As California Goes, So Goes the Nation?


As California goes, so goes the nation? We had better hope not, since the state’s economy is imploding so swiftly that it threatens to take cities and towns from Eureka to San Diego down with it. Consider the plight of El Monte, a city of 125,000 in Los Angeles County that recently cut expenditures to the bone in order to close a $9.5 million budget gap for the fiscal year begun in July.  Working frantically against an inflexible deadline, local officials furloughed most of the city’s 375 workers, laid off 17 police officers and closed down an aquatic center for all but four months of the year. Then they got the bad news: Sacramento will not be sending them $2 million in gasoline taxes they were counting on. And that’s not all:  The state will be taking even more revenues from El Monte, but the city won’t know how much until the legislators get their own house in order. “It’s devastating,” city manager Jim Mussenden told a reporter for the Wall Street Journal. “We’ve already worked very hard to reduce our budget, and now we will have to look at more cuts.”   


Redlands, also in Southern California, is taking similarly dire measures to balance its $50 million budget. After cutting $5 million of outlays through June, the city of 70,000 is looking to save another $5 million by opening libraries just two or three days a week, closing some senior centers, asking volunteers to maintain parks, and furloughing employees for ten days. In addition, Redlands is going to leave 15 positions unfilled on the city’s 83-officer police force. “This could really push us over the edge,” a city spokesman told the Journal.

L.A. Short-Changed

Big cities are getting hit just as hard. Los Angeles officials said they expect to lose about 2,300 construction jobs because the Community Redevelopment Agency will not receive $72 million that had been anticipated. The agency has a $688 million budget, according to the Journal, but most of it reportedly is earmarked for debt service on projects already under way.  Things are just as bad in Northern California, where, for instance, Solano County has cut $100 million from its $1 billion budget, in part by laying off 200 employees. Now the county is looking to lay off another 10% of its 3,000 workers in anticipation of rapacious state raids on its funding. “The problems caused by the state’s mismanagement are now being handed down to cities and counties, which is just wrong,” a Solano County supervisor told the Journal.

Ranked as a country, California would boast the sixth largest economy in the world.  Should we be worried, then, about a ripple effect across the U.S.?  Not according to Steve Levy, director of the Center for Continuing Study of the California Economy. “It’s a $26 billion issue in a $12 trillion [U.S.] economy,” he said.  We think Levy will be wrong on both counts, since California’s problems are metastasizing even as the U.S. economy continues to shrink. Like policymakers in Washington, D.C., officials in Sacramento are counting on a resurgence in growth to balance the budget. But in both cases, taxes are slated to rise to levels that will all but asphyxiate any recovery that could conceivably cause revenues to uptick.

Postponing Disaster

Moreover, neither Sacramento nor Congress has faced its fiscal problems squarely. At the national level, a massive bailout effort has produced windfall profits for a few big banks but no measurable pick-up in economic activity.  And in California, desperate attempts to balance a budget $26 billion out of whack have merely postponed disaster. In fact, much of the balancing has been done on a fulcrum of lies. Paychecks totaling $1.2 billion have been deferred into the new fiscal year, and $1.7 of income-tax withholding has been accelerated. These shenanigans all but guarantee that California will be mucking in deficits for years to come. Under the circumstances, any federal stimulus money that comes the state’s way is going to have about as much effect as food stamps raining down on a blighted neighborhood. 

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  • TahoeBilly August 1, 2009, 1:17 am

    My friend was just speaking with an RN in Sacramento who makes $85K a year working 3 days a week, okay no problem, but the nurse said he could make WAY MORE if he would nurse in the states prison system where RN’s make $800 per day.
    Not only did he say they make $800 a day, he said they have to be the BEST nurses available. Bottomline if you find out you need serious healthcare, cancer or something, and don’t have insurance, just rob a liquor store and get the best taxpayer
    health care money can by! Is this not the most twisted thing you have ever heard?

