When former Gov. Gray Davis was recalled, there was a sense in the financial community that the state's biggest problem was a leadership failure at the top. Soon after that election, the appetite for the state's bonds grew. Some of it reflected a national trend, but analysts said then that it was also indicative of investor confidence in the new governor.
A survey of 680 California investors conducted by the Irvine firm Nuveen Investments weeks after Arnold Schwarzenegger was elected found a large majority expressing confidence that he would fix the budget and the state's economy would improve within a year.
Now, less than two months after the state passed its latest budget on record, there is a broader disregard for California's governance. It is too soon to gauge investors' response in any scientific way, but opinion leaders are lukewarm. [my emphasis]
Why should the Lords of Finance think such a thing about a movie star with very limited experience in politics, taking office with the legislature controlled by the opposition party, in a state with far-reaching structural problems that result in the legislature itself having strikingly limited authority over the annual budget?
It could be that there was some error in some complex financial models they were running. More likely, it was because they allowed ideological assumptions and even fascination with Hollywood glamor to override practical considerations:
Brown's election has not been greeted in the business world with the applause that came with the recall election that swept a Hollywood action hero into office seven years ago. The state was at the financial precipice then too, but there was a sense that radical change was afoot and that California's grandeur could be restored.
Jerry Brown, in dramatic contrast to Schwarzenegger on the other hand, has extensive experience in state government and is a brilliant man whose has thought seriously about government his whole life and has been active in politics in some way for most of it.
Jerry obviously has huge challenges. And given the reality that we are in the early years of what promises to be a long depression - I've come to think about it that way, I'll be happy to be wrong about that characterization - and the Democratic Administration in Washington now appears to be taking Herbert Hoover as their model for how to deal with it, his main task will be to keep state government functioning and to address the unworkable cross-constraints of voter-mandated limits on revenue generation and voter-mandated spending allocations.
Unlike some of the commentators I most respect, I see Jerry as very much a pro-labor, environmentalist and generally left-liberal leader. But the "left" parts of his Administration the next four years are likely to come more in his appointments, executive decisions and personal leadership. But Jerry is also no rigid ideologue. By that I do not mean that he will pursue the mirage of a impossible brand bipartisanship with a thoroughly intransigent Republican Party. He will get some Republican cooperation, because he will make it more convenient for some Republicans to support him than to oppose him on key issues. I look for him to appear in the districts of key Republican legislators to bring pressure on them to cooperate, for instance. Here is one early positive signal to the Democratic base, as reported by Evan Halper and Michael Mishak in Brown likely to retain most of Schwarzenegger's administrationLos Angeles Times 11/17/2010 (a title that hardly fits with what the article actually says):
One area where Brown seems to be taking a markedly different approach than Schwarzenegger is labor relations. He has taken on as an advisor Marty Morgenstern, who served as director of the Department of Personnel Administration under Brown three decades ago. Morgenstern held the post under former Gov. Gray Davis and helped negotiate some of the lucrative contracts for state workers that Schwarzenegger spent most of his administration trying to unwind.
Morgenstern said Brown approached him the day after the election and asked him to examine the state's labor-related agencies. "I'm nosing about seeing how deep this hole we're in is, trying to make sure he'll be presented with all the facts and know where all the land mines are when he takes over," Morgenstern said. [my emphasis]
Just to be clear, I take this as a positive signal for the Democratic base, although Labor cannot and should not just roll over for any cuts proposed if they damage the interests of state workers; there will be things that organized labor will find to criticize about his administration.
Jerry's budget decisions will unavoidably be driven by the reality that California state government doesn't have the revenue to support its current level of services on an on-going basis. To the extent that he will have to cut services, the results will be in line with the Republican Party's "drown the baby in the bathtub" approach to government.
But I expect two things in that process to very visibly differ from the Republican agenda. One is that he will target areas like prisons, which any serious effort to put California's finances on a healthy basis over the long haul will have to do. It is basically the growth in prisons that have provided what overall growth there has been in state employment in recent times. The number of non-prison state workers has been declining. The wrecker-minded Republicans will oppose those cuts at the same time they take a hardline against raising new revenue. Brown will also work in some programs like new encouragements for green energy development that the Republicans and the oil monopolies will oppose.
The second thing is that he will present bluntly the choices the state faces based on the budget he comes up with working with the legislature. I expect something like what Gov. Schwarzenegger did in 2009 when preparing the 2009-10 fiscal year budget. That is to pass a budget that depends on the passage of some revenue-enhancing state proposition(s). That didn't work for Schwarzenegger, in no small part because Schwarzenegger himself didn't aggressively campaign for the propositions. After that election, he then had to go back and work with the legislature on more cuts.
Jerry's version would look different. For one thing, he would come up with some relatively easy to understand alternatives, e.g., if we pass Prop X, this will be the cuts we make. If we don't pass Prop X, the additional cuts we will have to make will be such-and-so.
Whether it takes that form, or comes in the form of the regular budget process, I expect Brown to make explicit to the public that there are real, identifiable consequences to the current situation in which revenues are restricted in a way that cannot support the existing level of state services. The Republican base voters are likely to continue with their magical thinking, in which taxes can be slashed and some unidentified programs can be cut without having any negative effects, at least on them. But for the rest of the voters, Jerry will very likely handle the budget in such a way as to make it clear that magical thinking doesn't work in the real world of state services.
Also, here in the real world, all states including California actually do have to balance their budgets annually, which can and does include borrowing funds through bonds. But states do not have the budget options the federal government has. The current level of deficit spending and borrowing by the federal government is not a problem, despite the howling and lamentations of the advocates of Social Security Phaseout. A White House that was serious about creating jobs and stimulating the economy would be using far more federal resources to, among other things, aid the states. That would create a very different environment for all states, California included. But that's not what we have in Washington. We have a Democratic Administration committed to neoliberal economics, i.e., the Herbert Hoover approach with a smiley face.
