Well over half the California electorate was ineligible to vote (or, like me, wasn’t even alive) in the June 1978 election that witnessed the passage of Proposition 13. Anyone under age 50 has never been given an opportunity to vote on its core principle of limiting property tax increases even though property taxes are one of the most effective and fair forms of revenue generation available to government.

Instead we have had 31 years of a state politics that treats Prop 13 as a sacred cow, mostly out of assumption and not reality. Most voters would like some sort of assurance that property taxes won’t force them out of their homes, but polls show that they also aren’t big on the undemocratic rule-by-minority that Prop 13 set up with its iteration of the 2/3 rule. Polls also show that voters don’t support giving businesses the same property tax protections that grandma enjoys.

In the 2002-03 budget crisis there was some talk of revisiting Prop 13, but it quickly faded. Without any leadership the issue died a quick death, as Arnold and the legislature borrowed our way out of the crisis and as the housing bubble took off.

Now, as two articles in today’s SF Chronicle note, there is increasing talk about Prop 13. But action on the matter is less clear than ever. Joe Garofoli does a good job examining the debate over Prop 13:

But this year, with California and the nation in the throes of the worst economic crisis in decades, some provisions of the 1978 measure – which curbed revenue for key state programs, particularly public education – may be open for discussion.

No changes just yet; just discussion.

One major challenge: There is no roadmap for changing Prop. 13. While the measure inspired a popular revolt against property taxes in the years after it was enacted, no other state has the same mix of property tax limits and the two-thirds majority required to pass budgets and increase taxes.

Government reform is the talk of the day, and whether you’re California Forward, the Bay Area Council, the Parsky Commission, the “joint committee to examine reforms to state government” the Legislature is likely to convene in a few weeks, or the Courage Campaign (where I am public policy director, and where we’ve been actively involved in government reform for years), you’ve realized that Prop 13 has to be part of the discussion.

One of the core aspects of the discussion is fixing the relationship between state and local governments. When then-gov. Jerry Brown and the state legislature decided to use a temporary budget surplus to bail out local governments, they set in motion a process by which counties and cities and school districts have lost most control over their own funding decisions. The 2/3 rule has made it even more difficult for localities to find their own solutions. If a community wants to support their local schools with a tax increase, it is very difficult to accomplish it.

Michael Cabantuan’s article focuses on SF City Assessor Phil Ting’s Close The Loophole effort to exempt commercial property from the Prop 13 tax protections. Polls show this “split roll” solution to be popular with voters, and it is a sensible method of restoring progressivity to the tax code.

And yet other key aspects of Prop 13 need to be in the mix as well. If we want to talk Prop 13, well, let’s really talk about it. Is it right for residential property owners to enjoy artificially low property taxes? Should a high-income property owner in Carmel or Woodside enjoy the same protections as a low-income homeowner in Soledad or East Oakland? Should we continue to build a homeowner aristocracy?

What of the effects of Prop 13 on the housing market? Since 1978 California has experienced two massive housing bubbles. The 1980s bubble, which seemed large at the time, was primarily focused on California, and caused widespread unaffordability before the 1989 crash. The 2000s bubble was a nationwide phenomenon, but Prop 13 played a role by removing a brake on housing inflation. If homeowners saw tax assessments rise in relation to their values, instead of being largely fixed at the rate at the time of purchase, it seems unlikely that we would have had the enormous and destructive boom and bust in the housing market we witnessed.

More over the flip.

Prop 13 distorts the market in several ways, as a 2005 report from the National Bureau of Economic Research noted. It creates a disincentive to sell, as those who were able to buy at a more affordable time and lock in a low tax rate hang on to their properties, locking out newer, younger, and more diverse buyers. First-time homebuyers, a key part of the market nationwide, are screwed in California, where they have had to seek the urban fringes to find affordability – or in the 2000s, seek subprime loans. The system fuels massive sprawl, unsustainable lending practices, while driving property values up to totally unreasonable and unaffordable heights here on the coast.

Prop 13 also plays a role in killing local businesses by pushing cities to seek big box stores to fill local coffers. The New York Times in offered a 2006 article on how Salinas, of all places, had become the least affordable place in the nation to buy a home:

The measure, which was supposed to facilitate home buying, has backfired to some extent; local governments prefer that land be used for retailing rather than housing because they collect more from sales taxes than from property taxes.

