Krugman’s California Dreaming

by Victor Davis Hanson

National Review Online

It is rare, even in the case of Paul Krugman, to read a column in which almost everything that is stated is either wrong or deliberately misleading. But his recent take on California’s renaissance is pure fantasy. I wish it weren’t.

Krugman starts with the premise that California conservatives, the most prominent being Ronald Reagan, helped to turn the formerly moderate Republican party into the “radical right-wing organization we see today”; California, he believes, did more than the South to spawn the Religious Right. How absurd! Reagan always governed moderately; he signed into law a liberal abortion statute and no-fault divorce; government and the state budget grew during his eight years as governor. Reagan’s record in California was about the same as that of Pat Brown, his predecessor, in actual terms of taxes, the size of government, and budget growth. Reagan’s achievement was not as a radical conservative, but as a pragmatist who for a while slowed, in Gingrich-Clinton compromise fashion, the trajectory of taxes and spending.

Conservatives have not really “declared the state doomed” but have instead pointed out that it is in dire jeopardy — and not just because “the political balance shifted.” After all, a supposed Republican, Arnold Schwarzenegger, was recently governor for eight years. The real problem is math, not politics, and it finally caught up with us in terms of massive deficits and unsustainable aggregate debt. Unfortunately for Krugman, the timing of his column roughly coincided with breaking news that the city of Stockton has just been allowed to declare bankruptcy (with many insolvent California municipalities keenly watching its precedent of shorting bondholders and contractors to meet staggering pension tabs) and with the McClatchy news report that the state auditor just declared California’s net worth to be minus $127.2 billion — mostly, again, as a result of skyrocketing bond and retirement liabilities, coupled with past sharp dips in revenues and a much higher unemployment rate than the rest of the country for the last five years.

Krugman then writes of California’s past energy crises, “But a funny thing happened on the road to collapse: it turned out that the main culprit in theelectricity crisis was deregulation, which opened the door for ruthless market manipulation. When the market manipulation went away, so did the blackouts.”

Not quite so funny — given what lies ahead. Although it is difficult to rate electricity prices state by state, given all the formulas of comparative computation used, most agree that California’s electricity prices are about 40 to 60 percent higher than the national average — odd, since California still has enormous natural-gas reserves and a sophisticated though now static hydroelectric system, and since it once was one of the pioneers in nuclear-power production. Our worry for this summer is not over Krugman’s “blackouts,” but rather over “greenouts” — the present politically correct bookend to Enron’s past crony price-gouging.

No one believes that in just seven years we will meet the state mandate to produce a third of our power from “renewables,” given the emphasis on solar power, which currently produces less than 1 percent of our aggregate electricity. What will save California, if anything does, is not thousands of subsidized Solyndras or the hundreds of postmodern solar-panel projects being undertaken on premodern school campuses whose test scores put California near to dead last in the nation, but the presence of one of the largest untapped natural-gas reserves in the world: The Monterey Shale Formation offers a way to produce clean, plentiful, and cheap electricity far away from the Bay Area and in the convenient center of the state — so tempting a revenue source for redistributionist politics that even the greenest members of the California legislature will probably not resist it.

Incidentally, California’s power pricing is illiberal to the core. Mandates and regulations favored by the coastal elites have spiked costs in the hot-in-the-summer/cold-in-the-winter interior, where many of the residents are poor. Air-conditioning and heating expenses in the Central Valley vastly exceed those in the Berkeley-to-San Diego corridor, where the ocean keeps temperatures more moderate. Not turning on your air conditioning when it is well over 100 degrees outside is a relatively recent Central Valley habit. Newer homes have wonderfully efficient air conditioners, but temperatures inside remain uncomfortable in summer, since many middle-class homeowners rely more on old-style evaporative coolers or even fans to avoid the exorbitant electricity costs — an apparently politically correct and green way to curb power use.

In his encomium to our recent tax increases (California now has the highest gasoline taxes, the highest sales taxes, and the highest rates on top incomes in the nation), Krugman states, “Far from presiding over a Greek-style crisis, Gov. Jerry Brown is proclaiming a comeback.”

Note the linguistic gymnastics in “is proclaiming” — a wise hedge on Krugman’s part, because Californians are just now paying their new, higher 2012 income taxes, retroactively back to January 2012. We do not yet know the exact reaction of high earners when they discover how much their state tax bills have shot up — just as their federal tax rates are scheduled to rise for 2013. No, we don’t have millions of tax refugees leaving the state, but a few thousand are. That’s worrisome because even before the recent tax hikes, about 144,000 households (out of a population of 37 million) accounted for about 50 percent of the aggregate state-income-tax revenue — and personal income taxes usually account for about 50 to 60 percent of all state revenues. We are learning that it does not take too many businesses or wealthy households moving to Austin, Paradise Valley, or Henderson to make a big difference.

Should we laugh or cry when Krugman finally concedes: “I’m not suggesting everything in California is just fine. Unemployment — especially long-term unemployment — remains very high. California’s longer-term economic growth has slowed, too, mainly because the state’s limited supply of buildable land means high housing prices, bringing an era of rapid population growth to an end. (Did you know that metropolitan Los Angeles has a higher population density than metropolitan New York?) Last but not least, decades of political paralysis have degraded the state’s once-superb public education system. So there are plenty of problems.”

