With state and local fiscal problems getting lots of press attention and Governor Arnold Schwarzenegger leaving office in California, FutureOfCapitalism checked in with Joe Mathews for an update from the Golden State. Mr. Mathews is a fellow at the New America Foundation and the author of two books: (with Mark Paul) California Crackup: How Reform Broke the Golden State and How We Can Fix It and The People's Machine: Arnold Schwarzenegger and the Rise of Blockbuster Democracy. We worked together on the Harvard Crimson.
I begin by asking Mr. Mathews what happened. It seems like not that long ago that people were talking seriously about amending the Constitution so that Mr. Schwarzenegger, born in Austria, could run for president. Now he's leaving office with a $25 billion budget deficit.
"The system doesn't work," Mr. Mathews says. He says that the $25 billion combines an $8 billion gap from the previous year with an expected gap of $17 billion or $18 billion for the upcoming year, on a total annual budget of $130 billion, of which $90 billion is the state's general fund. Even so, Mr. Mathews says, Mr. Schwarzenegger came into office with a big deficit, and he's leaving with a big deficit. "He leaves the state worse off," he says, because the state accumulated more debt over the course of Mr. Schwarzenegger's time in office.
If there's an upside to Mr. Schwarzenegger's tenure, Mr, Mathews says, it's that the governor "essentially discredited every approach to fixing the system." The governor tried cutting taxes, reducing corporate taxes and the vehicle license fee soon after taking office. He tried raising taxes, increasing sales taxes and personal income taxes in his second term. He tried restraining spending — Mr. Mathews says state spending increased less under Mr. Schwarzenegger than under any California governor before him. He tried praising George W. Bush and he tried praising Barack Obama, trying to get as much federal money as possible out of both of them.
State voters rejected a spending cap and a rainy day fund proposed by Mr. Schwarzenegger, but they approved the borrowing.
About that borrowing — I ask Mr. Mathews whether there's any chance that California will default on its debts. "No," he says, "It's in the constitution," which enshrines bondholders as second only to schools in payment priority. He quotes a state official as saying that "it would take something like thermonuclear war to get us to default." Still, he says, the state's borrowing costs are up amid broader concern about the municipal bond market, and he says that some local governments in the San Diego or Los Angeles area could have problems because their taxing powers have been limited by ballot initiatives.
I ask about Mr. Schwarzenegger's recent claim that serving as California governor had cost him $200 million. Mr. Mathews says public reaction had been muted — "people have sort of tuned him out." He said that the job had cost Mr. Schwarzenegger some money. About $50 million was political spending — mostly not on the governor's own campaigns, but on ballot measures. He did not take a salary as governor. And for much of the time he commuted daily by private jet at his own expense between his home in the Los Angeles area and the governor's office in the state capital of Sacramento. Even so, Mr. Mathews says the $200 million figure seems inflated. "He's assuming he would have made several big, big" movies, Mr. Mathews says. But Mr. Schwarzenegger is now 63, and, says Mr. Mathews, that age doesn't necessarily equate to "great action star years." Not in the movie business nor, at least for Mr. Schwarzenegger, in politics.