Pledging Bankruptcy

Here’s the basic fact facing the candidates in the recall election:

If California does not raise taxes significantly this year, it will go bankrupt, this year. There literally won’t be money in the state treasury to pay current bills.

The pseudo-budget passed by the legislature and signed by the governor includes several assumptions contrary to fact. In particular, it assumes a 10% cut in the state payroll, but we’re now two months in to the fiscal year and no one has been laid off or had his pay cut. Every passing month means that the cut, when and if it happens, will have to be that much bigger in order to get to the 10% target for the whole year. And for the part of the state workforce under union contracts, pay cuts will require negotiations: a process that hasn’t started and for which success can’t be assured.

The budget also assumes cash from bond sales that may or not be legal, and which are now being challenged in court. So the wheels could actually fall off even sooner. [*]

Most of the state budget goes to expenditures that are mandated either by the state constitution and various initiatives (in particular, Prop. 98 protects state funding for local education) or under federal programs, some of which have funding formulas that will cut $1 in federal payments to the state for every $1 the state cuts back its spending.

[My UCLA colleague Dan Mitchell provides the details:

Dan Mitchell on the California Budget.doc ]

Only Peter Ueberroth and Cruz Bustamante, among the four serious Round II candidates, have acknowledged this simple reality: Bustamante more forthrightly than Ueberroth. McClintock took “the pledge” years ago, and Schwarzenegger is hedging only by saying that he might have to raises taxes in the face of a major natural disaster: after backing and filling a little, he has now taken taxes off the table in considering how to handle the deficit. He has also pledged, as has McClintock, to eliminate the car tax, and has also promised no cuts in education, which makes up a little more than half of the budget.

(As this story from Fox News [*] demonstrates, that’s not good enough for the true-believing tax-haters, including bankruptcy advocate Grover Norquist. They want an absolute and unconditional read-my-lips pledge.)

So if Schwarzenegger is elected and keeps his word, the state will go broke. It’s possible for the state to function in bankruptcy, as New York City did. But not paying one’s bills when they come due is disgraceful and dishonest, and that’s just as true of a state as it is of an individual.

This is one of the many cases where liberals’ reluctance to use moral language keeps them from taking advantage of the voters’ strong instinct for basic decency. If I were running the Bustamante campaign, my slogan would be “Decent people pay their bills.”

Update Dan Walters of the Sacramento Bee [*]is even gloomier than I am, pointing out that none of the candidates has even started to address the political reality that the legislature seems unprepared for either tax hikes or spending cuts.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: