California reelin'
Lessons from a place that combines most of the shortcomings of the modern Western state
Mar 17th 2011 | from the print edition
DON NOVEY does not look like a typical Californian entrepreneur. The grandfatherly, fedora-wearing conservative began his career as a correctional officer at Folsom State prison in the 1970s. But he helped build one of the Golden State’s largest industries.
Thirty years ago, when Mr Novey became president of the California Correctional Peace Officers Association (CCPOA), only 2,600 members walked what he calls “the toughest beat in the state”, and there were only 36,000 inmates in California’s prisons. Now, as Barry Krisberg of Berkeley Law School points out, some 170,000 people are locked up there, and CCPOA has 31,000 members. From the air California can look like an archipelago of prisons.
Mr Novey made CCPOA a dominant force in state politics, and not just by dishing out political contributions in Sacramento, the state capital. He shrewdly formed an “iron triangle” with Republican lawmakers and prison-builders. And he gave it a cause: tougher sentencing for criminals. CCPOA sponsored the “three strikes” law, mandating life imprisonment for three serious felonies, and helped set up victims’ rights groups.
By the time Mr Novey gave up the CCPOA’s presidency in 2002, the state had built 21 new prisons. Some guards now earn more than $100,000 a year (with overtime). Mr Novey negotiated pensions of up to 90% of salary, with retirement starting as early as 50. To many of his members Mr Novey remains a hero—a man who provided good jobs and made them safer. And the taxpayer footed the bill.
Jerry Brown, the Democrat who was recently elected governor, faces a deficit of around $25 billion this year—bigger than the total budget in 1975. That was the year when Mr Brown in his younger “Governor Moonbeam” phase first ran the state. Back then California’s government was widely admired for its highways and its universities, and also as a font of political ideas both on the right (Reaganism) and the left (environmentalism). Now the roads and colleges are crumbling, even though total government spending in the state will reach $230 billion this year (see chart 4). Californian politicians get some of the lowest ratings in the country. Like a paranoid movie star, the state has kept on grasping at miracle cures—from Proposition 13, the tax-cutting ballot initiative, in 1978 to the election of Arnold Schwarzenegger, the cyborg-ex-machina, in 2003.
California is now widely studied as an example of what to avoid. 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? Such questions are worth asking because what happens in California, which is famously like America, only more so, tends to happen elsewhere. And indeed a list of its ailments applies to a greater or lesser extent throughout the Western world.
• 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.
In Sacramento things are no clearer. Thanks to various voters’ initiatives, as much as 75% of the budget is outside Mr Brown’s control. Proposition 13, which halved and capped property taxes, forced the state to bail out local government. A chunk of the state’s own money comes from the federal government. So cash for health, schools, welfare and much else sloshes backwards and forwards between Sacramento, Washington and various Californian cities. That makes it impossible to hold any Californian politician fully accountable for any part of government.
Some of this stems from specifically Californian afflictions, especially the ballot initiatives. But overlapping areas of responsibility are common throughout the West. In Australia, for instance, the federal government runs primary health care but the states run hospitals. In most European countries taxes are raised centrally but tend to be spent by local or regional government. The European Union increasingly plays the same role that Washington does in America, adding another layer of rules and mandates.
• Out of date. The most recent full redesign of California’s government was in 1879, when the state had only 865,000 people; now it has 37m, and a single state Senate seat represents more people than the whole Senate did then. As California’s pre-eminent historian, Kevin Starr, observes, “it is not surprising that an organisation set up to look after fewer than a million people should have a collective political nervous breakdown when it governs something almost 40 times that size.”
The same argument could be applied to the United States as a whole. Its constitution was designed for a country of 13 states and 4m people, when things like religious tolerance, the right to form militias and preventing people trying to become king mattered a lot. The Founding Fathers had no plans to bring either North Dakota or California into their union, nor could they imagine the ramifications of those two states both having the same voting weight in the Senate even though California’s population is 57 times bigger.
