Peak California Budget? Or Brown-ian Motion?

Jerry Brown

The headline out of California this week is that second-time-around Governor Jerry Brown has delivered a tough-love budget, one designed to make everyone equally miserable.

Well, on the question of misery alone that much is true. Brown is cutting the budget by 12.5 billion dollars, and looking to increase taxes and other revenues by the same amount to plug (yet another) fiscal hole–of 25 billion.

Brown’s proposal will hit higher education hard with cuts, and tranches of taxpayers with taxes. But on the broader measure of whether the this budget actually reduces overall spending, the proposed enacted budget will increase from the prior year by 2.2 billion, going from 125.2 billion to 127.4 billion.

For, California doesn’t spend merely what it raises in revenues, taxes, and fees. California also spends what it borrows. | see: State of California Enacted Budget in Billions 2010-2010 (with proposed 2011).

As you can see in the chart, California’s budget peaked out at the top of the housing bubble in years 2006, and 2007. Since the collapse there’s been a small recovery but of course this does not reveal the breadth of the fiscal mess that’s played out since that time in spending cuts, new borrowing, political wars and pressure from the credit markets on California’s debt. For incoming Governor Brown, this landscape will be no different. And possibly a great deal worse.

This blog has covered California’s economy and its energy profile for two years now. I’ve tracked everything from the advance in poverty in California, as measured in unemployment and food stamp growth, to the state’s present and future inventory of oil and gas. Governor Brown will eventually, in my opinion, have to consider more seriously the revenue side of the state’s economic potential. Neither Austerity nor Keynesianism will cure what ails OECD states and countries as the twin forces of debt-deflation and a loss of cheap energy are simply unstoppable. For example, I have suggested that California drill offshore for oil and gas and use 100% of the proceeds to build rail transport along with new solar and wind power generation. Prescriptions such as these are still unpalatable. Mainly because they reflect an unpleasant reality.

Americans are still not ready to accept that the country is getting poorer, not richer. In real terms. Also, both the political right and the political left share the same delusion: there there is some massive reservoir of wealth to either be released by tax cuts, or redirected through a change in spending priorities. To the tax cutting ideologists, I say the experiment has already been conducted, over the past 20+ years. This only served to amplify our distorted economy. To the hand-waving abundance folks, who for example might like to see the defence budget devoted instead to domestic spending I say fine. But remember, we’re borrowing alot of that capital to run defence and other spending.

Governor Brown will soon discover that there’s not another bubble coming along to bail out California. Housing, for example, will not recover for years. Why? Because there is no magical way to break the link between house prices and wages–and American wages are not likely to rise again for a long time. Besides, we already tried to break that link during the credit bubble. You know the results.

There will certainly be a few speed bumps in the descent, however. For example, Paul Kedrosky has shown that the IPO pipeline could create massive, one-time up-spikes in revenues to Sacramento over the next few years. I don’t doubt it. In my own work I’ve shown the resurgence of US exports, and I would expect California to tilt strongly–just like the rest of the country–towards greater growth in exports. Meanwhile, should credit markets grow more fearful of California then we could see tremendous advances and then reversals in California’s budget as well. Volatility, in both revenues and costs, may create a rather chaotic trend in California’s fiscal picture that, like Brownian motion (pun intended), contains an order: just not an order you can easily see. One prediction: in my view, this will all unfold at levels below the peak years of 2006, and 2007 when the enacted budget reached its apex of 145 billion.


Further Reading:

Brown’s Countdown, Day 2: Governor looking for three-sided trick shot on budget, Sacramento Bee.

Reacting to Brown’s Budget, Robert Cruikshank at

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at