Arnold So Bad At Governing, He Bungles The Shock Doctrine

Meetings of the Big Five lasted late into the night, and reports are that a deal is very close. Now, that deal won't be any good. The secretive Big Five process, which Democrats actually tried to counteract with 30 hours of public meetings, ends up leading to a deal that nobody reads and gets pushed through in the dead of night. And the very structure of the California system, with its super-majority requirements, will never yield a good deal for anyone but the well-connected.

Any final deal is expected to include some of the sharpest cutbacks in government services the state has experienced. Programs that have not been cut deeply in years are likely to shrink considerably, with tens of thousands of Californians losing access to programs they have relied on. Some programs may be wiped out entirely. Large numbers of low-income Californians receiving healthcare through the Medi-Cal program are expected to be moved into managed care, and thousands of seniors who receive home healthcare would lose it.

That said, it looks as if the Governor will lose on many of his priorities. He'll lay back with a stogie in his Jacuzzi anyway, but he's not going to get everything he wants. For instance, a proposal to cut public employee pensions has been scrapped.

California will not impose a two-tier pension system promising lower benefits to future state workers as part of any wide-ranging deal to solve its $26.3 billion budget shortfall, The Bee has learned.

The controversial proposal by Gov. Arnold Schwarzenegger has been shelved in budget talks, but options for cutting pension costs are expected to be discussed again in coming months.

I'd expect that to come up again, but it should not have been wedged into a budget deal when it would offer almost no short-term fiscal benefit.

In addition, the Governor will not be allowed by the courts to slash worker pay for IHSS employees.

A federal judge on Monday ordered California to pay In-Home Supportive Services workers up to $12.10 per hour in wages and benefits immediately, suggesting the state had dragged its feet in response to her earlier injunction.

California lawmakers and Gov. Arnold Schwarzenegger had agreed to drop the state's contribution to IHSS wages and benefits to $10.10 per hour as part of their February budget deal.

In a lawsuit filed by the Service Employees International Union, U.S. District Court Judge Claudia Wilken in Oakland ruled last month that the state did not analyze the impacts of the wage cut before approving it, running afoul of federal law. She blocked the wage drop to $10.10 that was supposed to take effect July 1.

This saved a pittance of money relative to the overall budget gap, around $100 million, and, you know, violated federal law.

As I speculated yesterday, the Governor's foregrounding of "no new taxes" in his TV ad, a point already conceded by Democrats, was an effort to claim victory on something as the rest of his shock-doctrine agenda goes down in flames. We'll see if the anti-fraud measures stay in there as well.

As I said, this is going to be a horrible budget deal, and under the current system there can be almost nothing else. But I don't think the IOU issuance had the desired effect for the Governor. He ended up having to play defense because his indifference to the state's plight was seen as cruel. And just like in 1992, the refusal of bailed-out banks to honor the IOUs led almost immediately to marathon talks arriving at a solution.

Arnold could have avoided all this and saved the state billions of dollars, with almost no difference in the final result.

...Funny. Arnold's TV ad might violate the Fair Political Practices Commission regulations because it was paid with campaign money, yet referred to now campaign. Awesome.

Après Aujourd'hui, Le Déluge

I suppose the only good news to come out of last night, and indeed this entire cycle of budget nightmares, is that we are not alone. Several other states missed their fiscal year deadlines. Illinois has no budget and no plans to enact one; Pennsylvania may not be able to pay state employees due to a failure to reach agreement; Arizona got a budget in under the wire, but the Governor has not indicated whether or not she'll sign it, because it doesn't include a sales tax increase she sought; Ohio approved a temporary 7-day budget as legislators continued to wrangle; Mississippi left their utility regulatory agency unfunded; Connecticut's Governor signed an executive order to keep the government running despite no budget. We can take little solace in these difficulties other than to note that the national erosion of tax revenues combined with balanced budget agreements make the situation almost impossible for many states, particularly the large ones, and because of the threat to any economic recovery that would result from massive reductions in state spending and services, the door may crack open for a second federal stimulus package that specifically targets state budgets. I don't think we're quite there yet, but the crisis reaches a whole new level starting today.

First of all, this is the first day that budget cuts from the previous agreement in February take effect for fiscal year 2009-2010. These include major reductions in health and human services:

SSI/SSP grants for low-income seniors and people with disabilities will drop by 2.3 percent, cutting the maximum grant for an individual from $870 to $850 per month. A previous SSI/SSP grant cut took effect in May, reducing maximum monthly grants for individuals from $907 to the current $870.

CalWORKs grants for low-income families with children will be cut by 4 percent, reducing the maximum grant from $723 to $694 per month (the same amount as in 1989) for a family of three in high-cost counties. CalWORKs grants have been frozen since 2004-05.

