A New Deal For California – Part 1 (Full Employment)

In Budget Politics, California, Democratic Governance, Economic Planning, Economics, Full Employment, Health Care Reform, Inequality, Liberalism, Political Ideology, Political Parties, Politics, Politics of Policy, Poverty, Progressivism, Public Policy, Public Works, Social Democracy, Social Policy, Taxes, Welfare State, WPA on April 26, 2010 at 1:51 am

Introduction:

The current state of California politics can be summed up in a simple comparison: in the Republican gubernatorial primaries, we see one candidate promising that their first action upon becoming governor is to put 40,000 people out of work and the other complaining that this isn’t enough; in the Democratic convention, we see a party divided over whether to fight for majority rule for budgets or for budgets and taxes.

As a state, California seems caught between the scissors of an increasing need for public services to provide a basic level of social protection for the sick, the elderly and the poor and to restore our high-road, high-wage economy based on superior public education and green technology, and a paralyzed, undemocratic, and irrational political structure that is unwilling and unable to take the necessary actions to meet those needs.

We know that the strategies proposed by the GOP’s gubernatorial candidates won’t work because they are essentially a retreat of the last seven years of failed policies – Schwarzeneggerism without a human face.

Yet Democrats lack a forceful message about what we want to do beyond the immediate issue of the budget.

What Won’t Work:

Contrary to conservative spin, government spending is not out of control in California. Especially when you take into account the fact that the California Price Index (i.e, the rate of inflation) has gone up 72% in the last 20 years, and that the population has increased 28% in that time, government spending is flat or declining. As the California Budget Project notes, thanks to rounds of drastic budget cuts, current spending is $16.9 billion below the previous year, and next year’s budget is projected to $20 billion below 2007-8 levels. As a share of the economy, California state government is down to levels we haven’t seen since the 1970s.

In this situation, regressive tax cuts to wealthy corporations is only going to make things worse. Meg Whitman’s proposed $10 billion dollar capital gains tax cut would increase our current deficit by 53%, and the savings that she proposes to make from unspecified but supposedly gargantuan amounts of “waste, fraud and abuse” wouldn’t come close to filling in this hole. Poizner’s proposals are equally ludicrous.

Moreover, the proposals by either candidates to eliminate tens of thousands of workers make the same elementary mistake that all anti-government activists make: public sector workers are real workers. 40,000 workers laid off means that California’s unemployment rate will rise from 12.6% to 12.84% at the very least, because it will also mean the loss of $1.59 billion in consumer spending, mortgage payments, and local tax base.

Simply put, the theoretical basis behind right-wing economic policy only makes sense in rare occasions in which government taxation is so soaringly high that businesses can’t make a profit, government borrowing is “crowding out” demand for credit in the private sector, and we’re in full employment so that a higher public sector workforce is causing a “substitution effect” which lures people away from the private sector. Now, even in those rare occasions, it’s not a slam dunk case (you have to take into consideration the increased provision of public goods and services, how much of private sector demand is for useful investment as opposed to speculation, and whether employers compete by offering higher wages) – but that’s not what the situation is right now.

Taxation in California is relatively modest (19th out of 50 states), and isn’t that progressive (the poorest fifth of Californians pay 11.1% of their income in taxes, the richest 1% pay 7.8% and 2,000 people who made more than $200k a year paid no taxes). Far from crowding out private investment, interest rates are basically at zero percent thanks to the Federal Reserve, and the private sector isn’t lending out of fear of losses. As far as unemployment goes, California’s 12.6% unemployment rate is one of the highest in the country, and our underemployment rate (including discouraged workers, part-time workers who want to be full-time, and so on) is even worse at 24%.

Where We Need to Go:

The Democratic Party is clearly correct in beginning with majority rule, because it will be impossible for California to do anything about our current fiscal or economic situation without the ability to pass budgets and raise revenues on a democratic basis. To that end, I heartily support the California Democracy Act (majority rule ballot initiative) being sponsored by George Lakoff and the progressive movement – and so should you.

However, I do want to make the point that Democrats need to look beyond the 2/3rds issue, no matter how hard this might be – because we cannot address the budget crisis (or any other of California’s pressing needs) without addressing unemployment. Even if we had majority rule, if we don’t act to bring down the unemployment rate, trying to balance the budget in our current economic climate is chasing a moving target over a cliff. Only when we get more people employed, so that they have paychecks to spend (which brings in sales, income, and payroll taxes), so that they can pay their mortgages (which will at least staunch the bleeding from declining property values and assessed taxes), and so that employers respond to increased consumer spending by expanding their inventories and expanding their payrolls (which in turn brings in more sales taxes, corporate income, property, payroll, and capital gains taxes), will we be able to solve our budget crisis once and for all.

