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Brooks Wilson's Economics Blog: I See Moonbeam Arising, I See Trouble on the Way

Tuesday, January 4, 2011

I See Moonbeam Arising, I See Trouble on the Way

Yesterday, Jerry Brown began his third term as governor of California as the state faces extreme fiscal challenges: a $28 billion budget deficit, $88.3 billion of bond debt, and $500 billion of pension liabilities.  For those of us old enough to remember his first two terms, Jerry Brown may be a social liberal, but he was a fiscal conservative and he promises more of the same this term as reported by Michael Marois of Bloomberg (“Brown Faces a Reckoning in California as $28 Billion Gap Shadows Inaugural”).    

Brown is armed with a new law that authorizes lawmakers to pass spending plans with a simple majority rather than a two-thirds supermajority.  He is constrained by the 1978 proposition 13 which requires a two-thirds majority to increase taxes.  These voting rules can be interpreted differently.  Given today’s economic condition, it might be argued that they are they a statement by liberal Californians that they prefer low taxes and low spending.  Given more prosperous times, they might be a canonized method of keeping taxes low and spending high.

Burned by his opposition to proposition 13 during his first term, Brown has promised initial cuts in spending to induce voters to approve a ballot initiative in June that would, among other things, extend higher taxes on income, vehicles and sales set to expire this year (Kevin Yamamura, Sacrament Bee, “Brown to propose broad list of budget cuts”).

There is no doubt that the cuts Brown is proposing are real.  They include cuts to universities, parks, Medi-Cal (California’s version of Medicare), and cuts in other social services.  He proposes eliminating hundreds of redevelopment agencies and enterprise zones, two changes that I view as pro-market and anti-corruption. 

Will Brown be able to push budget cuts through the legislature dominated by his own party?  Come June, will voters find the proposed tax increases more painful than the spending cuts? 

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