Note: this is a cross-post from  The Realignment Project. Follow us on Facebook!

 

Introduction:

With the belated victory of Kamala Harris as Attorney General, the full results of the 2010 election are in for California. There many things that progressives can be proud of – a sweep of statewide offices, picking up another Assembly seat, defeating prop 23 and passing prop 25. On the other hand, there are also some major disappointments – the defeat of prop 19 (marijuana legalization), the defeat of prop 21 (a VLF to fund the state parks), the defeat of prop 24 (rolling back corporate tax breaks), and the passage of prop 26 (2/3rds requirement for fees). Prop 26 especially complicates what this victory means for California.

Indeed, our situation is a lot like the national picture after the 2008 elections – we have an executive who straddles the line between the left and right wings of the Democratic Party, a big legislative majority, but not the ability to break the fiscal deadlock and really be able to govern our state.

So where do we go from here?

 

Finance:

The rather comfortable million-vote margin by which prop 25 passes would make me rather optimistic about the possibility for the passage of a majority-vote revenue proposal. However the failure of every revenue increase – prop 19, 21, and 23 – are daunting evidence to the contrary. Granted that the outcome might be different in a presidential electorate (younger, more minority and working class voters, higher turnout generally), but I think this shows how difficult it will be to thread the needle of the “Program/Government Blindspot” and the prevalence of austerity thinking, even if we link taxation to spending.

In the mean time, California Democrats have a daunting task ahead of them – to balance the budget without doing any more harm to already brutalized public services, and to create the economic growth necessary to ensure that the budget stays balanced. In the short-term, there are four things we can do:

1. Going back to the Steinberg Maneuver – According to the California Budget Project, Prop 26 doesn't establish a blanket 2/3rd requirement for all fees. A number of fees, including “charges where the feepayer receives a service, product, benefit, or privilege…charges imposed for entrance, use, purchase, or lease of state or local government property, penalties, fines, or other monetary charges resulting from a
   violation of the law, charges imposed for “reasonable regulatory costs” and assessments and property-related fees,” are not covered by the 2/3rds requirement. Thus, it's still possible to raise revenue through a two-step process in which said fees are raised by a certain amount by majority vote, then taxes are raised and the fees are lowered by the same amount by a majority vote. The issue here is whether we can get Governor-elect Jerry Brown to sign such measures, given previous statements of his.
2. We can try again with Ballot Box Budgeting – there's some indication that Brown's approach will be instead to put the budget to a vote as a proposition in a special election. The tricky thing here is how to persuade the public to vote for said budget; Schwarzenegger tried this in 2009 and it was dramatically unsuccessful. Perhaps the 2010 election signals a more realist (and realistic) electorate, but it's a roll of the dice.
3. Banks – I'vewritten before about the potential that a state reserve bank offers. That was true before the 2010 election, but it's even more true now. Given the newly-created restrictions on raising revenue, a state reserve bank offers an entirely new possibility, both for resolving the current budget crisis, and for creating the economic growth necessary for California's future development.
   1. I believe that this bank would be even more likely to gain support if, within the state bank, there was created a series of Development Funds – a Green Development Fund, an Education and Innovation Development Fund, a Health Care and Medical Science Development Fund, and so on – that could make targeted investments into key sectors of California's economy, both public and private.
4. Jobs – with or without financing from a state reserve bank, a Job Insurance fund would fit under the exemption in prop 26 – since the “feepayer receives a service, product, benefit, or privilege,” namely eligibility for a job when unemployed. Ultimately, as I have said before, California cannot balance its budget with 12% unemployment because revenues will continue to decline, no matter how much spending is cut. What is needed is a sudden shock to California's labor market, and unemployment being cut in half is that shock – it will pump huge amounts of money into local retailers and other businesses, it will make employers see the ranks of the unemployed in their communities shrinking, and hopefully shift the “animal spirits” of both employers and lenders.

None of these steps is a total solution for the fundamental problem of revenues – given the problems we had with the budget even before the recession. But they will fill the gap so that we can debate the question of majority-vote revenues in an economic climate of balanced budgets, normal levels of unemployment, and higher economic growth.

Green Economy:

Now that AB32 and CEQA (California Environmental Quality Act) are safe from Prop 23, we need to do more to show the real possibilities of a green economy. This means making it fast and seamless to develop sustainability, through the creation of expedited approval and categorical permits for model projects. It also means establishing special zoning rules in transit corridors to allow for sustainable, energy-efficient, high-density development.

This doesn't mean dismantling regulations in the name of the environment, but rather shifting the direction of regulation away from NIMBY no-growth, which only encourages sprawl and wasteful development, towards in-fill building of affordable housing in already-developed areas while protecting undeveloped land. It also means – and here is where environmentalists need to reckon with the realities of class and race – getting rid of the tools of modern class (and racial) discrimination: zoning rules that limit building heights to two-stories or less, that ban unrelated individuals from living in the same house (to prevent renters and subdivision), that establish minimum lot sizes to mandate , or that mandate the construction of garages. In other words, ending exclusionary zoning and encouraging inclusionary zoning.

Finally, it means supercharging public investments into green energy, mass transit, and other sustainable ventures. A statewide version of LA's 30/10 plan, aimed at speeding up and extending High-Speed Rail and local mass transit would be a huge transformation, both in terms of creating jobs and spurring growth, but also in lowering CO2 emissions and pushing land-use away into energy-efficient high-density development. Large-scale alternative energy projects, like the Beacon Solar Energy Project, San Fransisco's tidal energy project, should be built under public auspices, making use of the newest forms of technology. The advantage to this approach is that it allows the public sector to act as a yardstick competitor to California energy companies, spurring innovation and providing a guaranteed market for green manufacturing firms under democratic auspices.

All of this links together. Without financing, there's not going to be a green revolution in California any time soon. Without new sources of economic growth that don't depend on housing bubbles, California won't get the revenue it needs. In the end, the fight over our budget is really about the future direction of this state – whether we will have a government that can help build a broad economy or a night watchman state that is powerless to prevent corporate greed from running wild.

So let's get to work.

Note: this is a cross-post from The Realignment Project.

Introduction:

In part 1 of a New Deal for California, I discussed why any effort to rebuild the state must begin with a frontal assault on high unemployment as the only reliable means of achieving budget stability – as opposed to self-defeating quests for balance via austerity. In part 2, I studied how the quest for a more perfect democracy is inextricably linked to a renewal of democratic control over the state's own revenues.

Today, I want to discuss two areas of policy that are among the largest spending categories in the California state budget, but which also represent two faces of the state, and two approaches to developing its youth, and two sets of values – namely, education and prisons.

Arnold's recent proposal to put a floor under higher education at 10% of the state budget and a ceiling over prisons at 7% of the state budget is only the most recent example of a long trend of discussing the two in the same breath. As I discussed in the linked article, Schwarzenegger's approach is fundamentally flawed, a mirage of egalitarianism masking a reality of utter callousness. A moral society cannot pay for the future of its most talented youth through the deliberate immiseration of its least advantaged.

However, a New Deal for California will have to grapple with the reality that California will either educate or incarcerate its young, and that the power to choose lies with us.

Higher Education:

In my previous posts on higher education, I've tried to get across the idea that the purpose of public higher education is to expand and improve the functioning of democracy, that higher education is a social and public good, not a private commodity, and that the way a public university is run speaks volumes about the values of the society. If there is an overarching theme here, it's that the choices a state makes on higher education both reflect and shape the nature of its society. A state where the children of the poor and the children of the rich are equally limited only by the boundaries of ambition and ability will be a society is genuinely one of equal opportunity and healthy, meritocratic competition. At the same time, states should also think of higher education as a social investment in a high-road economy, distinguished by high levels of skill and education, high wages, and high living standards.

A New Deal for California is absolutely about making that investment and choosing that high-road, but one of the things you see in public discourse about higher education in California in progressive circles is a certain fuzziness – when it's razor-sharp conviction that wins the day in politics. There's the required genuflections in the direction of the 1960 Master Plan, and perhaps even a statement about how “college should be free!” or how cheap it was to attend the U.C when they were young, but nothing about how we proceed from where we are to were we want to go.

By contrast, I think a New Deal for California had to start with a genuine commitment to a new Master Plan for California that charts a path for gradually reducing tuition to $0 for the U.Cs, CSUs, and Community Colleges over the next 20 years. We should be clear about how much this will cost: it will take about $1.7 billion a year to make the U.C tuition-free, about $2 billion a year to make the CSUs tuition-free (about $5,000 a year in tuition times 417,000 students), and about $1.78 billion a year ($614 a year times 2.9 million students) to make the Community Colleges tuition. Altogether, we're talking about $5.8 billion per year, or an extra $290 million per year.

Assemblyman Torrico's AB 656, which would establish a 10% excise tax on oil extraction to provide about $2 billion a year to higher education (a system already in place in Texas, which funds the University of Texas through an oil excise tax). That gets us about a third of the way to our goal. The rest could be assembled from a variety of revenue sources – this is not beyond the means of one of the richest states in the Union,  and one of the richest economies in the world.

One idea that has been suggested in the United Kingdom by Ed Milliband (Labour M.P, Shadow Energy and Climate Change Secretary) is to replace tuition costs with a “grad tax.” The idea would be that, instead of requiring students to pay tuition and go into debt up-front, which acts as a prohibitive burden for many working-class students and constraints the future career choices of graduates, that we instead ask graduates to pay a progressive surcharge of between “0.25% and 2% of their income over a 20-year period,” enabling graduates to contribute, according to their ability to pay, to higher education whether they work for a non-profit or a Fortune 500 company.

As I have said before, the ultimate goal that we should be thinking about is not 100% of the youth population attending university, but rather that 100% of the youth population being able to achieve whatever level of skill or training that their ability and ambition provides for. This means treating skills training- whether it comes in the form of a union apprenticeship, vocational or technical college, or a professional course in a community college – as just as important as any other form of education. It means paying more attention to helping students get employed as well as enrolled (such as is the case in the German and Japanese education systems). And it means making sure that students graduate high school able to take advantage of higher education/training.

A Word About K-12:

I'll only say a few words onK-12 education, since it's not an area of public policy that I've actually done much work on. As someone who's been a TA at the U.C for four years, I can certainly attest to the fact that California needs to do a better job at preparing students, both for college and employment, because it's quite surprising how many of the top 12.5% of high schoolers in California have real problems with constructing essays or interpreting reading.

Here's what I'll say – I believe that the “Educational Equality Project” reform community has over-emphasized college preparation, has tended to over-emphasize incentives over resources, and relies too much on an economistic model of corporate efficiency. I think primary and secondary schools should emphasize employment as well as college, and experiment with the German and Japanese model of partnering with employers to offer students additional paths for career development; in part, I think this comes from an approach to manifest class and racial inequalities that opts for individual, behavioral intervention (assuming that schools can “solve for” poverty without outside interventions on social conditions, and emphasizing college attendance without consideration for labor market conditions).

Moreover, I think reformers have under-sold the degree of resources that will be needed to correct inequalities in resources (which is why California needs to move to equalization of funding across school districts) as well as social and cultural capital. Things like increasing instruction time, providing tutoring to struggling students, and lowering class sizes are all well and good – I'd even add commitments to expand Head Start to 100% of those within 150% of poverty, and extend it, “Follow Through” style, to prevent “Head Start fade” in primary school –  but they will require a significant commitment of funds to work.

I think the rhetorical emphasis on incentives over resources comes from two sources: first, it comes from the unspoken recognition that a lot of the key policies adopted in heavily-promoted charter schools aren't costless, which raises questions about scaling. KIPP is lauded among EEP-style reformers, but a 60% longer school day/year, 24/7 teacher availability, and weekend work costs, and not just in dollar terms – 50%-plus turnover rates are common in KIPP schools. Second, it comes from what Matt Yglesias refers to as a “Green Lantern” theory about education – if teacher productivity and efficiency are what matters, then you don't have to deal with the fact that California schools are 43rd in the nation in per-pupil spending, because all you have to do is push teachers hard enough. At the end of the day though, resources are real and it is not impossible for California to commit to raising its commitment to the top 10 in the nation over a period of 10-20 years, similar to the commitment to tuition-free higher education as well.

Finally, as I've said before, I think the debate over accountability and results has become poisoned by the link between the models of accountability used by reformers and ideas about corporate efficiency, leading to a massive level of distrust among teachers and their unions. I've said it before, but it bears repeating – I'd be very interested to see how EEP reformers would react to an offer to have accountability and performance targets negotiated right into collective bargaining contracts, and put the unions in charge of and responsible for teacher quality.

Prisons:

All of this discussion of resources brings us to the piggy bank that both Schwarzenegger and I are hoping to use to improve the quality of education – California's overstuffed prison population, the second-largest in the nation. Right now, California imprisons 616/100,000 persons, and its prison population has been growing 500% over the last twenty years. This expansion has led to a growing budgetary burden, overcrowding, and a series of lawsuits over health and safety standards. No one particularly disputes that something needs to be done, but there are different ways to go about it.

Schwarzenegger's vision is to combine privatizationand outsourcing – essentially to shove our prisons off our books and avoid changing the way we deal with our offenders. This is morally unacceptable for any sane society. Private prisons are rightly notorious for corruption, abuse, and the further cutting of corners on medical care, living conditions, and safety standards. Shifting our prisons to Mexico is simply an attempt to do privatization without getting tripped up by lawsuits filed in American courts when the inevitable lawsuits alleging subhuman standards emerge. California should certainly commit to keeping prison spending below 7% of the state budget, but this is not a just way to do it.

However, there are ways to solve our prison problems. California's shift to drug courts and rehabilitation has paid dividends in the form of 10,000 fewer prisoners on drugs charges than in the 1990s, but there are still 30,000 prisoners on non-violent drugs charges who could be better dealt with outside the prison system. The bigger target is California's broken parole system – about 70% of parolees are re-incarcerated (the vast majority of cases being not new criminal violations but rather some technical violation of the terms of parole), at a rate that has increased six-fold in the last 20 years. As a result, about two-thirds of prison admissions are parolees rather than new offenders. There are better ways to handle our parolee problem than the current system of catch and release, and solving our parole problem would largely solve our overcrowding problem.

Dealing with these two factors would allow California's criminal justice system, including the police, courts, prisons, and parole systems, to focus on doing a better job with the prisoners we've got. This means more, not less, effort directed at deterring violent crime and higher rates of arrest; this means freeing up resources to separate out first-time and non-violent offenders from hard-core criminals and violent offenders, with an eye towards reducing our state's abysmally high recidivism rate. In the end, being smart about crime works better than toughness for toughness' sake.

On an ironic note, one of the few truly successful anti-recidivism strategies in the U.S has been the oft-targeted, poorly-funded college education programs. Expanding the commitment of college for all to the prisons might itself help to solve our prison problem.

Side-note – on Interdependent Parts:

In earlier segments of this series, I talked about the need for an overarching vision for California, beyond just the policy-specific pieces. To that end, it's important to see how education and prison policy fit as parts of a larger whole. For example, let's examine the impact of full employment policy and changes to democratic governance and revenue on these two areas of public policy.

To begin with, full employment would greatly increase the public revenues available for K-12 and higher education. It would also add on a crucial back-stop to our system of educational development, ensuring that U.C and CSU and CCC graduates who've received incredibly expensive training don't get thrown on to an overcrowded labor market (as is happening now) where they can't find work, leaving their training to go to waste. It also means that rather than focusing solely on college attendance as our only strategy for getting kids out of poverty that we can offer them a chance at high-wage full time employment. Prior to the unraveling of high-wage labor in the 1980s, a high school graduate who had neither interest nor aptitude for an academic career could get a job for life as a skilled, semi-skilled, or even unskilled worker and be assured of economic security and a middle-class standard of living. With full employment, there's no reason that we can't build our way to an economy that provides opportunity to those kids as well as the college-bound.

Full employment would also greatly reduce our prison burden. We know that anywhere from one-third to two-thirds of prison admissions are unemployed at the time of incarceration, that many property crimes are associated with unemployment, and that the increased difficulty of finding employment as an ex-offender is a major cause of recidivism. While certainly not a silver bullet (violent crime is not particularly correlated with employment rates), full employment can only help. (On a slightly more cynical note, one of the reasons why prison guard unions have resisted parole reform, decriminalization, and other efforts that might reduce the prison population is out of a desire to protect the jobs of their members. In a full employment economy, where workers could be assured of having a job, this political inertia could be more easily overcome).

A similar case is true for democracy and revenues. A more functional democracy, where legislators could more easily match our revenues to the level and kind of goods and services demanded by the people, is one where the kinds of commitments we want to make to both higher and primary education can be made, and where reforms to our prisons systems can be more transparently and directly debated and carried out.

Conclusion:

There are 159,000 students at the University of California. They are among the top 12.5% of our youth, the most talented, the best educated, with the greatest likelihood to succeed. There are 170,000 prisoners in the California prison system – they are disproportionately young, non-white, and less-educated. Even when they are released, they will find it more difficult to find employment, housing, and credit. To place the burden of the best prepared on the least prepared is to compound injustice with unfairness.

Introduction:

In part 1 of “A New Deal for California,” I argued that Democrats needed to put forward a stronger message about what we wanted to do, a larger vision of what Democratic government would mean for the state, beyond the immediate issue of dealing with our structural inability to pass a budget. Both for practical and political reasons, that vision should include the aggressive pursuit of full employment for all Californians.

That’s a good start, but I don’t think a New Deal can stop there, or rest on a fragmented policy-by-policy case for Democratic rule. Rather, I agree with George Lakoff that we should frame our message around the idea that California is experiencing a crisis of democracy. However, I would push further than Lakoff to argue that democracy isn’t just about majority rule – democracy means both a government that does what the people want, and a government that has the ability to do what the people want. California’s problem right now is that we don’t have either.

What Democracy Looks Like:

Democracy begins with majority rule – which is why we will need to pass the California Democracy Act, either now or later, in whole or by parts, by any means necessary. Without this, democratic government is essentially hamstrung – the people can pass regulations, but can’t pass the revenue needed to enforce them; we can declare our priorities for spending, but lack the ability to turn our preferences into policy. However, it’s worth asking, would California’s government be truly democratic if majority passed but nothing else changed?

I would argue not – our democracy is in need of structural reforms beyond majority rule, both within and without the legislature.

Inside the legislature, a number of structural faults hamper the smooth exercise of democratic government – the establishment of term limits by Proposition 140 has decimated the capacity of legislators to develop expertise and competence in particular policy areas, allowing lobbyists to “wait out” challenges to their interests by legislators who must rely on other lobbyists for expert advice; and the current practice of budget negotiations undertaken in secret by the Big Five (the governor and the majority and majority leaders from the Assembly and Senate) has led to an undemocratic and unstable process in which negotiations can be reneged on at will and in which leaders can quickly lose the support of their members. At some point, we are going to have to establish at least a partial repeal of term limits if we want a state legislature that has the competence to rule. At the same time, the budget negotiation process should be expanded to include the chairs of the Budget and Appropriations Committees from both the Assembly and the Senate as liaisons to the majority caucus to ensure that the committee process matters and that there is more buy-in from the caucuses as a whole.

At least in part, this will have to involve the establishment of a clean elections system, along the lines of Prop 15. Ultimately, I think that a straight ban on outside donations is not going to work, especially in the wake of Citizens United. What does sound more workable is a system along the lines of the Voting With Dollars proposal: small donations should be progressively matched with public funds, private donations should be done anonymously, and large donations, independent expenditures, and corporate lobbyists should be taxed to fund the public funding mechanism. While Citizens United has certainly impaired the potential for campaign finance to restrict corporate campaign spending, the possibility of using the power to tax to “even up the sides” remains an unexplored option.

Outside the legislature, our system of elections is incredibly dysfunctional. The initiative and referendum process is wide open to capture by wealthy interests and presents the public with such an array of misleading and confusion proposals that it increases voter apathy and actually reduces democratic sovereignty. To begin with, initiatives must be vetted by the state’s legislative counsel (to prevent poor drafting and other errors) and identify the source of any revenues required to be spent; and the legislature should have a chance to amend initiatives (subject to a later referendum). Next, constitutional amendments should require a 2/3rds vote to pass, as should any initiative that would establish new super-majority requirements, but all regular “legislation initiatives” should require a simple majority. To prevent voter fatigue, initiatives should be limited to the general election, proponents should be required four years to resubmit an initiative that is rejected by the electorate, and no more than ten initiatives should be on the ballot each year (the top ten qualifiers would appear on the ballot, whereas any surplus initiatives would go to the front of the queue for the following general election). Finally, to reduce the ability of wealth and power to dominate the initiative process, signature requirements should be raised, the period of signature gathering should be extended to a full year (allowing volunteer-driven efforts a level playing field), and campaign finance should be extended to initiative sponsors and opponents (with mandated disclosure of sponsorships in ads and on the ballot itself).

Finally, California’s elections system should be reformed to not merely allow, but encourage, and ensure a more fully participatory democracy. California elections law should be reformed to automatically register every resident, and to allow for same-day registration – to ensure that everyone who should be able to vote will be allowed to. The flip side of this is that, if we go to such efforts to ensure that everyone can vote, we also have to ensure that everyone will vote by establishing a holiday for both primary and general elections, and if necessary, establishing mandatory voting.

Paying for Democracy:

While we’re sizing up institutions for failure, we shouldn’t leave out one of the major problems – the California electorate itself.* California’s electorate suffers from two major problems of thinking – the so-called “Two Santas” belief that we can have high levels of government services and low taxes at the same time (while at the same time being opposed to deficits and debt), and what I call a “Government/Program Blind-spot.” This last concept  attempts to explain why voters simultaneously express a lack of trust in government and opposition to higher government spending, while at the same time showing a deep level of support for many if not most government programs and a desire for increased funding for those programs. What I believe is the case is that voters have a conceptual block that separates the abstract entity of government (where popular prejudices about waste, fraud, and abuse, overpaid bureaucrats, and the superior efficiency of corporations hold), and the specific programs that make up the government (where people really like programs that help them and that fulfill their values of a good society). In this sense, it’s not actually contradictory for teabaggers to scream “get government out of my Medicare!” – because to them, those are two separate entities.

* to be fair, California’s voters are not unique in these problems, but super-majority requirements exacerbate these tendencies. It’s also the case that California voters are at least on some level willing to pay higher taxes (or at least for the rich to pay higher taxes) for better services – it’s just that this willingness is highly fragile and depends enormously on the political context and narrative that voters faced.

What this means is that progressive Democrats in California have to redirect our rhetoric over the budget from an abstract case for balanced budgets and good government (which people support, but in the rather hazy apathetic way that people support anti-littering campaigns) to a concrete case for progressive taxation and progressive programs.  Obviously the major barrier to this is Prop 13 and the power of anti-tax and anti-statist thinking in the electorate, which is why (assuming for the moment that 2/3rds is not dealt with) we need to build up to a direct challenge to Prop 13 orthodoxy.

The first tactical step, meanwhile, is to raise revenues while acting to restore economic growth. Reversing corporate tax cuts ($2.5 billion a year) and raising excise taxes (on alcohol ($.5 billion), cigarettes ($1.2 billion a year), oil extraction ($2 billion a year), and should the legalization initiative pass, marijuana sales ($1.3 billion a year)) make for as good politics on tax increases as you are likely to get – the electorate is in a very anti-corporate mood, not very happy about drilling, and tends to prefer “sin taxes” to other forms of taxes. These changes would raise around $7.5 billion a year, or about 40% of the budget deficit.

The next, more difficult step is to retain the 1.15% Vehicle License Fee, and eventually restore it to the 2% as it was before Schwarzenegger blew a hole in the state budget, and bring that approximately $3 billion a year back into the Fund. As can be seen in the 2003 recall, the VLF is tricky politics and will not be easy to finesse. However, one giant step that could be taken to change this tax politics is to to progressivize the Vehicle License Fee. Not only would this make it a lot easier to raise future revenues, but it would also set an important precedent for future actions on property taxes.

Together, these steps would help to meet the immediate crisis, but also begin to change the larger politics of taxation. However, to move beyond the immediate defensive to the longer-term push for progressive government, we’re going to have to think strategically.

The first strategic step is to link taxation and spending – because anti-tax rhetoric only works as long as it can exploit the Government/Program Blindspot to sidestep the fact that people like government programs and tap into the latent anti-statism that gets non-rich people to vote against taxing the rich. What I advocate is that we – purely as an accounting measure – subdivide our taxes (property, income, corporate income, capital gains, sales, etc.) into specific policy taxes, and the general fund into separate policy funds. In other words, you would have a separate Health Care Tax, Education Tax, Transit Tax, Environment Tax, and so on, which feed into a Health Care Fund, Education Fund, Transit Fund, Environment Fund, etc. This change could be packaged in with a progressivization of property tax rates, sales taxes, and other flat-rate revenue sources, which further shifts the politics of taxation.

The advantage to this system is that it completely short-circuits the Government/Program Blind-spot and reorients taxation and budget politics around specifics. People might not like paying taxes, but they really like health care and education and transit, and so on, and therefore would evaluate political debates about “should we raise the Health Care tax to fund more research hospitals for children’s cancer research” or “should we raise the Education Tax to reduce class sizes” differently from “should we raise TAXES to pay for BIGGER GOVERNMENT.” It has the same effect on budget debates – cutting the General Fund budget by 10% allows people to imagine cuts falling on imaginary waste, fraud, and abuse; cutting Children and Seniors Assistance by 10% makes the human consequences of budget cuts real and immediate.

The second strategic step, as I have discussed before, is the establishment of a State Reserve Bank. A State Reserve Bank, for those unfamiliar with the concept, is the result of the state chartering a public bank, and instead of placing its reserves, tax revenues, deeds for public lands, and so forth in a variety of state banks (as most states do), it puts all of them in the public bank to act as the bank’s capital base.  The bank then acts like a reserve bank, using the power of “fractional reserve lending” (i.e, that a bank can generate much more money in loans than it keeps in its vaults, thus multiplying many times over its actual reserves, as long as it keeps back a portion to redeem deposits) to generate loans, act as a local “lender of last resort” (thus buttressing the work of the Federal Reserve and FDIC during credit crises), and (this is the key bit) allowing the State to borrow money in order to deficit spend in a recession.

