Dan Walters had a funny column a few days back, excoriating anyone who use “numbers” and “projections” to theorize about the impacts of budget cuts.  As if it’s some kind of novel idea that an economy dominated by government spending would rise or fall based on the amount of that spending.  Mr. Walters, 1937 called and wants a word with you.

Anyway, let’s look at the heart of Walters’ complaint.  First he says that we must have a hefty budget reserve because the economy is likely to go south, and because it will signal to bankers that “we’re solvent so they’ll buy our short-term notes.”  As I noted earlier, this is nonsense given the clear Constitutional duty to repay debt before practically everything else.  Then he says this:

Democrats and Republicans are equally guilty, meanwhile, of emitting self-important nonsense about the impacts of their actions on the state’s recession-wracked economy. While Democrats claim that cutting “safety net” programs and/or public payrolls will worsen the recession by taking money out of circulation, Republicans claim that raising taxes will retard recovery by discouraging investment and/or consumer spending.

Both practice voodoo economics. The entire deficit on which they are working, $24.3 billion including Schwarzenegger’s desired reserve, is well under 2 percent of the state’s economy. The lesser cuts and taxes they are debating would merely shift relatively small amounts of money from one form of spending to another, all within the state’s economy, so the macro economic impact would probably be nil, no matter what they do.

That’s a strange opinion, especially because in the next sentence, he argued that a budget filled with gimmicks would threaten our economic future, even though such gimmickry would effect the same small amount of cash, from a macroeconomic perspective.  But to his main point – cutting spending for state services, cutting jobs, cutting salaries for public employees and their related vendors, has a multiplier effect that in fact does weaken the prospects for economic recovery.  You don’t have to take my word for it.  John Myers ran a story on this just today.

“It’s hard to see how the country recovers if California does not,” says U.S. Rep. Zoe Lofgren (D-San Jose). Lofgren says she thinks congressional authorization of loan guarantees for any state will happen. But no one thinks it’ll happen in time for California, which needs to go to market — assuming a budget deficit deal is agreed to in the state Capitol — early next month.

Lofgren says she’s particularly troubled that the national stimulus and recovery programs… which are expected to benefit California by as much as $80 billion… could be drained of their help by the cuts needed to balance the state budget. “It is contrary to the efforts that we’re making,” she says.

This is a fact neglected by Walters, the very real possibility that certain spending cuts would result in the forfeiture of stimulus funds as well as regular funding, multiplying the effect of the cuts.  Many of the programs that Schwarzenegger wants to eliminate, like Healthy Families,  CalWorks and Medi-Cal, have their funding matched by the federal government.  Clearly any dollar cut there would mean $2 in practical cuts to Californians.  And losing out on stimulus dollars could number in the tens of billions.

This UCLA Anderson Report also speaks to the impact of state spending on California and the nation at large.

According to UCLA Anderson Forecast senior economist Jerry Nickelsburg, there is nothing happening in California that will help pull the state out of recession in advance of the nation.

“California,” Nickelsburg writes, “is in for a continued rough ride for the balance of 2009 and is not going to see economic growth return until the end of the year, shortly after the U.S. economy begins to grow.”

The dire conditions surrounding the state budget will contribute to prolonging tough conditions in California, according to the report.

In his essay, Nickelsburg notes that Gov. Arnold Schwarzenegger is attempting to close the state’s $24 billion budget gap with a combination of fee increases, forced borrowing from local government, the sale of state assets and, primarily, budget cuts.

Yet that the real risk for California, Nickelsburg writes, is the possibility that there will be no budget agreement at all and that the chaotic and inefficient spending cuts that would likely follow would have an even more severe impact on the ability of California to stem the downturn in economic activity this year.

The rhetoric has risen to the extent where a prolonged stalemate, like every year given our broken governmental structure, is possible.  But clearly, Nickelsburg is demonstrating that state spending does have an impact on the economic picture at large, especially at a time when there’s 11.5% unemployment and a growing dependence on state services.

That one of the top political reporters in the state would deny this economic reality is just baffling.

