California's economic stability leaves Gov. Brown a new challenge

Gov. Jerry Brown, center, at a 2012 rally for Proposition 30, a temporary tax increase that voters approved. On his watch, the state’s finances have greatly improved, but big challenges remain. (Francine Orr / Los Angeles Times / October 30, 2012)

SACRAMENTO — Soon after Jerry Brown was elected governor in 2010, he invited the state's top budget official, Ana Matosantos, to lunch at his office. He had just two months to prepare his first plan for tackling California's $26-billion deficit.

He asked his assistant to fetch the budget director a sandwich. Then, Matosantos said, the incoming governor of one of the world's largest economies ate a single hard-boiled egg, sprinkled with salt.

Brown's dietary discipline was a hint of the regimented approach he would take to California's staggering financial problems, which he had promised to fix by pushing the state back into the black.

"I don't go to the theater. I don't golf. This is what I do," Brown told Matosantos.

For previous governors, California's budget was quicksand. Gray Davis, a fellow Democrat, was recalled by voters as state finances imploded following an energy crisis. Republican Arnold Schwarzenegger limped out of office with rock-bottom poll numbers, leaving a pile of debt.

But on Brown's watch, deficits have become surpluses, helped along by tax hikes the governor persuaded voters to approve. More money is being pumped into schools.

University tuition has stabilized.

Budget standoffs that once dragged through the summer are now wrapped up by the June deadline, lending the Capitol a new sense of orderliness. And on Wednesday, the governor called a special legislative session to prod lawmakers to pass his plan for saving money and paying off debt.

That record, which will be a major part of Brown's reelection campaign, is due partly to good fortune. California is benefiting from a nationwide economic recovery that has helped flood the state with revenue. Brown is also blessed with a Capitol dominated by fellow Democrats and a 2010 rule change that lowered the number of votes needed to pass a spending plan.

"Somehow he managed to get all the stars aligned," said Norton Francis, who studies state finances at the Tax Policy Center in Washington, D.C.

But California's finances remain vulnerable in some ways, as Brown's main challengers in the June primary — Republicans Neel Kashkari, a former U.S. Treasury official, and state Assemblyman Tim Donnelly of Twin Peaks in San Bernardino County — have noted.

Brown keeps pushing for a $68-billion bullet train whose funding is in dispute. And although some debts are being repaid, others are growing as the state fails to allocate enough money for long-term funding of teacher pensions and healthcare for retired state workers.

The governor has acknowledged the gap. "By no means are we out of the wilderness yet," he said in January, although he has not detailed any plans to address those ballooning costs.

When Brown was inaugurated in January 2011, California was a punch line for jokes about government dysfunction. The state had $35 billion in debt — equivalent to more than one-third of general fund spending — that it had accumulated by borrowing money and delaying payments when it was short on cash.

Brown warned then that there would be more pain ahead.

"Choices have to be made and difficult decisions taken," the septuagenarian governor said in a speech when he was sworn in. "At this stage of my life, I have not come here to embrace delay or denial."

Unlike Schwarzenegger, Brown did not convene blue-ribbon panels to recommend ways to overhaul California's finances — ideas that mostly went nowhere. But like his predecessor, he cut aid to the needy.

Providers in the state's healthcare program for the poor are now paid less. Welfare payments are lower, and fewer families receive state-subsidized child care.

The governor's decisions paved the way for his 2012 tax-hike campaign, a defining moment of his term.

Brown had promised to seek voters' blessing before raising taxes, but he failed to win the needed Republican support to put the issue on the ballot. So he used the initiative process, asking Californians to increase income taxes on high earners for seven years and raise the sales tax for four years.

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Cutting the Deficit, Compassionately - Economic View

Thanks to former President George W. Bush — remember the compassionate conservative? — I have a good name for the fundamental principle that should guide the Democratic alternative: compassionate deficit reduction. The essence is to cut the deficit in a way that does as little harm as possible to people, jobs and economic opportunity. This principle was implicit in much of what President Obama proposed in his 2013 budget, and in what he said about the deficit at the Democratic convention on Thursday. But embracing it more explicitly would improve the substance of the president’s plan, and make it easier to explain to voters.