“Proposition 13 is a big stop sign saying ‘no housing needed,’ ” said Peter Dreier, professor of public policy at Occidental College in Los Angeles and an author of “Place Matters: Metropolitics for the 21st Century” (University Press of Kansas, 2001). “Every municipality is engaged in a bidding war for retail – they’re battling for Wal-Mart, to keep the libraries open.”

Sprawl, unaffordable housing, a foreclosure crisis, the inability to keep schools open – all these are some of the lasting impacts of Prop 13. Certainly there are others and I invite discussion of them in the comments. But if we are to talk about Prop 13, let’s have a wide-ranging and inclusive discussion about Prop 13 and the full range of its destructive impact on the state.  

Both Carla Marinucci and her friends at Calbuzz have penned very similar articles in recent days examining the causes of the state’s crisis of governance. They both picked out the same contributing factors, some of which make more sense than others as I’ll examine below.

But what is most interesting about their articles is that they stem from the same basis – that California suffers from a system that makes it difficult for centrists to wheel and deal. Perhaps it’s a reflection of their journalistic attitude, one that emphasizes personalities and back-room details over an explanation of the ideological factors that have actually driven CA politics for some time. In any case, the articles wind up leaving Californians with something less than the full picture of why our state is facing its worst crisis since Commodore Sloat came ashore to raise the flag here in Monterey in 1846.

Marinucci and Matthew Yi’s front page article in today’s SF Chronicle posits the following factors as the cause of California’s crisis:

— Partisanship: California’s gerrymandered legislative districts tend to protect incumbents and encourage more political extremes – Republicans on the right and Democrats on the left with less incentive to reach out to the political middle, much less compromise at the Capitol.

— Term limits: Proposition 140, passed in 1990, limits legislators terms to six years in the Assembly and eight in the state Senate.

— Ballot-box budgeting: Initiative-loving Californians mandated set-aside funding for all kinds of single-interest issues, from education to stem cell research.

— Prop. 13: The 1978 landmark law slashed commercial and residential property tax rates, shifting state reliance to other more volatile sources.

— The two-thirds majority rule: The Golden State is one of just three states that require a two-thirds majority vote from each legislative house to pass budgets.

And the quite similar list from Calbuzz:

Proposition 13…

Budget initiatives…

Gerrymandering…

Term limits…

Boom or bust taxation…

The two-thirds vote…

First, let’s focus on the things they got wrong, beginning with gerrymandering and partisanship. Partisanship is impossible to extricate from American politics – politics IS about partisanship and has been since Hamilton and Jefferson faced off in 1790. Specifically, Marinucci and the Calbuzzers point to gerrymandering as somehow causing what Calbuzz called “ideological polarization in Sacramento, where lawmakers have little motivation to compromise.”

This is just not the case. As Nate Silver has effectively explained Americans are increasingly choosing to live in communities filled with like-minded people. This phenomenon is especially pronounced in California, where social and political values are an important factor in individual decisions about where to live. There are few conservatives in the SF Bay Area and few liberals in the Inland Empire. It’s nearly impossible to draw districts that do not reflect this reality without gerrymandering on an even more massive scale than what has been done previously.

Their analysis also ignores what happens in the swing seats. Democrats from purple districts tend to act like moderate centrists. But Republicans from similar districts, like Tony Strickland, act like hard-right ideologues. The evidence just doesn’t suggest that ideological battles are some side effect of gerrymandering. They are a feature, not a bug, of our state’s politics and have been for over 30 years.

More over the flip, including Calbuzz’s apparent endorsement of the Parsky Commission’s tax plans.

The two articles also focused on what Calbuzz called “boom-and-bust taxation”:

Boom or bust taxation: Since Proposition 13, state government has become increasingly dependent on volatile sources of revenue – the sales, corporation and progressive personal income taxes – that generate annual shifts in tax collections corresponding closely to the business cycle.

When economic times are good, as during the dot-com and housing bubbles, money pours in and there’s little political incentive – in fact, term limits creates a perverse disincentive – for long-term financial planning.

When revenues contract, the Capitol has rarely made real spending reductions, preferring to wait for the next boom.

This is a rather deeply flawed frame. The fact is that all taxes are volatile since all taxes depend on economic activity. We have lived in a boom-and-bust economy since the early 1980s. It should be obvious that will be reflected in the state’s tax revenues. There is no tax whatsoever that is immune from this, property taxes included.