I’ve seen a bit of confusion in traditional media accounts of California’s budget situation, and whether or not the state should receive a federal bailout.  This seems to go toward the idea that without federal aid, California will default on its creditors and go bankrupt, and the federal government has a compelling interest in keeping that from happening.  You can argue whether or not it would actually make sense for the state to default – it certainly worked pretty well for Argentina, despite neoliberal fuming to the contrary.  And as noted by Peter Schrag in the above-linked entry, the Governor has never asked for any help of this kind, and given his status as a born-again Friedmanite, would probably reject it.  But Paul Kedrosky, who has read the relevant law, explains in a piece supporting default that California really cannot do so.

The root issue, of course, is that California is insolvent, and irritating people like S&P analysts keep noticing. The state — let’s call it Latvia by the Pacific — has a $24-billion budget gap that must be closed for it to continue operating (and I use that word advisedly). Without a clear sense of how that will happen rational creditors are going to be increasingly skittish about filling the hole. Now, does that mean California can’t sell enough bonds to backfill the gap this time? You bet it can, and it will. This is part Schwarzenegger/Lockyer Financial Theater, and partly a laughably transparent attempt to demonstrate budgetary semi-competency in hopes of a few basis-points of relief on the inevitable bond sale. That’s all.

Because California has $5.7-billion in debt servicing obligations. And while that will grow, debt occupies pride of place in California’s constitution — only education must be paid off before the next slug of cash goes to creditors. Get that? Healthcare, prisons, and other frivolities can all go to rack and ruin, but creditors must be paid, constitutionally speaking. That means, if you’re looking at this through the gimlet eyes of muni-bond ghouls, that California has something like $50-billion in budgetary space to make its $5.7-billion in payments. It’s pretty easy to calculate that California can make the payment nut, even if it has to close hospitals, release prisoners and stop patrolling the highways to do it.

Now, Kedrosky thinks this is theatrical and should not be rewarded.  I say it’s the perfect reason for California, and actually all states with this kind of constitutional arrangement, to receive those federal loan guarantees to stop gouging from Wall Street for short-term bonds.  Not only do Schwarzenegger and Lockyer know we have to pay back all out debt, so do the bondholders and the rating agencies.  It’s almost literally impossible for us to default on those bonds, short of the entire state’s residents spontaneously getting fired at once.  If those loans will obviously get paid back, the interest shouldn’t be set at payday-loan rates.  And the federal government could very easily remedy that situation, at no cost and probably at a profit, as they reaped from the loans to New York City in the 1970s.

Is it a problem that California operates at the mercy of its creditors?  In a sense.  Is there a remedy?  At the least, there’s a way to get some equitability into the process so that we aren’t blowing money on Wall Street firms who have been bailed out by those same Feds ten times over.  In addition, this kind of thing weakens the municipal bond market, and the federal government has an interest in keeping credit flowing through that.

…H/t to John Myers for tracking down the obviously dubious story about Washington rejecting California officials clamoring for a “bailout”.  Nobody was doing any such thing.  They were asking for loan guarantees, which they’ve been doing for months and months.  Horrible reporting from WaPo.  

With Juan Arambula apparently leaving the Democratic Party, a day before both chambers were scheduled to vote on the Democratic alternative budget, it’s striking how little difference this will make.  Because the legislature will not vote to enact a budget but to revise it, on everything but tax increases they need only a majority vote.  And the way that the Democrats structured their version, less than 10% of the bill include solutions requiring a 2/3 vote.   And Assembly Democrats still hold a 49-29-1 advantage even if Arambula becomes an independent.  What’s more, the leadership structured a fallback option should those oil and tobacco taxes go down, along with a couple repeals of corporate tax breaks passed in February.  Presumably they would simply shrink the budget reserve and pass the same budget, and that could also be done on a majority-vote basis – actually they could pass the oil and cigarette taxes through a majority-vote fee swap, if they really wanted to, although I reluctantly agree with this article that Democrats are probably posturing, knowing they don’t have the votes and hoping to at least fork some Republicans on “voting with Big Tobacco and Big Oil.  It’s simply good politics to do so, but that’s a small consolation to those who may see their services cut as a result.

