Posted 9:23 AM by Robert

What "Crisis?" What "Inevitable?"

California Governor Gray Davis now admits that his State faces a $35 Billion budget shortfall, where it was running a $10 billion surplus when he entered office four years ago.

Davis blames the poor economy and a decline in tax revenue, due in part to the burst of the technology bubble and the subsequent fallout in the stock market.

But the problem really stems from the fact that the California legislature perpetrated a 35 percent increase in state spending since Davis took office - which almost exactly accounts for the huge deficit.

Davis also says that none of the "experts" saw California's problems coming. But the Governor's claim is preposterous since the recent decline in tax revenues is linked directly to the dot.com and technology collapse, as Mr. Davis admits, a collapse which a great many experts predicted was inevitable all along, which Mr. Davis denies.

But California is hardly alone among the states in its excess spending and overly optimistic predictions. Spending went up, now spending must come down California will hardly face a crisis by returning to spending levels pre-Davis spending levels. The population has increased during Mr. Davis' term, and there are arrearages in some needed state spending, such as transportation. But that's not enough to constitute or cause a "crisis."

There is a dead weight loss here: many people will have organized their lives and economic plans on the assumption that planned state spending would become actual state spending. Most of that misdirected activity will now have to be undone. It is not a small amount of damage that is occasioned here. Contractors and other firms that do business with the state will have retained employees and other resources that should have been let go. New plans must be made. State agencies that were required to conduct business as if the planned spending would materialize will experience especially large waste. In sum, this was a massive stupidity that will not be cheap to correct.

But it is not a crisis. The situation pales in comparison to what happened in the early 1990's - when, for example, McDonnell Douglas, then the state's largest private employer, laid off the great majority of its entire work force and residential property values on the West Side of Los Angeles declined by up to 70% (although the local mainstream media, such as the Los Angeles Times, seem to be in permanent deranged denial on this last point, which almost every real estate professional in the area acknowledges).

And, most importantly, contrary to the Governor's additional preposterous assertion: new state taxes are definitely not "inevitable". Indeed, they would be highly counterproductive. However, the spending cuts that are inevitable are going to be very painful for the politicians who have to put them through - including the Governor. And the Governor's actions to date look to increase that pain. For example, Mr. Davis just appointed Steve Peace, a former lawmaker and key architect of the state's failed electricity deregulation plan, as his top budget adviser.

Now, it is not all Mr. Peace's fault that the deregulation plan went awry. However, Mr. Peace's history has, shall we say, eroded his credibility as an economic forecaster.

During the height of the last real California financial crisis, Orange County went bankrupt (Chapter 9, actually). Howls of "inevitable" new taxes went up from the Los Angeles Times, the New York Times, California Democrats and the rest of the usual suspects. The County was grimly warned that to close the huge gap in its finances by budget cuts alone would impair the County as a desirable place to live, ... which would likely create a downward spiral ... which might result in a DISASTER OF AN EVEN HUGER SCALE! [The County was told to think Appalachia-on-the-Pacific!]

Well, the usual suspects were ignored, the cuts were made but taxes were not raised substantially ... and Orange County did very well, thank you very much.

California could, too.