Dental services for most adults in the Medi-Cal Program will be eliminated along with seven other benefits, including eye exams and incontinence creams and washes. (Last week, a trial court judge in Sacramento County ruled against a group that sued to stop the cuts from taking effect.)

Grants on those who make the least are the most stimulative to an economy, because that money gets spent quickly. Now it's drying up.

Of course, there's also the matter of the still-yawning budget gap here in California, which just got $7 or $8 billion dollars larger, depending on your math. This means that even more damaging cuts, likely to the most vulnerable elements of society, will ensue, leading to another wave of job loss, foreclosures, and pain. The Governor and Senate Republicans are completely responsible for that addition to the deficit - consider that $7 billion is MORE than the money at stake to the near-term budget in the May 19 special election - and for the issuance of IOUs, which will add billions in unnecessary interest obligations.

In a nutshell, under the governor's IOU plan the state pays vendors and others it owes with the equivalent of a post-dated check that is good for the face value of the amount owed plus interest. IOU recipients, for the most part, "sell" their IOUs to a bank for the face value of the check for quick cash. The bank holds onto and then redeems the IOU at a later date, earning millions of dollars in interest.

This type of borrowing is nothing like pulling out the state's credit card to pay the bills. Rather, this is more like the state going down the street and getting an expensive payday loan.

The Governor's payday scheme not only makes California the laughingstock of the credit markets, but it unnecessarily puts a black eye on the state's long-term credit rating.

This means that, for years to come, millions of taxpayer dollars get shoved into the pockets of Wall Street bankers every time we issue long-term debt to build schools or roads, or other needed public projects.

Somewhere in the neighborhood of $6 billion dollars in additional interest alone will be added to the cost of selling bonds that voters have already approved.

Of course, by that time, Schwarzenegger will be out of office, so what does he care?

Harold Meyerson has the must-read of the day about this disaster, pinning the blame where it needs to go - on shock-doctrinaires like the Governor who demand to use this crisis to destroy the public sector. Read the entire thing, but here's an excerpt:

Right-wing ideologues see the crisis as an opportunity to shrink government regardless of the consequences. Schwarzenegger is proposing to end welfare, not just as we know it but altogether, and to throw 1 million children off the rolls of the state's healthy families program. But the consequences of closing the deficit simply through cutbacks will be felt by more than the poor. Already reeling from $15 billion in cutbacks that the state put through in February, many school districts, including that of Los Angeles, have canceled summer school this year. Scholarships that enable students of modest means to attend California's fabled university system have been slashed. Most of the state's parks may have to be closed as well.

The terrible irony in decimating the public sector to save the state is that the California that was the epicenter of the postwar American dream was fundamentally a creation of government. Fighting a Pacific war during World War II compelled the federal government to spend billions on California industry and infrastructure, and the state was the leading beneficiary of Pentagon dollars during the Cold War. As Kevin Starr, California's leading historian, points out in "Golden Dreams," his brilliant new history of the state in the 1950s and early '60s, fully 40 percent of all defense dollars for manufacturing and research in 1959 went to California, anchoring the state's booming economy in a well-paid workforce that was either unionized or professionalized, and seeding an electronics and high-tech sector that was to blossom in the following decades. Building on that prosperity to create more prosperity, Earl Warren, Goodwin Knight and Pat Brown -- two Republicans, one Democrat -- invested state dollars in schools, universities, freeways and aqueducts that were the best in the world. The Golden State was never more golden.

Today, its governor seems determined to turn that gold to dross. On Monday, the Democrats in the legislature passed a budget that included cuts of $11 billion, levied a tax on oil companies and tobacco, and raised auto registration fees by $15 per car to keep the state parks from closing. Schwarzenegger reiterated his refusal to raise any taxes or fees and said he would veto the budget.

There's still a chance to avoid IOUs, though I wouldn't call it likely. There is no chance to avoid the devastating impact of a broken political process and irresponsible legislating which at this point can only slide California into depression.

The Latvia-ization Of California, And Bipartisan Fetishist Consent

I've been hearing the California crisis, and the Governor's response, referred to as a kind of shock doctrine, used to transform the state's social safety net and radically alter the lives of the poor and downtrodden. And that's entirely true. But not necessarily through the budget cuts, which have met fierce opposition from Democrats and the nascent activist progressive movement. No, the real shock doctrine is happening behind the curtain, with a proposal engineered with bipartisan support, that will really permanently turn the state into an experiment in Chicago Boys free-market fundamentalism, not unlike the conservative "paradises" created in developing nations, all of which are crashing, by the way.