Not only would the state reserve bank be important for boosting employment levels and spurring on the recovery, but it would also help with the state’s budget position. California spends about $5 billion a year in interest on its debt, in no small part because of Schwarzenegger’s use of bonds as an alternative to raising taxes in the pre-recession period, but also because California’s bond rating has been hammered by corrupt and ideologically-biased ratings agencies that have different standards for states that are effectively immortal (who have been repeatedly downgraded), than for corporations like Lehman Brothers and AIG who kept high-grade ratings even as their liabilities-to-assets ratio fell into the Marianas Trench.

The third strategic step would be to set up social welfare policy as social insurance as much as is possible. I’ve already discussed how California can set up a mass-scale jobs program as a Jobs Insurance system, both for practical reasons (social insurance creates an independent fund that would rescue programs from the 2/3rds trap) and for political reasons (social insurance creates a public acceptance of “earned rights” that makes anti-welfare politics almost impossible, and engenders broad support for universal benefits). There is no reason why California’s social welfare network could not be so reconstituted (as long as we are careful to make social insurance premiums progressive in nature): Cal-Works could be easily folded into Jobs Insurance, IHSS (in-home supportive services) and SSI/SSP (Supplemental Security Income, State Supplementary Payment) could be re-organized into a state-level Social Security analogue (again, shifting from contingent benefits to benefits secured by right); a state-level child care insurance program could similarly subsume existing child assistance programs; and so on.

When these strategic steps have been taken, then progressives can move directly on overall tax levels and Prop 13 directly, because they would have already shifted the terrain of debate so dramatically that the old politics of taxation and spending would no longer function.

Conclusion:

In the end, as Clifford Geertz suggested, politics is about telling stories. Because as progressives we tend to share a common belief in the overall goals and purposes of dynamic government, we have a tendency to speak in wonkish terms about the empiric merits of the things we care about. However important these things are in government, in elections, we have to learn to talk about a larger vision for what we want for this state.

Talking about taxes as a measure of the fairness of our society, and the budget as an expression of California’s values would be greatly aided by the policy changes suggested above. But we have to make the case publicly, and it’s not something we do often enough or well enough – one of the exceptions to this was a speech I heard a week ago when Das Williams spoke at a Jerry Brown campaign event at UCSB.

Williams talked about many of the same policies as Brown did – higher education, the environment, investments in working families – but he was able to bring them together with a call for higher revenue by talking about them as elements of a California Dream of universal opportunity, and redirecting the debate over revenue into being about paying for opportunity for all instead of for the few.

That’s the kind of politics we need.

Introduction:

The current state of California politics can be summed up in a simple comparison: in the Republican gubernatorial primaries, we see one candidate promising that their first action upon becoming governor is to put 40,000 people out of work and the other complaining that this isn’t enough; in the Democratic convention, we see a party divided over whether to fight for majority rule for budgets or for budgets and taxes.

As a state, California seems caught between the scissors of an increasing need for public services to provide a basic level of social protection for the sick, the elderly and the poor and to restore our high-road, high-wage economy based on superior public education and green technology, and a paralyzed, undemocratic, and irrational political structure that is unwilling and unable to take the necessary actions to meet those needs.

We know that the strategies proposed by the GOP’s gubernatorial candidates won’t work because they are essentially a retreat of the last seven years of failed policies – Schwarzeneggerism without a human face.

Yet Democrats lack a forceful message about what we want to do beyond the immediate issue of the budget.

What Won’t Work:

Contrary to conservative spin, government spending is not out of control in California. Especially when you take into account the fact that the California Price Index (i.e, the rate of inflation) has gone up 72% in the last 20 years, and that the population has increased 28% in that time, government spending is flat or declining. As the California Budget Project notes, thanks to rounds of drastic budget cuts, current spending is $16.9 billion below the previous year, and next year’s budget is projected to $20 billion below 2007-8 levels. As a share of the economy, California state government is down to levels we haven’t seen since the 1970s.

In this situation, regressive tax cuts to wealthy corporations is only going to make things worse. Meg Whitman’s proposed $10 billion dollar capital gains tax cut would increase our current deficit by 53%, and the savings that she proposes to make from unspecified but supposedly gargantuan amounts of “waste, fraud and abuse” wouldn’t come close to filling in this hole. Poizner’s proposals are equally ludicrous.

Moreover, the proposals by either candidates to eliminate tens of thousands of workers make the same elementary mistake that all anti-government activists make: public sector workers are real workers. 40,000 workers laid off means that California’s unemployment rate will rise from 12.6% to 12.84% at the very least, because it will also mean the loss of $1.59 billion in consumer spending, mortgage payments, and local tax base.

Simply put, the theoretical basis behind right-wing economic policy only makes sense in rare occasions in which government taxation is so soaringly high that businesses can’t make a profit, government borrowing is “crowding out” demand for credit in the private sector, and we’re in full employment so that a higher public sector workforce is causing a “substitution effect” which lures people away from the private sector. Now, even in those rare occasions, it’s not a slam dunk case (you have to take into consideration the increased provision of public goods and services, how much of private sector demand is for useful investment as opposed to speculation, and whether employers compete by offering higher wages) – but that’s not what the situation is right now.

Taxation in California is relatively modest (19th out of 50 states), and isn’t that progressive (the poorest fifth of Californians pay 11.1% of their income in taxes, the richest 1% pay 7.8% and 2,000 people who made more than $200k a year paid no taxes). Far from crowding out private investment, interest rates are basically at zero percent thanks to the Federal Reserve, and the private sector isn’t lending out of fear of losses. As far as unemployment goes, California’s 12.6% unemployment rate is one of the highest in the country, and our underemployment rate (including discouraged workers, part-time workers who want to be full-time, and so on) is even worse at 24%.

Where We Need to Go:

The Democratic Party is clearly correct in beginning with majority rule, because it will be impossible for California to do anything about our current fiscal or economic situation without the ability to pass budgets and raise revenues on a democratic basis. To that end, I heartily support the California Democracy Act (majority rule ballot initiative) being sponsored by George Lakoff and the progressive movement – and so should you.

However, I do want to make the point that Democrats need to look beyond the 2/3rds issue, no matter how hard this might be – because we cannot address the budget crisis (or any other of California’s pressing needs) without addressing unemployment. Even if we had majority rule, if we don’t act to bring down the unemployment rate, trying to balance the budget in our current economic climate is chasing a moving target over a cliff. Only when we get more people employed, so that they have paychecks to spend (which brings in sales, income, and payroll taxes), so that they can pay their mortgages (which will at least staunch the bleeding from declining property values and assessed taxes), and so that employers respond to increased consumer spending by expanding their inventories and expanding their payrolls (which in turn brings in more sales taxes, corporate income, property, payroll, and capital gains taxes), will we be able to solve our budget crisis once and for all.

Hence, job creation needs to be made a central part of the Democratic Party message, in the same way that single-payer health care for California (AB810) or historic climate change legislation (AB32) should be the core of the Democratic Party message about what we want to do to fix California.

Step 1 – A Jobs Program as a Tourniquet:

As I’ve discussed in previous posts, it is well within the fiscal capacity of California (or indeed, of most states) to create a jobs program on its own. In order to bring California’s economy and job market into normality, we need to create about 1 million jobs – which would bring our unemployment rate down to 6% (that’s not full employment, but it’s a start). It costs approximately $35 billion to put 1 million people to work for a year.

By structuring our jobs program as a form of social insurance – funding it by the equivalent of a 1% payroll tax, which would raise about $5.7 billion a year, and then using that as collateral for either a Federal or state reserve bank loan – a jobs program could be passed on a majority vote basis. Social insurance premiums are fees by any rational definition of fees, and therefore aren’t subject to the 2/3rds rule.

The reason why we need to pass an immediate jobs program is that it acts like a defibrillator applied to someone in cardiac arrest – especially if we target the jobs to areas where unemployment is concentrated (due to the downturns in the construction and agricultural industries, areas of the Inland Empire have underemployment rates of 40% or more), a jobs program that suddenly cuts unemployment in half not only has a direct impact in terms of fewer people unemployed, more paychecks flooding into depressed local and regional economies, fewer foreclosures and improved property values, but it also has a powerful effect on the “animal spirits” of employers and investors. No matter how low the taxes, employers and investors are not going to increase their payrolls or their inventories if they lack confidence that there’s going to be enough consumer demand to support expansion – by making a sudden and dramatic shift in employment levels, the public sector can radically reboot the expectations of private sector employers and investors. Then and only then will we see private sector employment recover – and with it, California’s tax base and budget.

Long Term Thinking – Full Employment for CA:

Getting back to 6% unemployment isn’t full employment, although it really helps. With a normal unemployment rate and sustained recovery in consumer spending, private-sector employment, and so forth, we can get the fundamentals of California in order. With a stable economic outlook, we can make budgetary decisions that will have a long-term impact – instead of cobbling together fixes that become undone a few months later as revenues continue to fall. With more resources flowing into state coffers, we can begin again to make the investments in public education, mass transit, and alternative energy.

However, there is a big difference between a California that averages 5-6% unemployment and a California which guarantees full employment (i.e, unemployment is kept below a “frictional” level of 3%). For one thing, that 2-3% of the workforce means $43.2 billion a year in production of goods and services that never happen, as well as about $13 billion in wages that won’t be earned, spent, and taxed, and it means increased costs for Unemployment Insurance, CalWorks, Medical, and other social services for the unemployed. In the same way that a single-payer health care system will make California a better place, both by ensuring that everyone has access to health care, but also that employers, start-ups, and other ventures won’t be burdened by heavy health care costs, full employment will mean that California will be a state where no one goes without work (frictional unemployment refers to the temporary periods of unemployment caused by people moving between jobs), with much lower poverty, and many more resources to make the kinds of investments we make.

In its own right, full employment is an investment in a better California. Like any blue-chip investment, it’s not free. In addition to using labor market policies to create incentives for employers to keep their workers on the job instead of laying them off, we’d also need a reserve of about 330,000-500,000 jobs in order to keep unemployment below 3% if the private sector falls down on the job. That costs about $11.7 to $17 billion a year, which the equivalent of a 2-3% payroll tax would cover without the need for regular loans from the Fed or a state reserve bank – which would be reserved for emergency situations in which a sudden recession causes a sharp spike in unemployment.

Conclusion:

A state jobs program isn’t sufficient by itself to create a “New Deal for California” – but it is a necessary prerequisite for the rest of the progressive agenda. Full employment will put us on the path to a high-road, high-wage economy, and from there, it will be much easier to get to single-payer or a green economy than it would be with a 12% unemployment rate.

Note: this is a cross-post from The Realignment Project. 

Introduction:

(Note: finding precise figures and statistics about Blue Gold is not particularly easy. If my numbers here are off, I will gladly revise the piece)

My previous post about the U.C’s policy towards post-docs and other researchers whetted my interest in the travails of the public university, especially as it deals with the universal budgetary crisis faced by higher education during the recession and the underlying process of privatization faced by many public institutions.

The result is a new mini-series of posts about how to rebuild the public university going forward. And a good place to begin will be to make an important distinction about what isn’t a viable strategy for the renewal of the public university – the much-ballyhooed Blue Gold Opportunity Program that U.C President Marc Yudof has made his calling card.

Assessing Schwarzenegger’s Amendment:

Before I explore the nature of the Blue Gold program, it would be remiss of me to overlook the kind of late-breaking news that rarely happens in the world of policy blogging. In his State of the State Address, Gov. Schwarzenegger proposed a new constitutional amendment that would ensure that state spending on prisons would be limited to no more than 7% of the general fund budget and that state spending on higher education would be expanded to no less than 10% of the general fund budget. This policy would be gradually enacted beginning in the 2010-1 budget and culminating in the 2014-5 budget, by which point the transition from current spending would be complete.

It is unusual in the extreme too see a political 180° like this from the same man who created the 2004 compact with the U.C Regents that decreased state support for the U.C, increased student fees by 10% per year (directly creating the need for a Blue Gold program), and committed the U.C to privatizing its funding to compensate for the loss in state funding. More than 190,000 students and 103,000 faculty and staff no doubt wish that Governor Schwarzenegger had thought of his constitutional amendment six years ago.

So, what are we to make of Gov. Schwarzenegger’s road to Damascus moment? On one level, a commitment of this kind would be the profound change in public higher education in California since the creation of the Master Plan in 1960. As this chart notes, the state’s fiscal commitment to the Plan’s vision for universal, free public higher education has slipped inexorably downwards. For just this year alone, the proposed constitutional amendment would have meant $1.7 billion more for the University of California, easily outstripping the $813 million cut it received instead.

All is not sweetness and light, however.

• First of all, this proposed constitutional amendment does not answer the larger chronic revenue shortage that the U.C’s budget faces; 10% of a budget that has tumbled almost $60 billion since the beginning of the economic downturn, in a state in which revenue bills require a 2/3rds vote to pass the legislature, may not be worth very much.
• Second, a constitutional amendment that requires minimum funding would exacerbate California’s budgeting problems – given that Propositions 98, 49, and other so-called “auto-pilot” provisions such as Medicare spending and debt repayment eat up 90% California’s budget, carving out another 10%, even if that’s balanced by a reduction in prisons spending only further limits the ability of the state legislature to set policy priorities.
• Third, there’s a nasty little razor blade in the candyfloss: the privatization of California’s prisons. If you read the text of the proposed constitutional amendment, the California Department of Corrections is empowered to “contract with a private entity for the building of, operation of, transfer of inmates to or placement of inmates in private correctional facilities,” including staffing of all correctional facilities (both in terms of medical and security personnel), and the state is actually statutorily prohibited from reaching the 7% goal by releasing prisoners. Given the documented abuses committed in and around for-profit prisons, there is something morally monstrous with the idea that the futures of the top 1/3 of California’s young will be paid for by the destruction of the futures of its least successful youth. While this power is not mandatory – the Department of Corrections can choose to privatize or not – the text of the amendment does everything possible to make prison privatization an inextricable part of the whole.

In these circumstances, progressives cannot in good conscience support the privatization measures of the amendment as written – and even stripped of these measures, the measure remains a positive step but hardly a silver bullet either for higher education or the state budget. By contrast, conservatives in the Legislature are extremely unlikely to vote for anything that protects public higher education. Given that the governor knows this, it’s likely that this amendment (which Schwarzenegger has insisted will go through the legislature first) is but one more infuriating stratagem in a political career that has successfully alienated the left, center, and right of California politics.

Inside Blue Gold:

If something so seemingly progressive as a constitutional amendment that protects spending on higher education can turn out to be so complicated, what can we say about the Blue Gold Opportunity Program- a program designed to ensure that “”if your family makes less than $70,000 a year and you have financial need, scholarships and grants will cover your fees”? A free college education for poor and middle class kids, paid for by increasing fees on more affluent students sounds like an incredibly progressive thing – and people like William Bagley and Ian Ayres have argued the exact same thing.

The reality is that the Blue Gold Opportunity Program is nothing of the kind.

To begin with, it should be understood that the Blue Gold program doesn’t represent a commitment of the U.C to contribute more to less well-off students as it does a commitment of the U.C to shift as much of its costs onto outside sources as possible. The Blue Gold program is contingent on applying for Federal financial aid and state CalGrants – as their own website notes, “The plan combines all sources of scholarship and grant awards you receive (federal, state, UC and private) to count toward covering your fees.” The Blue Gold program only kicks in when all of your other sources of aid fail to cover the cost of education.

Second, Blue Gold only applies to covering the educational fees the U.C charges (over $10,000 after the rate increase) – which is only 37% of the estimated total cost of education, which the U.C estimates to be $27,000. The difference between the total cost of education and the fees works out to $17,000 a year or $68,000 over four years. However, the U.C may well be underestimating the cost of living – for example, U.C’s estimates for graduate student food costs ($5,000 per academic year) are twice what they estimate for undergraduates living off campus; likewise, transportation costs for graduate students are costed out at over twice what they estimate for off-campus undergraduates.

However, even if we assume that the U.C’s estimates are correct, their sample budgets for families are quite instructive. For example, a family earning $20,000 a year will have to come up with $9,100 a year (or 45.5% of yearly income), a family making $40,000 will have to come up with $11,600 (or 29% of yearly income), a family making $60,000 will have to come up with $16,100 (26.8%), and a family making $80,000 will have to come up with $22,600 (or 28.25%). A system where families making $20k or $40k a year are responsible for a higher proportion of their income than families making $60 or $80k a year is hardly progressive.

Supporters of the system will note that the same budgets assume a much lower family contribution for poor or working class families – but this hardly makes up for the fact that the difference will be made up for by their children. The U.C’s charts show that this model only becomes affordable if students find part-time work during the school year and full-time work during the summer, and take on loans of at least $5,000 a year. Thus, in the best circumstances, a U.C student will graduate with about $20,000 in educational debt, which takes years to pay back.

Should the student be unlucky enough to not find part-time jobs that allow them to save $266 a month during the school year, and $566 a month during the summer, over the cost of living, the actual debt load could soar much higher, potentially to $36-90,000 by graduation.  At a time when the state of California has a youth unemployment rate well in excess of 20%, assuming that students will automatically find employment is not realistic.

At the same time, the Blue Gold program only applies to in-state legal residents. This means that DREAM Act students (i.e, undocumented students) have to pay the full freight, no matter what their economic status. International students, who never become in-state residents, also have to pay the full freight whatever their economics status.

Beyond the Numbers:

While the under-the-hood statistics of the Blue Gold program are hardly progressive, the problem with with the Blue Gold Program runs deeper than just the financial issues. At its root, Blue Gold erodes the essential ideological justification of public higher education: that higher education is a fundamental right of citizenship because an educated citizenry is essential for a well-ordered republic, and because “Education, then, beyond all other devices of human origin, is the great equalizer of the conditions of men, — the balance-wheel of the social machinery...it gives each man the independence and the means by which he can resist the selfishness of other men.” In a republic, where the mental and material basis for independence are so important for empowering active citizens and where great concentrations of wealth can easily become anti-democratic concentrations of power, public higher education is essential.