In Europe, thanks in part to two world wars, the state has been redesigned more recently, though many antiquated structures—such as Britain’s House of Lords—have survived. Many of these oddities work well in practice, and Americans revere their constitution. But structure matters. It is hard to think of any successful commercial outfit that has stuck to the same organisational design for 23 years, let alone 230.
• Too much power for vested interests. In “The Logic of Collective Action” (1965), Mancur Olson argued that rational individuals will work hard in a group with a selective aim reserved for its members (prison guards banding together to press for higher wages, for instance); they will expend less energy to push for public goods whose benefits are widely shared. Once entrenched, an interest group is extremely hard to shift. Its members have much to gain by fighting to retain their particular privileges, and would-be reformers have to take on disproportionately large costs to push for a vaguer public good. Californians have moaned about their prison guards’ perks for a while, yet have only recently plucked up the political will to do anything about them.
In rich countries no group has illustrated Olson’s work more clearly than farmers. In California’s Central Valley you can watch Californian tax dollars evaporating before your eyes as farmers guzzle most of the state’s precious water to cultivate crops that were never meant to grow in a desert. In the European Union two-fifths of the budget still goes to agriculture. In Poland farmers are exempt from income tax. Just as with the prison guards, the subsidies keep flowing to farmers largely because of conservative politicians. Although the greediest public-sector unions are firmly allied with the left (see article), the supposedly low-tax right also lavishes money on its own priorities. The new Republican leadership in Washington started its search for waste in the foreign-aid budget by trying to get the biggest recipient of American largesse, Israel, moved to the Pentagon’s budget.
Interest groups work especially well in systems like America’s where money needs to be raised and where party primaries matter. A Republican politician describes how the gun lobby works. If a Republican congressman signs up to the National Rifle Association’s agenda, he gets a little money and some organisational help from vocal supporters. If he does not, the NRA will put a lot of resources behind his opponent in the primary. Going with the NRA is thus a lot easier. Many Democrats would say exactly the same about the teachers’ unions and education reform. Opposing them is not worth the hassle.
Olson’s theory also helps explain why broad-based lobbying by big business has given way to narrower special interests. Fifty years ago California was run by a business elite, keen to keep taxes down and infrastructure spending up but with a broad interest in the well-being of the state. Since then Californian businesspeople have discovered that targeted lobbying can do a lot for their specific business. That has made it harder to get commercial interests to support projects of general benefit such as transport in the Bay area. It has also brought about an increase in regulation as individual businesses have lobbied for rule changes that create barriers to entry for other firms.
• Ever more rules and 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 favoured lobbies.
This points to two endemic problems with government throughout the West. The narrow one is that tax systems are in need of reform. America’s tax code has grown from 1.4m words in 2001 to 3.8m in 2010. Members of the European Union, too, have made their tax systems increasingly complicated—with the heroic exception of flat-tax Estonia. Most economists think taxes should be shifted towards consumption and away from income and investment. But whatever the system, it should be easy to understand.
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.
• The politics of gridlock. Sixty years ago California’s politics were rather cosy. In the early 1950s Pat Brown, Jerry’s father, who was then the Democratic attorney-general, used to share a car from Sacramento to San Francisco on Fridays with Earl Warren, the Republican governor. This year Jerry Brown in his inauguration speech described politics as a primordial battle between “Modocians” and “Alamedans” (Modoc being a rural, conservative Republican county and Alameda a liberal enclave east of San Francisco).
It is fashionable to blame this animosity on the internet and on partisan media channels such as Fox News. But it often has structural causes, such as gerrymandering. California has tended to choose centrists—liberal Republicans or conservative Democrats—in statewide elections, but the legislature’s electoral boundaries have been drawn to produce the biggest number of safe seats. That means primaries are the only real test for most politicians. Here reform may at last be on the way: Mr Schwarzenegger managed to force through an initiative that handed over redistricting to an independent commission.
