California, you get what you pay for

Today, many newspapers are disclosing more details of the new California state budget. Doubtless, many, like myself, are wondering what this will mean in terms of reduced services, such as fire, police and library services. Will these cuts further delay or cancel maintenance or improvements? Our Willow Glen neighborhood street hasn't been maintained in nearly 50 years. Also, how much worse will our state economy suffer with 14% payroll cuts, furloughs and forthcoming layoffs? Ofcourse, the state legislature is trying to put this carnage in its best light. Conservatives tout that taxes are untouched to promote commerce and spending while liberals promise a payback of education cuts as soon as practical. But the fact is the Californian economy and its citizens will either have to suffer a lower standard of living in the coming years or finally acknowledge that we're getting what we paid for.


Despite the spin, we know the 14% pay cut to state employees, the $8.8B cut to education and the $4.4B raid of county and city coffers will raise unemployment, cut spending and reduce future tax revenue. How? State local and educational employees will get paid less, therefore pay less taxes, they’ll spend less, therefore pay less sales taxes, and the ripple effect of belt tightening will affect businesses down the line, which aside from paying less taxes, will also have to cut payroll costs. That equals job loss. Adding to the jobless numbers are the young people who can’t go to college because of increased tuition and reduced class size, not to mention those teachers who are squeezed out of jobs due to cost cutting. This shouldn't surprise anybody. The economic effects of cost cutting are well understood in “trickle down” economics.

The benefits of a conservative tax cap are a canard as well. While its anybody’s guess how they'll spend their savings, its reasonable to assume that the top 10% of Californians who hold nearly 2/3 of the state’s GDP cannot consume or operate their businesses to help pull the other 90% of Californians out of recession. Additionally, the raiding of county and local government funds to the tune of $4.4 billion amounts to around $120 "borrowed" per Californian resident. If the state takes the funds proportionate to population, San Jose could stand to lose $120M in revenues (given 100M residents). Assuming county and local governments aren’t successful defending their funds, they may have no choice but recoup their loss by increasing city and county taxes. The alternative is to cut more crucial programs beyond those already excised from their budgets. Some areas like the Silicon Valley, at 11.8% unemployment, can probably handle it, while others like most mid valley counties, are on the brink of economic collapse. Again, California, you get what you pay for.


Lastly, the cut in state government expenditures and resulting loss in future tax revenues will forestall its ability to repay the funds it raided and restore programs that it cut. This will prolong the economic downturn. This is largely a result of California’s dependence on cyclical sources of revenues, from income and sales taxes, which is at odds with its linearly growing expense obligations, such as infrastructure and education. If you consider that 1/3 of the expenditures in the $80B state budget is fixed by initiative constitutional amendments, and there’s no complementary fixed source of revenues, its easy to see how the state has gotten into this mess. It’s sad to note that through the initiative process, Californian’s continue to authorize spending for more programs but conversely legislate more cuts in state revenue. Clearly, the initiative process has given too much power to the electorate. So after the dust has settled on the greatest budget crisis in California history, nobody should be surprised or disappointed with the outcome: we're getting what we paid for.