The Intelligence Pool
State of Dysfunction: California Lurches Closer to Fiscal Anarchy
Part Two
Structural Problem # 2 – State Government Spending Skyrocketed in the late 1990s
California State Spending skyrocketed in the late 1990s and early 2000s, during the Dot-Com Boom. Governor Gray Davis presided over the biggest increase in state spending of all time, both in absolute dollars and when measured as a percentage of state GDP. The compound real rate of increase of state government spending from 1999 through the 2004, during Davis’ first term and during the 10 months of his recall-shortened second term, was 8.43% annually, while the economy grew at a rate of only 3.3% annually. (Both figures are in inflation-adjusted 2000 dollars.)
Expenditures continued to increase after Arnold Schwarzenegger was elected Governor in October 2003, but at a slower rate. Between the 2004 and 2009 fiscal years, state expenditures increased just 2.88% compounded annually, which was below the rate of economic growth during the previous five years, but by that time economic growth had slowed. California’s economy grew at just a 2.55% annualized rate, adjusted for inflation, between 2004 and 2009, once again slower than the rate of increase of state government expenditures.
This meant that over the last ten years, California’s state budget expenditures grew much faster than real economic growth. The compounded average annual rate of increase in state government expenditures was 5.62% from 1999 to 2009, but the real rate of economic growth was only 2.92%. The rate of economic growth, therefore, was only about half the rate of the growth of state spending.
As a result, California’s state government spending ballooned from 6.38% of its GDP in 1999 to 8.27% of its GDP in 2009, an historic increase. That means the state government consumed 2 cents more out every dollar earned in California 2009, when compared to 1999.
This places California is the middle group of American states. Texas’ state government spends only 5.5% of its GDP, but in several Eastern states – New Jersey and Delaware, for example – state government spending currently exceeds 10% of state GDP. In Hawaii state spending is currently above 15%, but it has been even higher in the recent past. In Alaska it is 20%, but this includes massive oil revenue sharing with Alaska’s small population.
Republican legislators, in an effort to keep California from following in the footsteps of the high tax East Coast states, long ago made a pact to stonewall the Democratic majority. They would “starve the beast.” Not one of them would agree to additional tax increases. Without at least two Republican votes in the Senate and three in the Assembly, no tax increase could pass, and no budget could pass. Republicans believed this would force additional budget cuts on California’s Democratic majority.
The Republicans have a point. California’s state government imposes a much greater burden on its citizens in 2009 than it did in 1999. State expenditures cannot continue to grow faster than GDP or the state government will consume an ever-greater share of GDP, depressing the consumer economy. While some in California might think this is OK – after all, things aren’t so terrible in New Jersey or Delaware – most Republicans are horrified at the thought of California following this model. They prefer to follow the lead of Texas. They are dead set against higher taxes.