Hence, job creation needs to be made a central part of the Democratic Party message, in the same way that single-payer health care for California (AB810) or historic climate change legislation (AB32) should be the core of the Democratic Party message about what we want to do to fix California.

Step 1 – A Jobs Program as a Tourniquet:

As I’ve discussed in previous posts, it is well within the fiscal capacity of California (or indeed, of most states) to create a jobs program on its own. In order to bring California’s economy and job market into normality, we need to create about 1 million jobs – which would bring our unemployment rate down to 6% (that’s not full employment, but it’s a start). It costs approximately $35 billion to put 1 million people to work for a year.

By structuring our jobs program as a form of social insurance – funding it by the equivalent of a 1% payroll tax, which would raise about $5.7 billion a year, and then using that as collateral for either a Federal or state reserve bank loan – a jobs program could be passed on a majority vote basis. Social insurance premiums are fees by any rational definition of fees, and therefore aren’t subject to the 2/3rds rule.

The reason why we need to pass an immediate jobs program is that it acts like a defibrillator applied to someone in cardiac arrest – especially if we target the jobs to areas where unemployment is concentrated (due to the downturns in the construction and agricultural industries, areas of the Inland Empire have underemployment rates of 40% or more), a jobs program that suddenly cuts unemployment in half not only has a direct impact in terms of fewer people unemployed, more paychecks flooding into depressed local and regional economies, fewer foreclosures and improved property values, but it also has a powerful effect on the “animal spirits” of employers and investors. No matter how low the taxes, employers and investors are not going to increase their payrolls or their inventories if they lack confidence that there’s going to be enough consumer demand to support expansion – by making a sudden and dramatic shift in employment levels, the public sector can radically reboot the expectations of private sector employers and investors. Then and only then will we see private sector employment recover – and with it, California’s tax base and budget.

Long Term Thinking – Full Employment for CA:

Getting back to 6% unemployment isn’t full employment, although it really helps. With a normal unemployment rate and sustained recovery in consumer spending, private-sector employment, and so forth, we can get the fundamentals of California in order. With a stable economic outlook, we can make budgetary decisions that will have a long-term impact – instead of cobbling together fixes that become undone a few months later as revenues continue to fall. With more resources flowing into state coffers, we can begin again to make the investments in public education, mass transit, and alternative energy.

However, there is a big difference between a California that averages 5-6% unemployment and a California which guarantees full employment (i.e, unemployment is kept below a “frictional” level of 3%). For one thing, that 2-3% of the workforce means $43.2 billion a year in production of goods and services that never happen, as well as about $13 billion in wages that won’t be earned, spent, and taxed, and it means increased costs for Unemployment Insurance, CalWorks, Medical, and other social services for the unemployed. In the same way that a single-payer health care system will make California a better place, both by ensuring that everyone has access to health care, but also that employers, start-ups, and other ventures won’t be burdened by heavy health care costs, full employment will mean that California will be a state where no one goes without work (frictional unemployment refers to the temporary periods of unemployment caused by people moving between jobs), with much lower poverty, and many more resources to make the kinds of investments we make.

In its own right, full employment is an investment in a better California. Like any blue-chip investment, it’s not free. In addition to using labor market policies to create incentives for employers to keep their workers on the job instead of laying them off, we’d also need a reserve of about 330,000-500,000 jobs in order to keep unemployment below 3% if the private sector falls down on the job. That costs about $11.7 to $17 billion a year, which the equivalent of a 2-3% payroll tax would cover without the need for regular loans from the Fed or a state reserve bank – which would be reserved for emergency situations in which a sudden recession causes a sharp spike in unemployment.

Conclusion:

A state jobs program isn’t sufficient by itself to create a “New Deal for California” – but it is a necessary prerequisite for the rest of the progressive agenda. Full employment will put us on the path to a high-road, high-wage economy, and from there, it will be much easier to get to single-payer or a green economy than it would be with a 12% unemployment rate.

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  1. Thanks, Steve, great post. The Governor’s latest proposal to fill a $20 Billion dollar budget deficit is to cut 19 million from Santa Barbara K-12 Schools, kick almost 5000 Ventura County children off healthcare (Healthy Families). How much longer will the “moderate” voters of the Central Coast put up with this before taking a much more careful look at the $2 Billion per year worth of tax breaks given to multinational corporations that do business in CA??? Those tax breaks ain’t creating jobs, let me tell ya.

    • Couldn’t agree more, and thanks. The tax breaks are a good example, and those are only the most recent – our tax code is full of bizarre loopholes that don’t really create jobs.

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