California Insider

The New York Times on Monday had a big story saying California’s budget crisis – and budget cutting – had, along with similar events in other states, “stripped the nation of a source of economic growth” and begun to “drag down the national economy.” With all due respect, I think this is nonsense. And, because it’s becoming part of the conventional wisdom, it needs to be stopped, now.

First of all, The Times swallows whole the notion that California’s emerging budget deal will cut $8 billion in current spending, and says the state will see $12 billion in cuts over two years. I don’t know where they got the $12 billion – it’s not attributed – but even on paper, state general fund spending will shrink only from a high of $78.1 billion last year to $70.8 billion next year, a drop of $7.3 billion.

And even that is an accounting fiction. Actual spending won’t drop by nearly that much, if at all. More than half of the reported spending reduction is actually a tax increase -- the $4 billion tripling of the car tax. State bookkeepers count that as a cut because the car tax is a local revenue source, and when it was reduced several years ago, the state started reimbursing the cities and counties for their loss of revenue. Now that the tax is going back up, the locals will get their money directly from motorists, so the state reimbursement is no longer needed. The state books that as a budget cut, but the government will still be spending exactly the same amount of money. Other items booked as cuts include a $1 billion accounting shift in Medi-Cal that will have no effect on actual spending, and a $2 billion infusion of federal money that will relieve the state of some of its obligations in health and welfare programs. When you add all these and other measures together, it’s possible that actual government outlays in California will rise, not fall, in the year ahead.

But even if all the assumptions in the Times story were true, I still don’t think state spending cuts would hurt the economy. One could argue that they would actually help it. After all, the states, unlike the federal government, cannot print money. Everything they do is pretty much a zero-sum game. If they spend more, they must tax more. If they spend less, they tax less. This means that the only thing at issue is who spends the money: the government or private individuals and businesses. If the state cuts spending on health care by $1 billion, that’s $1 billion that remains in the private economy.

The net effects of this transfer are open to debate. Some would argue that state spending will produce more bang for the buck because it tends to go to low-income people who then put it all back into the economy, while private holders of wealth might keep it stowed in the bank or in investments. Others would say that leaving the money in private hands is better for the economy because those investments create jobs and boost productivity. I would stake out some middle ground by pointing out that even state spending often winds up in private corporate hands, or in the pockets of wealthy individuals, as when the state pays hospitals or doctors for medical care for the poor. That money can be socked away – or invested – as easily as money that’s simply left in private hands. Which is why the Republican complaint that state tax increases hurt the economy, while logical, is difficult to prove, because all the money the state takes in taxes comes back to the economy anyway, just in different places.

But the Times ignores that debate and all of these subtleties in favor of a simple explanation implying that every dollar the state “cuts” from spending is a dollar somehow removed from the economy. It’s just not so. Every dollar cut from state spending is a dollar left in the economy. There is a huge difference.

Find the Times story here. Signon/password required but use mine: californiainsider/insider

UPDATE: A reader notes that the Times' analysis is more credible if one considers the effects of state deficit spending on the economy. When states borrow, it allows them to spend money that they haven't yet taken from their citizens in taxes, thus stimulating the economy. This is true. But California isn't giving up on deficit spending. The budget deal pending today includes plans for a $10.7 billion bond to pay for services rendered last year. That's the biggest borrowing of its kind in the history of the state.

If Arnold is dropping out, people have been asking, why doesn’t he just get it over with and announce that he won’t run for governor? Why are his advisers issuing statements saying he has not made up his mind? Here’s my theory: He needs a stand-in. It’s clear that Arnold has been under a lot of pressure from Maria not to run. His own campaign advisers have said as much. I expect Arnold himself to acknowledge this at some point, either directly or through the “concern for my family” statement that’s become so familiar in politics. And I think it's sincere. He's got young kids. He probably doesn't want them exposed to the kind of trash that would be thrown his way if he entered the fray. But he doesn’t want Maria to be cited as his sole reason for ducking the race. Manly men respect their wives but don’t let their spouses dictate what they do. And Arnold has an easy out. He has said all along that he will run only if he doesn’t see anybody else out there capable of doing the job. Enter Dick Riordan. I think the reason Arnold hasn’t announced his decision is that Riordan either isn’t committed or doesn’t have the campaign infrastructure in place yet to take the ball and run with it. But if and when Riordan is ready, don’t be surprised to hear Arnold say, “I don’t need to run because we have Dick Riordan and he would do a great job.” Just a theory.

Rick Hasen has an interesting item on a new lawsuit being filed to keep the Connerly initiative and Keith Richman's infrastructure measure off the recall ballot.

The Schwarzenegger campaign-in-waiting says my source is all wet. Arnold, they say, still hasn't made up his mind. Here's the statement, in full:

Statement by Arnold Schwarzenegger political consultant George Gorton:

“There are reports in the media that Arnold Schwarzenegger has decided not to run in the California recall election. These reports are incorrect.

“Arnold spent the weekend continuing his due diligence regarding a possible run. He has made no decision at this time. He will continue to weigh the pros and cons with his family and will continue to seek the council of supporters and colleagues.

“When Arnold has made his decision, we will announce it to the media.”

I'm still hearing otherwise.

Things are changing by the minute, and will continue to do so. But as of this morning, Gray Davis has the momentum in his fight to beat the recall. One house of the Legislature has passed a budget, and the other will probably do so soon. The public will see this as progress, even if the toughest part of the job was left for the future. The recall is being portrayed in the media as a circus or a zoo, take your pick. It looks as if Arnold is out, and with him the recall's best chance of energizing independents and occasional voters. Riordan still isn’t in and might never be. That leaves the most likely Republican candidates as Issa, who has been and will be easy to demonize; Simon, who will be portrayed as either the sore loser or the “I told you so” candidate; and McClintock, the sincere but under-funded state senator who will want to talk about fiscal reform but will be marginalized by his conservative take on social issues. Assemblyman Keith Richman will run as the Republican moderate if both Arnold and Riordan bow out, but he is little known statewide and will have a hard time breaking out of a crowded field. Gray will ignore Richman and wrap the other three neatly with a bow and say the whole thing is a “vast right-wing conspiracy.” The entire political establishment is against it and, even if they don’t help Gray, they won’t be of much help to his opponents. The New York Times has started a full-court press against the recall on the editorial and op-ed pages, following the lead of the home-state LA Times. Even former Gov. Pete Wilson was quoted in the Bee this morning saying he hates the recall. Bottom line: It’s starting to look as if the recall drive is back to where it started: a guerrilla war. It might be well financed by Issa and a handful of others, but remember, Issa is himself an outsider. If this thing wins, it is going to be on the strength of a populist revolt, not celebrity star power.

Arnold Schwarzenegger will not run for governor, a very knowledgeable source close to actor has told me. I am told to expect the official announcement as soon as today. Look for Dick Riordan to start revving up his campaign in turn.