California Here We Come...

To commemorate California's histrionic, er… historic recall election, I thought it fitting to take a closer look at the economic picture of the less-than-golden state, and how it may affect the national economy.

First, unlike what many of the replacement candidates seem to have done, I spent a few hours online to actually look at the California budget to get a sense of the size of the problem and to see for myself how the media reports hold up to the spreadsheets (you can do this too -- see an official summary or the whole shebang).

First, to set the backdrop, California's Budget is just under $100 billion this year, and determined without much wriggle room: 40% is mandated for spending on K-12 education by Proposition 98. Almost all of the rest is federally mandated spending on programs including health and welfare. Only 2.5% of the budget is discretionary -- available for cuts and reapportionment. So why are the big cuts needed now?

Focusing on the two items in revenues that really stand-out, it's clear that a sizeable increase in personal income and capital gains taxes in the late 1990's lead to quite a boost in government revenues. Let’s look at the numbers (from the official budget, a study of the tax base, and statistics from RAND. Since I'm an economist, I can't resist making tables):
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  thanks to Cursor