The first tenet is to go slowly. Investors are willing to lend to the United States at the lowest interest rates in our history. That gives us the ability to cut the deficit on our own timetable. We should pass a comprehensive, aggressive deficit reduction plan as soon as possible, but the actual spending cuts and tax increases should be phased in as the economy recovers.

Why is this the compassionate approach? Because immediate, extreme austerity would plunge us back into recession. The Congressional Budget Office set off alarm bells a few weeks ago when it said that going over the fiscal cliff — a reference to the nearly $500 billion of automatic fiscal contraction scheduled for the start of 2013 — would cause a rapid rise in unemployment. Well, duh.

A crude rule of thumb is that every $100 billion of deficit reduction will cost close to a million jobs in the near term. If that isn’t a reason to move gradually, what is? But if you need another, just look at Europe.

A concrete way to adjust gradually is to pair serious long-run deficit reduction measures with equally serious, near-term jobs measures — like a sizable short-run infrastructure program and a one-year continuation of the payroll tax cut for working families first passed in 2010. President Obama advocated both in his proposed American Jobs Act last September.

Even better would be to give businesses increasing employment a tax credit so large they couldn’t help but notice it, and state and local governments a round of aid generous enough to finally stop the hemorrhaging of teacher jobs and essential government services.

A second feature of compassionate deficit reduction is well-designed tax reform that raises at least some additional revenue. Our budget problems are so large that solving them entirely through spending cuts would devastate the social safety net and slash investments essential for long-run growth and economic opportunity. So revenue increases must be part of the package.

President Obama has repeatedly urged Congress to let the Bush tax cuts expire for those earning more than $250,000 a year. Increasing rates on top earners is an obvious way to raise revenue from those who can afford it most.

Many experts also recommend raising revenue by lowering tax expenditures — the roughly $1 trillion of deductions, credits and loopholes in the income tax code. Cutting tax expenditures would probably have fewer undesirable incentive effects than raising marginal tax rates. But it’s important to move carefully. Many tax expenditures, like the mortgage interest deduction and the tuition credit, go to middle-class families. Cutting only those expenditures wouldn’t be compassionate: it would shift tax burdens toward ordinary families already struggling to make ends meet.

One big tax expenditure benefiting the wealthy is the low tax rate on capital gains and dividends. The tax cuts of 2003 lowered the top rate on this income to 15 percent, far below the 35 percent top rate on other income. Compassionate deficit reduction requires a willingness to raise this preferential rate.

Government health care spending is a major cause of our terrifying long-run budget outlook. Any effective deficit plan has to slow that spending growth. But a compassionate plan would minimize risk to people, especially the most vulnerable.

The central question is whether Medicare and Medicaid should remain entitlement programs guaranteeing a certain amount of care, as Democrats believe, or become defined contribution programs in which federal spending is capped, as Republicans suggest.

Democrats have been forceful in explaining that if the federal contribution is limited and competition doesn’t magically slow costs commensurately, individuals and states will have to pay more. With Medicare, if individuals couldn’t pay the extra cost, they’d have to settle for less complete coverage and fewer benefits. With Medicaid, if states weren’t willing to pay the extra cost, they’d have to throw people off the rolls.

But Democrats need to explain their own plans for slowing government health care spending. To start with, they shouldn’t be defensive about having found $716 billion of Medicare savings as part of the health care reform legislation. They should explain, as former President Bill Clinton did in his speech on Wednesday, that these were reasonable changes that reduced overpayments to providers. They should ask Mitt Romney, who has vowed to roll back these reforms, why he wants to waste taxpayers’ money.

Moreover, Democrats should explain that compassionate deficit reduction will involve more such reforms. Fortunately, there is much inefficiency in the current system, so it should be possible to cut costs without lowering benefits. But if we can’t save enough money by reducing waste and finding better ways to provide care, we might have to consider more painful choices.

Making the wealthy pay a larger share of their Medicare costs, through further means-testing of benefits, would be one way to go. Gradually raising the Medicare eligibility age would be another. That may not sound like a winning message until you contrast it with the Republican plan, which trusts private insurers to decide how to cut costs.

