California: From Golden State to Welfare State

While we are witnessing the unfolding fiscal disaster that the welfare state has brought upon Europe, we have our own version of this crisis in progress in the United States. The gaping hole in the federal budget is the best known element of the American version of the welfare state crisis, but the situation is almost as bad in many states.

The most notorious among the troubled states is California. Its budget problems go back many years and include such absurd practices as “paying” bills, and even tax refunds, with IOUs. But even though it is a serious enough matter when a state government cannot pay its bills, the worst part of the California mess is that no one seems to dare speak out about what is truly behind the Golden State’s chronic fiscal trouble.

The welfare state.

California’s budget mess is as simple as anything can be. The state government has made spending promises – handed out entitlements – which it is now notoriously unable to keep up with. From health care to welfare; from public union benefits to education; the lawmakers in Sacramento have piled on promises up and above what taxpayers can keep up with.

Over the past 25 years the California state government has increased its total spending (including General, Federal and Other Funds) by 6.8 percent per year, on average. During that same time the state GDP grew by 5.5 percent per year (both numbers adjusted for inflation).

Let us stop and ponder for a moment what these bone-dry numbers actually mean. GDP is the source of all tax revenues a government can get their hands on. It is the sum total of all our incomes and therefore the base for income taxes, sales taxes, user taxes, gasoline taxes, payroll taxes… Even property taxes are paid out of current income. Since your current income is part of GDP, this means that property taxes are paid out of GDP as well.

You don’t have to have a Ph.D. in economics to figure out that when the ultimate tax base, GDP, grows at 5.5 percent per year, and total government spending grows at 6.8 percent per year, government will run eventually run out of taxpayers’ money. This is precisely what the state lawmakers in California have allowed to happen. For some time, they have put off going to taxpayers for more money by asking instead that Uncle Sam sends more cash to Sacramento. But now that the federal government is in deep fiscal trouble and can be expected to turn off the cash faucet, California’s budget problems are about to go from bad to worse.

Predictably, the legislators in Sacramento are now in budget panic mode, scrambling to rein in a budget they have allowed to run amok for more than two decades.

Half of all state spending in California goes to three items in the budget: Medicaid (or MediCal), cash assistance (or “welfare”) and public education. Since 1985 two of these items have, on average, grown faster than the state GDP: Medicaid has increased at 10.7 percent per year and public education has gone up at 6.5 percent per year.

Each time legislators in Sacramento passed a budget that expanded welfare-state spending faster than the state’s economy was growing, they knowingly contributed to the fiscal problems that are now haunting taxpayers in California. The compounded effect of this decades-long streak of spendoholism is now coming back to haunt them. This year’s legislative battle to piece together a budget for The Golden State is tougher than it has been in many years. For the first time since California’s classis Proposition 13 tax reform, the state’s elected officials are facing resistance to higher taxes. They now have to learn how to restrain spending.

The problem with that is, of course, that 25+ years of lavish government spending has allowed the people of California to take effort-free entitlements for granted. The welfare state has created a large tenderfoot population who cries foul at the sight of even the smallest aberration in state spending.

Some of the tenderfeet do not think twice about using children in their protests:

Students at Elk Grove Elementary School joined kids from San Francisco to Los Angeles to blow bubbles Thursday in protest of state budget cuts to education. The “This Budget Blows” protest, organized by the parent organization Educate Our State, coincided with the March 15 deadline for school districts to issue preliminary layoff notices to educators. Nine empty chairs at Elk Grove Elementary represented the nine teachers at that school that were given pink slips.

To the defense of Governor Brown, he has been tough on the budget from the day he got (back) into the Governor’s mansion in 2010. He has actually been able to put brakes on the General Fund:

Largely through spending cuts, Brown and the Legislature have reduced the state’s structural deficit by roughly two thirds, to an estimated $9.2 billion at the start of the year. General fund spending as a percentage of the state’s economy, according to the governor, has dropped to levels last seen in the 1972-73 fiscal year. More than 15,000 positions have been eliminated from state government.

It is important to keep in mind, though, that these spending “cuts” for the most part consist of deferred increases in spending. They put a lid on expansions of government spending programs – but they do not do anything about the underlying problem.

The welfare state.

Each entitlement program that the government spends money on, comes with a formula that defines:

• Who is eligible;
• How much money (such as cash assistance) or in-kind services (health care or education) each eligible person should get; and
• Under what conditions a person is no longer eligible.

When people become eligible they adjust their lives to that eligibility. A cash assistance recipient, or someone who is eligible for food stamps, expects to get a certain amount of money each month from government. A family who is entitled to public education for their children (i.e., all of us who have school-age kids) will expect government to continue to deliver that service as promised.

Being dependent on a tax-paid, work-free entitlement is comfortable. The longer people are dependent, the more comfortable they get with consuming the entitlement. Every prospect of a cut becomes an imminent threat to that comfort. When government starts cutting entitlement spending, the first reaction among entitlement consumers is to demand that government continues to deliver as promised.

This is particularly obvious when it comes to public education. Taxpayers who consume public education for their children still pay the same taxes as they did before the budget cuts went into effect. After the cuts, government delivers a reduced-quality product for the same price.

As much as it is wrong that people demand to be allowed to continue to consume entitlements, there is a point in the protests against panic-driven budget cuts. If government makes a promise, the right thing to do is to keep that promise.

The legislative error is not in the budget cuts, but in the very existence of the welfare state and its entitlements. These entitlements have given California chronic fiscal bronchitis – perpetual budget problems – against which the state legislators are prescribing marginal, annual budget cuts. But that medicine won’t work: it does not treat the underlying problem, namely the very existence of the welfare state. On the contrary, the budget cuts that are planned and have gone into effect in California are in fact designed to save the welfare state. After 25 years of growing entitlement spending faster than the state’s tax base, the lawmakers in Sacramento have teamed up with the governor to try to rein in the welfare state and make it fit what taxpayers can be expected to keep up with.

This is a losing strategy. The cost of an entitlement program is, again, defined by eligibility rules that are independent of what taxpayers are able to pay. Nowhere in Medicaid does it say that people can enroll and get services provided that taxpayers can afford to pay for them. Naturally so: the very definition of the welfare state is to give people what ideologues and politicians say that people have the right to, period.

California’s decline from the Golden State to the Entitlement State was a long, slow process. Ideologically charged politicians are fighting a panic-driven battle against the very behemoth that caused the state’s decline in the first place. They are going to lose that battle. California is heading for a Greek situation.

Unless, of course, Californians wake up and realize that the only solution is to eliminate the welfare state. If they do, the Entitlement State can once again become the Golden State.