February 26, 2010

California: A scary fiscal preview

EZRA KLEIN

— By

The Washington Post

We Californians pride ourselves on the crystal-ball quality of our state. Auto emissions regulations, the tech boom and bust, Ronald Reagan, Hispanic immigration, the anti-tax revolt, the mortgage bubble, the struggle for gay rights, most movies, the popularity of Richard Nixon, the unpopularity of Richard Nixon, plastic surgery, and Tiger Woods' marital problems were all tested in the Golden State before being released to audiences nationwide.

The next likely item on that list is not a happy one, however. California is in a fiscal crisis. It's had to slash state services to the bone and will have to cut further. It's gutted the University of California and lost its credit rating. David Paterson, the governor of New York, casually mentioned that he thinks California might default on its debt. That's bad enough, as it could drag down the national recovery. But what's worse is that this picture is probably coming to a theater near, well, all of us.

California's fiscal crisis will look sadly familiar to close watchers of the national checkbook. That's because California is not having a fiscal crisis so much as a political crisis. The trigger may have been the recession, but the root cause was written into the state constitution, and it was visible long before the housing boom went bust.

In California, passing a budget or raising taxes requires a two-thirds majority in both the state's Assembly and its Senate. That need not pose a problem, at least in theory. The state has labored under that restriction for a long time, and handled it with fair grace. But as the historian Louis Warren argues, the vicious political polarization that's emerged in modern times has made compromise more difficult.

All of this, however, has been visible for a long time. Polarization isn't a new story, nor were California's budget problems and constitutional handicap. Yet the state let its political dysfunctions go unaddressed. Most assumed that the legislature's bickering would be cast aside in the face of an emergency. But the intransigence of California's legislators has not softened despite the spiraling unemployment, massive deficits and absence of buoyant growth on the horizon. Quite the opposite, in fact. The minority party spied opportunity in fiscal collapse. If the majority failed to govern the state, then the voters would turn on them, or so the theory went.

That raises a troubling question: What happens when one of the two major parties does not see a political upside in solving problems and has the power to keep those problems from being solved?

If all this is sounding familiar, that's because it is. Congress doesn't need a two-thirds majority to get anything done. It needs a three-fifths majority, but that's not usually available, either. Ever since Newt Gingrich partnered with Bob Dole to retake the Congress atop a successful strategy of relentless and effective obstructionism, Congress has been virtually incapable of doing anything difficult because the minority party will either block it or run against it, or both. And make no mistake: Congress will need to do hard things, and soon. In the short term, unemployment is likely to remain high and the economy is likely to remain weak unless Congress can muster another round of serious stimulus spending. The economist Karl Case, co-founder of the famed Case-Shiller housing index, now believes that earlier optimism about our economic recovery -- which he shared -- was misplaced. ''The probability is very high of a serious double dip like 1982,'' he told The New York Times. The housing market seems to be sagging again, and the government's interventions -- not just the stimulus but also relaxed standards at Fannie Mae, Freddie Mac and the Federal Housing Authority -- are set to end.

Further out, the long-term deficit problem, which is driven largely by health-care costs, is startling. The Center for Budget and Policy Priorities estimates that debt will reach 300 percent of gross domestic product come 2050 -- and that estimate might be optimistic. But solutions seem unlikely. No one who watched the health-care bill wind its way through the legislative process believes Congress is ready for the much harder and more controversial cost-cutting that will be necessary in the future.

Similarly, Sens. Kent Conrad, D-N.D., and Judd Gregg, R-N.H., recently suggested a bipartisan deficit commission that would reach a consensus on the budget and report back to a grateful Congress. Last week, a Wall Street Journal editorial showed the conservative interest in such compromises: Republicans should ''agree to a deficit commission only if it takes tax increases off the table,'' it said, reminding wavering Republicans that ''President George H.W. Bush renounced his no-new-taxes pledge and made himself a one-termer.''

These two problems get to the essential difficulties confronting the nation: There is no doubt that minority parties generally profit in elections when the unemployment rate is high. But given that reality, what incentive do they have to help the majority party lower the unemployment rate? Further out, there is no doubt that the majority party has an incentive to prevent a fiscal crisis on its watch. But what incentive does the minority party have to sign on to the screamingly painful decisions that will avert crisis? In another system of government, that wouldn't much matter. In our system of government, which requires a supermajority in the Senate for most projects, it matters a lot. On Jan. 20, for instance, the Senate is expected to vote on raising the debt ceiling. Generally, this is a bipartisan vote, as the debt is a bipartisan creation. This year, Senate Minority Leader Mitch McConnell reportedly told Majority Leader Harry Reid that if he wants an increase in the ceiling, he owns it and needs to find the votes for it. That's the sort of budgetary brinkmanship that brings us back to California.

The lesson of California is that a political system too dysfunctional to avert crisis is also too dysfunctional to respond to it. The difficulty is not economic so much as it is political; solving our fiscal problem is a mixture of easy arithmetic and hard choices, but until we solve our political problem, both are out of reach.

If you want to see how that movie ends, just look west, to California, as we have so many times before.

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