Here's something everybody should be able to agree on regarding California's current budget crisis in the midst of a major economic downturn: Any option will hurt.
State spending reductions will hurt.
Tax increases will hurt.
Everybody also ought to be able to agree that the need right now is for spending in the economy.
For lawmakers during the special session, decisions must boil down to: Which of the two options - spending cuts or tax increases - does the least to curtail spending by families?
Put another way, the question is: How to balance the state budget with the least possible harm to the already weakened economy?
Read on for possible solutions...
During the 2001 recession economists Peter Orszag and Joseph Stiglitz suggested in a piece for the Center on Budget and Policy Priorities that direct spending cuts (on everything from health programs to child care to public schools to universities to nonprofits and businesses that provide services and supplies) would "generate more adverse consequences for the economy in the short run" than a tax increase.
Their reasoning was that a tax increase would have more of an effect on how much people, especially at higher-income levels, would save rather than on how much they would spend. But spending cuts on goods and services would directly reduce how much people would spend, especially at lower income levels (where people tend to spend all that they earn).
California's budget crisis is so great that the state will have no choice to do both spending cuts and tax increases, though both are harmful to the economy. But if lawmakers cannot promise to "do no harm," they can at least do the less harmful thing. As Orzag and Stiglitz concluded, that is: "tax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run."
Just something to think about during into the special session.