There is a cost to passing these revisions by majority vote, however, because anything done in this fashion will take effect 90 days out, while a 2/3 vote for any revision would take effect immediately.  Obviously, with a 90-day lag the savings will not be as robust on the cuts, requiring yet another go-round of this at the end of the year, which was probably inevitable anyway given the lack of revenue filling state coffers.  And of course, that will be on the heads of those Republicans who don’t vote for these solutions, those “fiscally responsible” types who will cost the state money by failing to fast-track these revisions.  Let’s hope, beyond hope, that actually reaches the headlines.

The point to all this is that the Democrats’ budget will provide a significant amount of pain, which is why they don’t have to put up too much of a fight to get it passed.  The side-by-side comparison of the two budgets shows pretty clearly that Democrats accepted a substantial amount of the cuts, and also some of the gimmicks that the Governor had in his plan.  They added a couple tax increases but not the broad restructuring of government necessary to protect the most vulnerable.  They repealed a couple corporate tax breaks for CEOs but not as many as they could have.  If you’re going to engage in what George Skelton calls Kabuki theater, since you’re delivered a fallback plan, don’t compromise the Kabuki and instead create the real vision for the state that you desire, something that the grassroots, just getting their feet wet in this fight, can rally behind.  Or maybe, the Democratic caucus DID, a somewhat terrifying thought.

Here’s an article showing kind of a silly trumped-up sanctimony on behalf of the Yacht Party.

California voters said no, but Democratic lawmakers are pushing to do it anyhow.

The issue involves billions of dollars and a ballot measure so important to schools that the California Teachers Association spent more than $7 million in a failed attempt to pass Proposition 1B.

One month after the initiative died, Democrats are proposing to pay schools the same $7.9 billion that was the heart of the measure and to begin payments the same year, 2011-2012.

The funding commitment is part of a massive budget-balancing plan crafted by a joint legislative conference committee and scheduled to be voted upon this week by the Senate and Assembly.

Sen. Mimi Walters, R-Laguna Niguel, said the proposal to commit $7.9 billion to schools directly contradicts the people’s will.

“The voters have spoken and we need to listen,” Walters said. “Unfortunately, the majority party in Sacramento isn’t listening.”

Would that the Republicans always listen precisely to what the voters want – say, when they put 63% majorities into both houses of the Leigslature, for example.  The Republican Governor has asked for a $4.5 billion reserve at a time of economic crisis, when voters “rejected” a rainy-day fund in Prop. 1A.  You can argue the economics of a reserve fund that large on the basis that the economy still has some rough patches, but you can just as easily argue that the Governor is somehow upending the voter’s will.

The SacBee does offer the contextual reality of the Democrats’ effort here.  Before the May 19 special election, the California Federation of Teachers and associated groups sued the state for that $7.9 billion, which they feel is owed to them.  The dispute comes over how mandatory Prop. 98 funding gets calculated, and the CFT feels they have a solid argument that they actually deserved more money under the law than the state provided.  You can say that you don’t like mandates in funding generally, but the courts will eventually decide this dispute regardless of what the legislature does.  And Democrats can see the possibility – some would say probability – of CFT being able to win that lawsuit and receive payment immediately, rather than two years out (although “immediately” would probably not happen for a year or so, until the case worked its way through the courts).

Prop. 1B was essentially an attempted out-of-court settlement.  That having failed, the participants are going to court.  Incidentally, every subsequent budget cut adds to the money owed to schools under Prop. 98, which has ballooned to around $11 billion.  So the options are: either set up a future payment schedule, hope the courts rule in a way that would break with precedent, or dismantle Prop. 98 (which wouldn’t get the state off the hook for funds owed).  So when Mimi Walters argues that “the people have spoken,” she’s saying that they’ve spoken on cutting school funding to dead-last in the nation, all the while not answering the still-thorny problem of a current lawsuit.

Someone should tell her constituents that.