The Calbuzz analysis of this “problem” reads like an endorsement of the Parsky Commission’s plans to hit the poor and the middle class with taxes in order to allow the rich to escape their obligations. They are right that term limits creates a disincentive for long-term planning, but they also show their own ideological bias in criticizing the supposed lack of “real spending reductions” – not only have these reductions actually happened every year since 2007, but those spending reductions are extremely damaging to our state’s economy.

The two articles did note some problems that actually contribute to the mess in Sacramento, but their explanation of these problems is flawed. Take Prop 13, which Calbuzz sees not so much as a revenue problem but as a political problem:

After Proposition 13 passed, then-Gov. Jerry Brown and the Democrat-dominated Legislature realigned – “tangled” would be more accurate – the relationship between state and local governments by effectively shifting control of remaining property tax revenue to Sacramento.

In a crisis atmosphere, they radically transformed California’s political landscape, taking power and responsibility for health, welfare, schools and other local services away from city councils, boards of supervisors and school boards, thereby establishing today’s chaotic maze of overlapping jurisdiction, which defies efforts at accountability.

The loss of local control certainly didn’t help matters. But that’s not the main argument against Prop 13. Instead the problem is that it gutted the state’s ability to pay for core services. Neither the state nor local governments can use the property tax, a tool most other states are able to employ, to fund schools and roads. Prop 13 also played a central role in fueling California’s real estate bubbles in the 1980s and the 2000s – although the latter bubble was national in scope, it was most pronounced here in California where property taxes did not act as a brake on land speculation.

Marinucci’s article is a bit better on the topic, as she did mention the split-roll issue, where corporations are given the same protections as residential property owners.

Both articles also pointed to the 2/3 rule as a key factor in the crisis, and both got this one right. Marinucci’s article was the stronger of the two on the 2/3 rule, quoting a public policy prof who gets why the lack of democracy distorts the budget process:

“The problem is that neither side has been held to account,” said John Ellwood, a professor at UC Berkeley’s Goldman School of Public Policy. “Republicans are not blamed because there’s only a third of them and Democrats are not blamed because they don’t have a supermajority to pass taxes.”

If Democrats, who hold the majority in both houses of the Legislature, “keep hiking taxes, at some point the voters will just throw them out. That’s what representative government is all about,” he said.

Still, the overall effect of the articles is to suggest that the problem in Sacramento is too much partisanship and rules that get in the way of letting politicians from both parties come together to make cuts. Neither article seems to grasp the ideological nature of the present crisis, or the fact that many of these structural flaws are themselves the product of conservative ideologues who wanted to block the Democratic majority of California from building a more progressive state.

The inattention to ideology in order to preference a study of personalities and deal-cutting is a characteristic of the journalism Marinucci and the Calbuzzers practice. California’s system of governance needs to be reformed, as we have long been saying here at Calitics. But even those reforms will just be a first step, enabling progressives to finally have the chance to get Californians to embrace their vision of a better state. Focusing on the structural problems without explaining the role of 30 years of conservative policy in producing the crisis is only giving readers part of the story.

This is better than what we’ve seen before. From the SacBee:

Senate President Pro Tem Darrell Steinberg called for using much of the state’s proposed $4.5 billion budget reserve next year to save key health, welfare and college scholarship programs.

“The purpose of a rainy-day fund is to provide funds for a rainy day,” Steinberg said at a news conference. “It’s thunder and lightning in California right now.”

Specifically, Steinberg proposed using reserves as an alternative to Gov. Arnold Schwarzenegger’s proposals to eliminate the state’s CalWORKs and Healthy Families programs and to end future Cal Grant awards.

Steinberg also proposes to not raid local governments, which is a very, very good move for him – not only is it bad policy but it’s bad politics, for it could do more than any other move to undermine Democratic efforts to win new seats in 2010. Steinberg also signaled openness to repealing the corporate tax giveaways in the September 2008 and February 2009 budget deals:

To help make up the difference between the two plans, Steinberg would tap $3.5 billion to $4 billion of a proposed $4.5 billion reserve.

If bolstering the reserve fund is necessary, Steinberg suggested revoking various corporate tax breaks approved as part of past budget negotiations.