Last year, the Governor and legislative leaders put together the Parsky Commission, a classic blue-ribbon panel led by Gerald Parsky, a right-wing investment fund manager and professional hack who has consistently been put to use by Republicans in Sacramento and Washington to carry out their radical plans. He was George Bush's California campaign chair in 2000 and 2004. The idea behind this one started from a decent premise - California has a taxation problem, and needs a study group to look into how to reform it so that it's better equipped to handle boom-and-bust economic cycles. Supposedly, all ideas - including Prop. 13 - would be "on the table" from this commission, which would seek a more stable solution.

Of course, the fix was in from the start. Because this panel respected the 2/3 requirement for raising taxes, it sought revenue-neutral solutions, tinkering and shifting the tax burdens rather than reforming them. So predictably, the end result is a proposal that broadens the tax base while shifting the burden downward onto the lower and middle classes while relieving the wealthy. The Governor's Chief of Staff tipped her hand about this previously when she said that the problem with California's tax structure is that it's too progressive.

Some of the Commission's proposals, like broadening the sales tax to include services in addition to goods while lowering the rate overall, make a bit of sense. But the rest of it is pure right-wing fantasy:

At the 14-member commission’s penultimate meeting in Los Angeles June 16, its members appeared to narrow its potential recommendations, due July 31, to two proposals.

Both would lower the top income tax levels and, in one case, eliminate the state’s corporate tax and the portion of the sales tax pocketed by the state.

Under one proposal, what the commission refers to as Tax Package 1B, all Californians would pay a 6 percent income tax rate. The state’s wealthiest residents currently pay 9.3 percent with lower percentages as earnings fall.

The effect of the proposal would be to increase the taxes on Californians earning less than $100,000 to broaden the tax base.

The state’s 8.8 percent corporations tax would be eliminated, as would the 5 percent of the sales tax the state retains [...]

A new “business net receipts” tax makes up for much of the lost revenue from the sales and corporation tax eliminations.

"Business net receipts" taxes are essentially a value-added tax. And one estimate predicts that it would take in $28 billion dollars annually. But everything must be revenue neutral, so in a time of crisis, the Parsky Commission would go to a FLAT TAX and eliminate the corporate tax rate, as well as possibly cutting the capital gains tax. It's impossible to see this as anything but a giant wealth transfer from the rich to the poor. Simply impossible.

Useful idiots like the folks at Calbuzz prefer not to actually take sides on an issue when just splitting the difference between left and right automatically provides the best practice every time. Their somewhat illuminating article about all of this betrays a bias toward that wise "sensible centrism" that ends up orienting toward crazed right-wing solutions every time.

The political play is to produce a tax reform bill so clean it can be introduced in both houses with assurances no one will be allowed to bog it down with amendments. Democrats will be able to avoid drastic program cuts and Republicans can claim they’ve cut taxes. The bill breezes through both houses on an up-or-down vote and bada bing it gets signed by Arnold and everybody goes to dinner. No muss, no fuss, no partisan fingerprints [...]

Getting a consensus recommendation from the commission, which includes conservatives like former Reagan economic adviser Michael Boskin and liberals like Santa Cruz County Treasurer Fred Keeley is by no means guaranteed. Even if commissioners do agree, their proposal will be fly-specked by lefty groups who will dislike elements that are not progressive, and industry groups, who will push for business-friendly changes.

As a political matter, forcing an up-or-down vote on a package in the Legislature would address what-about-me objections from all quarters, in the same way as the prohibition on amendments to congressional legislation produced by the military base closure commission in the 1990s finally solved that intractable problem. (Or like a Pete Wilson-Willie Brown deal from days of yore in Sacramento.)

After all, the impending bankruptcy of state government should be sufficient to show players at every point of the political spectrum not only that sweeping change is needed, but also that everyone will have to compromise to keep California from sinking into the 9th Circle of Hell.

This is "the midpoint between two points always works best" pop politics masquerading as serious thought, and what else would you expect from a duo who can spin a whole article out of a picture of two politicians smiling. Somehow, "lefty groups" arguing against the literally insane idea of a flat tax has the same moral and intellectual equivalency of business groups trying to wiggle out of a way to pay their taxes. A flat tax would very clearly shift the burden of taxation to the middle class, and practically every taxpayer would actually see their tax burden increase except the few at the top. But because we're in crisis, and everyone will have to "sacrifice," surely we should ram through a right-wing fantasy, turning California into Latvia, Estonia and Lithuania, all of whom have flat tax systems. How's that working out for them?

Over the last decade, Eastern European countries became darlings of the far right by instituting free-market economic policies designed to break convincingly from their Communist past. The so-called Baltic Tigers—Latvia, Lithuania, and Estonia—garnered worldwide plaudits for a number of free-market reforms, led by the imposition of a flat-rate income tax, especially from the American right. "The flat tax is making a comeback," trumpeted the conservative National Review. The three nations are "leading a global tax reform revolution," said the right-leaning Heritage Foundation [...]

