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Mitchell’s Musings 5-21-12: The Golden Mean
Daniel J.B. Mitchell
California, the Golden State, has had well-publicized budget
problems for years. Its formal budget
process consists of the governor proposing a budget in January for the upcoming
fiscal year which begins July 1. The
legislature is supposed to enact a budget by June 15 and the governor is
supposed to sign it, possibly with line-item vetoes, by June 30. In fact, although budget hearings begin in
the legislature shortly after the January proposal, there is a tradition that
the governor comes back with a revised proposal in mid-May known as the “May
Revise.” Before the May Revise, not much
is done.
The May Revise is based on updated information on state
revenues and spending, economic trends, and the political reactions to the
earlier proposal. At the beginning of
last week, as shown in the photo above, California Governor Jerry Brown
presented his May Revise. California’s
fiscal institutions include the state’s Legislative Analyst Office (LAO) which
prepares critiques of budgetary proposal from the governor for the
legislature. The LAO points to policy
issues, to disagreements over forecasts, and to legal constraints. At the end of last week, the LAO issued its
report on the governor’s May Revise. And
now, the real work on the budget will begin.
This musing is not the place to go into the detailed numbers
of the latest budget proposal or the immediate politics of it. The background, however, is that California
had a major budget crisis in the early 1990s, when what was a mild recession in
the rest of the U.S. – but a severe downturn in California - adversely affected
state tax revenues. Efforts over several
years, which included spending cuts and tax increases, brought the budget back
into seeming balance by the mid-1990s.
At around that time, however, there were warnings that over the long run
the state had a “structural deficit,” i.e., a tendency for spending to rise
relative to revenue.
For several years thereafter, the dot-com boom of the late
1990s brought in substantial tax revenue from capital gains and masked the
structural problem. Spending rose rapidly so that just as the economy peaked in
2000-2001, and as the dot-com boom turned to bust, the state found itself
running a small deficit. The deficit quickly
widened as another recession - again mild in the U.S. but severe in California
– chopped state tax revenue. In
political terms, the resultant budget crisis led to the recall in 2003 of
Governor Gray Davis and his replacement by Arnold Schwarzenegger. As governor, Schwarzenegger implemented an
enlarged and modified version of a plan to borrow his way out of the state’s
accumulated fiscal problems that had been in the works under Davis.
The housing/mortgage boom, as had the dot-com boom before
it, masked California’s underlying fiscal challenges during the mid-2000s. But even before the financial crisis of 2008,
it was evident to budget aficionados that problems were accruing. The recession that was linked to the
financial crisis, unlike the recessions of the early 1990s and early 2000s, was
severe at the national level. But it was
more severe in California than elsewhere and the state staggered along with
spending cuts, tax increases, and even the issuance of IOUs in lieu of state
tax refunds and vendor payments at one point in 2009. Thanks to the renewed budget crisis, when
Governor Schwarzenegger left office in January 2011, his poll ratings were as
unfavorable as Davis’ had been at the time of the 2003 recall. Since that time, the task of dealing with the
California budget crisis has fallen to Jerry Brown.
California’s fiscal problems tend to receive national
attention. For example, Brown was interviewed last week at length by Charlie
Rose on CBS news about his May Revise.[1]
As part of his budget plan, Governor Brown has placed an initiative on
the November 2012 ballot that would provide temporary tax increases. If it doesn’t pass – and passage is not a
sure thing – automatic trigger cuts would take effect. You can count on more headlines from
California, either way.
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| LA Times 5-18-12 |
Since I write an annual chapter on the California budget,
these current events are of special interest to me. But there were other items
in the news last week that caught my eye.
In particular, there were longer-term demographic developments reported
in the news media, both for the U.S. and California. There was national news about a Census report
that minority births have exceeded those of non-Latino whites.
California is ahead of that trend. A related Census projection indicated that in
a few years, the Latino population of California would be larger than the white
“Anglo” (non-Latino) population. In
effect, no ethnic group in the state will be a majority. Not surprisingly, much
of the discussion around these issues has
focused on political consequences.
But there are other ways of looking at demographic trends besides
changes in ethnic composition and the voting propensities of various
groups. These alternatives may provide
some insight into the underlying fiscal problems of California and into issues
it may face in the future. They may also
explain why California seems to have a harder time than other states in making
fiscal adjustments.