Dealing with the deficit will require more than increasing revenue and reforming health care programs. We’ll also have to cut other spending. Compassionate deficit reduction requires that we choose carefully what to trim.

Spending that protects children, such as money for school lunches and vaccinations, must be maintained. So should assistance for workers displaced by international trade and for veterans struggling to recover from combat wounds.

Democrats shouldn’t be ashamed to advocate actually increasing spending that encourages opportunity and long-run growth. Aid for effective public education and Pell grants that help low-income students go to college aren’t luxuries — they are the building blocks of tomorrow’s labor force and the foundation of the American dream. And spending on infrastructure and basic scientific research is essential for the growth of productivity and standards of living.

BUT to make support for good spending credible, compassionate deficit reducers should be specific about what they would cut. Personally, I’d start with agricultural price supports and subsidized crop insurance programs that mainly benefit large commercial farmers. High-speed rail might be next. (Sorry, Mr. Vice President.) And if the defense secretary says that there is $487 billion that can be safely cut from the Pentagon’s budget over the next 10 years, we should listen to him.

Honest talk about the deficit is risky. Voters are more enthusiastic about the abstract notion of deficit reduction than about the painful details of accomplishing it. But deficit reduction is coming, and this election will most likely determine how it’s done. Democrats owe it to the American people to detail their more compassionate approach so that voters can make an informed choice.

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.

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Hoyer predicts Democrats win back House if economic upswing continues - CNN

20 hours ago CNN Senior Congressional Producer Deirdre Walsh Washington (CNN) – The No. 2 House Democrat predicted Thursday that, if the economy continues to improve, Democrats will win control of the House of Representatives in November.

"I think our chances are reasonably good that we can take back the House, and if the economy continues to perform as it's been performing, I think we will take back the House," House Democratic Whip Steny Hoyer, D-Maryland, told reporters in his Capitol Hill office.

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The Maryland Democrat argued that out of the 76 Congressional districts that House Democrats are focused on this November, "no less than 50 of these districts are really solid opportunities for us."

Democrats need to pick up 25 House seats to regain the majority in the House.

Hoyer cited a divided Republican Party - both in Congress and in the GOP 2012 presidential nominating process - as factors that position Democrats well in the fall election.

More than any other issue Hoyer said the economy will be what voters focus on in November, "If it's better we'll do better, if its worse it will affect us."

But the top-level House Democrat said his party learned a lesson from the last election when voters were unhappy they didn't focus enough on the issue and tossed them out of the majority. This time around he believes Democrats will be helped by the president being at the top of the ticket and traveling the country talking about his efforts to boost the recovery.

While Hoyer acknowledged that the backlash to the health care debate was a liability for Democrats in 2010, he argued that it will actually help the party this fall as seniors see lower drug prices, and younger Americans who aren't employed become eligible for health care coverage.

In addition, Hoyer said the tea party won't play the same role it did in the last election, when it helped elect GOP candidates. He cited his own race two years ago when he faced a tea party-backed candidate, who drew sizeable support because of his (Hoyer's) support of the health care bill. But after a couple of years of GOP control of the House that has seen fights over spending and few legislative accomplishments, the Democratic leader believes those activists may be less energized.

"The tea party is probably saying 'geez this isn't working,'" Hoyer said of Republican control in the House.

As the battle among Republicans for the presidential nomination continues to play out, the House Democratic Whip said the attacks on former Massachusetts Gov. Mitt Romney will help Democrats.

"Where Romney I think has been wounded over the last six months I think Obama has been strengthened over the last six months," Hoyer noted.

The latest news from CNN's political team with campaign coverage 24-7.  For complete political coverage, bookmark PoliticalTicker.blogs.cnn.com as well as CNNPolitics.com.

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Was Goal of Economic Stimulus a Payoff for Democrats, Supporters? (ContributorNetwork)

COMMENTARY | Critics of President Barack Obama's nearly $900 billion stimulus package consider it a failure, the equivalent of burning the money in a bonfire for all the effect it has had on the American economy. Now the president's Council of Economic Advisers agrees.