You may know that health care reform is in a fair bit of trouble.  The defenders of the status quo in Washington, often a bipartisan lot, want to deny consumers choice, force them into a market monopolized by private insurance companies who have shown through their actions over the past several decades that they are concerned about profit and not people, and scream that we cannot afford giving all our citizens high-quality and affordable health care, while spending trillions on banks and military weapons.  It’s the tragedy of the bipartisan elite consensus that currently rules the roost, and not even the greatest economic crisis since the Depression has so far been able to dislodge it.

The bipartisan elite consensus that governs this country is quite simple. First, deficits and high taxes are always the basic cause of economic stress or the biggest threat facing a recovery, no matter the circumstances. (The corollary is that cutting taxes and spending are the ultimate answer to every economic challenge.) Taxes on the wealthy (excuse me “the most productive”) must be kept as low as possible, the military cannot be subject to any budgetary constraint and the national security state cannot be held accountable, business and industry must always be given top priority and all other government expenditures are legislative bargaining chips regardless of their impact on the lives of average Americans. Nobody questions that consensus or even suggests that some other set of priorities might be useful from time to time.

This consensus flies in the face of known public preferences, both in this state and around the country, for a full overhaul of the broken health care system that turns lives into data points on a balance sheet.

The health policy survey of 1,207 registered voters showed that 88 percent of Democrats, 73 percent of nonpartisans and 55 percent of Republicans agree that the health care system either needs significant restructuring or should be completely rebuilt.

“There is bipartisan agreement that the health system needs some fundamental changes, and there is greater impatience that this should be done now,” said Mark DiCamillo, director of the California Field Poll.

The poll, funded through a grant by the California Wellness Council, comes as President Barack Obama is calling for overhauling the health care system.

His insistence on a government program to compete with private insurers is infuriating some conservatives, who fear such a plan would drive insurance companies out of business. It is also drawing scorn from some liberals who want a single-payer, government-run program.

But 85 percent of respondents to the Field Poll said they support the general concept of allowing people a choice between privately run and government-run health plans.

“They’re not necessarily endorsing the public plan or saying that they would choose it,” DiCamillo said. “They just like having alternatives. The introduction of a public plan is supported because it would provide greater choices.”

You cannot get Americans to agree with 85% consensus on whether the sky is blue.  But this they understand: the system is broken, the pharmaceuticals and the insurers and the HMOs cannot be trusted, and choice to force them – through could old market economics – to compete on price and quality is deeply desirable.  Later in the poll, Field finds differences on how to pay for reform, an outgrowth of the Two Santa Claus Theory.  But giving people a policy they can support will certainly allow them to swallow the mechanisms for paying for it.

So at this point we need to ask our legislators if they support what 85% of Californians support – a robust public option to compete with private insurance in the health care system.  Frankly this is the very least we should have, but without it, we cannot call anything coming from Washington real reform.  Open Left and DFA have created a whip tool.  Simply put, we need to email our Senators – and the Senate is where health care will be won or lost – to answer four specific questions about whether or not they support the public option:

Write a short note in your own words on why you support a public healthcare option:

A public healthcare option is crucial to controlling costs, the heart of the healthcare crisis.

A public healthcare option will keep private insurance honest.

Then ask your Senators these four questions:

Do you support a public healthcare option as part of reform?

Do you support a public healthcare option that is ready on day one?

Do you support a public healthcare option that is national, available everywhere, and accountable to our government?

Do you support a public healthcare option that has the clout to establish rates with providers and big drug companies?

Conclude by reminding your Senators that you are a constituent, and you expect answers to these questions in writing, via email.

Right now health care reform is reeling.  We need this whip count to know where everyone stands and put pressure on our lawmakers to adopt the position of 85% of the public.  Please take action today.  You can see where Sens. Boxer and Feinstein stand here.  This is the most important domestic policy of this generation, and we cannot wait another year to get it right.

I mentioned in passing that I didn’t particularly like the Democrats’ budget counter-proposal.  Let me go into some detail on that.  