But why does Krugman think “long-term unemployment . . . remains very high” — given the stellar universities and world-class companies the state inherited from past generations, along with a superb climate and geography? Why don’t its unusually robust regulations and tax rates promote unusually robust job growth?

The sloppy statement “the state’s limited supply of buildable land means high housing prices” is laughable. There are millions of acres in the San Joaquin Valley that lie open; housing prices are very reasonable from Stockton to Bakersfield. The West Side along I-5 is empty for hundreds of miles. Even in the pricey coastal strip, there are still millions of acres of undeveloped land that easily could accommodate moderately priced high-density apartment buildings. But green zoning restrictions, “not in my backyard” aristocratic land-use mandates, and building regulations mean that open spaces like the Freeway 280 corridor between North San Jose and San Francisco, or millions of acres between Highways 101 and 1 along the coast, simply are not available for housing. The last thing California’s progressive elites want is more places like Redwood City or Seaside lapping up to the very shores of their largely segregated atolls.

Krugman’s statement “that metropolitan Los Angeles has a higher population density than metropolitan New York” is true not because the vast LA basin ran out of land, or because LA is a city of towering high-rises like Manhattan but unlike the rest of New York City, but rather because hundreds of thousands of overpriced residences once used by single families now each house large numbers of extended family members and boarders, in a way that was not true before Los Angeles became one of the largest cities of Mexican nationals in the world.

“Political paralysis” does not explain the degradation of the “state’s once-superb public education system.” Nor does a lack of money explain why the remediation rate of incoming students in the California State University system has soared, during both good times and bad times, over the last 30 years (to over 50 percent of incoming students), or why the country’s largest state-university system, again during both boom and bust, is graduating only 50 percent of its students, or even entirely why, in many surveys of public-school test scores, California has ranked between 47th and 49th (thank God for Alabama and Mississippi), a far lower ranking than the state’s expenditure per pupil (around 35th in the nation).

Krugman has completely mischaracterized conservative concerns. What worries us in our beloved California is that a state with singular natural gifts (the best agricultural climate and soils in the world, vast ports facing the rich Pacific Rim, vibrant tourism, huge reserves of gas, oil, and timber), and a wonderful inheritance from our ancestors (the UC system, Caltech, Stanford, USC, the origins of the American idea of freeway transportation, brilliantly engineered hydroelectric and irrigation systems, and a mostly harmonious, skilled, multiethnic populace), has been so mismanaged, by both recent Republican and Democratic governors, as to result in chronic budget crises, terrible public schools, and a third of the nation’s welfare recipients, with nearly a fourth of the state’s residents ranked below the poverty level — the highest rate in the nation. Apparently those latter statistics are symptoms of what Krugman characterizes as the California “comeback” that can offer lessons to the nation.

Our problems are even not public employees per se (indeed, we do not have an inordinately high percentage of them for our population), but the exorbitant salary, medical, and pension costs of an aging, high-end caste of them — mostly the legacy of the disastrous (Democratic) Gray Davis administration. Immigration from Mexico and Central America in the past was manageable, since it was mostly legal, newcomers met a host eager to assimilate and integrate them, and the limited pools of yearly arrivals facilitated such confident melting-pot approaches. But in the last 30 years, a perfect storm of huge increases in illegal immigration, the politicized abandonment of the assimilationist melting-pot model in favor of the multicultural salad-bowl approach, the transfers of billions of dollars out of the state in annual remittances to Latin America, and the dismal economy resulted in soaring costs in welfare, Medi-Cal, the penal system, and law enforcement. Ironically, it is the sputtering California economy, not federal- or state-government enforcement of the law, that has led to a fairly recent slowdown in illegal immigration.

Krugman concludes by suggesting that California’s current upswing is a blue-state model for the nation. We hear that often now from Sacramento, but there are two caveats. Tax-and-spend iconoclast Jerry Brown is still far more fickle and may still prove to be more pragmatic than is Barack Obama, Nancy Pelosi, or Harry Reid, as his efforts to address the water crisis and bring some balance to the controversy over development of the Monterey Shale Formation may attest. Because Brown, unlike his confreres in Washington, cannot print money or borrow vast sums to balance the annual budget, he simply ran out of cash and accordingly made cuts in the budget that, until this year, marked a historic reduction in state spending. Second, we are currently in the eye of the hurricane. We don’t know the full effects of the latest hikes in income, sales, and gasoline taxes, or the longer-term aftershocks from such a poorly schooled younger generation, or the ripples from looming bankruptcies among our cities, or the full costs of bailing out pension funds, or whether the fiscal assumptions of the budget really will result in a balance.

Millions of us will stay, but thousands of Californians who have enriched the state may not. Sadly, the California legislature operates on the principle that the climate, hip culture, and beautiful panoramas of California will always keep enough high-earners from leaving, and that Napa Valley, Silicon Valley, Central Valley agriculture, the gas-and-oil industry, our great research universities, and Hollywood will continue to thrive, even with the high taxes, ever more regulations, the failed public-school system, soaring outlays in social services, and problems from years of massive illegal immigration. It is as if the current generation of politicians can extract a premium for something that they did not create, but have done their best to destroy.

What a retrograde assumption.

©2013 Victor Davis Hanson

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