Economy of California: Who’s to blame?

Arnold Schwarzenneger?


1. Gov. Schwarzenegger warns that without approving the propositions, California will be forced to do some big budget cuts and even to sell some landmarks. But what’s the reason that California is faring so badly in the first place? Where did the problems start and how serious are they from the realistic point of view?

2. What is the role of Gov. Schwarzenegger in Californian economy and budget problems?

3. There was a proposition recently to allow selling marijuana in California and tax it to help the strained budget. Do you think it’s just a weird idea or could such strange-looking measures help?


John Ellwood, Professor of Public Policy, University of California at Berkeley

1. California’s basic problem is the international deep recession. Same as the EU. Same as Russia. Unlike nation states California does not have a central bank and therefore cannot monetize its problem (cannot print money). Moreover because of problems with the US credit markets it is not clear that it can borrow enough to cover its short-term cash problems.

So California’s biggest problem is the weakness of its economy, which in turn leads to a large decline in its revenue base. California has a special problem in that it is one of only three us states that require a two-thirds vote in both chambers of its legislature to raise tax rates. This gives a veto to conservatives (Republicans) who are ideologically opposed to raising taxes. This means that efforts to balance the California budget have to be in the form of either cutting expenditures or borrowing. Given that the size of the budget problem is somewhere 1/4th to 1/3rd of the general operating fund of the budget this will require very large cuts and thus a dramatic reduction in services. As I said above borrowing might be difficult give the size of the problem and the weakness of the us credit markets.

2. Governor Schwarzenegger has had no role in creating the current recession – it is a national if not an international problem. One can argue that he has had a role in creating the size of the state’s budget problem in that until this year he has opposed raising taxes and has been unwilling and/or unable to get the legislature to make significant reductions in expenditures.

Moreover, when he first ran for office the governor led a movement to reduce a motor vehicle fee (licence) tax that use to bring in us$6 billion per year. So he was part of a successful effort to reduce the tax base by us$6 billion. Finally, for four years during which the economy was strong the governor rolled over a structural deficit of about us$6 to us$8 billion. One could argue that during these good times he should have eliminated this structural deficit. If he had done so today’s deficit would be us$6 billion lower.

3. This is a joke. Not to be taken seriously. To impose such a tax the national government would have to legalize marijuana. There is no support in the US congress to do this.

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