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California’s Post-Corona Challenges

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California’s Post-Corona Challenges

The Golden State faces some difficult choices ahead. April 24, 2020
Covid-19
California
Economy, finance, and budgets

California has, at least to date, escaped the worst effects of Covid-19. Despite predictions by Governor Gavin Newsom that upward of 25 million Californians would become infected, after six weeks of lockdown the state, despite having twice as many residents as New York, has suffered only one-eighth the number of cases and considerably less than one-tenth the fatalities. The numbers could worsen, but if the rate of growth of infection slows, as is now occurring even in New York, the Golden State may well avoid the worst-case scenario.

Less thought has gone into how the aftermath of the pandemic could intensify other long-term problems that the state leadership would prefer to ignore. Most critical will be the effect of the virus on the state’s already-severe income inequality and poverty. The pandemic has disproportionately hurt poor and working-class people, precisely those Californians already suffering under the state’s strict regulatory regime. The huge but generally low-paying tourism industry is particularly vulnerable to declines in travel, especially from Asia.

Not all the pain will be felt by the working classes, though. The pandemic is likely to stall or even derail some of the new IPOs that the state relies on for revenues. A reversal in real-estate price inflation, another key source of state funding, also seems likely. California faces a likely scenario of falling revenues and soaring demand for government services.

Citing a series of annual budget surpluses, some progressives have argued that California has developed a “fiscally responsible” form of sustainable capitalism. Yet, as even former governor Jerry Brown predicted, the state’s “Johnny one-note” tech economy would eventually stumble, reducing the huge returns on capital gains that remain critical to state revenues. Even before the coronavirus, this lapse seemed imminent, given the recent poor performance of tech IPOs and the $100 billion drop in the value of privately held “unicorn” startups, once seen as destined to become the next great source—a la Google and Facebook—of income for state coffers. Capital-gains payments, which doubled last year to over $15 billion, could now drop by a large margin, as occurred in 2008, drilling a big hole in the budget.

The coronavirus-induced recession will make clear how tenuous California’s financial condition has become. The state’s much-touted $21 billion operating-budget surplus is likely to disappear entirely under the weight of declining revenues and rising welfare costs. Since March, California’s chronically underfunded unemployment-insurance claims grew by 1.6 million filers.

Coupled with a drop in revenues, expanding demand for services will prove catastrophic. More than two-thirds of California cities have no funds set aside for retiree health care and other retirement expenses; the budgets of 12 of the 15 largest cities are in the red. The state overall owes $1 trillion in pension debt, notes former Democratic state senator Joe Nation. Truth in Accounting in 2019 placed California, despite the tech boom, 42nd in fiscal health among the states.

Even before the pandemic, CalPERS, the state’s public-employee retirement fund, was “catastrophically underwater,” with barely two-thirds of the funds to meet its commitments. Given the ongoing expansion of California’s generous welfare state, these pension obligations can be met only with much higher taxes and cutting back on infrastructure and other expenditures. Before the virus, the state’s welfare system already covered roughly one in four households in the state, according to a recent Public Policy Institute of California report, and this proportion now is likely to increase. By some measurements, state aid to families—rental subsidies, food assistance, energy, and other benefits—is higher than in social-democratic welfare states like France and Sweden.

The pressure on California’s government resources is made much worse by a bifurcated economy that produces a disproportionate amount of poorly paid jobs. As manufacturing and middle-management jobs have fled the state, notes new research from Chapman University’s Marshall Toplansky, the vast majority of all new jobs—some 80 percent—pay less than the median income, and roughly half of those pay under $40,000 annually, virtually a poverty income in the expensive coastal areas. Critically, California has been among the worst states in producing middle-income jobs, while rivals such as Utah, Texas, Arizona, Nevada, and Washington have boosted these kinds of positions at five to ten times California’s rate.

California’s low-end jobs in restaurant and retail have been hard-hit by the pandemic, as they have everywhere. But California’s pain will be made worse by the outsize role of tourism and hospitality in employment. This sector, now 2 million strong, has accounted for a quarter of all new jobs created in the state this decade; according to the Bureau of Labor Statistics, its share of all employment grew from 10.6 percent to 13.4 percent, with much of the growth concentrated in idyllic coastal Southern California.

Even one of the steadiest sources of higher-wage blue-collar employment, shipping and trade, could be severely affected. International trade, including exports and imports, supports nearly 5 million California jobs—nearing one in four jobs. Yet due to regulatory and labor issues, Southern California’s ports, Long Beach–Los Angeles, have been losing market share to other regions, notably in the American South. Reduced trade flows, particularly with China, could have additional negative effects.

Under the governorship of Pat Brown in the late 1950s and 1960s, California, observed the late historian and onetime state librarian, Kevin Starr, enjoyed a “golden age of consensus and achievement, a founding era in which California fashioned and celebrated itself as an emergent nation-state.” In 1971, the economist John Kenneth Galbraith described the state government as run by “a proud, competent civil service,” and enjoying among “the best school systems in the country.”

This competence is now rarely seen. For all its activism, California’s bloated nanny state, for example, showed a distinct lack of preparation for a pandemic. Looking to save money under Governor Jerry Brown, the state abandoned a program to store ventilators and other emergency equipment for a future pandemic. Even after the budget crisis ended and the surplus surged along with rapid spending, the state did not revive the program. To his credit, Governor Newsom admits to “owning” the state’s slow implementation of testing, which has lagged other states, notably New York.

The pandemic is a wakeup call for California’s leaders. They need to start developing policies that address the chronic problems of poverty and lack of opportunity, while keeping the public health in focus and protecting citizens from further outbreaks. The current crisis presents an ideal time to readjust California’s regulatory environment, to the benefit of its citizens. We can save our cities by making them more affordable and healthier. Pandemics are terrible things, but their effects will be worsened in California, if the state fails to learn new lessons that can help restore its status as a beacon of opportunity.

Photo by Mario Tama/Getty Images

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