California is slouching toward the millenium, now only five years away, with its Golden State image in tatters. Should we blame the recent chain of disasters--riots, earthquakes, drought, fires, mudslides and the worst recession in 50 years? Or is something else going on here?
McCARTHY: It's tempting to blame these events, but I believe the causes of California's problems run much deeper. At the most basic level, it seems our institutions aren't able to cope with the sheer scale of change.
I used to think that diversity was one of California's greatest strengths, but now I worry that it may be our undoing. It's not only ethnic diversity--California has always had that--but the way invidious distinctions are drawn along ethnic, ideological and single-issue lines. These distinctions are even occurring within groups. Working- and middle-class African Americans have fled communities like Watts for the suburbs, leaving behind the poor and less educated. With these various groups pressing against each other, gang and turf wars of all kinds seem inevitable.
Another dark side of diversity is the growing gap between rich and poor. Not too long ago, California's surging economic growth along a broad front made everyone a winner. Some were bigger winners than others, to be sure, but even those at the bottom of the ladder could count on a job and a social safety net to help them through the worst times. More important, there was a sense of optimism that tomorrow would be better.
CARROLL: With defense spending on a downhill slide, California is struggling through a post-cold war transition that makes me wonder which side won. The state still has tremendous resiliency, but when we finally pull out of this recession, the economic landscape is going to look very different. Big industry, notably aerospace, is shrinking fast. In the last five or six years, California has lost in excess of 600,000 manufacturing jobs. At the same time, smaller, high-tech firms are doing very well and there has been vigorous growth in service jobs--particularly in the financial sector. These dislocations--some firms growing rapidly and others shrinking, the demand for new kinds of skills, the growing trend of firms to hire outside contractors--have put the squeeze on certain groups. Where before there was a rough equity, there is now a widening gulf between winners and losers. The implicit belief in growth and in the California dream is a casualty.
BENJAMIN: California's problems are not simply a matter of numbers, overwhelming as they are. We're experiencing a qualitative shift from one kind of political universe to another. That's why diversity and growth, which seemed such good things yesterday, seem wholly unmanageable today.
Worse, our government doesn't work anymore. How else to account for the proposition movement? People don't trust the politicians to get it right, so they take matters into their own hands. During boom times, the costs of this form of direct democracy are not obvious. Now we're paying for it in the form of greatly reduced public services and a rolling budget crisis. I hate to sound like Chicken Little, but time is running out. We had a wake-up call the other day when Wall Street bankers lowered California's bond rating again. In three years, the rating has fallen from AAA, the highest, to A, the rank above speculation.
CARROLL: Conditions along virtually every dimension have been changing at immense speed. We live in a city that had a population of about three million at the end of World War II. Today, there are about 15 million people in the Los Angeles metropolitan area. Similarly, the total population of California was 10 million at the end of World War II; it's 30 million now.
When people are subjected to changes of that magnitude, their natural inclination is to try to protect what they have. The proliferation of ballot initiatives is a reflection of that impulse. In the last five years, we've voted on 76 propositions and there seem to be more every year. By and large, these initiatives are attempts by some group to institute control over some aspect of their lives--taxes, schools, auto insurance rates, term limits, crime and so on.
In a way, politics is like the street gangs. It's people, feeling pressured, trying to carve out their niches. It's politicians, trying to get reelected, saying to their constituents, `I'm going to act in your interest.'
The result is a radically altered environment in which the government structures that served us well during a long period of rapid but sustainable growth are breaking down.
BENJAMIN: This is a classic `tragedy of the commons.' When there is no shared vision, when the imperative is everyone for himself, it's only logical for individuals to try to increase their share of the common wealth, to the profound detriment, alas, of society as a whole. At some point, people must be made to understand the long-term, harmful consequences of narrowly selfish actions. Maybe we should be teaching that lesson to schoolchildren from the first grade on--it certainly doesn't come naturally to the human animal.
Is this increasing reliance on the people rather than the legislature to make decisions at the root of California's problems?
CARROLL: It's more than that. We've allowed something bizarre to happen to the state's fiscal structure. State spending has gone from $4 billion to $40 billion in 20 years, on the order of a three- to fourfold increase after inflation. Now, this is what's odd: Nearly everyone thinks Californians are taxed much more heavily than the residents of other states. Unpopular though I may be for saying so, that is simply not the case. The share of the state's gross product that is paid to state and local government in taxes and fees is right at the national average. Compared to the residents of other states, then, Californians are generally taxed right at the midpoint.
So what accounts for the huge increase in the state's budget over the past two decades? The answer is a booming economy during those years and a whopping population increase. Many more people are paying taxes. But they are not paying more taxes. In fact, the average person is paying less, thanks to tax limiting laws like Proposition 13, which rolled back property taxes, and the Gann amendment, which put a cap on total state spending.