This is much weaker language than is necessary – Steinberg ought to attack the tax breaks outright. Zed Hollingsworth predictably defended those tax giveaways in the article, but he is WAY out on a limb by doing so. Nobody in this state things those tax breaks are worth making the deeper cuts needed to offset their cost, and the notion that California needs a rainy day fund in the middle of a hurricane was soundly rejected on May 19.

Steinberg and Bass also ought to be proposing other tax increases. Arnold Schwarzenegger has opened the door to an oil severance tax by his framing of the Tranquillon Ridge offshore oil project as necessary for the budget, and the Binder poll laid out other taxes, including higher income taxes on the wealthy, that the public not only supports but wants.

So while I am pleased to see better stuff coming out of the Democratic leadership, it’s not as strong as it needs to be. Democrats have to stop pre-compromising. Come out swinging with bold and progressive proposals. And if they have to move toward the middle, at least it would be a genuine middle, instead of the right-wing “middle” that has dominated the last few budget cycles.

Another day, another example of the economic senselessness that is Arnold’s budget. In this case it’s a major study from Sac State showing that state parks pay for themselves:

A team of researchers at Sacramento State University have released a new research numbers on Monday they say shows that the state parks system more than pays for itself by generating sales tax revenue.

In the face of a $24 billion budget deficit, Governor Arnold Schwarzenegger has proposed cutting all $150 million in annual general fund money to the parks system. Under the administration’s plan, 220 of the state’s 279 parks would be closed.

That would be a bad move, according to researchers at SSU’s Department of Parks, Recreation and Tourism Administration. According to survey results taken from the fall of 2007 through this February, California state parks are visited 75 million times each year.

These visitors, in turn, spend $4.3 billion in “park-related expenditures” each year. This money generates $300 million in sales tax revenue to state government. This includes $122 million in sales tax revenue each year generated by out of state visitors.

“You’ve got 80 percent of the state parks budget being picked up by non-Californians just in the generation of sales tax,” said Dr. Anthony Sheppard, a professor in the Parks and Tourism Department.

We can see this very clearly here on the Central Coast. Monterey County is full of state parks, from Moss Landing State Beach in the north to Point Lobos State Reserve and the extremely popular parks down in Big Sur. Those parks bring tourists here by at least the hundreds of thousands each year. Their tax dollars help keep local government services funded and their spending keeps small, locally owned businesses afloat. The tourist sector is a major source of employment. And this is true across the state, from Humboldt County to San Diego County and including the Central Valley as well.

The Sac State study also found that the state park system gets some of the highest marks from the public for any government agency, and that recent gas price spikes have led to an increase in visits to state parks, at high levels which have been sustained well into 2009.

The state parks cut is yet another sign that there is no logic whatsoever at work here motivating these cuts, unless it is Arnold’s desire to use the crisis as a shock doctrine moment to destroy government services that work and that keep our economy humming. Whether it’s parks, Cal Grants, funding to AIDS patients, or any other major program cut, the cuts are being proposed for their own sake, and not out of anything remotely resembling fiscal responsibility or economic common sense.

How will budget cuts help promote economic growth?

It’s a question that I rarely ever see asked, and one that is never answered, certainly not in a state where the conventional wisdom is that revenue increases are impossible, even though we’ve never tried to make them happen. Instead the supposed “political reality” of no new taxes is trumping the economic reality that taxes are preferable to spending cuts in a recession. The result is that spending cuts are treated as inevitable even though they are a sure path to Depression.

Yesterday’s LA Times had a remarkable editorial calling for no delay or hesitation in making the cuts. But the only time they made mention of the economic impact of the cuts was when they argued against permanent revenue solutions:

Be smart about new taxes. Reject, for the current year, broad-based sales and income tax increases as damaging to the recession economy and as politically infeasible, but move forward on carefully targeted temporary taxes, specifically on tobacco, alcohol and snack foods, to prevent cuts in particular health and human services (but not necessarily agencies).

And yet this ignores the evidence gathered by Peter Orszag and Joseph Stiglitz which showed that income tax increases were actually better for the economy than spending cuts.

Had the opinion page editors read George Skelton’s column that ran in the same edition, they might have understood how that abstract point works out in practice:

Faced with what he calculates to be a potential $24-billion budget deficit in the fiscal year starting July 1, Gov. Arnold Schwarzenegger has proposed cutting state supplemental payments for the elderly and disabled down to the minimum allowed by federal law. It would be their third cut this year.

