New Chart: More Spending Impossible
DEC. 8, 2011
By JOHN SEILER
This week, Gov. Jerry Brown unveiled his new proposal to increase taxes $7 billion to support higher state spending. The Think Long group of the rich and famous is proposing $10 billion in higher taxes to back more spending. Other tax increases are on being cooked up. Voters would have to pass one more of these tax increases in November 2012.
But a new chart I’ve devised shows the state just does not have the economic foundation to support higher spending, and the taxes to pay for it. The chart follows. It is a “combination chart” showing two different things along the same timeline.
Note how closely the data correlate, especially in recent years. (All data are adjusted with the Consumer Price Index to reflect 2010 dollars. For 2010 expenditures, I’m using the 2010-11 budget number, $91,480 billion, from the governor’s enacted Budget Summary. All other budget data are from his January 2011 Budget Proposal, Appendix Section 8.)
The left vertical axis, which tracks the red line, scores Californians’ median household income from 1995-2010. That’s how much money our people make, per capita. It’s how much can be tapped to support state spending.
Notice how it has risen and fallen depending on the booms and busts in the California economy.
Next, notice the right vertical axis, which tracks the blue line, and which scores state general-fund expenditures per capita. That’s how much, on average, the state spends of the taxpayers’ money. (Median household income data come from the U.S. Census Bureau, and are not yet available for 2011.)
The one anomaly is on the far right, in which expenditures are much higher than median income. This may indicate that the state still is spending more than Californians can support. But it might be that the data need to be revised. When Gov. Brown presents his next budget proposal in January, I’ll re-do this analysis to reflect fresher numbers.
Seiler’s Second Law
But for most years, especially recently, the ratio is that the state general fund spends approximately 1/25th of median household income.
I call this “Seiler’s Second Law of the California Budget”: The California state general fund can’t spend more than 1/25th of median household income.
(Seiler’s First Law is that the state general fund can’t spend more for the general fund than 6.2 percent of personal income. I plan updating this, too, when the January budget numbers come out.)
There’s also a corollary to Seiler’s Second Law: If the state wants to increase general-fund expenditures, it must enact policies that foster increases in median income.
Increasing tax rates, which will suppress median income, thus would be counterproductive. The tax rate increases would chase away businesses that create high median-income jobs, and well could decrease tax revenues.
Already, California’s median income has been hammered by the recession. From 2006 to 2010, median incomes in California crashed by 9 percent, almost double the 5 percent national rate.
Put another way, if California’s recession had struck at the national rate, our median income would have dropped only 5 percent, instead of 9 percent. Thus, our median income would be about 4 percentage points higher, or about $2,000 more.
Not the 1970s
In his “An Open Letter to the People of California,” calling for his $7 billion tax increase, Gov. Brown wrote, “Spending is now at levels not seen since the 1970s,” during his first stint as governor. He’s living in the past.
The real numbers are shown in the chart above, indicating that median income has crashed to the levels of the mid-1990s. The numbers show that, except for population growth, the California economy hasn’t grown since about 1998, when Pete Wilson was governor. We’ve suffered a “lost decade” — and are working on a second.
In his letter, Brown lamented cuts he made to schools, public safety and aid to the poor. But you can’t spend what you don’t have, and can’t get.
In his first stint as governor in the 1970s, Gov. Jerry Brown spoke of an “era of limits.” He was wrong. The economy, especially median income, kept growing through the 1970s, 1980s and up to about 1998. On the foundation of median income growth, the state general fund could expand. But the foundation first had to be laid.
The era of limits is now.
And the only way out of this new era of limits is to increase median household income through pro-business, pro-jobs and pro-taxpayer policies.
The chart shows there’s no other way.
If you want to play with the numbers yourself in an Excel spreadsheet, I’ve included them below.
Median Income source: http://www.sacbee.com/2011/09/13/3906899/california-incomes-plummet-poverty.html
General Fund source for 1995-2009: http://www.ebudget.ca.gov/BudgetSummary/BSS/BSS.html
General Fund source for 2010: http://www.ebudget.ca.gov/pdf/Enacted/BudgetSummary/FullBudgetSummary.pdf
For the CPI adjusted numbers in Column D, I plugged the numbers in Column C into the Bureau of Labor Statistics’ CPI Calculator: http://www.bls.gov/data/inflation_calculator.htm
Finally, California’s fiscal years begin on July 1. For the years in column A, I used the first half of the year. Thus, in column A, “2009″ means “fiscal year 2009-10″
May 20, 2013