All eyes now turn to California, where a major crisis is unfolding, threatening the national economic recovery effort. The state budget deficit became a full-blown crisis yesterday, as Arnold Schwarzenegger proposed pushing the state into a Depression by making massive and economically insane cuts to spite an electorate that has once again rejected him and his ideas:
After he announced Thursday that he would abandon plans to borrow $5.5 billion by issuing short-term revenue anticipation warrants, or RAWs, Schwarzenegger's Department of Finance presented options for additional cuts in testimony before the joint legislative budget conference committee.
Options included eliminating the Healthy Families program that provides medical, dental and vision care to needy children; eliminating the state's welfare-to-work program, CalWORKs; eliminating the Cal Grant program of college aid; eliminating general fund support for state parks; and trimming the number of inmates, rehabilitation programs and other costs of state prisons.
Those proposed cuts would be an act of madness, especially coming on top of massive layoffs of state workers. As we have discussed numerous times over at Calitics, cutting those kinds of programs would cause deeper economic crisis by forcing low-income and middle-income families to spend more money on their health care and education, and thereby spend much less on consumption. The result would be to pour pesticide on the so-called "green shoots" of recovery.
As Joseph Stiglitz and Peter Orszag explained, tax increases on the wealthy are preferable to budget cuts in a situation like this. Instead Arnold Schwarzenegger is openly proposing that California be pushed into an outright Depression. And if that happens in California, it is difficult to see how the US as a whole can avoid getting pulled down with it.
It's theoretically possible this is a negotiating ploy by Arnold - but I can't tell what the real goal is. My own view is that Arnold actually believes in this right-wing "drown government" stuff. He has been trying to apply the shock doctrine to California for some time now, and his economic policies have always been fundamentally right-wing.
There are three other factors at work here. The first is the growing evidence of the Obama Administration's total failure to grasp the severity of the situation in California - or a lack of desire to do anything about it. Treasury Secretary Tim Geithner made it clear that he doesn't care what happens to our state:
Gov. Arnold Schwarzenegger abandoned plans to seek billions in emergency loans to help close a gaping budget hole Thursday, the same day that the Obama administration said it would not provide guarantees for such transactions.
Schwarzenegger did not comment directly on U.S. Treasury Secretary Timothy Geithner's testimony before a House panel Thursday that no loan guarantees would be forthcoming absent an act of Congress.
While not the deciding factor in Schwarzenegger's decision to pull back, apparently, Geithner's disclosure could have dimmed prospects for obtaining loans by a state with a sagging credit rating and reeling economy.
This is becoming a disturbing trend with the Obama Administration on a range of issues - punt to Congress, and then refuse to actively push Congress to act (another good example is repeal of "Don't Ask, Don't Tell"). This is especially ludicrous coming from Geithner, who was quite happy to pour taxpayer money into banks but can't be moved to back economy-saving programs in California even though it would cost the Treasury nothing to do so.
The Obama Administration, by this action and its willingness to give Arnold what he wanted on eliminating the stimulus rules to screw homecare workers, shows that it is essentially clueless when it comes to the unfolding crisis here in California - a crisis at least as serious as the auto industry crisis. If California slides into Depression it seems unlikely the rest of the nation can avoid following us.
The second factor is the growing rightward tilt of the Legislative Analyst's Office under Mac Taylor. This probably deserves its own post, but Taylor's budget analysis is a fundamentally right-wing proposal that includes this rather stunning statement:
We agree with the Governor’s choice not to propose any additional tax rate increases. The Legislature, however, could still increase ongoing revenues by making targeted changes in tax expenditures and tax administration. In addition to the Governor’s fee proposals, we suggest other ways to offset General Fund costs by implementing proposals to charge users appropriate fees for government services.
While that seems a coded endorsement of the "majority vote budget", it's also a deeply right-wing approach by rejecting the sound economic advice mentioned above on increasing taxes on the wealthy. Obviously it would help if someone in the capitol were pushing those kind of taxes. Unfortunately, the LAO is still seen as a credible and independent source of budget analysis, even though under Taylor it no longer fills that role.
The final factor is the failure of Speaker Karen Bass and Senate President Darrell Steinberg, both Democrats, on the messaging front. They lost the battle for the May 19 propositions and they now appear to have lost the messaging war. Although Sen. Mark Leno claimed the Democrats were done enabling Arnold, the leadership's statements on Wednesday wound up bolstering Arnold's emerging narrative that voters demanded cuts. Bass and Steinberg ought to have made a strong case for minimizing or preventing cuts, but that either did not occur or was not successful.
The public is sick and tired of conservative policy - that's why Obama still commands high approval ratings, and why DC politicians still poll better in CA than Sacramento politicians. But the state is drifting over a cliff due to a lack of leadership against Arnold's policies. It's too late to recall him. We've already demanded his resignation. But what we really need is strong progressive leadership to stop the slide of California into another Depression.
So far, that leadership is non-existent, including from the White House.