The United States may have zigged right in Tuesday’s election but the People’s Republic of California zagged left. While most Americans determined that they’d had enough runaway spending, deficits and job-killing regulations, Californians concluded that they were quite comfortable in the smothering embrace of big government.
Let’s survey the damage. Sen. Barbara Boxer, one of the nation’s most liberal senators, defeated Carly Fiorina by more than nine percentage points, and Republican gains in the massive congressional delegation were held to one seat. More importantly for governance in the Golden State, Jerry Brown captured the Governor’s office, dispatching Meg Whitman by a 13% margin. Bucking the national tide at the statehouse level, Democrats bolstered their margin in the state assembly.
Meanwhile, voters rejected Proposition 23, which would have suspended the state’s greenhouse gas regulations until unemployment, now more than 12%, dropped to 5.5% for a full year. And they passed Proposition 25, which allows the legislature to pass a budget with a mere majority vote, as opposed to the 2/3 majority necessary previously that had augmented the bargaining power of fiscal conservatives.
Other Americans may have lost faith in big government, but Californians said decisively that they like it just fine. The United States now will be treated to a large-scale experiment. Which model for economic prosperity will thrive in the years ahead? The progressives’ model of expansive, activist government in California? Or the conservatives’ model of small government and fiscal restraint in much of the rest of the country?
Democrats are promising fiscal sanity now that Proposition 25 will make it easier for the ruling party to enact a budget. If nothing else, they should get their budgets approved on time. And they expect their greenhouse gas regulations to spur enough growth in the green economy to create many thousands of new jobs. (Their case wasn’t exactly strengthened, however, by Solyndra Inc.’s announcement Wednesday that, despite having received $535 million in stimulus funds, it was closing its old solar-panel manufacturing plant and scrapping expansion plans at the new plant.)
Also in their favor, California is famous for its openness, tolerance and diversity. Anything goes, from decriminalizing pot and filming porn to providing sanctuary for undocumented aliens. This openness, according to the theories of economic geographer Richard Florida, should stand the state in good stead by fostering an environment that attracts the “creative class” and fuels innovation. The state’s world-class industry clusters — movies, gaming, biotech, microchips, software and now green energy — will continue to spew innovations and create new jobs.
There is no denying the vitality of California’s leading industries. They are world-class centers of wealth creation, the likes of which few other states can boast. If any state in the country can make liberalism work, it is California.
But there is a dark side to California’s political economy that may prove to be its undoing. Sacramento is run for the benefit of the poor, the public employee unions and industry elites who lean left on social and environmental issues. Taxes are high, energy prices are punishing and environmental regulations are stifling. The business climate is hostile to small business, manufacturing and the middle class. If conservatives are right, the state will continue experience an exodus of businesses that see no long-term future for the state for anyone outside the orbit of Hollywood and Silicon Valley.
And California needs strong growth to pull state and local governments from the mire of high taxes and crippling indebtedness. Banking analyst Meredith Whitney gives California the nation’s lowest rating for government finances. Real estate prices will continue to fall, she predicts, which will pull down property tax revenues in the downdraft. Many municipalities loaded up too much debt during the years of plenty and now find themselves with a staggering load.
If California’s political culture resists making spending cuts and raises tax rates instead, the flight of businesses and taxpayers likely will accelerate. Large swaths of the economy outside the San Diego, Los Angeles, San Jose and San Francisco knowledge clusters will shrivel. Whether the islands of prosperity can carry the state’s debt load with declining support from their parched and dying hinterlands is the question that municipal bond investors everywhere will be most anxious to find out.
