The Truth About Prop 1A and the State Budget

All the way back in March I opined that the biggest threat to the passage of the high speed rail bonds was the state budget. If the budget was still in deficit, folks might vote against HSR bonds even though the two are unrelated.

That may well be happening. We haven't seen new polls on Prop 1A in some time, but when we do I expect it to show a very close race.

The problem is that this thinking is deeply flawed. The state budget's problems do not - at all - mean that Prop 1A is a bad idea. Prop 1A is not the reason why the state is in deficit. It will not worsen that deficit. Instead Prop 1A is absolutely necessary to getting us OUT of deficit. Anyone telling you otherwise is simply demonstrating their ignorance of economics.

Let's look at this more closely. First, the state budget deficit. Deficits are NOT a product of natural forces but instead of bad decisions. California's current deficit stems from two major sources:

1. $12 billion in tax giveaways since 1993. This includes a $6 billion hole Arnold blew in the budget when he unilaterally cut the vehicle license fee upon coming to office in 2003. That is an annual cost of $6 billion, by the way, since Arnold has since been backfilling the revenues. Restoring that $6 billion would alone close the projected deficit. Prop 1A will create 160,000 infrastructure jobs that will pump income and sales tax revenue into the state's general fund. We badly need that revenue. We cannot afford to leave that money on the table.

(Note: California has also cut nearly $10 billion in spending since early 2007. Those who claim that this is a spending problem clearly have no knowledge of the details of the state budget.)

2. The weakening economy. As I have been arguing almost every day this month, that is an argument FOR Prop 1A. Infrastructure projects are a tried and true part of stabilizing and growing the economy during rough times. The Golden Gate Bridge, Shasta Dam, and the California Aqueduct were all built with voter-approved bonds during a recession, the first two during the deepest part of the Great Depression. Prop 1A will do the same today. We need jobs. Now. California would be crazy to turn down 160,000 jobs right now.

Further, as a recent PBS documentary explained, it was high gas prices that burst the housing bubble. Yes, gas prices have been falling - but that is only because of demand destruction. In other words, people drive less, so the price falls. The ONLY way that can be sustained over the long-term is by building alternatives to oil. If we don't, demand WILL rise - and so will gas prices.

Finally, numerous economists have argued strongly for infrastructure spending right now as both economic stimulus and a way to ease the financial crisis - which after all is happening because of underlying insolvency here in the United States. These economists include Lawrence Summers, Nouriel Roubini, Duncan Black, Dean Baker and Brad DeLong, and Nobel Laureate Paul Krugman.

Those who claim otherwise - that the state budget deficit means we must reject Prop 1A - are lying to you. They're trying to prevent a revival of the New Deal. These groups, like the oil company funded, far-right Reason Foundation, or the anti-government Howard Jarvis Association, are primarily interested in drowning government in a bathtub. Their opposition to HSR is part of a broader ideological agenda designed to prevent California from addressing its economic crisis by providing sustainable, non-oil based transportation that we badly need.

If you want to help ease our budget deficit and grow the economy, vote for Prop 1A. If you want to prolong the pain and do nothing to resolve the deficit, vote against Prop 1A. A no vote on Prop 1A is like punching the wall to cure starvation. It's only going to leave you in more pain and do nothing to solve the immediate problem.

UPDATE: Matt Yglesias calls them The New Hoovers:

This is ludicrous. You need to respond to a downturn with expansionary policies of some kind. In recent decades, we’ve preferred relying on expansionary monetary policy (Fed interest rate cuts) rather than Keynesian deficit spending. But at the moment, there’s no real room left for the Fed to cut rates. That means you need deficit spending. Among other things, the nature of state and local budgets means that a contraction in the economy will naturally lead to a contraction in state and local spending. That will lead to further contraction in the economy. If the federal government did what Scherer’s suggesting and added its own cutbacks to state government cutbacks, local government cutbacks, and private sector cutbacks that would only deepen the recession.

Again, consider the source of most HSR denier propaganda: the Reason Foundation and the Howard Jarvis Association. These people think Herbert Hoover was a good president with the right ideas.

SacBee Gets Bonds Wrong

A few days after editorializing against Prop 1A, the Sacramento Bee has committed themselves even more deeply to the argument that bonds are bad. Today's paper offers an article on bond funding that contains some major flaws, and provides an unbalanced and incomplete picture of the overall cost of Prop 1A to readers. The result is an article that could mislead readers about the basic facts of high speed rail and its impact on California.

The beginning sets the tone:

The dozen measures on California's Nov. 4 general election ballot would cost taxpayers – and their children and grandchildren – $78.9 billion over the next 30 years, a Bee analysis has found.

The entire article proceeds from this premise, which is unimaginably flawed. The article assumes that Californians will get nothing in return for this - that it's basically a money pit. Nowhere are the 160,000 construction jobs that Prop 1A will create discussed. Nowhere is discussed the income and sales taxes that high speed rail will generate. Nowhere discussed is the 12 million barrels of oil saved, or the 12 billion pounds of carbon emissions (which will either be taxed or subject to cap-and-trade costs before much longer).

