I just spent the last 30 minutes reading a few articles in the L.A. Times, and some of the comment threads. Now, comment threads typically make me lose faith in humanity, but these comments were just pissing me off.
It's become increasingly clear to me over the last 5 years or so, that people can be incredibly ignorant when it comes to government. The vast majority of the people don't seem to have an inkling about how this stuff works. That becomes a very, very serious problem when you have drastic government-related problems.
As a small case-study of this, I'd like to look at California's budgetary mayhem. There's no way of getting around it -- California is in full fiscal meltdown. I don't pretend to be an expert on this situation, because I don't live in California, but a lot of my family does, so I follow what goes on out there pretty closely.
California's budgetary woes come from a variety of things: a legislature with really poor spending habits (yes, I'm looking at you fellow Democrats), mis-managed loans and bond sales, and an economic mess that has looming double-digit unemployment, and a housing market that has cratered. On top of this, California has two special measures in place that make everything to do with the budget fifty-times harder: a requirement for a 2/3 majority to pass a budget and/or tax changes, and the proposition system. I'm going to discuss these first.
Money creates some of the most volatile problems in politics. People never totally agree on where it should go. You have $10 and two friends. You're all hungry. What do you spend it on? Maybe two of you can agree. Ok. You have $50 and 9 friends. Can 6 of you agree? How about $500 with 20 people, each with children? Can 15 of them agree? How about 40 people, $41 billion worth of debt, and 30 million people counting on you to do something? How likely is it that 27 of them are going to agree? It sounds great to people that its harder to mess with the money, and harder to change the taxes, but requiring a 2/3 majority is just bad policy. By the way, that means 2/3 to lower your taxes too.
Additionally, the proposition system is something that sounds great, but is just bad policy, at least with budgetary concerns. There have been so many different propositions attaching money to certain programs that, even if the state legislature wanted to cut spending, they can't from many areas because a proposition by the people has mandated that that money goes to that program.
With all the revenue problems and basic budgeting problems that California is going through, it would be difficult enough to balance the budget. Add on these ridiculous propositions, and slap on a requirement for a 2/3 majority vote, and it's really not surprising that it has been so difficult. Half the time, the legislature doesn't have the authority to change some of the budgetary practices by itself, it needs to pass a measure with a 2/3 vote, and then have the California people ratify it via proposition. Which is exactly what they've done, but because Californians don't understand their own government, they're rejecting it all, claiming that it's the government that incompetent, and "why didn't they deal with this?" Well, they did, as much as they can. It's your own fault that you've put in so many barriers to actually getting anything done.
Moving on, to the revenue issues...
I mentioned the problems I have with the Democrats in Congress right now, and this notion that somehow we can get all the entitlements we want without raising our taxes. It's total b.s. And what we see in California is a small taste of that. The budget has been a problem in California for years. It came to a head during the last major economic downturn ('99-'02), and Gray Davis was recalled as a result. Since then, they've relied on loans and bonds sales to help cover the problems, and now, that's finally all come to a head.
Let me explain. This may take awhile.
With any economic downturn, state revenues drop dramatically. That's largely because, unlike federal revenues, which are largely based on taxes on income (personal income, corporate income, capital gains, estates, windfall, etc), a much larger percentage of state revenue comes from sales taxes -- which drop harder than income taxes during a recession because, obviously, fewer sales are occurring. Local government (county, city) is hit even harder, because they're revenues are based almost solely on sales and property taxes -- and when your housing values are cratering and the recession is killing business, you're not getting a whole lot from either of those.
Back to California. California's already been having trouble with deficits, and has had to borrow money to cover it. What happens when you borrow money? You have to pay interest. As the deficits continued, the interest payments kept getting larger. Ok, this is going to get a little complicated.
There are multiple ways to cover a deficit in a government budget. You can get private loans from banks and other organizations, but the most common way is to sell bonds. The bond acts as an I.O.U. of sorts. The federal government does this constantly (especially in the last decade). As I've written before, a Treasury Bond (or T-bills, issued by the United States Treasury) is considered basically the safest place to keep your money, because there is almost zero risk that you won't get your money back, with interest. States sell bonds too, as do local agencies -- like your utility authorities (if your utilities are publicly run). However, state bonds are not as stable as T-bills -- banks and financial traders don't have the same faith in state treasuries that they have with the U.S. Government. So state bonds are rated, according to risk.
Some states, like Georgia, that have exceptionally low levels of debt, have a AAA bond rating -- they're very low risk, and can sell their bonds at lower interest rates. It's a safe bet that the money is safe. The risk is typically associated with past fiscal behavior, which is most easily measured by current levels of state debt. Georgia's debt as a percentage of its revenue is below 6%. If it went any higher than 7% Georgia would lose its AAA rating. It would go to AA, then A, then BBB, then BB, and so on.