  • DG July 27, 2009, 9:30 pm

    Mike: That was my point about McCain. He is/was mostly wrong, but he did say that government need to be slashed while Obama said it needed a scalpel (I think he thought scalpel was latin for steroids). No McCain fan here, “my friend”. Only candidate that got my contribution was RP.

    Chris: Regarding government and CPI, I think it is an interesting point. Should government grow in lockstep with CPI? Many of the things they provide are hinged on technology and there has been massive efficiencies resulting in price decay. Education is a great example of something increasing its expense, when technology has made the very information and knowledge education transfers now available with technology which provides it virtually free. Should it increase with CPI? I don’t think so. If you are a great professor and have an incredible ability to communicate and teach, why should it cost a few hundred students thousands of dollars to take your class when you could teach a few million for tens of dollars? You can youtube lectures today throughout the world. -Yet that diploma skyrockets in cost. CPI has no ability to calculate this gigantic game changer ( realize it tries, but come on, it is not even close. Of course, there is a lot to be said for small interactive classes, but at what expense?

    In California, education has kept up with inflation, but the schools have gone from the best in the Nation to nearly the worst. So shouldn’t that be reflected in price? Yet, it continues to get more expensive. Given quality, it has far exceeded CPI.

    The postal service is another example. For the most part nearly every single document in your mail could be done online. Yet, we have a system moving a ridiculous volume of flyers and catalogs no one asks for. (Stop your mail for a week and pick up the massive amount of junk mail.) Given this, they still lose money. It is insane. Technology, embraced, would have the entire postal system go to zero. If you privatized it it would just go away, replaced by fed-x and ups, and mostly the internet, like many obsolete technologies.

    I really don’t think that you can take CPI and apply it directly to government. Like computers, it too, should get cheaper, in many instances. Not all. Yet, the largess, inefficiency, and political maneuvering for personal gain, keep the fat dripping.

    Monetary inflation explains some of it, but certainly not all of it.

  • Chris July 27, 2009, 7:11 pm

    I forgot one other power block that leveraged its power to keep up with true inflation: the UAW. They kept their members at purchasing parity, showing why inflation (and lousy cars) is the root cause of GM’s and Chrysler’s downfall.

  • Chirs July 27, 2009, 6:58 pm

    Rick, you are putting the numbers out, good thing that.

    Somehow though, one has to laugh a wry smile at the size of those numbers when compared to New Jersey.

    Redlands has 70,000 and a budget of 50mil. There a SCORES of communities here in property-tax hell NJ, that are a third of the size (22-24,000 people) with budgets of well over 100mil. These towns have school budgets bigger than Redlands total. budget.

    As to DG, I understand your point with the 1978 to 2009 comparison, and agree with its intention, BUT:

    Just using the official CPI numbers as per the Minneaplis Fed, a 1978 dollar is 3.3 2009 dollars, 326%..

    Thus :
    14 bil in 1978 = 46 bil in 2009
    increased by 1.6 for pop growth=
    74 billion.

    The rest would appear to be California’s excess spendng over back then.

    As should be common knowledge, the official CPI is a lie, as demonstrated many times by John Williams at SGS.

    Adjusting the 14bil by 1.6 for pop. growth first, gives 22.5bil in 1978 dollars.
    105bil in 2009 dollars is 475% above that, or about 150% more than official CPI.

    That sounds about right, when compared to SGS (might even be a bit below SGS numbers).

    None of this is to absolve CA of anything, but to show that while all of us have been getting poorer due to inflation, the government sector has been about the only one that was able to leverage its tax & gun power to keep up with actual price inflation.
    (school supers here making 225,000, principals 165,000).
    Two other sector that were able to do so, are higher education (private +8% pa for 2 decades) and health care

    All these have grown and left us behind (by sucking us dry), so that we are now the first gen. doing worse than our parents.
    Thanks to Paul, Alan, & Ben.


    I know a thing or two about New Jersey’s problems, Chris, since one of my closest friends is initimately involved in the state’s budgeting process. NJ is in very serious trouble, no question, and nothwithstanding a note I received today from my friend saying he was in relatively good spirits. (I’d sent him a link to The Privateer as a reality check.)

    Regarding those three hitherto intractable engines of inflation — government, health care and education — they have finally hit a wall. They cannot continue to grow simply because the money to pay for growth is no longer there, nor is there inflation to coax forth ever-growing tax revenues. As far as the U.S. economy goes, large layoffs by state and local governments is the Next Big Thing. We can only hope that this trend spreads soon, and in a big way, to the federal level. RA

  • mike July 27, 2009, 3:55 pm

    No DG, McCain wasn’t right. Like a blind squirrel, McCain was mostly wrong.

    McCain in September 2008: ‘… fundamentals of the economy are strong’. ”
    He then suspended his campaign to help pass the fat-cat-banker bailout bill.

  • DG July 27, 2009, 2:04 pm

    In the end, the taxpayer will get their day in court. The entire chain of folks who exist in the system of taxpayer grace, will be coming to an empty (or much less) trough. Then, through a process of bickering and nonsensical, hyperbole-ridden discussion, each group will make their case. It will likely get ugly. Cops looking the other way just to make a point? Do you really want to cut back funding? Clearly the obscure protected salamander is going to have a hard time rallying support.
    Some quick stats I found:
    1978 Cal budget $14b
    1978 Cal population: 22m
    2008-9 budget: $105B
    2009 population: 36 m (official)
    leads the nation in welfare per capita at 3%

    Look at this disparity. How many legislators does it take to see the obvious? (a lot, probably more)

    prop 13 was intended to take away the food (tax) from the ever expanding government in 1978. If they could limit the growth of government, by capping prop tax growth at 2%, then all would be solved. Result: Government grew at nearly 7% per year, while population grew at less than 2 %. The day of reckoning is here. Don’t look to the politicians or the mass of folks on the dole to solve it. They are the problem.

    Of these choices, it is obvious which one will solve the problem:
    cut government 70% (that is the right figure for California based on 2% growth) no
    more taxes (nice try)
    take more debt (ding, ding, ding)

    I know states can’t borrow, but they do.
    Taxation is now proving to be impossible because the underlying income and assets are deflating faster than you can say “hope and change!”

    They will never cut government proactively enough to positively effect change. Hence, they will chase it down the slope of hope. McCain, like the blind squirrel, was right, you don’t need a scalpel, you need a machete to trim the budget.

    One way or another, constitutional or otherwise, they will borrow. The borrowing will deflate the currency (eventually all rivers lead to the ocean and all debts, without underlying real economic growth, lead to lower dollars). How much of the federal stimulus went to States just to pay the bills, not new stimulation? A lot.

    Like the democratic party leaving Reagan, California left me when my $24,000 a year in property taxes for a basic house in a nice hood was not enough to pay for basic local services. It was economically prudent to simply cash it in.

  • jp July 27, 2009, 1:10 pm

    when you pick your leaders at the drive thru window, which is perfectly appropriate for an 1/8th inch deep mindset with a 15 second attention span, you get what you pay for…

  • gerry July 27, 2009, 12:00 pm

    Hi Rick,

    Firstly… as a retired typographer I have to congratulate you on outstanding typographic styling… one doesn’t find this level of graphic sophistication very often on the web.

    As for California, I’m afraid that state is the proverbial “canary in the coal mine”. The Federal and many state governments have been moving pressing current problems into the future… and that future is NOW!

    Some issues such as Social Security and others may not be real pressing issues TODAY, but they will be so in the next 5-or-so years.

    With that record of inaction, our Canary is still peeping, but barely so.


  • KHL July 27, 2009, 11:34 am

    The elected leaders in Sacramento just don’t get it. Until they drastically curtail all excessive benefits for past and present employees, curtail state operations back down to the basics of police, fire and courts, there will be no hope of recovery. They need to cut the size of goverment by 70 percent and cut taxes by the same. Get rid of their war on poverty Programs and make the place hospitable to business again. Oh, sorry I just awoke from a dream.

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