By emphasizing higher education as an economic good with a market rate, where the benefit accrues to the individual wage-earner, Blue Gold undermines the case for why the public should support higher education at all. In its own literature, the Blue Gold program analogizes paying for education with paying for automobiles, and emphasizes that the major objective of a college education is a higher salary. If a college degree is the same as a car, just another consumer good, there is no public purpose for providing it. (Although a more radical argument might be to say that perhaps consumer goods should be publicly provided/subsidized.)

At the same time, by setting the middle class who must pay Blue Gold’s costs against the working class and poor who benefit from it, Blue Gold erodes the cross-class political coalition that is essential for shepherding public higher education through the legislative process. In this fashion, Blue Gold resembles not a progressive tax (which benefits the poor, the working class, and the middle class alike) but targeted welfare programs that superficially benefit the poor but in reality create huge political vulnerabilities that turn programs for poor people into poor programs.

Finally, we must understand what political role the Blue Gold program plays for the U.C Regents. It’s hardly an accident that the U.C’s 32% increase was paired by an increase in the Blue Gold program’s eligibility and funding; the Blue Gold program functions as political cover, allowing Yudof and the Regents to portray an unprecedented fee increase as essentially painless – look, poor kids aren’t going to get hurt, and we’ll even help out the middle class. Nevermind that in an environment of declining resources, higher tuition creates an incentive for the U.C to enroll rich out of state students who can pay the full freight over poorer students who will require extra resources to attend the U.C, Yudof says he’ll raise an extra billion for financial aid!

In other words, Blue Gold is the “human face” for the privatization of the U.C. A tuition-free institution meant to provide a right of citizenship is becoming an institution that approaches charging a market rate for a private commodity, but Blue Gold provides the appearance that nothing has changed. That’s why it’s wrong.

An Alternate Route:

As an inveterate optimist, I don’t like to condemn any structure without providing a blueprint of what we should put up in its place.

My suggestion is this – we should replace Blue Gold with a new Master Plan designed to gradually reduce tuition to $0 over a period of ten to twenty years, eventually re-establishing the social contract of public higher education in California. This would amount to decreasing tuition by a thousand (or five hundred) dollars a year, which is hardly a small order – it means that each year, we need to come up with an additional $159 million in revenue (to make up for $1,000 in tuition less per student) from somewhere. In other words, in order to make the U.C tuition-free, we need to find $1.59 billion a year in additional financing.

In the grand scheme of things, this isn’t impossible. For example, a constitutional amendment that established a 10%/7% requirement without Schwarzenegger’s privatization poison pill, even after compensating for the $813 million cut this year, would have provided an additional $887 million in revenues, or 55% of the total needed to make the U.C tuition-free. In future years, an additional $1.7 billion a year would easily set

Assemblymember Torrico’s AB 656, which would establish a 10% excise tax on oil (California is the only oil-producing state that does not tax oil) to fund higher education, would raise $1 billion a year for higher education and the U.C’s 1/3 share of that would come out to $300 million a year (or 18% of the total needed to make the U.C tuition free). That’s enough on its own to drop U.C tuition by almost $2,000 a year. While that’s obviously not enough on its own, AB 656 does show that it is possible to make the U.C a free public university by creating some form of independent financing stream.

Ultimately, the re-establishment of the free public university is an ideological statement about the kind of California we want to have. The resources are there – the question is whether we have the political will.

Pretty much all that needs to be said about the impact of deregulation has already been said. And quite a bit has been written about the government's refusal to regulate the new “shadow financial sector.” And if that were all there was to the story, it would be fairly easy to fix the financial sector.

The problem is regulatory capture and potential incapacity – regulatory capture seems to be nearly inevitable, as long as financial institutions can offer jobs to former regulators, contributions to electeds and party organizations, and financial experts to the regulatory agencies themselves; even if that weren't already a massive conflict of interest that allows financial institutions to game the system, you have the problem that even a completely honest regulatory watchdog might not have have the financial, personnel, legal, and expertise resources needed to actually regulate – and Congress certainly hasn't shown itself particularly interested in keeping the FDA up to scratch, let alone the SEC.

So what do you do if old regulations are gone, there aren't new regulations to deal with new problems, and the regulators either can't or don't want to regulate? This brings me to a point brought up by Matt Yglesias, when he pointed out that the failure of regulatory authorities to recognize and halt this crisis:

..leaves us with an appreciation of crude measures rather than hubristic efforts to get the regulations precisely right…The best you can hope from a regulatory regime is that it will be a satisficing [sic] solution wherein some fairly crude rule will improve on the outcomes generated by the unfettered market. When that’s not the case, we may as well let the market go unfettered even though that, too, will be somewhat sub-optimal.

What we don't need is to look to the newest fad in economics (behavioral economics, I'm looking at you) to give us a flawless model for predicting when market faiilures will happen. What we don't need is “regulation for the 21st century,” or for any new paradigm. What we need are regulations that work without regulators – automatic regulation.

Automatic regulation doesn't refer to some sort of sci-fi legislation that creates self-enforcing, self-aware regulatory cyborgs. Although a Wall Street Robocop would be a cool idea, I'm actually talking about regulation that establishes clear and transparent bright lines that any informed member of the public or the media can understand. The Glass-Steagall Act's separation between commercial and investment banking was virtually self-evident: if people could deposit their money in a bank, that bank wasn't allowed to underwrite securities (stocks and bonds); if a bank floated bond issues and acted as a broker in the securities market, it couldn't receive deposits. A reserve requirement, like the Fed's reserve requirement or the 1860s rules that required "national banks" to back their bank notes with T-Bills, is easy enough to check: you look at how much money the bank is circulating, and how much it's supposed to keep in reserve,  and if the two numbers don't balance out, there's a problem. Bob LaFollette, one of the forgotten heroes of American Progressivism, in his 1924 third party race for the presidency called for the breaking up or nationalization of all corporations with (either 9% ot 15%) of market share – a radical proposal, but one that would have been easy to administer.

Automatic Financial Regulation:

In thinking about how to create automatic regulation for the financial industry, three broad categories of regulation come to mind:

1. Bright Line Regulations – the proposed limitation of oil derivatives seems like a good place to start in terms of automatic regulation – extending these limits to other commodities such as electricity and waster might prevent a future Enron-like fraud-via-false-scarcity (such as befell California).  Another example of how one could establish an automatic regulation in finance would be to ban tranche-ing, preventing one step of the process by which uncertain assets can be repackaged into a more marketable form. Restoring transactions on margin, or establishing a small transactions tax would further reduce speculative bubbles, market “hurn,” and pump-and-dump schemes without restricting long-term investment. If these ideas seem a little scattered, and underdeveloped, I accede to that, but I would point out that all of them rely on relatively simple prohibitions or requirements, reducing the effort of oversight.
2. Competing Public Ratings Agencies – one major area of the financial sector whose inherent weakness has allowed bubbles to become more frequent in recent years is the fact that the major ratings agencies for stocks, bonds, derivatives, and so on are for-profit private institutions whose livelihood depends on a reputation for providing good ratings for their clients. In this, we see a parallel between virtually all of our recent financial scandals – in the Enron/WorldCom/etc. corporate scandals of 2003, it was accounting/consulting agencies who helped conceal the bookkeeping fraud that made most major American corporations seem more profitable than they really were; in the housing bubble, the subprime/securitization/tranching system wouldn't have functioned without housing evaluators whose conflict-of-interest-ridden valuations helped spiral real estate prices out of rational bounds. Hence, I would argue that one major systemic change that should be done is to create a number of public rating agencies for stocks, bonds, other securities, and real estate, who would be required to use common standards of valuation, and whose ratings would only be published as averages – complicating if not completely eliminating the process of agency capture.
3. Right of Private/State Suit to Enforce – arguably one of the most important elements in the civil rights bills of the 1960s were the provisions allowing private citizens to bring suit to protect their own rights (Title VII of the 1964 Civil Rights Act, and Section V of the Voting Rights Act), allowing enforcement to continue even when the government was hostile to civil rights enforcement. In recent years when the regulatory agencies have been captured by conservative ideologues, the use of state suits to force the EPA or similar agencies to enforce the laws have been crucial in preventing the total undermining of environmental and other regulations. Hence, one crucial factor in creating automatic regulation must be a clear mechanism to allow private groups, state attorneys general, and the U.S Justice Department to bring lawsuits against both regulators and the subjects of regulation to require that bright lines be enforced.

Note: this is a cross-post from my group blog, The Realignment Project.

