Last week’s election, ushering in Jerry Brown as Governor-elect and changing passage of the state budget from two-thirds to a majority vote, will impact how legislators reconcile California’s budget deficit. Missing in the debate between higher taxes and less spending is whether current spending provides Californians value for their money.
According to Census data, California had the 10th largest state and local government sector in the country in 2008, the most recent year for which comprehensive data is available. State and local government spending represented 22.3 percent of the state’s economy. That is almost twice as large as 11.4 percent of GDP, the size of state and local government that corresponds to maximizing economic growth, according to academic research.
This data, however, still doesn’t clarify whether residents are getting value for their tax dollars. After all, if Californians have the 10th best education, 10th best transportation, 10th best social safety net, then the bargain in terms of the burden of government (10th highest) might make sense. Again, the key is to determine value-for-money or what residents are getting for their tax dollars.
Thankfully, noted economist Antonio Afonso and his colleagues developed an innovative empirical approach to answer the value-for-money question. They collected outcome performance data from a group of industrialized countries (OECD) including the U.S. on areas like education, health care, and infrastructure. This data allows one to ask how much output was generated from each country compared to the rest and how much it cost.
The first step is to compare California’s outcomes with those of the 23 countries in the analysis. California ranked a dismal 22nd among the 24 jurisdictions. California was 12-percentage points below average in its ability to deliver outcomes in areas like education, health care, and infrastructure compared to the other countries.
The second step is to compare the outcomes with the resources (money) spent to finance those outcomes. California improved slightly but still underperforms. It ranked 15th among the 24 jurisdictions. Given the resources spent, California displayed particular weakness in its ability to deliver results in education and health care.
These measures allow a calculation to determine the “wastefulness” of government spending. California scored a woeful 0.72 and ranked 21st out of the 24 jurisdictions. The score implies that with the current level of government spending, California’s government performance is 72 percent of what it could be if it were providing services efficiently. Poor value-for-money, coupled with a heavy burden of government, amounts to a rather terrible bargain for Californians.
The empirical evidence is powerfully persuasive that government in California has grown too large and inefficient. Reducing the size of government in California is a foundational component of economic renewal. The programs and services that survive spending cuts need to ensure better value for taxpayers. We suggest subjecting every state and local government department to the following tests.
First, assess whether each program and department operates in an area in which government is required. Second, if government intervention is need, what is the level of government closest to the people that is best able to deliver the program or service? Research has consistently shown that services delivered by governments closest to the people are more efficient and less susceptible to corruption and capture by special interests.
Third, what is the proper role for the public and private sectors in each of these areas? The reality is that there is a spectrum of opportunities for both the public and private sectors to participate. The key is to determine the proper mix in each area to achieve efficiency.
These criteria provide a broad framework for evaluating current spending, prioritizing programs and services, and identifying areas for reform. Spending reform is the foundation for downsizing government, achieving a sustainably balanced budget, and restoring prosperity to the Golden State.