Nowhere does the article discuss the cost of doing nothing - the article assumes it is zero. And as we know, the article assumes wrongly. The cost of expanding roads and airports to cover the same demand HSR will serve has been pegged at $80 billion. That's *four times* the cost of the bond even when interest costs are considered. The cost of upgrading Highway 99 alone is pegged at $6 billion.

Nowhere does the article discuss the Green Dividend - the savings that mass transit creates, money that can be reinvested elsewhere in the economy.

What the article does is provide merely half the story. If Prop 1A was merely a way to grab money from people and toss it to the four winds, perhaps the article would have a point. But if you are going to talk about costs - especially long-term costs - it is incumbent upon you as a journalist to provide a balanced equation. To weigh the bond cost against the tangible benefits of the project.

It is especially ironic because the article DOES describe that equation for Proposition 5, which would expand drug treatment programs:

But there is a fiscal flip side to the measure: If the rehab programs worked, they could drop California's prison costs by more than $1 billion annually, plus save more than $2.5 billion by reducing the need to build more prisons.

The same calculation must be made for Prop 1A. Otherwise the article does not do justice to its readers.

As Pete Stahl explains the cost of bonds to the general fund, as a percentage, typically declines over time as the general fund revenues increase due to inflation and population growth. This, too, is entirely absent from the article.

The article does go on to mention the political prospects of bonds at this time:

"I think with the way things are, many people are going to vote 'no' on almost everything," said Bob Stern, president of the Center for Governmental Studies in Los Angeles. "It's a bad time to be asking for money for anything."...

Mark DiCamillo, director of the Field Poll, has charted the success rate of California bond proposals since 1976.

In normal times, DiCamillo found, voters have approved a minimum of 68 percent of bond proposals.

During the economic recession of the early 1990s, however, it dropped to 23 percent.

"Voters have generally been receptive to debt financing," DiCamillo said, "but the immediacy of the current economic troubles, plus the presence of other high-cost initiatives on the ballot, may make it much more difficult to support them this time."

Stern and DiCamillo are probably right, and it seems clear that the prospects for Prop 1A are not as solid as they were a few months ago. The problem is that Californians have forgotten their own history. As we've been explaining here, bonds were used during the Great Depression to build some of California's cornerstone infrastructure projects, from the Golden Gate Bridge to Shasta Dam. Shasta Dam in particular provides ongoing benefits to Sacramento residents, from flood control to electricity to agriculture. The federal Bureau of Reclamation has estimated that Shasta Dam has provided over $300 billion in economic growth since it opened in the early 1940s.

So the Sacramento Bee is quite wrong to suggest that Prop 1A is going to cost me and my progeny billions of dollars. It is going to save billions of dollars and put more money in our pockets by providing sustainable, clean, non-oil based mass transportation for our state. It will provide immediate economic stimulus, which economists like Nouriel Roubini have been calling for as a necessary part of getting our country out of the serious economic and fiscal crisis we find ourselves in.

Californians deserve to hear about those aspects of bond funding. It's neither fair nor justifiable to only present half the story.

Sacrificing the Future to the Failure of the Present

California is staring into the abyss. 30 years of conservative economic policy, including tax cuts, have brought the national and the state economy to the worst economic crisis we have faced since 1933. The state budget is in perennial deficit - caused by those same conservative policies. Since Prop 13 in 1978 the state's revenue levels have been set artificially and deliberately too low to maintain our core services. The purpose was to force crises like this and tell Californians "either we raise your taxes or we destroy government."

The budget deficit is a difficult problem. But it can be closed fairly easily by returning to the income tax levels on the wealthy that Ronald Reagan supported, that were in place from 1991 to 1998. It is a question of political will - our budget deficit is not a force of nature but a deliberate creation of man. What we make, we can unmake.

More importantly, how exactly are we going to close that budget deficit, provide short-term relief and long-term economic growth without infrastructure projects? Many economists argue that government spending on infrastructure must be part of not just an economic stimulus *right now* but also of any financial rescue plan. These economists understand what we at this blog have understood - that we need stimulus to revive our economy.

Banks aren't lending just because of the bad assets on their books - they're not lending because the economy is sliding into recession. To stop that we need government spending on new stimulus. That was conventional wisdom during the Depression and it eventually brought us out of the depths - while also setting up the prosperity of the postwar era.

Unfortunately California newspaper editorial boards remain trapped in the failed conventional wisdom that brought us to this point of crisis. Instead of returning to tried-and-true economic principles of infrastructure stimulus, they argue we should sacrifice the future to the failure of the present. That because we are in crisis now, we cannot act to rescue ourselves from that crisis, and cannot act to provide a more stable future.

Such is the position of the Modesto Bee in its editorial against Prop 1A. They claim it is "too costly for the state." In doing so they merely demonstrate their lack of knowledge about high speed rail and their unwillingness to act to reverse the slide into severe recession.