From Whence We Came:

As much as some people cling to the idea that the United States has always been a land of anti-government, laissez-faire bustling capitalists, the fact is that the specters of democratic statism haunt the chronicles of American history, all the way from the beginning. One of the oldest and most powerful phantoms is the Bank of the United States that died and was reborn, again and again through the history of American politics like the immortal monsters of slasher horror films.

Because the Bank was there from the beginning – Hamilton drafted it, Washington signed it, and Adams maintained it. Even when the anti-central government Democrats took possession of the Presidency in 1800, Jefferson maintained the Bank and Madison actively promoted it (due to the support of Albert Gallatin (the Secretary of the Treasury and a Democratic-Republican who had begun to learn the virtues of Federal activism in such matters as the Bank and Federally-funded public works). The Second Bank of the United States was established in an era of Democratic-Republican dominance, suggesting that the Bank of the United States had a rough political consensus between 1800-1832. Now, two caveats should be made – first, that the original bank was a public/private venture, and second, that the Bank was highly politically controversial, leading to thirty years of Jacksonian decentralized state banks – but the larger point remains that the Federal government of the Revolutionary Generation was not some libertarian paradise of limited government that left the economy to laissez faire.

 

The second half of the 19th century saw an enormous explosion of central banking. The Civil War gave us the Second Banking System, whereby the Republican Party, strong nationalists that they were, created for the first time a single, national, paper currency, a system of national banks with reserve requirements (held in Treasury securities), regulated by the Comptroller of the Currency.  When this system began to fail (largely due to the requirement to back all notes with Treasuries and the lack of a lender of last resort, as well as the restrictive monetary policy of the era), the Federal Reserve was called into being. However, what few people realize is that the public-private nature of the Fed was the result of a political bargain struck between conservative Republicans like Nelson Aldrich (who wanted a 100% private Fed), Progressives (who wanted a 100% public Fed), and conservative Democrats (who wanted a decentralized and private Fed).

This was not a single grand vision, but a messy compromise, and there remains in the history books, the vision of a Fed that might (and should) have been, a People’s Bank exercising political authority over the economy.

 

Where We Stand Today:

This brings us to our current dilemma. In the last twenty years, the so-called FIRE sector (finance, insurance, and real estate) of our economy has metastasized out of control – helped along by deregulation, regulatory capture, and refusal to establish new regulations to keep up with a changing industry. The vast increase in essentially paper value of derivatives, collateralized debt obligations (CDOs), mortgage-backed securities (MBSs), asset-backed securities (ABS), credit-default swaps, and other financial instruments have dramatically raised the stakes of a potential financial collapse, while making some Wall Street firms and their chief executives wealthy on a scale that puts the Gilded Age to shame. Rockefeller and Morgan were rich as they came, but they at least had the good sense to not order gold-flaked ice cream for dessert.

All of this would be merely troubling if the financial industry was merely off in its own little world making up imaginary money, if it wasn’t for the fact that the financial industry has begun to infect the rest of the economy with a dangerous instability. As Matt Taibbi’s piece on Goldman Sachs shows us, the financialization of the economy has had a predictable effect – with too much money chasing too few vehicles for investment, the financial sector begins to create speculative bubbles in new and untried areas of the economy. In the late 90s, they turned to the internet and tech stocks as their new bubble, because investors who might be wary of new and untried firms in something they understood, like steel or cars, promising massive and infinite returns didn’t know what this magical thing called the Internet might do – maybe their stocks really were worth their weight in solid gold. Then it was the housing bubble, where the massive profusion of new investment vehicles (MBSs, default swaps, etc.) and the deliberate compromising of ratings agencies were used to hide the on-the-ground reality (that money was being flung at mortgages on the expectation that home values would never fall, so it didn’t matter that people couldn’t afford their mortgages) behind the illusion that you could slice up debts into risk-free chunks, hedge yourself with insurance so that you couldn’t lose money, and that prices were only ever going to go up.  Even more recently, it’s been commodities futures, where speculators have been bidding up the price of oil and other basic commodities, leveraging the huge sums they now control to pump up prices in a fashion that Jay Gould would have approved of.

All this has huge consequences in the real economy – if you over-invest in internet and tech companies, you get the boom and bust in Silicon Valley, which made some people rich, left a lot of computer programmers and engineers high-and-dry, and somehow we’re still behind the rest of the advanced world when it comes to broadband. When you turn the housing industry from a way for people to buy homes into a gigantic casino/piggybank, then people can’t afford to live where they work, sprawl accelerates, net savings turn into massive net debt, and when it all goes belly up, we have huge foreclosure rates, ghost towns, millions of people’s homes “underwater,” homelessness, nosediving public revenues, and Depression-level unemployment in areas dependent on the real estate industry. When oil contracts are traded twenty times between production and sale, oil prices go up to $145 a barrel and $4-5 per gallon at the pump, the price of everything else (because we generally burn oil to transport goods) goes up, consumers’ purchasing power goes down, and the economy sours. You know things have gotten bad when we’re actually considering limiting speculation in oil.

And every time we try to fix the mess they made, the financial industry sticks a gun to its head and threatens to pull the trigger unless we give them trillions in public funds. So they make money when the bubble goes up, they make money when it goes down, and they make money when someone else is stuck with the cleanup. Meyer Lansky would be proud.

How Do We Get Out of Here?

Someone like Matt Taibbi can feel comfortable telling people there’s nothing we can do. It’s the journalist’s prerogative, well-honed since the days of H.L Mencken, to stand back and cynically chuckle as the world burns. But as an activist, I don’t feel that I can leave it at that. I think there are things that we can do, or at least try to do. A lot of ink and pixels have been spent talking about the need for new regulation, and I don’t really have much to add there for the moment.

But one idea that I do want to explore is to return to where we should have gone with American central banking – the idea of a public finance sector, a People’s Bank. In my imagination, the People’s Bank would focus on three key areas where we need an active, not-for-profit public presence:

1. Secure Deposits, Open to All– despite the success of the FDIC in making people’s savings and checking accounts more secure than they used to be, the large numbers of bank failures in the recent crisis suggests that we have a need for something even safer than an FDIC-insured bank – a Federal bank where you can put your money without ever having to be afraid of losing it. However, I wouldn’t be a very good progressive if I didn’t extend this idea one further to explore a whole area of the “shadow financial sector” which really hurts people who don’t make enough money to be worried about losing it.
   1. Free Checking/Savings Accounts –  Twenty-eight million Americans don’t have either a checking or a savings account . Usually, this is because they don’t have enough money on hand to make it over the minimum required to open an account, or because they live so close to the line that they can’t wait three days for their paychecks to cover it, or because they’ve become overdrawn and hit with so many bank fees that they owe more than they can put in. Thus, the working poor are forced to turn to check-cashing companies who charge up to 391% interest for their services.  Simply by giving working people a way to put their money in a safe place, we would be increasing the net income of twenty-eight million working poor people by hundreds if not thousands of dollars a year.
2. Availability of Basic Transactional Credit – in addition to being exploited when it comes to simply getting access to their own paychecks, many Americans, including the working poor but also comprising vast swathes of the working class, are also routinely victimized by their lack of access to basic transactional credit. Instead, they turn to  payday lenders, who charge up to 911% interest, and auto-title lenders who charge up to 300% interest. These companies, together with the check-cashers discussed above, collectively rake in $8.5 billion a year in fees. And if the financial crisis’ underbelly – the racial profiling of subprime loans revealed in the Wells Fargo lawsuit in Baltimore,  the abuse of so-called NINJA loans by middle-men, the ridiculous spectacle of the banks defeating cramdown legislation and watering down credit card interest rate reform – has shown us anything, it’s that the so-called legitimate finance industry isn’t so much better in how it deals with working and middle class Americans. Thus, the second basic function for the People’s Bank – one that I have to give credit to Matt Yglesias for linking to – is Steve Waldman’s suggestion that the government should provide “basic transactional credit as a public good…Every adult would be offered a Treasury Express card, which would have, say, a $1000 limit. Balances would be payable in full monthly. The only penalty for nonpayment would be denial of access of further credit, both by the government and by private creditors…Unpaid balances would be forgiven automatically after a period of five years. No interest would ever be charged.”
3. Non-Profit Yardstick Home Lending –  in the wake of Fannie Mae/Freddie Mac, it would seem counter-intuitive to argue for a public institution to guarantee home loans. However, I would argue that the failure of those two institutions is more an argument against privatization – for decades, the two institutions worked well at what they were supposed to do, namely guarantee long-term loans; it was when they tried to chase the subprime money (which they came late to) that they went belly-up. So if we’re going to have an institution designed to make it easier and safer to buy mortgages, and as we just spent huge amounts of money rescuing these two institutions, let’s actually do the job right. In the wake of the failure to cramdown mortgages or otherwise deal with the foreclosure crisis, let’s have an institution that values homes correctly (one of the other market failures of the housing collapse was the corruption of home value assessors), that lends wisely, that provides long-term fixed rate mortgages to people who need primary residences…perhaps even using the returns on middle-class loans to make loans affordable to working people without creating crooked sub-prime practices.
4. A Truly Public Fed – finally, and this would be the largest, most politically fraught, and most unlikely reform, we need to fold the Federal Reserve’s central banking powers into the People’s Bank. An institutional accommodation from 1912 left us with a central banking partly public and partly private, and we all know what happens to a house divided. I believe in central banking, and of the various political groups out there, I have the most contempt for the gold-standard loving Fed-abolishers. But the essence of central banking – controlling interest rates, managing the supply of money, acting as a lender of last resort, and regulating financial institutions – is an exercise in public authority over the economy. I would argue that much of the current lack of faith in the government’s attempt to reboot the financial system stems, among other things, from the hidden nature of the Fed’s operations, how the Federal Reserve as an institution has the singular authority to loan trillions of public funds without any democratic control, accountability, and virtually no oversight. (on a side note, I would also argue that the public-private nature of the Fed is why it for so long has focused on inflation over unemployment, as well as its habitual paranoia over wage growth) So if we’re going to have a central bank, as we should, let’s forgo the inane illusion of laissez-faire, and actually have a people’s bank.

