Monday, December 20, 2010

The Debt Crisis and the Austerity Trap

State officals are caught in a mental loop, and it is nicely visualized by state treasurer Bill Lockyer's forlorn op-ed in the Los Angeles Times.  Arguing that "California Isn't Broken," and anxious to head off implausible suggestions that the state could default on its debt, Lockyer and coauthor Stephen Levy write,
During the current fiscal year, general fund revenues are expected to total $89.4 billion. Education spending under Proposition 98 will total $36 billion. That leaves $53.4 billion available to pay debt service on bonds — more than eight times the $6.6 billion the state will need.
Thus is raised the specter, in its very denial, that the state might spend the entirety of its non Prop 98 money on servicing its own debt.

The article goes on to debunk the myths that California has lost more jobs and businesses than other states, that its decline is worse than that of the country's, and that its structural budget deficit is caused by runaway spending:
Thirty years ago, general fund expenditures totaled about $7.43 for every $100 of personal income. In the 2009-10 fiscal year, that ratio was almost $2 less, at $5.52 for every $100 of personal income. In the current fiscal year, per capita general fund expenditures will total $2,246, less than the $2,289 spent 10 years ago and roughly equal to the inflation-adjusted level of 15 years ago.
But then what? The obvious question is, "so what's wrong with spending less"?  The next obvious question is, since we still have a deficit, why not spend still less than we do right now?  These are entirely rational questions for our austerity culture, and they need direct and concrete answers. Nobody is going to care about cuts in general unless Lockyer, Jerry Brown and the new Sacramento order can rekindle belief in a causal connection in which cuts in public investment causes economic decline.  But how will they, and who will help them?
Jerry Brown is the original small-government Democrat: in the 1970s he was already running as an austerity governor for the "era of limits" he later proclaimed in Cedar Rapids during his presidential campaign tour in January, 1976.  His promise this month to cut the governor's budget was first made in his inaugural address in January, 1975.  Circumstances have not given Brown much reason to change his mind.  He has said, "The depressing spirit of the age ungratefully feeds off the boldness of the past.  Where there should be saving for the future, I see frantic borrowing."  Thee occasion was his second inaugural address in 1979.

Arnold Schwarzenegger built his governorship around repeated calls to cut state spending. Brown just recently promised to do the same, only worse.   Arnold's version was more "blood makes the grass grow."  Or "throw mama from the train."  Jerry's version is "Curb Your Enthusiasm."  But the implication is very Arnoldian: Brown may propose mid-year cuts in all sectors of state government. He assured K-12 that this would happen to them.  We may be facing the same thing at UC and CSU: general fund cuts mid-year, perhaps the return of employee furloughs to make up for them, possibly mid-year tuition hikes, who knows?

What is Brown going to offer that's different from Arnold?  In his presentation, he moved from budget basics to an illustration of persistent deficits (slide 7), to a clear portrait of declining expenditures (slide 10), to a conclusion that stressed that California is a Bottom-5 state in major public sector measures, including ratio of state employees to population (slide 16) and student-teacher ratios (slide 17).  The strategy seems to be what driver's education courses used to call Red Asphalt: show the 15 year olds pictures of bloody car wrecks so that we are scared into driving well by seeing the deadly consequences of our careless acts.  Show the causal connection between budget cuts and lowered educational resources.

Educationally and democratically this is the right strategy: don't tell the people the answer you already have, but lay out well-organized analysis that allows them to reach their own conclusions.  Others have tried this before on this same topic of California's public spending being low rather than high.  Los Angeles Times columnist Michael Hiltzik made an excellent short case using LAO data in May 2009.  It will help to have the state's governor pulling in the same direction.  But what about the causal case between public funding cuts and economic decline -- not just less government but less economy?  How to work in personal hardship and stunted hopes?

The discussion raised a vital issue, but a different one: the burden of debt.  Lockyer did most of the lifting here.  He showed that during the governorship of Arnold Schwarzenegger, the state's debt nearly tripled from $34 billion in 2003 to $91 billion in 2011  (slide 1), and that debt service has tripled as well, to over $6 billion a year or nearly 7% of state general fund revenues (slide 2).  The pace of this increase has caused the state's bond rating to fall to A1 (slide 5), and has added over 1 percentage point (110 basis points) to the interest California needs to pay on this interest (slide 8). 

These numbers reveal the extent of the disaster for the citizens of the state.  The increase in annual debt service during the Schwarzenegger administration of about $3 billion is about the same as what the state spends on all programs for the developmentally disabled, and what it spends on the University of California.  In other words, during the Schwarzenegger era, the state came to pay the annual costs for an entire second University of California entirely to the holders of its new public debt.

The Brown-Clinton tradition of Austerity Democrats has a history responding to "check" by taking pieces off the board.  Some members of their party are trying to head this off by painting the demand for austerity as a Republican trick:  the Republican right creates public insolvency on purpose so it can cripple government and "drown it in the bathtub," in right-wing activist Grover Norquist's famous phrase.  Progressives also point out that this is happening on the federal level with the extension of the Bush tax cuts, whose stimulus effect will be far outweighed by the nearly $1 trillion in new deficits it will create.  The same is true in Europe, particularly in bastions of Anglo-American-style financialized capitalism like Ireland and Britain, where a crisis of private debt that threatened massive bank insolvency led to simultaneous 100% bailouts of private investors and simultaneous cuts in the public sector to pay for it.  Ross McKibbin summed this up in a piece on Tory strategy in the UK by saying, "the crisis allowed the Conservatives to transform a crisis of the banks into a crisis of the welfare state."  This is precisely the crisis that Brown is inheriting in California, and it is important to point this out.

But the cure depends entirely on ending the current Hoovermania with countercyclical policies. My claim here is that we need Red Asphalt 2 - the movie that shows not what happens when you don't slow down and pay your debt, but what happens when you don't repave the roads where you might be tempted to drive too fast. There's one slide in the Brown budgetfest that gets at this.
This chart suggests that given current policy -- the continuation of Arnold Schwarz- enegger's program of borrow and cut, , the state will not get back to its 2007 employment level until 2015 - with a significant larger population. Given how young the state is, and how poor our public services are, this is a death-spiral that leads to social unrest sooner rather than later, and to the end of California as an advanced society.

This is the theme Brown needs to lead with: Rebuild or Die.
 Rebuilding - specific versions, prominently including higher education - requires spending.  Hence, and only hence, there must be spending.

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