Tuesday, February 17, 2009

Goodbye California?

California’s $1.8 trillion economy is theoretically the eighth-largest economy in the world (just behind the United Kingdom, France, and Italy). But now it is in deep trouble – it is a bankrupt economy, just like several other US States which cannot afford to do what they have always done. It has a looming deficit of some $41 billion and its legislature is unable to agree on an action plan that might tackle this – tax hikes and cuts to public service, the only two primary devices available to a State government (though California, unlike many other US States, is also able to borrow on the market).

How did it get to this? Governor Arnold Schwarzenegger - who once railed against “economic girlie men” - has allowed California's budget to grow by 40 per cent to a rabidly obese $144 billion since winning office 2004. The State is currently amassing debts at the present rate of $1.7 million per hour. Despite claiming to be a Republican, Schwarzenegger has spent like a liberal democrat and brought about State level bankruptcy – a problem he promised to solve back in 2004.

Part of the problem is that liberals dominate California’s direct ballot democracy, where various propositions find themselves on the ballot paper and can determine spending and government actions. Voters, who care little about cost and more about ideology and services, are responsible for their actions and should pay through taxation. A law change made by ballot should indicate clearly the additional taxation that the change will lead to – but there is no focus on cost in this direct democracy debacle. The constitutional problem is that the budget which Schwarzenegger wants to pass to resolve the current deficit problem requires a two thirds majority of his legislature – a silly rule aimed at preventing change.

What Schwarzenegger proposed was $15.1 billion in budget cuts, $14.4 billion in tax increases and $11.4 billion in borrowing, much of it subject to voter approval. He lost his legislature vote by just one vote. He is now proposing to lay off 20,000 public servants and put an immediately halt to all public works activities, which will lead to a significant number of construction workers for private companies being laid off - some stimulus package.

Meanwhile, the State of Kansas has suspended income tax refunds and may not be able to pay employees on time. A bill, which proposes cuts of $32 million to schools as well as other agency cuts, is being blocked as part of the complex game of Kansas State politics.

When we talk of the collapse of the American Empire, one wonders just how many signs it takes to know that the world as we knew it has changed dramatically.

Yet the response is generally the same. Spending by government is out of control – we need to spend more! A likely solution. Stimulus in California might mean repealing legislation related to direct democracy and enabling the government to work in a sane way – now that is radical.

Watch this space.

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