California Dreamin'

California has been the Promised Land for explorers, prospectors, hopeful starlets and Dust Bowl refugees. It has mountains, deserts, beaches, rugged coastline and miles of vineyards and fruit tree orchards. It is the home to at least four major cities. Between Hollywood, the L.A. and San Francisco music scenes, top research institutions and Silicon Valley it produces more valuable intellectual property than any other place on Earth. It has an embarrassment of natural resources; it’s celebrated in poetry, prose and music throughout the world. If it were a country it would have the eighth largest economy in the world - and it’s broke.

Anyone who has been paying attention has known that this was coming. Increasing tax rates and burdens on business have resulted in business flight to more accommodating states and a diminished tax base. California has had deficits in the past three years of $24.3 billion in ‘08, $60.0 billion in ’09 and a projected $19.3 billion this year. Despite this, California did not reduce its spending this year, actually increasing spending from ’09 by $300 million. The problem is California’s spending. There seems to be a spending program for every circumstance, real or imagined.

California has temporarily increased income, sales and vehicle taxes while reducing some services. California legislators had projected these actions would produce a balanced budget in ’10 but revenue did not increase as expected. This is no surprise to those who believe that there is some truth in the Laffer Curve.

On November 2nd, California had an opportunity to elect an amazingly successful business woman, Meg Whitman. Instead the Golden State selected former-Governor Jerry Brown, a re-tread who has never held a private sector job, never created a job, and could easily be dubbed, “Mr. Nanny State.”

California’s debt burden grows worse. In July of this year, Moody’s dropped California’s bond rating two steps to BBB. California has the worst bond rating of any US state. For over two years, both pundits and financial experts have openly speculated that California will default on its debt. So far this has not happened but California keeps adding to its debt burden and the new rating makes it even more expensive to borrow.

Do Governor-elect Jerry Brown and the California Assembly have the courage and will to reduce state spending by cutting their extensive social programs? There is no evidence that this will happen. Instead, I believe Brown will call for increased taxes and fees while keeping all, or nearly all, of California’s massive social programs.

After reading Brown’s lengthy paper on job growth, found here on his campaign website, there is a great emphasis on green jobs and education. There is almost no attention paid to actually stopping California’s loss of businesses within the next few years. There is a brief mention of evaluating accelerated depreciation and not charging sales tax on some manufactured goods, but most of Brown’s ideas, if they work at all, won’t be helpful for a decade or more. Brown also promises to review regulations to see what can be made less obstructive to job creation – especially in the field of clean energy jobs, but offers no specifics.

If this is Brown’s plan, it won’t work. Soon, I look for Jerry Brown to head to Washington and lobby for the federal government to bail out California by backing, or purchasing, its bonds. This would result in California bonds becoming more valuable and the rest of us shouldering yet more debt. California is clearly the winner here, but what does it have to offer in exchange?

If GM and AIG are too big to fail, then California is too gigantic to fail. In Washington terms, California has all the collateral it needs: 55 electoral votes. Would any of those 53 US Representatives vote against getting a bailout? After California, only 165 other votes are needed to carry a bailout.

Would a Democrat-controlled US Senate turn down the opportunity to put California deeply in its debt? I don’t think there is the willpower on Capitol Hill to pass on the opportunity. For those in states which are fiscally responsible, get ready to carry another burden in the form of a loan to California or at least be responsible co-signer. Maybe AIG will fund the loan.

It’s ironic that the descendents of Spanish and American explorers, gold hunters, pioneers who pushed on until they saw the sun set over the ocean, and rugged individualists who risked everything are such a bunch of wimps. What happened?

A book could be written on the dangers of the Nanny State and California deserves its own chapter. Appropriately, it could be Chapter 11 or perhaps Chapter 13.