Wednesday, July 15, 2009

Dream of Californication

California has long led the country. Now, it's totally dysfunctional.

The reasons for California's problems are well-known. Democrats won't cut spending; Republicans won't cut taxes. Legislative lockjam prevents action even in the best of times, and in the worst results in governance catastrophe the like of which are almost impossible to imagine in a modern country.

Is the rest of the country so far off?

Consider: the government has barely raised taxes in decades. Bush I's decision to raise them, and go back on a pledge, is widely thought to have cost him a re-election. Clinton raised some, but Bush reversed those and extended them further. Better to raise the deficit. Obama's campaign took as a central plank that taxes would not rise for the middle class. Relative to the status-quo at the end of the Clinton years, this was actually a tax decrease for the vast majority of Americans. It is becoming virtual political suicide to raise taxes on anyone except the rich--and even they complain bitterly.

Meanwhile, spending is growing out of control. Huge outlays are certain to happen on healthcare, education, and energy. Health care reform promises to curb costs, but the missing step--the one between mandating coverage for all and lowering health care bills--is totally absent. No doubt the White House's technocrats have ideas, but Congress shows no signs of letting them pass. Even the Republicans are raising all hell about 'rationing' health care--even for government funded care, which makes no sense. Iraq is more peaceful, so the Defense budget is down a bit, but Afghanistan is still going. It's soon going to be time for America's decennial war--my bet's on an irregular war within Pakistan.

Obama's term so far highlights the crisis that the legislative branch has fallen into. One might reasonably think that after winning a decisive mandate, the Democrats would find it easy to pass their favored bills. One would be mistaken. Excepting Regan's first few years, no President in recent memory has managed to pass his favored bills. Clinton's major legislative achievements are all things Republicans would love--NAFTA and welfare reform. Bush could not privatize Social Security or pass health care reform even with his majority. And now Obama can barely get Congress to cut the number of GM dealers. The one agency that acquitted itself well during the financial crisis has been the Fed, a fact largely arising from the fact that it is not accountable to Congress. The more democratic our institutions, the worse they perform.

Congress can do two things well: spend and bail out. From Wall Street to Detroit, federal funds sustain corporate America, and corporate America in turn finances Congress. In other countries, we call this crony capitalism. The deficit is huge this year--which isn't a horrible thing--but projections in the future show trillion dollar yearly deficits trailing off into the future.

True, it's hard to predict the future. But suppose the economy fails to get better as scheduled. Say we've all been living beyond our means for the past years, and need to readjust to a more sustainable level of living. Unemployment will lag growth, and the rich will not contribute to the federal pot. Then we'll face poor government revenue, spending that can't decrease, and taxes that can't go up. The legislature can't do anything productive. We'll face government debts that will get harder to pay.

In other words: California. Of course, if America starts to look like California, where will California be?

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