The Truth About California

MarketWatch

Commentary: Maligned state is actually saving the rest of us

Can everyone please stop talking total nonsense about the California budget?

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I know that facts and truth seem to be optional these days. I know that in the exciting new world of infinite media everyone can choose to believe whatever fantasies they want. But in the case of California, it's getting on my nerves.

Last week Chris Whalen, the high-profile analyst at Institutional Risk Analytics, caused a stir by arguing California was going to default on its debts.

"I think they're going to default ... I think eventually the debt will have to be haircut," he told Henry Blodget, the former dot-com analyst and now editor of Business Insider. "I don't think the Republican Congress is going to sign on for a bailout of California." Default was "inevitable," Whalen added, and suggested Sacramento might have to start issuing its own currency.

Alarming stuff. But when I e-mailed Whalen, asking him for specific calculations, none were forthcoming.

"My general comments have to do with my guess as to the impact of mounting foreclosures and flat to down GDP on state revenues," Whalen replied.

Do the Math

Your guess? These are important problems, to be sure. But do you have any actual numbers?

"Revenues fall and mandates rise to the sky," he wrote. "You do the math."

Er, no, actually. It's your assertion. You do the math.

Whalen blamed the matter on Blodget.

"I am a bank analyst," he wrote. "I have not written anything on this. My comments have taken on a life all their own ... This is all Henry's fault. Call him."

Some prediction. Meanwhile Blodget chimed in on the e-mail exchange: "It's a bold prediction! Don't back down now!"

Bah. Welcome to the media world in 2010.

But this is hardly an isolated case. California bashing is everywhere these days — especially since Californians had the temerity not to vote Republican a few weeks ago.

You've probably heard a variant of the following storyline:

California is a basket case. The Greece of America. Decades of crazy liberalism and runaway spending have crippled the economy. Wealth creators are fleeing in droves. The people left are spending themselves into rack and ruin. They can't balance their budget, once again, so they are asking the rest of us for a bailout. And they even voted for Jerry Brown, a Democrat! It's time we said enough is enough. No bailout for California! And get out of their muni bonds while you can — they're going to default.

Basket Case

It's persuasive. You can hear it anywhere. But it's total hogwash. You might just as well believe that California is inhabited by pixies from the planet Mars, or that the budget problem in Sacramento has been caused by a giant sea monster destroying downtown San Diego.

It's not just slightly wrong. It's almost totally wrong.

California's a basket case? The state has one of the highest living standards in the country, yet over the past 10 years the economy has still grown much faster, per person, than the national average. According to the U.S. Bureau of Economic Analysis, it's up 15% — compared to 8.9% for the U.S. overall.

It's grown faster than low tax neighbors like Arizona, Utah or New Mexico. It's grown three times faster than Texas.

And this was from 1999 through 2009: In other words from the peak of the dot-com years through the depths of the recession. It managed this growth despite the double blows of the tech and housing busts.

Most of the states that have grown faster than California during that time are farm states, riding an incredible boom in agriculture prices.

Fact.

Venture Dollars

Back in the Silicon Valley glory days, in the late 1990s, California attracted an incredible 42 cents of every venture capital dollar invested in America. Ah, those were the days — when the private sector was still willing to back California with its own money. As any conservative will tell you, that's the real voting in the economy.

How far has California fallen from those giddy days?

According to the latest data from PricewaterhouseCoopers and the National Venture Capital Association, in 2010 California just got a miserable, er, 50 cents of every venture capital dollar invested in America.

That's right. Venture capitalists are putting a bigger share of their money into California today than they were in 1999. Wow. What a failed state. What a basket case. Will the last person left please turn out the lights?

Don't expect to read about this at the far-right Manhattan Institute or the National Review. Don't expect to read a column about it from George Will anytime soon.

Are wealth creators fleeing? I keep hearing this. Did Apple Inc. and Google Inc. just relocate to Oklahoma? Is Twitter being run from Alabama? When Mark Zuckerberg left Harvard to run Facebook full-time, did he open shop in "low cost" Utah?

During the past decade, one of the biggest reasons its residents left California was simply because of the astronomical cost of housing.

Tax Base

Now let's talk about taxes. This is where the lies really earn a Ph.D — as in "piled high and deep."