January 11, 1944:

When Franklin Delano Roosevelt gave his State of the Union Address on January 11, 1944, the United States was engaged in the largest two-front war of its, or any nation's history. In the European theater, Allied forces were bogged down in Italy south of Monte Cassino and Operation Overlord was still in the planning stage. In the Pacific, Allied forces were advancing through New Guinea following the bloody Battle of Tarawa.

And yet, in the middle of a crucial address at a time when the successful outcome of the war was still very much in doubt, FDR spoke instead to what would come after, in what might have been the last New Deal speech he ever gave. The theme began with him pledging that:

We are united in determination that this war shall not be followed by another interim which leads to new disaster- that we shall not repeat the tragic errors of ostrich isolationism—that we shall not repeat the excesses of the wild twenties when this Nation went for a joy ride on a roller coaster which ended in a tragic crash.

Roosevelt continued by re-framing the objectives of the war as “not only physical security which provides safety from attacks by aggressors. It means also economic security, social security, moral security.” The invocation of Social Security, the seemingly jarring transition from foreign to domestic policy was the opening movement of a speech whose moral center was the home front. In the bridge of his speech, FDR decried the “uproar of demands for special favors for special groups,” and recognized that “we have not always forgotten individual and selfish and partisan interests in time of war,” a rather unusual tone for a period we prefer to remember in glowing, sepia tones.

Even more unusually, he went on to challenge an even more sacred cow than national unity – individualism. Far from being an expression of American rugged independence, Roosevelt argued that “In this war, we have been compelled to learn how interdependent upon each other are all groups and sections of the population of America,” following the thread of prices and wages from farmers and workers and factory owners to “teachers, clergy, policemen, firemen, widows and minors on fixed incomes, wives and dependents of our soldiers and sailors, and old-age pensioners.”

Shifting to explicitly addressing the issue of the post-war world, FDR explicitly returned to the theme of his 1936 Inaugural Address, the theme that more than any other idea than “security” defined the New Deal – “one third of a nation.” The first condition for a new America, the first war aim would be not merely the achievement of economic prosperity but rather the leveling upwards of the poorest of Americans towards a universal minimum standard of living. (Sadly, the first, more anodyne goal of GDP growth would become the standard for post-war liberalism, while the second and higher aim would be marginalized)

It is our duty now to begin to lay the plans and determine the strategy for the winning of a lasting peace and the establishment of an American standard of living higher than ever before known. We cannot be content, no matter how high that general standard of living may be, if some fraction of our people—whether it be one-third or one-fifth or one-tenth- is ill-fed, ill-clothed, ill housed, and insecure.

America could not be content with a return to prosperity because of the re-discovery of economic interdependence, he argued. This economic reality, once hidden behind the veil of the free market, was being made plain to Americans, and just as the recognition of political community had reshaped an America in 1776, he believed that the recognition of economic community in 1944 would engender similar results in the post-war America:

This Republic had its beginning, and grew to its present strength, under the protection of certain inalienable political rights—among them the right of free speech, free press, free worship, trial by jury, freedom from unreasonable searches and seizures. They were our rights to life and liberty.

As our Nation has grown in size and stature, however—as our industrial economy expanded—these political rights proved inadequate to assure us equality in the pursuit of happiness.

We have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence. “Necessitous men are not free men.” People who are hungry and out of a job are the stuff of which dictatorships are made.

Linking the Depression to the rise of the Nazi ideology and movement that it empowered, FDR here linked the cause of economic security to the cause of the war, bringing the theme of the home front into unity with the reality of a world war against fascism.

And then he introduced the Second Bill of Rights:

In our day these economic truths have become accepted as self-evident. We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all regardless of station, race, or creed.

Among these are:

   The right to a useful and remunerative job in the industries or shops or farms or mines of the Nation;

   The right to earn enough to provide adequate food and clothing and recreation;

   The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;

   The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;

   The right of every family to a decent home;

   The right to adequate medical care and the opportunity to achieve and enjoy good health;

  The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;

   The right to a good education.

It has been argued in the past that America has been exceptional in defining rights solely as legal and political in nature, and avoiding the economic and social rights spelled out in later 20th century constitutions. FDR's speech stands as a powerful rebuttal to this argument, a momentary glimpse of another America. Because Roosevelt did not intend this Second Bill of Rights to be a mere legal letter; there was instead a legislative movement to enact them into law, through the combination of the Wagner-Murray-Dingell Bill (universal health care plus a national cradle-to-grave welfare state), the Full Employment Bill (establishing full employment and the right to a job through Keynesian planning and the government as employer of last resort), and what would later be the Housing Act of 1949. This political drive was blocked in Congress, but for a moment in 1944, the United States seemed to be moving to a new recognition of human rights.

And for Roosevelt, the Second Bill of Rights really were about the United States and the world at the same time. We often forget that American politics and public policy doesn't happen in a vacuum, that there is a conversation that goes on across oceans and national borders. And 1944 was a time when there was a Trans-Atlantic conversation about what the post-war world should look like. In the United Kingdom, John Meynard Keynes had established his economic theories into government practice and William Beveridge was in the process of writing his two famous reports, the 1942 Beveridge Plan for a National Health Service and a cradle-to-grave welfare state, and Full Employment in a Free Society (1944). In Sweden, Gunnar Myrdal and the Stockholm School were solidifying the intellectual foundations for the Swedish social-democratic model. Throughout every occupied country in Europe waiting for Operation Overlord, people imagined a new, better world to come. And here was FDR, speaking with the world.

All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being.

America's own rightful place in the world depends in large part upon how fully these and similar rights have been carried into practice for our citizens. For unless there is security here at home there cannot be lasting peace in the world.

July 4, 2009:

In the sixty-five years since FDR's Second Bill of Rights, the larger historical mission of the progressive movement in America has really been the adoption of the Second Bill of Rights for all Americans, regardless of race, class, and gender. Truman's failed Fair Deal was built from the intellectual foundations of the Second Bill of Rights. The Great Society and the War on Poverty were incomplete attempts to establish health care, education, and protection from poverty; the Civil Rights Movement's call for “Jobs and Freedom” and the 1963 “Freedom Budget” echoed even more deeply the spirit of Roosevelt. And even in the darkest years of the left's nadir, when America seemed to be permanently the land of Reagan, the “dream that will never die” that kept people going ultimately is that same dream.

So where do we stand today?

   * The Right to a Job – here, we've made the least amount of progress at the time when we have a nigh-unprecedented need for it. Even in the wake of the first stimulus bill, 9.5% of the country is officially unemployed. Unofficially, the number's more like 18.4%. After health care, this must be the goal of our political efforts, because it has become all to clear that each future recovery will become even more of a jobless recovery.
   * The Right to a Living Wage – here, we actually have made some progress, both in terms of restoring some of the lost value of the minimum wage, and on a state and local level, establishing a living wage as the legal minimum. As I have said before, I think this is an important and productive part of our politics, a ritual of reconsecration to social justice.
   * The Right to Farm – ironically, here we succeeded far more than we ever intended to, and the result has been a permanent system of subsidies to agro-business and a distortion of our agricultural, energy, and food policy by the sheer political gravity of corn.
   * The Right to Freedom From Monopolies – if the financial crisis has shown us anything, it's that we need a return to stronger anti-monopoly regulations.
   * The Right to a Home – as I've said before, we really need to work on extending this to mean something more than Federal subsidies to middle-class suburban home construction.
   * The Right to Health Care – after the successful scoring of the HELP committee's new bill and the AMA's endorsement of a public option, I feel more confident than ever before that we will finally enact this right into law.
   * The Right to Social Security – while we did establish a system of old age, disability, and unemployment insurance, it is in desperate need of improvement, especially in regards to unemployment insurance (more on this later).
   * The Right to a Good Education – while we have made some steps in the right direction in improving and expanding public education, a lot more is needed to make this right a reality for all (more on this later).