The Legislature already has approved a $20 monthly cut beginning July 1, lowering the grant for single people to $850. That’s it: No food stamps, and that includes any Social Security.

This was the cut Jean had read about. But the governor also is seeking another $20 trim starting in September, reducing the benefit to $830.

The rent for her one-bedroom condo is $850.

What Jean’s story shows is the ripple effect of safety net spending. I’ve heard it said that Cal-WORKS, for example, is de facto one of the most important rent subsidy programs in the state. When the state cuts aid to the needy, they have to make up the difference out of their own pocket. That means they have to cut back on other spending, which means more foreclosures, more rental vacancies, less consumer spending, less tax revenue, fewer jobs, and more business failures.

Nobody in Sacramento has explained to the people how these cuts will help produce economic recovery. They ought to, and we should demand that we get such an explanation before any legislator votes for a single cut. I want an answer to the $24 billion question. Who in Sacramento will give it?

If the votes aren’t there for taxes and if the votes aren’t there for Arnold’s cuts, then what are there votes for? That’s the key question in Sacramento right now, and the answers we’re getting from inside the Capitol aren’t encouraging. From Matier and Ross:

Budget bailout: The latest plan being floated by state Senate Democratic leader Darrell Steinberg of Sacramento to solve the state’s $24.3 billion budget problem goes something like this:

— Make $19 billion in cuts. [Steinberg’s people claim this is a misquote – see note just below this blockquote about this statement.]

— Tap into $4.5 billion of reserve money.

— And “borrow” a couple of billion from local government.

Steinberg says the cuts will be deep and painful, but that the state will be able to survive without completely gutting education and health care for the poor.

And therein lies the irony.

“It’s a double bind,” said state Sen. Mark Leno, D-San Francisco. “We do our best to minimize the pain, and then everyone just thinks we were crying wolf.”

Shorter Darrell Steinberg: “We’re going to have a cuts-only budget.”

Note from Robert: Steinberg’s communications director Jim Evans chimed in down in the comments to say Steinberg was misquoted by Matier and Ross:

Hi all, Actually my boss was misquoted by the fine people of the Chronicle on this one. He told KCBS’s “In Depth” (where Matier got his info) we will do $19 Billion in “SOLUTIONS.”  That is different than $19 B in cuts.  For reference, the Gov’s framework is about 60% cuts.

Back to your originally scheduled post.

The problem is that nobody will see this as “minimizing the pain” – instead everyone will think, with good reason, that Democrats cannot be counted on to defend the people who voted for them. While the 2010 governor’s race will probably see some higher turnout, there is going to be a big dropoff downticket. Dems aren’t giving people an incentive to vote for them, even though it’s highly likely that the Dem budget strategy is being driven by electoral considerations (i.e. how to position themselves to win the purple seats).

Part of the problem is that Democrats are taking the “no votes for taxes” at face value. Instead of putting in the work to find those votes – votes that the Binder poll shows would be popular with voters and therefore should not actually be all that difficult to produce – Democrats are shutting out those voices demanding new revenues, particularly those from unions that led the fight against the flawed May 19 propositions:

For example, there are pledge forms being passed around to lawmakers by a major labor union that might have attracted takers in budget battles past. The union, the American Federation of State, County and Municipal Employees, wants the legislators to sign statements of support for up to $44 billion in new or higher taxes on the wealthy, oil companies, tobacco and other industries, products and people.

But so far the drive hasn’t produced a single signed form, even from the Democrats who normally march into California’s budget fights in lock-step with organized labor.

What explains this, as Shane Goldmacher and Evan Halper explain in a devastatingly accurate analysis, is that Dems have embraced Governor Hoover’s shock doctrine:

But even some of the most liberal Democrats say some union leaders are ignoring the reality of an angry public, a sour economy and a state government approaching insolvency. Moreover, more taxes would require Republican support in the Legislature, and the minority party has made clear that there will be none…

The Democratic leadership has largely accepted the governor’s framing of the budget crisis as one requiring deep cuts, quickly. Any taxes they may push for are expected to be limited.

“Of course there are going to be cuts,” said Senate leader Darrell Steinberg (D-Sacramento). “This is the worst drop in revenue since the 1930s. We’re going to try to be as surgical as we can in making very difficult decisions, but we will make the decisions.”

Sen. Gloria Romero (D-Los Angeles), a veteran lawmaker and former caucus leader, said, “When someone tells us ‘No new cuts,’ I say, ‘Look, don’t tell me that.’. . . . There is the sense that we must do what we must do to keep California solvent.”

I suppose in this case “surgical” is meant as a metaphor for outright amputation of limbs.

Totally missing in this discussion is any examination of the economic consequences of the cuts. Instead what we’re seeing is a movement toward a mostly-cuts budget with some raiding of other funds to enable Democrats to say they preserved programs – even if they accede to an evisceration of those programs through 50% cuts. To hear elected Democrats tell it, the real battle will be to find votes for fee increases, which could offset more of the cuts but would certainly fail to close the entire gap.

Instead we ought to be seeing Democrats using the proposed cuts to aggressively assert a totally different message on the budget – that we are in this crisis because of tax cuts and tax giveaways to the wealthy and to corporations. That doesn’t seem to be on the table in either the Assembly or the Senate.

What all of the above suggests to me is that Sacramento Democrats are essentially clueless in how to deal with the budget fight, and have been for many years now. No wonder the unions are fed up and planning to take their cause directly to the voters. Sacramento has failed us. Time to take our state back.

We keep hearing from wingnuts and their online apologists that California’s budget crisis is the product of overspending and waste and those people who dare earn a living working for the state. We’ve tracked pretty well the role of our broken state government in producing the crisis as well.

But it’s worth remembering that the #1 cause of the budget mess is the severe recession – as we can see in other states:

The carnage in state budgets is getting worse, a report said Thursday, with places like Arizona being hurt by falling revenue on multiple fronts, like personal income and sales taxes. Other states are having mixed experiences, with some tax categories stable, or even rising, even as others fall off the map….

Hardest hit on the income tax collection front was New York, where revenues were off 48.9 percent compared with the last fiscal year. Corporate income taxes plummeted most in Oregon, down 44 percent, while sales taxes fell most in Washington, down 14.1 percent….

A report issued by the group in April said that spending increases related to the recession, from more people seeking state services, were compounding the impact of a decline in tax revenue. Sixteen states were facing higher-than-anticipated costs for health care, seven were spending more on public safety and four were seeing cost overruns on programs for the poor like food stamps.

Worse is yet to come. The total collective budget gap that the states will have to resolve in the fiscal year that starts, in most states, next month, is $121 billion, compared with 102.4 billion for the year approaching its end, the report said.

It didn’t help matters when Senate Democrats gutted the stimulus and took the all-important state stabilization funds out. It doesn’t help that the California backstop has been framed as a bailout, making the whole notion of federal aid to the states somewhat toxic.

But if the Democrats here in DC (where I’ve been for the week) think that there’s going to be an economic recovery without solving the budget crisis in ALL 50 states, they’re out of their minds. As Paul Krugman predicted, 50 Herbert Hoovers are succeeding in deepening the recession. We know that Obama prefers the path of least resistance, but here he needs to show some bold leadership and help rescue the states.

A few months ago several netroots activists, including most of the Calitics Editorial Board and several Courage Campaign staffers (myself included) had the opportunity to speak to members of the California Forward board about their reform strategy. In that conversation we made it quite clear that their refusal to countenance a repeal of the 2/3 rule was an obstacle to their effectiveness as a reform organization, and encouraged them to support majority rule.

I don’t know if that conversation alone got them thinking they need to change or whether they decided to accept reality and admit that the 2/3 rule has broken the legislature and the budget, but yesterday CA Forward decided to embrace majority rule:

California Forward, the good government group backed by the state’s most muscular civic foundations, decided Wednesday – at least tentatively – to stand up and play a role in reforming California.

The goo-goos’ leadership council agreed to support scrapping the two-thirds legislative vote now required to approve the budget in favor of a majority vote, according to leakage through the Victorian windows in the Drawing Room of the Sterling Hotel, where the group was meeting in Sacramento to hash out an action item agenda.

Endorsement of a majority budget vote would be part of a package of reforms that includes two-year budgeting, performance management measures, a sunset review of government codes, a rainy-day fund and a “pay-go” requirement that new legislation must identify funds or cuts, Calbuzz also learned. (Until the whole group agrees with the leadership council’s proposals, support for any of this remains provisional.)

That last paragraph is an important qualifier here – CA Forward is still trying to appease the right with stupid and backward policy reforms designed to break government for ideological gain (we already have a rainy-day fund, and the “sunset review” is a waste of money and resources). But it is good to see that the reform organization with the most money is now willing to play in the mainstream of the movement to fix the state.

Of the numerous disturbing and troubling aspects of Arnold Schwarzenegger’s insane “let’s destroy the safety net!” proposal is how the need to cut has become conventional wisdom in Sacramento. So says Darrell Steinberg:

Democrats realize they will have to agree to “painful” cuts and have vowed to comb through programs to find waste and inefficiencies, said Senate President Pro Tem Darrell Steinberg, D-Sacramento.

“But we must continue to find a way to invest in health care for children, invest in college opportunities and scholarships for young people, to continue to invest in helping people from assistance to work,” Steinberg said. “So, we need to be surgical in the way we go about in cutting, and cut we will.” [emphasis mine]

Actually, Senator Steinberg, what you will be doing is ensuring California suffers a prolonged and deep Depression.

Cutting the safety net is an act of economic suicide. Given the reasons for the current downturn, cutting away the safety net will merely reinforce the recession and ensure that California experiences no near-term economic recovery. California’s 121 Herbert Hoovers will drive the state into Depression the way Hoover himself did in 1930-31 by insisting on massive cuts to government spending.

Here’s how it works. As Edward Harrison explained at Naked Capitalism yesterday the US economy likely faces a “balance sheet recession” caused by a massive increase in saving as people seek to purge debt:

Richard Koo goes further in his book “The Holy Grail of Macro Economics.”  Here, he argues that the unwind of great bubbles suffers from what he labels a ‘balance sheet recession.’  In essence, companies go from maximizing profits, as they had done in normal times, to a post-bubble concern of reducing debt. Regardless of how much priming of the pump monetary authorities do, the psychology of debt reduction will limit the effectiveness of monetary policy as a policy tool.

In my view, the catalyst for this change of psychology is the ‘debt revulsion’ that ushers in the panic phase of an asset bubble collapse…. the household sector has gotten religion about debt reduction as the savings rate has increased dramatically since Lehman. In fact, I would argue that companies learned their lesson about debt from the aftermath of the tech bubble.  It is the household sector in the U.S. (and the U.K.) which is heavily indebted. Therefore, if the psychology of a balance sheet recession does take form, it will be the household sector leading the charge.

In sum, the psychology after a major bubble is very different than the psychology before its collapse.  The post-bubble emphasis becomes debt reduction and savings, making monetary policy ineffective, not because financial institutions are unwilling lenders but because companies and individuals are unwilling borrowers. These are forces to be reckoned with for some to come.

And sure enough, the saving rate is still on the increase as Americans, and Californians in particular, stop spending and use their incomes to pay down debt and put money in the bank for a rainy day.

It’s that phenomenon which is acting like a scythe across the economic landscape. Nobody spends, so companies aren’t making money. Unless consumers feel capable of spending again, there will be no economic recovery.

What Harrison doesn’t examine is the importance of the safety net. If people feel confident that their basic needs – housing, food, health care – can be met if they lose their job, then the mania to save, save, save would be eased. However, if they do not feel confident that the safety net is there, they will save every penny they can, reasoning that they’ll need it to live.

I know that’s true for me. I use one of my two monthly paychecks to pay bills, and the other goes straight into the savings account. I’d be a fool not to. As California is poised to eliminate its safety net, it would be irrational and reckless to not hoard every dollar that came in.

That’s why Arnold’s budget cuts are so economically stupid. They will reinforce the trend toward saving and ensure that we do not have an economic recovery.

There is one other pernicious aspect of Arnold’s cuts. In some ways we can see the health care cuts in particular as a bailout of the private insurers. By ending state aid for children’s health care – even though Arnold gives up 3 times as much federal money as CA would save – and ending other key health care services, Arnold will force families that need treatments to send money out of their own pocket to private corporations. That will help enrich a few wealthy executives, but it will do absolutely nothing to improve the balance sheets of already strapped households, and will merely reinforce the “save at any cost” attitude.

Other aspects of Arnold’s budget are economically ruinous – the negative impact of park closures on tourist-dependent towns, the negative impact of mass state worker layoffs to the entire Sacramento region, the negative impact of mass teacher layoffs, etc.