The best study of state and local tax burdens comes from the venerable Tax Foundation, an independent non-profit that's been acting as a taxpayers' watchdog in Washington since 1937. The Tax Foundation is non-partisan, but by the nature of what it does it leans politically to the right.

According to them, as of 2008 (the most recent year analyzed) state and local taxes in the average state came to about 9.7% of the annual state economy.

What was it in crazy, liberal, communistical, socialistical, un-American, soviet-style California?

Er, 10.5%.

That's right. The burden was all of 0.8 percentage points higher than the average.

Higher Wages

Paging Leon Trotsky!

In the late 1990s, when California was riding high, it was...10.6%. Thirty years ago, when even Meg Whitman thought it was a wonderful place to work, start a family, and hire an illegal immigrant to raise your kids, it was...10.1%.

You will occasionally hear horror stories about "public sector teachers" in places like "San Francisco" (shudder) earning, say, $100,000 a year.

I've never understood why it's wrong for a teacher to earn a good salary. The same people who wouldn't blink at the news that a Wall Street banker made $20 million anthraxing our economy is horrified that a teacher makes $100,000. But even putting that issue aside, it's worth remembering that wages are higher in San Francisco for a very simple reason.

It costs more to live there. A lot more.

According to the authoritative ACCRA cost of living index, a $100,000 income in San Francisco will only buy you the same living standard as a $55,000 salary in places like Austin, Texas, or Little Rock, Arkansas. Do we hear horror stories about teachers in Texas earning $55,000 a year?

But if you think the lies stop there, think again. Because we haven't even gotten to the biggest of all.

That California "bailout."

There's no such thing.

California bails us out. It has been bailing out the rest of America since, oh, about 1849 — before it even joined the union.

Californians are so productive that every year they send billions of dollars in surplus dollars to the rest of America. Year after year they have sent vastly more in federal taxes than they ever get back in federal spending.

California isn't our Greece, it's our Germany. It isn't Little Orphan Annie. It's Daddy Warbucks.

Fact.

The conservative-leaning Tax Foundation, which tracks the data, calls this surplus a "fiscal transfer." I call it a bailout.

The numbers are simply staggering. In the quarter century through 2005 (the most recent year for which we have data), Californians bailed out the rest of America to the tune of about $620 billion in today's dollars. In 2005 alone it came to nearly $50 billion.

That is 30 times next year's forecast "budget shortfall" in Sacramento. The only reason California has a budget problem at all is because they have, foolishly, spent so much money subsidizing everyone else.

If it weren't for that, California could cut its state and local taxes by around $1,300 a person. That's a $1,300 tax cut for every man, woman and child. Hmmm. Funny you never read about that anywhere, isn't it?

Meanwhile, take with giant fistfuls of salt those self-serving claims of fiscal rectitude you're apt to hear from politicians in other states, especially in the South and the West. These states haven't balanced their own budgets with their own money in living memory. Without bailout money from states like California, New York and New Jersey, their taxes would be much higher and their citizens poorer.

But don't expect to hear any of this from California bashers — least of all those on the right. After this November's electoral humiliations of Meg Whitman and Carly Fiorina, the Republican Party is putting away the kid gloves and getting out the knife.

Could California really default? Run the numbers.

State debt costs come to just $6 billion a year — a fraction of the $90 billion-plus budget. Under the state Constitution, the interest on the debt gets paid second, after the $36 billion that goes to K-12 education.

Certainly it would be foolish to be complacent. And there are serious problems with long-term budget commitments, especially for the retirement and health care benefits for teachers and other public employees. Future cost growth with have to be restrained, and presumably some planned benefits will end up being renegotiated.

But how big are these costs in California? The non-partisan Legislative Analysts' Office in Sacramento estimates there's a $136 billion gap in the state pension and benefits system. It may work out to more or less. But that's the actuarial figure at the moment.

Size of the state economy? Oh, $2 trillion a year. That's 14 times the size of this gigantic pension-fund gap.

But don't expect any of these facts to surface when Washington starts talking about a California "bailout." This is 2010. Inconvenient facts are optional.

Brett Arends is a columnist for MarketWatch and The Wall Street Journal, based in Boston.

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