California Dreaming

“Why did the population of Southern California explode so fast in the last 50 years?”

“The Rose Bowl.”

This short conversation was between a long-time Orange County resident and me in the summer of 2011. He was explaining how the once wide-open spaces of Southern California have gotten so cramped and crowded in the last half of the 20th century. His conclusion? Weather. That was the summer my wife and I (in LA for an internship) decided that, if we could swing it after finishing some schooling in Boston, we would head back to California. We moved out in the fall of 2012 on a wing and a prayer and miraculously, we’re making it.

Sadly, fewer and fewer of my fellow Americans are going west to pursue the California Dream. Despite the televised Rose Bowl drawing cold-weather converts for years, despite Disneyland, despite sunny beaches, Silicon Valley tech booms, and one of the largest (currently 9th) economies in the world, people are not coming to California from other states; they’re leaving it.

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California has had its share of ups and downs, booms and busts, but the trend of the last 20 years is more and more red ink – along with higher rates of taxation, relative job loss, and those negative migration patterns.

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Remember that these numbers compare California to the nation as a whole.

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But wait, there is some good news. Recently re-elected Governor Jerry Brown (D) has just announced a balanced budget for the coming fiscal year; this is something that makes us here at The Can Kicks Back very happy. We love balanced budgets. But that’s not the whole story. The balancing of the budget was achieved primarily through new taxes, 80% of which fall on the wealthiest Californians in the highest tax bracket. CNN adds a cautionary note: “the Legislative Analyst’s Office warns that the measure depends heavily on the income of the wealthiest residents, which is volatile and difficult to predict.” Keep in mind that the wealthiest tax payers are also the ones with the most resources to pack up and move across state lines, or find loopholes to avoid paying those increased rates.

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Numbers from the tax foundation.

Furthermore, a short-term balanced budget does not address California’s very real, very large long-term “wall of debt” (Brown’s phrase), accumulated through years of big promises to various groups. The LA Times reports that “The governor’s budget does not address hundreds of billions of dollars in debt the state has accumulated.” Steven Greenhut of the LA Daily News says that “in reality, the Brown approach is the latest in a series of “kick the can down the road” budgets that ignore the buildup of debts. It rewards public-employee unions with pay and benefit increases, while shielding them from desperately needed pension reforms, and ignores deep problems within the state’s economy.”

Uh-Oh.

We do not like can-kicking here at TCKB.

California’s problem, like the problem of the United States as a whole, is the existence of long-term systematic deficits due to entitlement (or for the states, pension and benefits) spending. California owes its current and former employees a whole lot of money, in addition to the billions of dollars in debt it owes to Wall Street, among others. Another critical issue is the direct democracy or “Proposition” system in California, which has led to incredible deficits in the state budget. For example, Prop 13 of 1978 limited the amount of property taxes the state could collect (money necessary to fund education and neighborhood development), yet Prop 98 of 1988 required the state to place increasing amounts of money into education – money which could no longer be raised legally through property taxes. These inherent flaws have contributed to the huge debt problems that California has yet to meaningfully address.

Balancing one year’s budget does not get California out of debt any more than cutting discretionary spending or raising marginal income tax rates will for the United States. California and the United States can tax as much as they want, and even cut spending in certain areas, but significant damage has already been done. The good news for well-to-do Californians like pro golfer Phil Mickelson is that they can leave if they don’t like it (many wealthy golfers like Tiger Woods have already left California for Florida), but where do Americans go if our Federal Government refuses to tackle the long-term debt through entitlement reform?

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I hear Greece is nice this time of year.