The rub is that spending for mandated programs has gone on apace, so it won't be long before California faces a fiscal crisis that will make previous ones pale by comparison.
McCARTHY: The ripple effect of tax-limiting laws has hit local government the hardest. With the drying up of the property-tax base, many communities have instituted a variety of user fees. These can be fees to use a park or swimming pool, but more often local officials have learned to go where the money is. Consequently, developers are getting socked enormous fees not only for improvements in their housing developments, but for upgrading services in the community at large--bike paths and hiking trails and the like. That may be okay for cities and towns that are attractive and growing, but the loss of revenue is devastating for struggling communities that are losing even the few amenities they once had, to say nothing of vital services like firefighters and police. This only serves to increase the isolation of the poor.
So the root causes of California's problems are the magnitude and rate of change--too much, too fast--and the breakdown under this onslaught of institutions that evolved in a gentler, less complex era. The initiative movement is a reflection of the failure of government. Tax revenues are constrained, but mandated spending is way up and going higher. A fiscal crisis looms. What else?
McCARTHY: We've lost sight of how these problems fit together. Take the state budget crisis. Even with tight limitations on revenues, everyone is calling for more spending. Yet Steve's analysis has shown that currently 80 percent of our general fund revenues is by mandate, going to three areas: K-12 education, corrections and social services. That doesn't leave much for everything else. And in a few years--unless we change the law--the money available for discretionary spending will have dwindled to the vanishing point.
If you are a politician scrambling just to get through this year's crisis, you are not going to worry about long-term public spending that represents an investment in the future, because areas like higher education, the environment, and the transportation infrastructure have only small and not very powerful constituencies in the general population.
BENJAMIN: I think we are seeing a calamity unfold in the case of higher education. California's system was a model for the nation; in many ways the state's prosperity was built on the world-class reputations of its colleges and universities. But funding for higher education has been shrinking for almost a decade and the squeeze is going to get much worse. A college education will revert to being a benefit enjoyed only by a privileged few. The paradox is that never have these institutions been more critical to the state's social and economic well-being. Without access to higher education, how are the vast majority of our young people going to gain the skills they need in today's high-tech workplace? Conversely, how can California flourish without a well-educated, highly trained workforce?
McCARTHY: There is another dimension to the education crisis that should concern us. A dramatic change is occurring in the composition of the state's population. Despite what you may have heard, California is still growing--not as rapidly as in the recent past--but the numbers are still substantial. The Anglo population is basically stable or declining. The real growth--I estimate something like 70 percent--is the result of immigration, counting the immigrants and their American-born children. These newcomers desperately need educational opportunities, and the state's long-term economic success is going to hinge on building an education system to accommodate and prepare them.
We're facing a similar crisis in infrastructure, where we haven't made any major investments in a long time. The Northridge earthquake galvanized us into high gear to repair the freeways--but other sectors are also in bad shape--the ports, the highway system, dams, bridges, waste treatment facilities, public buildings and on and on. We need to make these investments to ensure our competitive advantage in the years ahead. To defer spending in these vital areas in order to cover immediate expenses makes no sense. But that's the way our government structure is pushing us.
You have identified structural reform of government as a top priority, but that is an abstraction that eludes most people. What's wrong with our government institutions? Why don't they work better?
BENJAMIN: Part of the problem is that we, as a nation, have never quite sorted out how responsibilities and tax revenues should be divided among the various levels of government. Nor, and perhaps this is more important, how strong a role government at any level should play in regulating the private sector. The longest-running argument in U.S. history is probably between those who favor a strong, centralized regulatory role for the federal government and those who advocate decentralization and believe that the government that governs least, governs best. The upshot is that neither camp trusts the other to do the right thing. The feds try to solve problems by piling on regulations and mandates; the `public choice' folks fight for what they want with initiatives. What's more, mistrust is endemic. The feds don't trust the states, the states don't trust the locals, and the people have learned not to trust any form of government very much. The result is often stalemate or paralysis on vital issues.
CARROLL: Here's another part of the problem. We have evolved political institutions that are very good at managing growth. In the old days, the implicit bargain was: I get mine today, you'll get yours tomorrow. You weren't happy about having to wait, it might not have been fair, but sooner or later you knew you would get your share out of future growth. But those same institutions are lousy at reallocating a dwindling supply of new money, because that entails making hard choices among the different claimants and that's not what they're geared for.
McCARTHY: Also, and this is key, we're not creating new programs out of new revenues to make life better for people. Instead, we're generating more and more regulations and mandates. That is nickel-and-diming business and government to death, without anybody ever asking what it is we're trying to do and what's a reasonable amount we can do. At what point--by adding just that incremental bit more--does the whole system collapse and business start to flee the state?
