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Bogus Conventional Wisdom on Arnold and the Budget

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Gov. Arnold Schwarzenegger was, as I argued in a piece this weekend in the LA Times, a heroic failure on fiscal matters, a pragmatist who tried everything he could to fix the budget -- but failed because the budget system simply doesn't work. But Schwarzenegger himself doesn't see things this way.

Schwarzenegger told the LA Times for a Sunday story that he could have licked the budget problem but made a mistake by not taking a tougher stand on the budget the moment he went into office. Instead, the governor cut a deal with Democratic legislators to put a $15 billion general obligation bond on the ballot to paper over the deficit. Voters approved the bond.

Schwarzenegger is not the only one who thinks this. People of both parties who are sympathetic to Schwarzenegger often say the same thing: He should have been tougher earlier. That sounds good. But the people who say this disagree about exactly which tough measures he should have taken. And it's far from clear that the budget picture would have looked any better if he pursued a different strategy.

Here's what happened: Schwarzenegger took office in November 2003 taking a hard line -- at least in rhetoric on spending. (He cut the vehicle license fee on his first day in office, which made a bad budget problem billions worse). During intense negotiations with the legislature the first week of December 2003 (Schwarzenegger moved quickly because he wanted to put budget solutions on the statewide primary ballot in March 2004), the governor demanded what amounted to a hard cap on spending -- in combination with the $15 billion bond to help paper over the current deficit. Democrats had no particular problem with the bond -- but they hated the spending cap. So they said no to a deal and said they welcome a ballot fight over the cap.  And Schwarzenegger initially indicated on Friday night, Dec. 5, 2003, that he would give them that fight, by taking the spending cap to the November 2004 ballot as an initiative.

In other words, he was tough. At first. But over that first weekend in December, Schwarzenegger and his wife Maria Shriver consulted with various outside advisors, including former Congressman Leon Panetta (now the head of the CIA) and former U.S. Secretary of State George Shultz. They told the governor that he needed to find a way to do a deal and show that California could be governed. They also advised him that the budget cuts required if he didn't have the $15 billion from the bond would be too painful. So Schwarzenegger dropped the demand for the spending cap and cut a deal that added a weak "balanced budget" amendment in the constitution. And the legislature put the $15 billion bond on the ballot.

That bond was bad policy -- particularly in the way it turned one year's budget crisis into long-term debt. But it's not clear there was another way that was both politically viable and better as policy.  

Schwarzenegger's idea of getting tough would have been to stick to a spending cap -- which would have provoked a ballot battle that he almost certainly would have lost. The evidence? Schwarzenegger lost ballot measures in 2005 and 2009 that would have put less severe limits on spending because of opposition from the state's left-of-center electorate. There's no reason to believe that California voters, who are themselves allergic to spending discipline, would have voted any different in November 2004. In fact, the only budget ballot measures of Schwarzenegger's that voters embraced were the $15 billion bond and accompanying "balanced budget" amendment of that very first deal.

So what if the new governor had gotten tougher on spending? Yes, Schwarzenegger in his first year could have demanded more cuts in the budget--making the public feel real pain. But Democrats and their legislative leaders had the leverage to fight cuts. And every bit of polling at the time indicates that the public would have opposed cuts and sided with lawmakers. And what if Schwarzenegger had shown toughness by violating a campaign pledge and raising taxes? Republican lawmakers would have used their leverage under the state constitution's requirement of a two-thirds vote to approve taxes to block any such increases. In the end, it's highly likely that the only way to have gotten a budget in 2004 would have been with the same kind of accounting gimmicks and borrowing that the state has long used.

The bottom line: Schwarzenegger was just as trapped by California's broken budget and election systems in 2004 as he was seven years later. The notion that a tougher Schwarzenegger might have gotten more on the budget is becoming conventional wisdom. But it shouldn't be.

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