Now, on top of the risk ratings for state bonds, there's also issues of demand. This is a multi-pronged equation -- one, with the banking problems that have occurred, there's a lot less capital, so there's less money to be put into bonds. On the other hand, because banks have screwed the pooch, and the stock market is still volatile, bonds are an extremely popular place to put money -- because they're "safe." However, as I stated before, the safest bond is a T-bill. The next safest is a AAA, like a bond issued by the state of Georgia, or another similar state. I don't know if you've noticed, but with the deficits the feds are racking up, there are a lot of T-bills out there to buy, so even low-risk bonds will get cut out of the market.
Ok, so back to California. As I said, California's been racking up debt for a long time now. Their interest payments are huge. Their bond rating, suffice to say, is not AAA. It's horrible. No one wants to buy their bonds, unless they're at sky-high interest rates. No one wants to lend California money, unless its with a sky-high interest rate. Obviously, California can't afford to do that. The state can't cover it's own operating expenses, let alone the interest it has on its past debt, let alone interest on NEW debt. Plus, with banks feeling the squeeze, they've started calling in parts of California's past loans.
So, California is in debt, has massive interest payments, banks calling in loans, they can't get new loans or sell new bonds, they have plummeting revenues. What does this add up to? The $41 billion deficit they confronted earlier this year. How do you get around a massive deficit without borrowing money? You find creative ways to borrow, like the proposition to borrow $5 billion from the state's lottery program (not the worst of ideas). You cut spending. And you try to boost revenue. For the government that means, unfortunately, raising taxes.
It would be incredibly difficult for California to balance the budget with no tax increases. And by difficult, I mean people haven't seen cuts like these before. We're not talking eliminating welfare programs and you'll be saved (welfare, by the way, accounts for a miniscule part of the budget, the federal welfare program, for example, is about 1/10 of 1% of the federal budget). We're talking eliminating state pension programs, laying of tens of thousands of state workers, closing prisons, closing police and fire stations, closing state parks, cutting public transportation services.
And this is where the misunderstandings come in. One, people don't understand the origins of the budget problems. Two, people don't understand what state government does, or who the people are that are being threatened by this. Who are your state employees? Teachers, police officers, fire fighters, prison guards, subway drivers, bus drivers, principals, city planners, clerks, public defenders, sewer inspectors, emergency medical personnel, hell, even the national guard. These are not just lazy bums who just sit around collecting a paycheck. Granted, there are always a few rotten apples in every tree, but how many lazy people do you know in your offices? I know plenty. I've worked in private businesses, and I've worked in government offices, and I can tell you, on average, the people in the government offices worked ten times harder.
I read a comment that we should all send our children to private school and away from the overpaid and incompetent teachers. My sister, a Los Angeles teacher who got a 1590/1600 on her SAT and was National Merit Scholar, would like to show you her paycheck. So would the police officers and fire fighters who are there to protect you and save your lives. So would the correctional officer who runs your prisons. So would the attorney that will defend you in court, even if you can't afford your own lawyer. So would the sewage worker, who makes sure you don't have raw sewage leaking into your drinking water. So would the bus driver, who makes sure people get to work on time.
Californians are looking at 40 kids per classroom. Have you ever tried to teach English or Math to a room full of 40 14 years olds? How about having to release "low-risk" prisoners because the state can't afford to keep all the prisons open? From a cold, economic perspective, how about the fact that, for each person laid off, that's another person that can't afford to buy anything, thereby hurting businesses through fewer sales.
Ok, mini-rant over.
So, how can California solve this disaster? What is truly needed is an absolute budgetary overhaul, which, in all likelihood, would actually require a rewrite of the state constitution. The budgetary measures need to be completely rewritten, and the proposition measure needs to be altered.
The 2/3 majority requirement should be scrapped, and replaced with a requirement for a constitutional majority. A constitutional majority is a tad stricter than a simple majority -- a simple majority is just the majority of those voting. So if, out of 40 state senators, 20 show up to vote, a simple majority would require 11 votes to pass. A constitutional majority requires the majority of all office holders. So out of a senate of 40, you would require 21 votes to pass, even if only 17 people showed up to vote.
All budget propositions should be removed, and budget items should not be allowed to be enacted via proposition. It creates too many special funds, special programs with earmarked money. A tax dedicated to highway construction sounds ok, but what about when you don't need to build any highways, but you're looking at laying off 5,000 teachers, and the highway fund is flush with cash. Well, under the proposition system, you can't touch that money, because the voters of California have stated that the highway money only goes towards highway construction. By law, you would need another proposition to change it.
The tax code needs to be rewritten, with earmarked taxes being repealed, the brackets being readjusted, and all loopholes, tax breaks, and incentive programs being re-examined. All of this would be a nasty process, rife with political battles, and it's not something that can be done easily.
But it needs to be done. And not just in California. Discounting the propositions and 2/3 requirement, the only difference between California's budget woes and those of the federal government is the faith in the United States Treasury Bond. Many of these same budget reforms need to take place at the national level.
Because if people lose faith in the U.S. Treasury Bond........
