“The Spending-Industrial Complex” and the Future of California

“The Spending-Industrial Complex” and the Future of California

SACRAMENTO – California’s current crisis, worst since the 1930s, has spurred talk of revising the state constitution. Legislators so inclined might first consider recommendations from the 1996 California Constitution Revision Committee, subject of a July 10 lecture by Fred Silva at the University of California’s Sacramento Center.

Mr. Silva was the staff executive director of that 1996 Commission. He is now the senior fiscal policy advisor of California Forward, an organization aiming to transform state government through “citizen-driven solutions.” On July 10, Mr. Silva lamented the state’s current crisis, noting the drop in property tax revenues. He didn’t spell out a specific solution but his comments, and the 1996 Commission, may provide some guidance for reform.

That Commission recommended abolishing the Board of Equalization and the merging of state tax administration functions. For each fiscal period, the recommendation said, “expenditures must not exceed revenue and reserves.” The California constitution should require the budget to be passed by the prescribed deadline “or the governor and the legislature forfeit their pay.” The 1996 Commission wanted a majority vote to enact the budget and budget-related legislation. But borrowing to finance a deficit would be prohibited.

All references to county superintendents and county boards of education should be deleted from the constitution. The superintendent of public instruction, the treasurer, and the state insurance commissioner, should be appointed by the governor, not elected.

These and other 1996 recommendations failed to become reality. Mr. Silva, formerly of the Public Policy Institute of California and not known as a fiscal conservative, explained that there was no constituency for change. He did, however, identify a constituency for the status quo in our “political class.” This class, he said, likes the down-ballot offices that help politicians move up the ladder.

Mr. Silva also mentioned California’s “spending-industrial complex,” which he knows from experience. (The reference, for those who missed it, is from President Eisenhower’s warning about the dangers of the “military-industrial complex.”) For the spending-industrial complex, Mr. Silva said, “fiscal balance is not as important as spending obligations.” He also cited “the K-12-industrial complex,” which Mr. Silva said has had first dibs on state revenue since 1849.

Things are clearly worse now than they were in 1996. So what does Mr. Silva recommend?

“Pick your dragons carefully,” he said, and “try not to solve everything in the constitution.” The problems should be tackled during the crisis, because afterward “nobody cares.” Further, he said, “there is no constituency for change, so build one during the crisis.”

That should not be terribly difficult. The current crisis is inherent in the system, especially the punitive state income-tax system, and is likely to be around for a while. The constituency for change may be found in the working people of California, now suffering in the downturn.

As for the “dragons,” Mr. Silva did not name them, but the spending-industrial complex would seem to qualify. Allowing spending obligations to trump fiscal balance, after all, is a major source of California’s problems. Those problems remain considerable, but Mr. Silva tries to look on the bright side.

“Better to be optimistic and declared a fool than a pessimist and be right,” Mr. Silva told the UC gathering in Sacramento. There are indeed grounds for optimism.

Assembly Speaker Karen Bass, not known as a fiscal conservative, is talking about a flat tax for California. That is a good sign because as PRI noted last year in Ending the Revenue Rollercoaster, by Robert P. Murphy, a flat income tax would provide more stability in revenue, and would not punish Californians for working harder.

“It has never paid to bet against a state with as many inventive people as California,” said the July 11 edition of The Economist. “The state also has an awesome ability to reinvent itself – as it did when the defense industry collapsed at the end of the cold war. Perhaps the rejection of tax increases will ‘starve the beast’ and promote structural reform.”

As they contemplate structural or constitutional reforms, legislators should understand that economic growth will play the key role in California’s recovery, and its future.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.