California NightmareWondering about the economics behind California's recall circus? And the national significance? Read yesterday's Paul Krugman.
California's slide into irresponsibility, in which politicians refuse to acknowledge any connection between the government services the public demands and the taxes that pay for those services, is being replicated all across America.Krugman points out that it was initiatives that got California into this mess: Proposition 13, which cut property taxes, and later, Proposition 98, which mandated that the state replace educational funding cut due to Prop 13. So now
the state faces a huge deficit, and spending must be cut. But shouldn't the state also seek more revenue? During California's last crisis, Governor Wilson increased the sales tax and temporarily raised income taxes on top brackets. This time Governor Davis proposed doing more or less the same thing — but Senate Republicans refused to go along. Their counterproposal relied entirely on spending cuts — but, tellingly, offered no specifics about what, exactly, should be cut.And the federal implications?
Outside the Social Security system, the federal government is now running a deficit equal to a third of its spending — worse than California. The administration says it will never, ever contemplate increasing taxes; it says it will narrow the deficit through spending restraint, but has never said what spending it intends to restrain.
If the federal government isn't in crisis, that's only because — unlike state governments — it isn't obliged to balance its budget each year. And so far bond markets have been willing to give the feds the benefit of the doubt.
But the people now running the country are every bit as irresponsible as those blocking a serious response to California's crisis. And sooner or later that irresponsibility will have the usual consequences. California, here we come.