A Depression-Style California State Budget - California Progress Report
As the ongoing horror show that is the daily financial news continues to lurch from one gut-wrenching revelation to another, and journalists and commentators increasingly compare the current financial crisis to the Great Depression of the 1930s, it is time look at some facets of that earlier era to gain an insight into what the folks in Sacramento could be up against.
The current crisis, which started in the real estate sector, is now expanding across the economy, and it appears that no market is safe. Starting with the crash in auction-rate securities, state and locals bonds became vulnerable as well as government pension funds. CalPERS’s investment portfolio is estimated to be down 20 per cent.
Across the country states are cutting back cost-of living adjustments and general benefits while asking contributors to up their contribution to the various funds. Debt at all levels continues to increase and not just in California. New Jersey’s outstanding debt increased 6 percent this year and has tripled in the past decade. Municipal bond prices are crashing in Michigan. New York City is rolling back a property tax cut and cutting 3,000 workers to plug a $4 billion deficit.
In California, the accumulated deficit in the next 18 months is expected to be in the range of $25 billion, with another $20 billion from 2010 onward. The new Legislative Analyst has declared that the state’s financial situation can not be solved by just spending cuts or tax increases—it will take both. No wonder Governor Schwarzenegger is eying a job in the Obama administration to get out from under this mess.
But just how bad could things get, and what could we really be looking at if the state has to confront a depression-style budget? One of the most famous episodes from that era in California was the 1931 threat by movie mogul Louis B. Mayer to have the state exempt theater tickets from sales tax or the studios would move out of state. The threat worked. That is why there is no sales tax on theater tickets today. Also in 1931, Nevada legalized gambling to avoid going bankrupt.
But other stories probably convey the level of desperation of those times more personally. Like the famous Literary Digest presidential poll in 1936, which showed Alf Landon defeating Franklin D Roosevelt when in fact, Roosevelt won in one of the greatest political landslides in US history. The reason for the skewed poll was that it was an early telephone poll, and in 1936, only well-to-do Republicans supporting Landon could afford telephones. In my father’s family, the telephone service was disconnected, just as it was in many households. A recent story on the Depression in the Washington Post discussed how the Depression first entered American households, such as the day people switched from electric lighting to cheaper kerosene lamps, the day beans replaced beef on the dinner table, and the day extended family members moved in. The most grisly story in the article was in 1932 in Detroit, when the city shut down its zoo and slaughtered its animals to provide food for a starving population.
Now it is hard to conceive of such an appalling event happening at a California zoo today, but what all these Depression-era moments convey is how things we take for granted simply disappeared and how radically for the worse life changed for Americans at that time. The country of the late 1940s would have been almost unrecognizable to people of the 1920s. In fact, people of the 1950s have more in common with people of today than they did to people of just a few years earlier— the change brought on by the Depression and World War II was that great.
This is what awaits Americans of this era and the state budget. The governor and the legislators will be faced with making decisions that would have been inconceivable just a year ago for a state that in a few years will be unrecognizable to its current inhabitants. As the Democratic legislators convene in Sacramento, they, along with their Republican opponents, will have to determine which items will be the equivalent of the 1932 Detroit Zoo in the 2009 California budget. Let’s hope that the financial carnage will not be as gruesome as the animal carnage was seventy-five years ago.