The Democratic budget provides a $3.8 billion dollar reserve.  I recognize that, with state personal income tax revenues falling off the cliff (though by more in several states – man, Arizona’s getting crushed – than here), that $3.8 billion will probably need to be used down the road, when this budget projection fails to match reality.  But we’re on fire right now, and using more of that reserve in this package would eliminate cuts that will probably contribute to more of an economic slowdown and bigger deficits down the road.

Of course, the reserve is so big because that’s clearly the back-up plan for the legislature in case the $2 billion in taxes on oil severance and cigarette companies, so they can pay for their externalities, fail.  I guess the problem is that those tax increases are only $2 billion dollars, and only around the margins instead of actually moving to a more progressive tax structure.  However, there are of course short-term exigencies here – e.g. the 2/3 rule.  But I’m assuming that putting the oil and cigarette taxes up is designed to provide fodder for future campaign ads – “X voted against kids and for Big Oil and Big Tobacco.”  Well, why wouldn’t you HEIGHTEN those contradictions, then?  There are plenty of other options – a nickel a drink alcohol tax, adding tax brackets between $47,500 and $1 million, etc. – that could be put into a model budget.  Why not create the budget you WANT instead of the one you have to have, at least at first?

Finally, the budget sets aside the $2.5 billion dollar annual tax breaks for the largest corporations in America, secured in the last two budget agreements in the middle of the worst economic downturn since the Great Depression.  That doesn’t come close to sharing sacrifice, and it’s really disappointing to see the Democrats shield big business on this.  Their tax hikes are so small that all of them could have been covered by repealing the tax breaks.  And a point of information – while normally repealing such tax breaks would require a 2/3 vote, because this is a modification of an existing budget and not a new budget, I’m not so sure that remains the case:

A couple of other points worth noting. First, the package of proposals is a modification of the state budget; the new fiscal year spending plan was actually enacted in February. As such, all proposals that are not a tax increase — most notably, the spending reductions — can be passed with a majority vote in each house. Trouble is, that would mean they wouldn’t take effect for 90 days… thus delaying aid to the cash-strapped state. For the cuts to kick in immediately, it will take a supermajority vote — which shifts some of the pressure over to the GOP about matching votes to their rhetoric about cuts, even if the rest of the package isn’t to their liking.

Looking for some information on whether that applies to repealing tax cuts as well, I’ll get back to you.

UPDATE: John Myers writes in to tell me that his understanding is it would take 2/3 to repeal those corporate tax credits.  I pretty much figured this, but it seems weird that you cannot cancel what was enacted in the same budget cycle with a simple majority.  In addition, treating repealing a tax cut like a tax increase and covered by Prop. 13 sounds just very wrong to me – an extension of conservative dogma that ought to be challenged in court.  But yes, that’s the most perverse part of our budget dysfunction. Hat tip to John for the info.

(As a side note, we will see what it’s like if you lowered the 2/3 threshold for the budget and not for taxes – and that is, EXACTLY THE SAME.  Taxes are part of the budget process.  Walling them off makes it just as hard to pass a budget, especially if you’re in the kind of hole that California is in.)

That the failed enterprise zone program is still funded at $500 million dollars annually is a sin.

Finally, there are very few solutions here – outside of the vehicle license fee for state parks – that incorporate the majority-vote fee increase items passed in January and vetoed by the Governor.  They have veto bait in this deal, so I don’t see why you wouldn’t add the fee increases as well, which would have savings in the billions.

Some of the solutions that the Democrats came up with are fine, some gimmicky (delaying paychecks for state workers one day from June 30 to July 1, 2010 “saves” the state $1.2 billion dollars in this budget), but some still unconscionable – basically all of the education cuts sought by the Governor remain.  There are $1 billion in Medi-Cal cuts that would need a federal waiver.  And there were options to cancel those cuts.

The Democratic leadership thinks Schwarzenegger will cave and accept this budget.  Keep in mind that, other than the $2 billion in tax increases, Republicans are somewhat irrelevant in a modification, and the fight will focus on whether that $2 billion will come from the budget reserve or additional cuts.  Republican votes are needed to put the modifications in immediately, which maximizes their savings.  So all these fiscally conservative Republicans can say now and waste the state lots of money.  Their choice.