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Toss the Rosy Glasses

November 22, 2003

Two upbeat economic reports issued late last week bring to mind the punch line for an old joke about how an economist gets out of a hole: First, assume a ladder.

The Schwarzenegger administration should resist the temptation of undue optimism as it figures the significance of October's relatively strong job growth in California and the welcome news that state exports registered their strongest quarter since 2000. It's just too risky to assume that there's enough of a recovery underway for the state's economy to grow so robustly that it will pull California from its budget quagmire.

Even if that does happen, it won't happen fast enough -- that is, in the next 18 months. That was the message several economists delivered to Finance Director Donna Arduin in a recent meeting.

On the basis of experience and available data, they and others urge caution. Although the state collected surprisingly strong withholding and quarterly estimated-income taxes during the early months of this year, for example, that extra revenue will go for the costs of fighting October's wildfires and for spending on education, as required by Proposition 98.

No single thing, not even massive borrowing, provides a simple answer. Legislative Analyst Elizabeth Hill warns that "engaging in budget-related borrowing to avoid spending cuts and tax increases, or to finance additional spending and tax cuts, is a slippery slope."

Bad decisions already have sunk the state deeply in debt. Hill sets the 2003-04 budget deficit at $14 billion, including Schwarzenegger's repeal of the car tax hike; Arduin has issued even more dire predictions of what will happen the mess doesn't get cleaned up now.

California created much of the mess it's in, with legislators overspending in the late 1990s, then using financial sleight of hand to balance the budget. Ill-advised laws -- like SB 2, which will saddle employers with even more health-care costs -- worsen matters. So do rosy, simplistic assumptions that making California a "business-friendly state" by dumping regulations will magically cause the economy to rebound.

California's finances always will be linked to the national and global economies and events. If the nation and the world are in the doldrums, who is going to buy the state's goods and services? Losing sight of that seemingly simple reality will only compound the pain that California taxpayers already suffer.

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