If Arnold and the Democrats wanted to ensure California experienced a prolonged Depression, they could do no better than to follow the policies they have so far supported. Just as Keynes identified the future Great Depression in the flawed and punitive Treaty of Versailles, so to can we identify unending misery in the flawed and punitive 2009-10 budget.

Over the weekend word of a truly stunning statement from Mike Genest, Arnold’s right-wing ideologue Finance Director, circulated around the internets. We’ll quote the report from our friends at Calbuzz:

Calbuzz sat in on a conference call with state Finance Director Mike Genest on Friday, in which he detailed the latest $3 billion of cuts Governor Arnold is proposing to close the Deficit That Ate Sacramento…

The most salient, big picture point, however, came in Genest’s clear and direct response to a great question by Judy Lin of the AP, who asked why it was that all the pain of budget cuts seems to fall on the poor. Said Genest:

“If you look at what the government does, the government doesn’t provide services to rich people. We don’t provide many services even to the middle class…”

This is one of the biggest lies that has ever been told in American politics. The notion that government services only go to the poor is complete bullshit, as is the implicit notion that the rich derive no benefits, direct or indirect, from state fiscal policy. Genest is arguing against the very concept of a safety net – to him, a recession is a time to take away supports for the jobless, a time to instead force them to fend for themselves by spending more money they don’t have.

Let us count the ways Mike Genest is a liar:

The Middle Class receives:

• Unemployment insurance

• Public education – including subsidized higher ed and Cal Grants (I wouldn’t have gone to UC Berkeley without it!)

• State-provided health care assistance (yeah, many middle-class folks are themselves on, or have family members who depend upon, things like dialysis, AIDS drugs, IHSS, etc)

• Food stamps and Cal-WORKS (yeah, the recession is so severe that many formerly middle-class households are using these services to get by)

• Cal Fire, the Highway Patrol, etc

• California State Parks – not just for recreation, but for income. Many middle-class families derive income from tourists visiting nearby parks, as many employees and small business owners in my Monterey neighborhood can attest

• Freeways, commuter trains, buses (although the state isn’t supporting them any more!), which subsidize a middle-class suburban lifestyle

I’m sure there are others. But let’s move on to the highest incomes.

The wealthy receive:

• All of the above

• Income based on the economic activity enabled by the above (without the safety net, folks won’t spend, and the incomes of the rich will plummet)

• Over $12 billion in tax giveaways since 1993

• The benefits of Prop 13, ensuring that their property taxes are artificially low, especially if they own or derive income from commercial property.

That’s just a very brief listing; we could spend hours tallying the ways the middle- and upper-classes derive major benefits from state programs. It’s stunning that we even have to explain that obvious point to Genest or to Calitics readers. But then it’s par for the course from a right-wing that is convinced Hoover was right, and that the New Deal was both unnecessary and harmful to the country, all evidence to the contrary be damned.

Combined with Susan Kennedy’s explicit call for a regressive tax system, Genest’s misleading interpretation of the role of the state in economic growth and prosperity is part of a rather surprisingly explicit move to use the budget crisis as a shock doctrine moment to destroy the middle-class, further immiserate the poor, and turn California into a paradise for the rich that would make Ayn Rand envious.

It’s worth briefly reminding ourselves of how Naomi Klein defined the shock doctrine:

The shock doctrine, like all doctrines, is a philosophy of power. It’s a philosophy about how to achieve your political and economic goals. And this is a philosophy that holds that the best way, the best time, to push through radical free-market ideas is in the aftermath of a major shock. Now, that shock could be an economic meltdown. It could be a natural disaster.

And we are seeing that emerge here in California. Arnold has created a budget crisis that gives him the opportunity to demand implementation of a right-wing economic agenda. He makes it seem as if there is no alternative – “well of course we have to cut social services!” and has the opposition party on board as Democratic leaders still refuse to propose tax increases on the wealthy to preserve these vital programs.

The Schwarzenegger Administration is planning to use this crisis to destroy the middle class and the poor and further enrich the wealthy. The California Dream, the archetype of the postwar American economic model, is about to become a California Nightmare, as those who are not lucky enough to possess wealth will find they have no ability to achieve economic security, educational advancement, or enjoy the kind of safety net that for nearly 80 years Americans have known is necessary to the functioning of a modern economy.

It is time for California’s Democratic legislators to loudly and consistently reject this. They must vow to oppose Arnold’s plans, and refuse to be shock doctrined into carrying out an insane right-wing agenda that will destroy our state.