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The Byrne Report
THE CLEVER PEOPLE'S media regularly swoon over the political muscle of Gov. Arnold Schwarzenegger. The New Yorker ran a long profile of the strongman in June, portraying him as bipartisan, competent and "Supermoderate!" The New York Times' editorial board is much taken with what it perceives to be a middle-of-the-road governing style. And in September, Wired magazine saw fit to pump Schwarzenegger as "moderate" and "effective."
In reality, the governor is neither moderate nor effective--his main economic advisers are the same right-wing academics (a lot older now) who promoted the ineffective "free market" theories used by President Ronald Reagan to cut taxes while running up record deficits and trade imbalances.
On Sept. 17, Schwarzenegger formed the Council of Economic Advisers to help him "return economic vitality to the Golden State." The 16-member panel is packed with Reagan-era supply-side economists such as Milton Friedman and Arthur Laffer. It is chaired by George Schultz, former Reagan cabinet member, board member of the Bechtel Group and fellow at the Hoover Institution, a right-wing think tank located at Stanford University. In fact, half of the governor's economic advisers are Hoover Institution fellows.
The council includes Hooverites Annelise and Martin Anderson, who co-authored a series of obsequious Reagan biographies. The Andersons, who are married, were both on former governor Pete Wilson's council of economic advisers, which led the charge to deregulate California's energy industry with horrible results. Martin also serves on the Defense Policy Board, a neoconservative body that advises Department of Defense Secretary Donald Rumsfeld and includes Henry Kissinger, and Hoover fellow Gary S. Becker--who also serves on Schwarzenegger's economic council.
Other Hoover fellows on the council include Michael Boskin, who chaired George H. W. Bush's council of economic advisers and John F. Cogan, currently an economic adviser to George W. Bush. In an interview, Martin Anderson said that the council is bipartisan. When asked which of its members are Democrats, he replied, "I have not studied that."
A quarter of a century ago, Shultz, Anderson, Friedman and Laffer claimed that cutting business taxes would result in "trickle-down" economic stimulation and lower budget deficits. The opposite occurred during the Reagan-Bush years. The poor got poorer and military spending shot the federal deficit into orbit. And who can forget what happened when the Reagan team deregulated the savings and loan industry, unleashing a $500 billion crime wave that bankrupted mom-and-pop banks and pushed the economy into a prolonged recession?
Shortly after Schwarzenegger was elected to office last November, an economic report on the state's rosy fiscal outlook was issued by the nonpartisan Office of the Legislative Analyst in Sacramento. The governor must not have read it, because his main talking point is that corporations flee the world's fifth richest economy due to overregulation and high taxes. But the highly regarded legislative analyst Elizabeth Hill has said that the impact of the dotcom-triggered recession of late 2001 was no worse in California than it was anywhere else in the United States. It was mostly due, she observed, to "chronic overcapacity in many key industries [and] weak foreign demand."
Hill did not say that high taxes or workers' compensation insurance rates or overregulation of industry had anything to do with the downturn of the business cycle. California business revenues and profits "are up sharply," she determined.
The analyst attributed the upswing to better sales, cheap labor and hundreds of millions of dollars per year in state subsidies to business, called tax credits. In addition, under Proposition 13, companies are protected from paying taxes on the fair market value of real property. No wonder that, in 2002, Fortune magazine rated California as the best state in America in which to do business.
(Interestingly, individuals are picking up the corporate tax slack. Personal income taxes in California now account for 48 percent of general fund revenues--up from only 18 percent 40 years ago. And, as the federal government reported in April, nearly two-thirds of all U.S. corporations paid no income tax between 1996 and 2000.)
Mirroring Reaganomics, Schwarzenegger "balanced" the 2004-2005 budget with $15 billion in bond and loan funds. In effect, he kited the deficit, paying operating costs with borrowed billions laden with Wall Street vigorish. To avoid collecting business taxes, he slashed education funds, raided local property tax bases and even killed a small annual tax credit for underpaid teachers. Hardly moderate. Hardly effective.
In September, Hill reported that Schwarzenegger's one-time budget-balancing act does not address the problem of the state's structural deficit--measured at $15 billion and growing. It's a bust. Rather than embrace the governor's immoderate economics, the people of California would be wise to push his advisers back inside Reagan's crypt--then lock the door.
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From the November 10-16, 2004 issue of the North Bay Bohemian.