Friday, December 16, 2011

California’s Road to Ruin | The Economist

Golden State’s ability to sustain Medicaid and private health insurance will rely largely on its ability to tame its budget woes. 

California is now widely studied as an example of what to avoid.  (Note that this is a particularly alarming statement coming from a European media outlet.) Why is the home of Apple and Google so useless when it comes to running school districts or budgeting, and why have so many clever people settled for such a bad deal?

  • A messy structure of government. Look at an administrative map of California and you might assume that a child had scrawled over the design. It is a muddle of thousands of overlapping counties, cities and districts. Beverly Hills and West Hollywood sit in the middle of Los Angeles but are separate cities. The LA school district has 687,000 pupils, but there are 23 others with 20 pupils or fewer. Often voters have little idea what their officials do for their money. Last year the residents of Bell, a poor Latino city of 38,000 people, found their city manager was paid $788,000 and their police chief $457,000 a year.
  • Ever more taxes. A study last year by the Pacific Research Institute said California had the fourth-largest government of all American states, with state and local spending equal to 18.3% of its gross state product. Texas, a state with which California is often compared, chewed up just 12.1% of GSP. It also looked at tax structures, and on that count California came 45th out of 50 states, with its steep income tax being especially damaging. Its tax system has been a mess ever since the dotcom boom when it relied too heavily on capital-gains taxes. As taxpayers have got crosser, the state has tried to tax them as sneakily as possible while adding tax breaks for favored lobbies.
  • And more rules: The broader problem is the growing thicket of regulation—of which taxes are merely the most onerous part. Many of the new laws that have been passed in both Europe and America have admirable aims: better health care, cleaner air, less discrimination against minorities. But as Philip Howard of Common Good points out, they are amazingly cumbersome—Mr Obama’s health bill was over 2,000 pages long—and once on the statute book, they seldom come off again. One solution is to follow Texas’s example and let legislatures meet only occasionally. Another would be to introduce sunset clauses so that all regulations automatically expire after a while.
  • Towards the older middle. Given the fury from the left about bankers and from the right about welfare spongers, you would expect all that extra government spending to have been swallowed by either end of the income spectrum. In fact in California, as in most of the West, the cash has flowed mostly towards those with middle incomes and the old.  Both the rich and the poor do relatively badly out of government.
  • The rich pay for most of it. In California the top 1% by income accounted for 43% of income-tax revenues in 2008 and the top 5% paid 64%. In America as a whole the top 1% paid 38% of federal income taxes and the top 5% paid 58%; their respective shares of national income were 20% and 38%. The wealthy pay the lion’s share in most European countries too. Getting the rich to cough up so much might be a desirable social goal in a time of great inequality, but it is hard to claim that they are not paying their share.

Californians are still determined to get something for nothing. (See graph below.) “People here are addicted to improving their lifestyle. They want more and more from their government.”

Is there a better way? Many of those who used to see the future in the Golden State now prefer to look across the Pacific—towards emerging Asia.

Source: The Economist, Print Edition, Mar. 17, 2011. Full text: