California is back in the news. On Saturday, Governor Jerry Brown announced that the state’s budget deficit would exceed the original estimate he made in January of $9.2 billion. The new deficit is projected to be a remarkable $16 billion. With state spending still through the roof, unemployment at 11 percent, and poverty on the rise in the Golden State, hope is diminishing that California’s finances will ever return to normal with anything short of a declaration of bankruptcy.
So how did California get in this ugly predicament? The same way the federal government did; by interfering with free market forces by erecting a massive welfare leviathan. The only difference between the caretakers in Sacramento and the caretakers in D.C. is that the latter have the political luxury of printing money to forestall the inevitable day of reckoning. Sacramento does not have that same luxury and unless something drastic happens, it faces insolvency right now.
The five features of the welfare state that have brought the current financial calamity upon California are overregulation, bureaucracy, high taxes, social welfare programs, and unionization.
Overregulation and bureaucracy go together. It has been said that the fastest-growing entity in California is government and its biggest products are bureaucracy and regulation. California’s environmental regulations have always been legendary, but little noticed is the enormous bureaucracy built to regulate most other areas of life. Maintaining these ever growing monstrosities costs a fortune. Additionally, their onerous regulations are one reason that for the seventh year in a row Chief Executive Magazine’s survey of 500 chief executives ranked California as the nation’s worst state to do business in.
Besides regulations chasing business from the Golden State, there are also high taxes. Statists claim that California’s budget deficits have been caused by an ever-shrinking tax base. This is the old chicken before the egg argument.
The reason the tax base continues to shrink is precisely because taxes are so high. California has the 48th worst business tax climate. Workers who earn more than $48,000 a year pay a top income tax rate of 9.3 percent, which is higher than what millionaires pay in 47 states. Its sales tax is one of the highest in the nation, at 8.25 percent. Rounding out the levies that rank among the highest in the country are its capital gains taxes, gasoline tax, and vehicle license taxes. High taxes are a big reason why the state has seen a net loss of four million citizens to other states in just the last two decades. When government raises taxes, the astute find ways to avoid them. The industrious cut back their enterprises and in the case of California, many simply left for lower tax states.
Lastly, Californians have voted for and built a huge social welfare system that puts an enormous strain on the state treasury. The state has about 13 percent of the country’s population but 33 percent of its welfare recipients. Add to that the union contracts of state workers and it is no wonder California is a sinking financial ship. Her prison guards and public school teachers are the highest paid in the country. As of 2009, the average pay and benefits package for a firefighter was $175,000 per year.
California is not alone. For decades, the United States, Greece, and Spain have created welfare states that have choked the lifeblood out of the free market. All face grave financial circumstances today. The free market’s great revenge is that welfare states cannot last forever. Their inevitable collapse comes because they are not self-sustaining. They grow by feeding off the labor of hard working citizens either through higher taxes or inflation. At some point either those sources dry up or the social programs become so large that no amount of money could ever be raised to keep the scheme going. Like Spain and Greece, California is facing immediate financial insolvency. The only thing keeping the United States from the brink is Bernanke’s printing press.
Article first published as The Welfare State has Destroyed Californiaâ€™s Economyon Blogcritics.
Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina.