Image from JP Valery via Unsplash
Looming Deficits Present Another Opportunity to Offer Solutions for California

Edward Ring

Director, Water and Energy Policy

Edward Ring
December 1, 2022

Looming Deficits Present Another Opportunity to Offer Solutions for California

Just a few months ago, Gov. Gavin Newsom was bragging about California’s “$100 billion budget surplus.” At the same time, the California Policy Center was pointing out that the governor’s “surplus” was fantasy – that state and local governments owed about $1.6 trillion. In those heady days, however, with obliging media cheering him on, Newsom ignored reality and forged ahead with a record-breaking $300 billion state budget

Newsom may come to regret this. We already do.

The latest revenue projections from the nonpartisan Legislative Analyst’s Office (LAO) show our state budget for 2023-24 now faces a potential $24 billion deficit. The concern should focus on why there has been an explosion of state spending, yielding nothing but growing dysfunction.

By nearly every measure, things are worse today in California. Obvious examples include expensive and unreliable energy and water, failing schools, rising crime, unaffordable housing and college tuition, and an exploding homeless population. But that’s hardly the entirety of the bad news facing Californians. The decade-long run of record tax revenue spawned an avalanche of new regulations, driving up prices, discouraging expansion of big business and crushing small businesses. Through its spending priorities, California attracts the dependent and repels anyone striving for independence. 

As it is, LAO’s projection of a $24 billion deficit is a baseline case, relying on several assumptions that could go sideways, tumbling the actual deficit into darker territory. For example, LAO acknowledges the likelihood of a deepening economic recession, but does not factor the impact of a recession into its tax revenue estimate. “Were a recession to occur soon,” LAO says, “revenue declines in the budget window very likely would be more severe than our outlook.” In an obscure section of their analysis, where LAO projects worst-case scenarios, the office projects general fund revenue dropping as low as $180 billion in 2024-25, which based on merely maintaining the current general fund budget reflects a deficit of $55 billion.

If the events of the past three years have taught us anything, it’s that consequences of pivotal events are often obvious only in hindsight. In June 2020, few foresaw that COVID shutdowns would lead to a boom in tech-company valuations. Fewer still delivered the headline news – how uniquely beneficial that tech-stock boom would be to California’s state general fund tax revenue. 

It’s easy today to look back – with tech stocks stalled or falling – to recognize the chain of causes. It’s also clear that the state legislature’s blind ambition – to make sure that state spending sucked up every dollar of that one-time revenue growth – made it blissfully unaware of just how improbable and fleeting the gift was that they were squandering.

Another lesson from the past three years, however, is to be wary of excessive pessimism. Unsustainable economic models work until they don’t work, and as long as the U.S. dollar is the least afflicted currency in the world, as long as the U.S. is the most secure investment haven in the world, and as long as inflation continues to reliably erode the principal value of a nominally exploding federal debt, massive deficit spending to stimulate economic activity may remain a viable strategy. It’s delightful to imagine a legislature and a governor who recognize the opportunity to invest in long-term infrastructure that serves Californians’ need for water, road maintenance and energy, for example. But it’s more likely that Sacramento’s cycle of Vegas-style wins and losses will go on for decades. It could take forms we can only imagine. We simply don’t know.

The question therefore isn’t how to cut spending and raise taxes in order to balance the budget. The likely truth is that California’s state legislature is going to muddle through one way or another. The prevailing question should be how does California’s state legislature start to do the right thing instead of the wrong thing with all that money? 

Only 10 years ago, California’s general fund was $93 billion – adjusted for inflation, that’s $118 billion today, against the current actual budget of $300 billion. Meanwhile, California’s population has grown only modestly over the same period, from 38 million to 39 million. This means that inflation-adjusted per capita general fund spending in California has increased from $3,124 in 2013 to $6,023 today. California’s state government is spending twice as much money today per resident as it did just 10 years ago.

LAO warnings of an impending general fund deficit are a good time to talk not only about how California’s state legislature is on the wrong course. It’s the right time to change course. If you want to realign the state’s politics, it isn’t enough to say taxes, crime, and prices for everything are too high, and educational achievement and the supply of housing are too low. Propose concrete solutions. Very few Californians would mind paying their taxes if the state was affordable and effectively addressing the challenges of crime, homelessness, education, housing, water, transportation, energy, and education.

Solutions exist, but lack politicians with the courage to promote them and the charisma to effectively convince voters of their efficacy. Here are a few:

  • Offer state vouchers to parents to use to send their children to any accredited school, public or private. End the failed monopoly on public education.
  • If you refuse to do that, tescue public education by replacing progressive curricula with classical education. That would save billions and rescue a generation from a failing system. Do this and you’d have the gratitude of tens of thousands of teachers who’d like simply to teach. 
  • Fast track approval of nuclear power plants, natural gas fracking, and refinery expansions to force competition for energy, and lowering the prices for fuel and electricity. 
  • Fund more water supply projects and practical freeway improvements, using tax and bond funds to yield long term economic dividends. 
  • Approve housing developments in weeks instead of decades and reduce California’s absurdly overwritten building codes to increase housing supply and lower the cost of housing. 
  • Turn the timber industry loose again to create jobs, lower construction costs – and thin California’s dangerously overgrown forests. 
  • Build inexpensive minimum-security facilities to incarcerate drug addicts and petty thieves to curb crime and end unsheltered homelessness. Use these facilities to teach inmates vocational skills so that upon release they can fill hundreds of thousands of high-paying construction jobs.

New solutions. An entire new alternative vision. A prosperity budget. This is the real discussion that California needs – not just how to balance the budget but how to allocate the budget, and how to deregulate the economy. 

Where are politicians who are ready to step up with more than criticism of the failures of California’s one-party state, and offer solutions?

Edward Ring is a co-founder of California Policy Center. A version of this essay appeared in the California Globe.

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