Since California became a state in the mid-19th century, its
population has tended to grow faster than the U.S. population as a whole
through a combination of natural increase (births over deaths), net
in-migration from the rest of the U.S., and immigration. However, some periods have exhibited more
rapid growth than others. The chart below shows California’s population as a percentage of the U.S. total. Census of Population data are used through
2010. Thereafter, the figures are based
on projections through 2050 by the California Department of Finance and the
U.S. Bureau of the Census.[2] The chart
may provide a clue as to why California seemed to have a rougher time adjusting
its budget during and after the Great Recession when compared to other states.
Two notable inflection points appear on the chart: 1940 and
1990. Growth after 1940 represents the
inflow of federal military funding for World War II, the Korean War, the
Vietnam War, and the Cold War. After
1990, the Cold War ends. Within that
1940-1990 super-normal growth period, there is a slowdown in relative growth in
the 1970s reflecting the end of the Vietnam War. However, taxes continue to rise thanks to a
housing bubble (which raises property taxes) and inflation (which raised income
taxes due to that tax’s nominal rate progressivity). In the late 1970s, California thus became the
home of the “taxpayer revolt” with the passage of Proposition 13, which
drastically cut and capped local property taxes. Prop 13 was an omen of what might happen in
California when voter expectations were frustrated by a growth slowdown.
Projections after 2010, particularly in the out-years, are
at best forecasts with the chance for error increasing as we move into the more
distant future. But loosely, the numbers
suggest that California will grow henceforth at roughly the same rate as the
U.S. population. The state completes its
transition from the super-normal growth before 1990 to being an average growth
state after 2010.
Being average in growth may not seem to be a major
burden. But if you’ve had decades of
super-normal growth, you have expectations based on an every-enlarging “pie” of
economic resources including taxes to pay for roads, schools, universities,
water projects, and other infrastructure along with social programs. Providing public services in such an
environment avoids nasty trade-offs. An
extra dollar for program X does not mean one dollar less for program Y, since
the widening pie keeps adding to the available dollars. During super-normal growth, even if taxes
have to be raised, the tax base is also growing.
At the root of California’s seemingly endless fiscal
problems is the gap between voter expectations, formed in the old pre-1990
super-normal regime, and the current (and future) period of being in the
average range. Other states - which have
been average for a long time - are better equipped to make unpleasant
adjustments. Their voters don’t have
California-size expectations. They are
used to trade-offs.
The future holds another burden for California. Ethnic mix projections of the type that
caused the recent stir in the news media are interesting. But the dominant demographic shift at the national
level is the aging of the population as the baby boom reaches traditional
retirement age, not ethnic mix.
Prior to 1940 and the era of super-normal growth, California
was an elderly state, much as Florida is today – a place to retire in the
sunshine. And during that period when
California was relatively old, its internal politics were roiled by various
“pensionite” movements that appealed to older voters. But in the super-normal growth era after
1940, there was an influx of younger people that turned California into a
relative youth state.
First came the wartime (young) workers into the budding
aerospace and other related industries.
Then came the returning (young) GIs after World War II. After them came young people to work in Cold
War aerospace and other sectors. And
those folks were joined by immigrants from outside the U.S. as immigration
restrictions eased in the 1960s and as internal pressures in Mexico and
elsewhere in the world brought in young populations, legally and
illegally.
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Footnotes
[1] http://www.cbsnews.com/8301-505267_162-57436905/gov-jerry-brown-says-california-is-not-a-tired-european-country
[2] A cautionary note: The projections used by each agency are not necessarily based on the same assumptions. The Census has not yet released projections based on the 2010 decennial survey and recommends use of its 2008 estimates. U.S. figures used on the chart are from http://www.census.gov/prod/2010pubs/p25-1138.pdf.
California figures are from
http://www.dof.ca.gov/research/demographic/reports/projections/interim/documents/Final_2012_Interim_Proj_Web.xls[3] The same cautions noted in the prior footnote apply to this chart.
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http://www.employmentpolicy.org/topic/402/blog/mitchell%E2%80%99s-musings-5-21-12-golden-mean
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