in America. There is no smoke here. There are no mirrors. It is apparent to me that if Brown is to be surprised, he only wants good ones.

This may be the most honest forecast accompanying a proposed budget that Californian’s have seen in decades.

The realistic economic forecast leads, reasonably, to lower budget revenue assumptions, lower by billions of dollars. With more realistic revenue assumptions, Brown forecasts a larger budget problem than did his more easily deluded predecessor.

Then, Brown demonstrates that he’s learned some things over his lifetime in politics. He splits the budget problem in half, proposing cuts for half of the problem and proposing extending temporary taxes for the other half. Predictably, the dinosaurs in both parties howled.

The howling was all for show.

The Democrats can’t possibly believe that they can solve California’s budget problems by raising taxes. California is already one of the United States most difficult places to establish and maintain a business, burdened as it is by an expensive soup consisting of delay, uncertainty, regulation, and among the nation’s highest marginal tax rates. Increasing taxes to solve the deficit would only further weaken California’s already ailing economy, ultimately resulting in lower state revenues and new budget shortfalls. It would be a self-reinforcing death spiral.

The Republicans are, if anything, even more disingenuous. After telling us for months, on a national level, that allowing temporary tax cuts to expire is a tax increase, they now want us to believe that extending a temporary tax is a tax increase. I have news for them. People aren’t that stupid. If allowing temporary tax cuts to expire is a tax increase, allowing temporary taxes to expire is a tax cut. Extending the temporary taxes is simply not cutting taxes. Calling it a tax increase insults our intelligence. Reducing revenues when the budget is so imbalanced would be irresponsible.

Then, there is the composition of the cuts. Deciding where to cut government spending is extremely difficult. Cutting any spending is going to hurt someone, which means that every nickel has a constituency. Here again, Brown showed his savvy by exempting K-12 education, placing himself in the calculated intersection of economic virtue and political expediency.

If I was going to prioritize government spending by its impact on future government budgets, I would prioritize those spending items that prevented future costs and increased future revenues. Given the high social and government costs associated with failed educational outcomes--teen pregnancies, high crime, low productivity--there is a strong practical incentive to improve educational outcomes. To the extent that K-12 educational spending improves outcomes, preserving that spending makes strong economic sense, though the research is far from conclusive that spending does improve educational outcomes.

Politically, preserving K-12 spending is probably necessary if Brown is to have a successful governorship. Schwarzenegger provides the counter example. His governorship was doomed after the 2005 special election. Each of Schwarzenegger's 2005 proposals had merit, but by bringing all of them to the voters at one time, he committed the tactical error that destroyed his governorship. He allowed the enemies of each proposal to band together, and they mugged him.

When the dust settled, Schwarzenegger was as badly beaten as any of his action-film opponents. The Terminator became Arnold, and Arnold didn't look very tough. He abandoned any real effort to deal with California's budget issues, searching instead for a legacy built on imposing a green wish list of environmental regulation.

In contrast, Brown showed his street smarts and sidestepped the problem of fighting too many constituencies. Like an aging martial artist, he channeled their energy to his benefit. Instead of fighting the powerful K-12 education lobby, he can count on them helping him convince California voters to extend the temporary taxes. They know what a failure to extend the temporary tax means for them- and their children.

I do have one problem with Brown's proposal. I see the cuts as a down payment on California's budget issue, and the expiration of the temporary taxes as the due date for the balance. I would have preferred to have the due date come in Brown's term, say in three years instead of five. As it is, if the temporary taxes are extended, Brown has put the budget problem behind him, and he has no incentive to finish the job. That will be up to the next governor.

But by putting the budget behind him, Brown will be free to deal with California's other big problem, its economy. California, with all its natural advantages and former economic glory, has managed to become one of the Unites States basket cases, with extraordinary unemployment, decimated real estate markets, and an accelerating stream of businesses and individuals leaving the state. If Brown can deal as adroitly with the economy as he has with the budget, he can go down as one of California's great governors --- with a legacy more akin to his father Pat Brown than the one Jerry accumulated in his first two terms.

Bill Watkins is a professor at California Lutheran University and runs the Center for Economic Research and Forecasting, which can be found at clucerf.org.

Photo by Troy Holden