Too bad for them that it hasn't worked out. Latvia, which has a flat tax of 25 percent, and Lithuania and Estonia, which have 21 percent tax rates, are all in deep economic trouble. They all have huge government budget deficits, a sign that they took in too little in tax revenue to cover their costs, primarily state expenditures to provide a generous welfare state. Conservatives might argue that they didn't slash welfare benefits enough, but there is no dispute that the flat tax didn't provide the expected revenue.

This is the future that would be put into place - with a no-amendment, up-or-down vote - under the Parsky Commission. Somehow, the elected legislature of the people cannot be trusted with tax law, but an unelected, unaccountable blue-ribbon commission should be empowered to create this radical change in law with no public input. That's the wise and sensible solution. Because we can't have all this messy "democracy" mucking up the need to protect the rich and transfer wealth downward more radically than any proposal ever seen in America. California Budget Bites has more.

It's important to note that this all stems from the revenue-neutral demand embedded in the proposal. Otherwise, it could never pass because it would need a 2/3 vote. So somehow, a flat tax, elimination of corporate income taxes and slashing of capital gains taxes get thrown into the mix, something that nobody outside the fringe far right would ever endorse. The 2/3 rule, AGAIN, prevents a real solution.

If you wonder why I oppose a so-called "bailout" for California, it's because in addition to everything else, that attacks the wrong problem. We need a major restoration of democracy in the state, and instead we get "solutions" that don't reflect the desire of the citizenry. That's why only a local grassroots movement to finally remove the structural barriers, not a one-time cash infusion, will work.

Smash And Grab Job

You can't teach an old dog ethical tricks. The Republican ethos in the Age of Bush has been to use government as a vehicle for profit-taking, and that continues:

The financial world was fixated on Capitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.

But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion [...]

"Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks."

The story of the obscure provision underscores what critics in Congress, academia and the legal profession warn are the dangers of the broad authority being exercised by Treasury Secretary Henry M. Paulson Jr. in addressing the financial crisis. Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.

This is a long and well-reported story by Amit Paley, which is really the only thing that can kill this provision. I think the White House was banking on nobody finding out; the implementation appears illegal, and lots of tax lawyers don't even know Section 382 exists. The simple way of explaining it is a giant tax shelter for banks - they could conceivably set up a dummy company with manufactured debt, buy the company, and write off the debt to avoid corporate taxes. It's been a conservative white whale for years, and so they tried to kill it by writ in the hope that everyone was distracted. The problem, however, is that closing the loophole would decelerate bank mergers and cause more failures, which is probably necessary but nobody was to pull the trigger and get stuck with the blame:

Lawmakers are considering legislation to undo the change. According to tax attorneys, no one would have legal standing to file a lawsuit challenging the Treasury notice, so only Congress or Treasury could reverse it. Such action could undo the notice going forward or make it clear that it was never legal, a move that experts say would be unlikely.

But several aides said they were still torn between their belief that the change is illegal and fear of further destabilizing the economy.

"None of us wants to be blamed for ruining these mergers and creating a new Great Depression," one said.

Some legal experts said these under-the-radar objections mirror the objections to the congressional resolution authorizing the war in Iraq.

"It's just like after September 11. Back then no one wanted to be seen as not patriotic, and now no one wants to be seen as not doing all they can to save the financial system," said Lee A. Sheppard, a tax attorney who is a contributing editor at the trade publication Tax Analysts. "We're left now with congressional Democrats that have spines like overcooked spaghetti. So who is going to stop the Treasury secretary from doing whatever he wants?"

Yes, this is exactly the problem. Conservatives overreach and create giant giveaways under the cover of a crisis, and then dare anyone to reverse them, lest the crisis be blamed on them. Naomi Klein wrote a whole book about it. It's what makes these reversals so politically treacherous. You can't pull the rug from AIG because they're too big to fail. You can't find out who the Fed is lending to because the system will collapse. And under this cover, the shouts of "you're not being economically patriotic," the profit-taking grows.

Which is why the initial language from the Obama transition team about reversing decisions by executive order was so heartening. He is the only one with the political capital to make these moves - Congress simply doesn't have it. And throughout the campaign, while Obama tied McCain to George Bush's failed policies he didn't go all the way into delineating what they were. As Thomas Powers said, "The change Obama seeks remains oddly bloodless, as if the mess were a found object, not something that someone had done."

Now, that change has a face. They are being pretty clear that what it reversible will be reversed, and quickly. The Bush legacy project over the next several months is to embed these radical theories of government deep inside the institutional structure, to set landmines and keep the cash flowing to corporate entities. Obama is signaling that he's willing to fight that. And that is a very welcome development. It doesn't mean that there aren't pitfalls, or that conservative media types won't roil at the horrible partisanship Obama is engendering by going after these abuses. It means that such concerns may not drive decisions anymore.