The annual cost to operate the high-speed rail network would exceed $1 billion. Backers believe they can operate in the black. We're skeptical. Passenger rail systems throughout the United States require subsidies.

The Modesto Bee should NOT be skeptical. Every single HSR system around the world functions without operational subsidies. In France HSR is so profitable it subsidizes the other systems! Even Taiwan HSR has achieved profitability after just 18 months in operation. Of course we should remind the Modesto Bee that every other form of transportation in America is subsidized - but HSR stands on its merits. Ongoing subsidies are just not likely. The Modesto Bee misleads its readers in not mentioning that.

That aside, our main concern is the price. A review by the independent legislative analyst's office says that if the bonds are sold at an average interest rate of 5 percent and paid off over 30 years, the cost to the state general fund would be about $19.4 billion. That works out to about $647 million per year.

State legislators struggle to produce a budget year after year, and the current budget, just signed, is expected to be nearly $5 billion in the red unless drastic action is taken. As we noted in opposing Proposition 3, California can ill afford to encumber the general fund with more debt, especially the staggering cost for high-speed rail.

The Modesto Bee would do well to read Pete Stahl's "semi-biennial lecture on bonds". Pete reminds us that bonds are a fixed cost over time that become much easier to pay off as general fund revenues increase. Further, HSR construction will actually BOOST the general fund by providing increased income tax and sales tax revenue. Combined with the green dividend from HSR it is likely that it will pay for itself - the benefits to the general fund will equal or outweigh the ongoing bond service costs.

Newspapers like the Modesto Bee are suggesting that we were wrong to build Shasta Dam and the Golden Gate Bridge during the Great Depression. Both required public bond financing to be constructed. Modesto STILL benefits from Shasta Dam water. Instead, according to papers like the Modesto Bee, we should have waited until the 1950s. Of course that would come at the cost of not only higher unemployment during the Depression - which is the last thing you need - but it would have limited our ability to have postwar growth.

The equation is very simple, people. Prop 1A = jobs now + long-term economic growth. California would be engaging in an act of extreme recklessness if it sacrificed the future because of the failures of the present. The best way to ensure that we continue to have unemployment and a budget deficit is to reject Prop 1A.

UPDATE: the same applies to the Sacramento Bee, which used the same logic to oppose Prop 1A.

Pete Rates Prop 1A a Yes

Pete Stahl has been giving insightful and clever recommendations on ballot propositions since 1980. This year he saved Prop 1A for last, and offered a strong YES on 1A endorsement.

Pete also has some good insights on bonds, gathered from 28 years of watching California government. While the HSR deniers are trying to mislead voters into believing these bonds are going to bankrupt the state, Pete is explaining why they are sensible for long-term infrastructure projects like high speed rail:

"Wait a minute!" I hear you cry. "What about those interest payments? Won't we end up paying more for interest than for the bonds themselves?" This may once have been the case, but with today's low interest rates each dollar of bond money will cost only 30 cents in interest, accounting for inflation. (See details online or on page 8 of your supplemental ballot pamphlet.)

"Okay," you admit, "but loans are still more expensive than pay-as-you-go." This is true. But loans are the only way to buy a house, or a car, or anything else that you need immediately but can't pay for yet. It's worth paying the premium of interest to get the funding now.

This is especially important as the American economy enters a deep recession. We're going to have to raise taxes to balance the state budget, so we can't pay for HSR that way. We desperately need the jobs, the clean and sustainable transportation, the reduction in oil consumption and carbon emissions, if we are to get out of this economic trough. Bonds are going to be costly, but as Pete explains, there's a compelling reason to pay the premium.

Pete also explains how the long-term repayment actually is a good thing:

Remember, too, that California's population continues to grow by hundreds of thousands of people every year. Borrowing makes particular sense if you know your income will go up in the future. As the state grows, the General Fund will certainly grow too.

This is a very good point. In 1998 the General Fund revenues were at $58 billion. In 2008? $102 billion. As California grows, the General Fund will grow too. The bond debt will become easier to repay as a result. This is an oft-overlooked point.

There is one last reason to vote for a bond measure. In addition to being formal requests for permission to take out loans, bond measures are also looked upon as referenda on the merits of the proposed projects. If a bond measure fails, legislators are likely to believe that the public feels the project is not worthy of receiving state funding. By voting no, you may have meant, "Yes on the project but no on the bonds," but your message to Sacramento will read, "No on the project." So if you vote down a bond measure just because you don't like bonds, you may well have killed forever the project the bonds were to have funded.

This is an especially important point given that many HSR deniers claim to support HSR as a concept. If we kill this now, it's not coming back. Federal HSR money will go elsewhere - to Texas, to the Midwest, to Georgia. California politicians will move on to something else as they will take the message that voters don't want HSR.

Which is of course the entire point. That's why they're HSR deniers. The opponents of Prop 1A aren't espousing fiscal responsibility, they're espousing the death of California's high speed rail project, ten years in the making.

Bonds built the Golden Gate Bridge and Shasta Dam during the Depression. They worked for California then and they'll work for us today.