Editore"s Note
Tilting at Windmills

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February 25, 2004
By: Kevin Drum

PROPOSITION 57....Enough about gay marriage. How about those deficit bonds that Arnold wants us Californians to approve next Tuesday? I know that 90% of you don't care about this, so consider this a bit of pandering to my fellow inmates here in the Golden State.

Here's the deal: last year the legislature passed about $10 billion in bonds to help cover the deficit for 2003-04. Needless to say, 2003-04 is nearly over, and the money has been spent, so it's too late to fix this problem either by raising taxes or lowering spending. What's more, since there's a chance that the courts might overturn these bonds, our only choice is to approve Arnold's bonds via a constitutional initiative. It's either that or default.

Up until now, anyway, that's been my vague understanding. However, thanks to a reader I finally located a genuinely readable explanation of the whole issue from the unlikely source of E.J. De La Rosa & Co., an investment banking firm. It's only four pages long, so go ahead and read it if you're interested in learning more about the nuts and bolts of the deficit.

The bottom line is this: it's not true that the money has already been spent and that's why we have to approve Arnold's bonds. Rather, California has $14 billion in short term debt that we have to pay off in June. That's what the bonds are for.

But if the bond measure doesn't pass (and if the legislature's bonds get overturned in court), what can we do? Answer: we can issue more short term debt.

Now, there are indeed problems with this. The short term debt would be issued at a higher interest rate, it would put a pretty tight straitjacket on state spending, and it would have to be paid back fairly quickly.

However, it wouldn't be fiscal Armageddon. What it would be is a firm order to the legislature to raise taxes and cut spending in order to pay off the short term debt. This is what should have happened years ago, and painful as it may be, it's now obvious to me that this is still an option.

Arnold wants to have it both ways: he wants to have a tax cut and he wants a bond measure to help finance it. This is almost Kafka-esque irresponsibility and I think it's time to cut the crap. The only way to get ourselves out of the mess we're in is via both spending cuts and tax increases.

So despite the undoubted problems it's going to cause, I think Californians ought to vote No on 57. Combined with a Yes vote on 56, which allows the legislature to raise taxes, and the line item veto, which allows every California governor to cut spending to his heart's content, we have all the tools we need to bring the budget into balance.

It's time for everyone to grow up. If the credit card is a bad idea next year, it's a bad idea this year too. Let's go ahead and tear it up.

UPDATE: Armed Liberal has a different take: we need to restore liquidity first and then fix the budget. It's a reasonable point. But after three years of this crisis, my feeling is that the legislature (and the governor) have proven that they won't act responsibly unless there's a gun to their head. If we ease up the pressure, we're just going to see more smoke and mirrors, more posturing, and more flights from reality.

So while I might have voted for the Prop 57/58 combo three years ago, I'm not willing to do it now. I flatly don't believe them when they say that if we give them one more chance they'll do the right thing this time.

Kevin Drum 10:41 AM Permalink | Trackbacks

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