On the other hand, every time a business leaves California, a chorus of wails goes up that we should do whatever we can to keep them here. That's also nonsense. The trick is to be far more selective about the kind of businesses we want--to wit, those that are good for the state's future--then work to produce the conditions that make the state attractive to them.
You've outlined a chaotic situation in which everyone is fighting for a piece of the pie and no one gives a hoot about California; in which there are no leaders, no vision, no goals, no plan. It's like one of those Saturday afternoon melodramas where the canoe is getting perilously close to the falls and unless somebody starts paddling like mad, the boat is going to plunge over the edge. What is to be done?
CARROLL: First, we must face the reality that the world has changed irrevocably. Currently, everyone from the public to the business and political leadership is looking for handy culprits--the recession, defense cutbacks, immigration--and grabbing for the quick fix. There is a comforting notion that, if we can just make it through the next few years, the economy will improve and we can go back to business as usual. So we put off investment in infrastructure and structural reform and busy ourselves with minor, tinkering changes that do more harm than good. Take Proposition 141. It slashed the budget for the legislative analyst's office, which is the independent research arm of the legislature, and eliminated the commission on state finance, which provides independent data to both the governor and the legislature on the condition of the state's finances.
How ironic that the very agencies responsible for telling our government whether what they are doing makes good sense are the ones that get axed!
McCARTHY: What's most needed next is a summit conference of the state. The governor should identify and bring together a broad-based coalition of leaders who care about California and can put aside partisan concerns. They should be drawn from every sector--business, academia, the research community, the legislature, public interest groups and the media. Especially the media, because reforms of the kind we've been talking about would require a massive public education effort. The group's job would be to sound out the people about the kind of state they want and the trade-offs they are willing to make.
Perhaps we could have a referendum setting out different scenarios of what the future might look like. What the research community can do --and RAND has a critical role to play here--is to analyze the choices and the consequences of choosing one path over another--or, worse, of not choosing and letting the canoe go over the falls.
BENJAMIN: Ultimately, out of these deliberations should come the broad outlines of a plan, incorporating the goals and the trade-offs the people say they want. Not a detailed blueprint of the state's future, but rather a vision that fits the new realities and a strategic plan for achieving it.
CARROLL: Athough it's important to think about the whole, the job is too complex and overwhelming to tackle all at once. Fortunately, there is a precedent for making massive improvements in one area at a time. In the early 1960s, Clark Kerr and other academic leaders came up with a master plan for higher education that has guided the California system ever since. They set out long-term goals and a vision of how the whole system should be structured, about its various responsibilities and missions, and then they worked toward that goal. The old master plan is no longer viable because the environment for which it was created is gone. One could envision a new master plan that, while it might not be as glorious, at least would be a coherent, sensible whole. And we could do that in other areas.
For example, instead of arguing forevermore about a quarter-cent sales tax increase, let's start a public debate about a really fundamental question: Should this be a state that provides a high level of public services (and accordingly levies high taxes) or medium-level services/medium taxes, or low services/low taxes? I'm not advocating one over another, but if we could agree on which of those--or where in between--we wanted to be, we could come up with coherent policies to implement the goals. The point would be to get as good a balance as possible within the constraints decided upon.
McCARTHY: What we're recommending is a pretty tall order, but until we can decide where we're going, we'll have about as much luck as an Angeleno asking whether to turn right or left on Lincoln Boulevard before deciding whether the destination is New York or San Francisco.
Taking part in the discussion were:
Kevin F. McCarthy, a demographer with special expertise in immigration policy and a broad range of other domestic research, coordinator of RAND's work on the issues facing California. He completed a comprehensive analysis of the causes and consequences of Mexican immigration into California; led RAND's Institute for Civil Justice for several years; and before joining RAND was associated with the Office of Economic Opportunity as part of the Upward Bound program.
Stephen J. Carroll, an economist who has focused on policy issues in education, finance and civil justice. He currently directs an analysis of California's state and local governmental finances and prospects for support of public education, and recently completed a study of the fiscal effects of the California school voucher initiative. He joined RAND in 1968 and served as Deputy Director of the RAND Institute for Civil Justice from 1980 through 1987; his work has been published in such books as The Search for Equity in School Finance and How Effective is Education?
Roger W. Benjamin, director of the Institute on Education and Training, senior political scientist in RAND's International Policy Department. His research is focused on policy issues related to higher education, including reform of K-12 teacher training. He is currently codirecting a research program on restructuring governance in higher education. Before joining RAND, he held a variety of high-level academic and administrative posts at the University of Minnesota and the University of Pittsburgh. At both institutions, he led strategic planning processes that resulted in significant institutional redesign and reallocation of resources.