Nexus: Chapman's Journal of Law and Public Policy

California’s recurring fiscal crisis, the worst since the Great Depression, is reminiscent of the movie “Ground Hog Day” in which Bill Murray’s character wakes up every day in the same strange reality. Just weeks after closing a $40 billion budget deficit, California is once again facing a multi-billion dollar gap. The Schwarzenneger administration has already forecast a $7.4 billion deficit the next fiscal year. Others are expecting the gap to grow to more than $20 billion.

This is the fourth time in the past year and a half in which we wake up to a huge budget gap, endure deep and painful spending cuts and tax increases, and the deficit is finally closed. Yet the next day we wake up again to the same reality, another large budget gap, and the same fiscal austerity to try to close the shortfall.

In February 2008, California faced a $2 billion budget gap that was closed by emergency spending cuts. Yet only weeks later an estimated $10 billion budget deficit reappeared, only to rise within days to more than $20 billion. Governor Arnold Schwarzenegger laid off more than 10,000 temporary state workers and proposed a one-cent increase in the state sales tax - a proposal that went nowhere. After another compromise of spending cuts and tax hikes, the budget was closed late in the summer.

It was deju vu all over again. Within weeks, in October 2008 another $3 billion to $5 billion budget shortfall was estimated. By early November, the gap was estimated at $11.2 billion. This time, the Governor ordered furloughs of state workers and the gap was closed. That is, until February of this year, when the state budget deficit was projected at $40 billion. A new plan was passed, only to see yet another $8 billion budget gap in March. By May, the deficit was projected to hit $21.3 billion. This time, state voters rejected five of six budget-related ballot measures and legislators failed to reach a compromise with the Governor. In July, California began paying some of its bills with more than 130,000 IOUs worth more than $500 million. The state’s bond rating was downgraded.

The last big compromise, barely three months ago, was particularly severe. An estimated $14.5 billion was cut from education, after nearly $10 billion last year. For public education K-12, there were layoffs, unpaid furloughs, rising class sizes, and elimination of summer school programs throughout the state. Higher education was also hit hard. The California State University and University of California systems cut more than $1.4 billion. As a result, student fees were raised, enrollment was cut, and unpaid furloughs were imposed on faculty and university employees, representing pay reductions of more than ten percent in many cases.

Other painful cuts were made to college grants for low income youth, welfare-to-work programs, and In-Home Supportive Services for the disabled and elderly. Many state parks were closed and fees sharply increased. The state also grabbed several billion in tax dollars from cities, counties and special districts at a time when local government was cutting police and public safety budgets.

Each time state legislators and the Governor have faced a budget gap over the past year, they have dealt with it as if it were another short-term problem of overspending and under-taxing. In fact, we may need to tax less and spend far more. The real source of the recurring budget gap is not excessive state spending. The problem has been falling tax revenues resulting from a weak economy. When people are out of work and business volume is down, governments at all levels bring in less in tax revenues. This has been true for taxes across the board, for the sales tax, income tax, capital gains tax, business taxes, local property tax, hotel and occupancy and tourism taxes.

This is a variation of the paradox of thrift and reminiscent of the 1930’s. As the state cuts spending, it also undermines its own tax base, and the result is falling revenues.

Of course, it has been much the same elsewhere. At end of the 2009 fiscal year, nearly a dozen states across the country labored to close more than $150 billion in combined budget deficits. It has been estimated by the Wall Street Journal that states will have combined deficits of $166 billion in fiscal year 2010 and an astounding $350 billion in fiscal year 2011.

This is another historical parallel to the Great Depression when much of the New Deal federal fiscal stimulus was erased by recurring spending cuts and tax increases by state and local governments throughout the 1930’s.

It has been said that history repeats itself, but often in different ways. On Oct. 30 - the 80th Anniversary of the 1929 stock market crash - scholars and policy makers will converge on Chapman University School of Law to consider today’s financial distress and economic downturn in broad historical terms. Congresswoman Loretta Sanchez and governor candidate Tom Campbell, among a host of cross-disciplinary experts, will discuss the state’s fiscal crisis and the failure of regulation of financial markets, such as historical comparisons to bubbles in the 1790s and the dollar devaluation of the 1930s.

Many of these discussions will no doubt raise a similar insight, that today’s financial and economic crisis was produced by an unholy alliance of Wall Street bankers and lobbyists and Washington insiders. The irony is that these are the people being propped up by taxpayer support through the Treasury bailout and hidden Federal Reserve subsidies. For the five largest banks, there are massive subsidies as well as bonuses. For most everyone else, there is austerity, financial losses, and the fear of job losses, or worse.

How different from the policy agenda that helped the United States emerge from the Great Depression as the world’s leading industrial powerhouse. Since it was the federal government that dropped the ball that started this downward spiral, there should be a federal solution to the crisis in state finances. What is needed is a federal revenue-sharing program for state and local governments comparable to that of the Greatest Generation.

Note: Reposted from the Daily Journal, October 26, 2009, with permission from the author.