ShareThisBy DAN WALTERS
Monday, November 20, 2006
Gov. Arnold Schwarzenegger, fresh off his landslide re-election victory, was in an upbeat mood this week as he laid out the broad themes of his second term during an address in Los Angeles.
Schwarzenegger didn't use the "fantastic" label he seemingly applied to everything during the first months of his up-and-down governorship, but as he described it, a new spirit of bipartisanship has infused Sacramento and would lead to agreements on just about everything.
When asked about the state's chronic budget deficits, however, Schwarzenegger did offer a fantastic scenario _ fantastic as in fantasy _ that the $42 billion in infrastructure bonds also approved by voters this month would generate so much economic activity that the state's coffers would overflow and the deficits would disappear.
"Now we have 42 billion dollars," Schwarzenegger said. "We're going to start building immediately; you will be seeing cranes everywhere in California. We're going to start building our levees, and start building roads, highways, freeways, tunnels, bridges. There will be building everywhere... There will (be) so much construction activities going on that where the private sector will fall off, the public sector will pick up."
"So now with our infrastructure bonds we will again stimulate the economy," Schwarzenegger continued. "We're going to push forward. I think that that is our main objective, and so I have a great vision of the future and total confidence that we are going to solve those problems and lower the structural deficit and eventually wipe it out."
It could be characterized as ersatz Keynesian economics, one supposes _ more government debt and spending will generate enough revenue to cover more government debt and spending _ but voodoo economics would be more accurate. And by any name, it doesn't make any sense.
The state has a chronic deficit _ annually spending more on its operations, aid to schools and local governments and debt service _ because its commitments, both legal and political, add up to more than the tax system generates even during a period of record prosperity.
As the Legislature's nonpartisan budget analyst, Elizabeth Hill, pointed out a day after Schwarzenegger's speech: "At this advanced stage of the current economic expansion, California should be running projected operating surpluses instead of deficits..."
Hill believes that as the economy cools, largely due to a marked slowdown in the powerful housing sector, the state's deficits may grow, especially as it begins repaying the money that it borrowed earlier in the decade to cover immense shortfalls. And that doesn't count the billions more dollars that the state may have to spend to fix its prison crisis, or the billions it could cost to expand health care, one of Schwarzenegger's self-proclaimed priorities.
Schwarzenegger would have us believe that spending $40 billion or so over the next decade on highways and other public works will somehow neutralize those deficits, which is, indeed, fantastic. Spending $4 billion a year is a droplet in the bucket of a $1.5 trillion economy, for one thing, and it's not free money. It must be repaid, plus interest, out of the same general fund that's already running deficits.
We have three choices when it comes to the state budget: ignore the deficits and continue living on borrowed money until the banks cut off our credit cards, reduce spending (and put up with the howls from affected groups) or raise taxes (and run counter to the voters' skepticism about giving politicians more money to spend that was also voiced in this month's election).
Schwarzenegger has four more years as governor, and they should begin with some straight talk about the state's shaky finances, not economic fantasies.
Reach Dan Walters at (916) 321-1195 or dwalters(at)sacbee.com.