But at a national level it will be a long time before America has a sensible debate about its budget deficit. George Lodge, a Harvard Business School professor who ran as a Republican against Ted Kennedy in Massachusetts in 1962, argues that many Western countries are now conducting a dialogue of the deaf. Conservatives want to talk about the “macro” vision (a smaller state) but not the “micro” specifics (the unpopular cuts to achieve that). Leftists want to talk about specific micro programmes they want to build up without ever discussing the macro bill for all of them.
• 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.
The poor pay virtually no income taxes, and many countries, especially in Europe, have a problem with entrenched welfare dependency. Britain, for instance, has a quarter of a million households in which no one has ever held a formal job. But overall it is not clear that the poor benefit from government transfers and benefits as much as you might expect. In America two-fifths of all “social payments” are made by the private sector through employers’ pension contributions and health plans—both spurred on by tax breaks that go mainly to middle-income Americans.
When you look at overall public spending, the gap widens. Middle-income Californians go to better schools than poor ones do. Their streets often have more policing. They are far more likely to go to a publicly financed university, to claim mortgage relief on their home, to own a farm that collects subsidies or to attend a ballet supported by public funds. Europe is different only in that it subsidises the middle classes less through tax breaks and more through “universal” benefits—things like free bus passes for the old—which often started out being targeted at the poorest but are now given out to all.
That points to another distortion, which is generational. A large number of welfare payments and social transfers are now aimed at the elderly. The huge baby-boom generation that is just about to retire will make these even more expensive. In Christopher Buckley’s political satire, “Boomsday”, America’s young eventually start bribing their self-indulgent parents to end their lives early. In his interesting book “The Pinch”, David Willetts eschews that solution for Britain’s baby-boom generation, but calculates that it will take out nearly 20% more from the system than it has put in. The first budget of the new Tory government, in which Mr Willetts is a minister, still directed money disproportionately towards the old.
Across the rich world, politicians keep on pushing money towards the middle class and the old because that is where elections are decided. People aged 65 and older still account for only 13% of America’s population, but they made up over a fifth of its electorate in 2010. No group is better organised: the AARP (formerly the American Association of Retired Persons) has 40m members.
• The secession of the successful. Hollywood, Silicon Valley or any of the other places where successful Californians gather show a profound contempt for their government. At the most extreme, such people have walled themselves off in gated communities, with their own security, health services and even schools. Their main relationship with the state, at least as they see it, is to write a cheque for their taxes—and their only interest in it is that the cheque be as small as possible. Philanthropy continues, but remarkably little goes into beautifying their environment (Silicon Valley is the ugliest industrial cluster imaginable).
Similar complaints can be heard in other centres of elitism: Wall Street does not do much about the Bronx, and the City of London usually ignores the East End. Both globalisation and the internet have increased this sense of separation. Companies with strong local links have been swallowed up by larger groups. Wells Fargo used to be a powerful force in San Francisco and Security Pacific in Los Angeles; both are now part of bigger empires. The Indian tycoons in Palo Alto feel closer to Bangalore than they do to Bakersfield (and so do many of their American colleagues).
This secession has an effect on government. It makes capital, as well as businesses and talented people, more footloose, so it becomes harder to raise taxes overtly. Worst of all, the secession of the successful means that the most talented brains are largely left out of the mix. One leading California Democrat describes the list of businesspeople prepared to run a public commission as “painfully short”.
• You, yes you, are to blame. California is interesting for one final reason. Throughout most of the West, people are in denial about the consequences of wanting both more government and lower taxes. In California ballot initiatives have actually given voters a direct say. Generally they have made government worse, protecting bits of spending yet refusing to pay for it. Having voted for Mr Schwarzenegger in 2003, they deserted him the moment he tried to introduce structural reforms in 2005.
Interviewed shortly before his exit at the start of this year, the gubernator had two thoughts. One was that his successor would find reform easier because the system is more manifestly bust now than it was in 2003 (and Mr Brown is certainly having a go). The other is that Californians are still determined to get something for nothing. “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.
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