It has been claimed that the stimulus "created or saved" 2.4 million jobs. According to the Weekly Standard, the report suggests that every job "saved or created" by the stimulus cost $278,000. That means the government could have come out ahead if it just cut checks for $100,000 and distributed them to the unemployed.

The report also suggests that the economy would have "created or saved" jobs even without the stimulus. Furthermore, the stimulus is now having the reverse effect over the past six months, shedding jobs as the stimulus money runs out.

Here are some sobering statistics that demonstrate the ultimate effects of the stimulus:

* Unemployment rate before the stimulus: 7.3 percent

* Unemployment rate after the stimulus: 9.1 percent (It was supposed to keep the unemployment rate below 8 percent.)

* National debt before the stimulus: $9.986 trillion

* National debt after the stimulus: $14.467 trillion (and rising)

In theory, if the stimulus money had actually been spent on infrastructure, such as roads and bridges, and technology development, there might have been a lasting economic effect. Unfortunately the stimulus money was spent on every pork barrel project imaginable, as well as giveaways to the labor unions. A lot of the money went to states with profligate spending practices to pay the salaries of bureaucrats who also happened to be members of public sector unions (political supporters of the president and his party in Congress).

In effect, the stimulus package was the greatest robbery in the history of civilization, fleecing the American taxpayers and using the money to pay off congressional Democrats and their supporters. It suggests that the Obama administration not only had no notion of how to stimulate the economy but actually had no care to do so. The stimulus should be seen as graft and corruption on an epic scale, done in the guise of economic stimulus.

How is that hope and change thing working out for you?

Source:Obama's Economists: 'Stimulus' Has Cost $278,000 per Job, Jeffrey H. Anderson, The Weekly Standard, July 5. 2011

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Senate Democrats seek new economic stimulus (Reuters)

WASHINGTON (Reuters) – Democrats in the Senate on Wednesday called on Vice President Joe Biden to include new economic stimulus spending in deficit-reduction talks as a way of lowering the 9.1 percent jobless rate that is hobbling the economic recovery.

Senate Majority Leader Harry Reid made the proposal to the White House, Richard Durbin, the No. 2 Democratic senator, told reporters.

"The Republicans are fixating on the budget deficit and it's a serious problem," Durbin said.

But citing the conclusions of a presidential deficit-cutting commission that he served on last year, Durbin added, "Get the recovery right before you get in this deficit cutting mode ... get people back to work. Let's start moving in that direction."

A senior Democratic aide said the job-creation idea Senate Democrats are now pursuing represented a pivot in the deficit-reduction negotiations.

He said the idea presented to the White House has three components to help create jobs: new infrastructure spending, a payroll tax cut and support for clean energy jobs.

He did not say how large the infrastructure spending proposal would be. In 2009, President Barack Obama won enactment of an $814 billion economic stimulus that Republicans opposed as wasteful spending.

The aide said the White House appeared to support extending the current payroll tax cut for employees, although there has been discussion on Capitol Hill of also expanding that tax cut to employers.

Biden is to return to the Senate on Wednesday for another meeting with the bipartisan group of lawmakers looking for ways to significantly reduce deficits. A deep cut in spending -- in the neighborhood of $4 trillion over a decade -- is a Republican requirement for allowing a vote to increase U.S. borrowing authority that is hitting up against a $14.3 trillion limit.

The group is facing an August 2 deadline for resolving the debt limit problem and thinks that it needs to make some decisions within the next few days in order to give the Senate and House of Representatives enough time to write and pass spending cut and debt limit legislation.

Durbin told reporters he thought that effort could become a "two-step" process containing a "serious down payment on the deficit" followed by more work on long-term savings.

"We're just not going to be able to accomplish (all of) it by August 2," Durbin said.

The Biden group has aimed to raise borrowing authority by enough to get through 2012 and next year's presidential and congressional elections.

"I hope Vice President Biden can get an agreement that takes us through the election. I don't know if he can," Durbin said.

(Editing by Jackie Frank)

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