California and New York against America

Fred Siegel writes in City Journal, November 3:

Indebted and Unrepentant

New York and California stand virtually alone against the rest of the country.

The big news from Tuesday’s elections—the GOP’s gains of 60-plus seats in the House, recapturing the majority that it lost in 2006—naturally makes one wonder about the divisions that the victories are likely to foment. Pundits are speculating on conflicts between the Tea Party and Republican regulars over spending; between the 25 remaining Blue Dog Democrats and the party’s liberal leadership; and of course between the two parties over budgetary matters, which could lead to gridlock.

But another division is likely to compete for center stage in the next two years: the split between, on one side, California and New York—two states, deeply in debt, whose wealthy are beneficiaries of the global economy—and, on the other, the solvent states of the American interior that will be asked to bail them out. This geographic division will also pit the heartland’s middle class and working class against the well-to-do of New York and California and their political allies in the public-sector unions.

While most of America turned toward the Republicans in this election, Democrats strengthened their hold on California and New York. In California, they won all the statewide offices and even made gains in the legislature, prompting the Orange County Register to describe the Republicans as having been reduced to “almost total irrelevancy in Sacramento.” In New York, Democrats similarly swept all the statewide offices and may have held on to the state senate, too, though three contests are still too close to call. Those three races are all that stand between New York’s GOP and a similar irrelevancy.

Some of the reasons for the Democratic victories can be attributed to individual candidates. In California, Jerry Brown, the once and future governor, comfortably defeated Meg Whitman, the wealthy Republican political novice and former eBay CEO. Whitman campaigned as a West Coast Michael Bloomberg, but without as much money or luck. In New York, a GOP figure like Suffolk County Executive Steve Levy could have given Democratic gubernatorial candidate Andrew Cuomo a serious run for his money; instead, the Republicans nominated Carl Paladino, whose wildness disqualified him with voters and helped drag the GOP’s highly competent candidate for comptroller, Harry Wilson, down to defeat as well. But candidates aside, New York and California lead the country in middle-class—often white—outmigration. That has produced a vicious circle in which the very wealthy, the urban poor, and the public-sector unions who define the Democratic coalition create a high-taxing, heavily regulated polity that drives business and the upwardly mobile to the exits.

Californians rejected an ill-drafted proposal to legalize marijuana, but they also adopted two resolutions sure to send their state deeper into the economic swamp. Proposition 23 would have suspended the state’s draconian environmental laws until unemployment, currently at 12.5 percent, comes down to 5 percent. It was defeated, 61 percent to 39 percent. Proposition 25, drafted by one of the state’s premier pressure groups, the California Federation of Teachers, sought to allow the legislature to pass a budget with simple majorities instead of the current two-thirds supermajority, which requires a degree of GOP support. Naturally, it passed. In New York, where the latest budget estimates suggest a $9 billion shortfall (up from an earlier estimate of $8.2 billion) for the fiscal year beginning next April, most of the state’s incumbents were unaffected by the national trend.

The mood in much of the rest of the country was quite different. In the nation’s interior, Republicans gained ten governorships and may have picked up as many as 20 state legislatures. In traditionally blue Minnesota and Wisconsin, both houses of the legislature are now in Republican control. This sets up what could be an ugly fight in which a Tea Party–inflected national Republican Party, encouraged by its strength in the interior states, forces California and New York—now heavily dependent on federal subsidies—to reduce their spending sharply. The coastal giants would no doubt respond by threatening defaults, which could affect the credit standing of the entire country, since many of the bonds are held by foreign investors. The upshot would likely be a high-stakes conflict about free trade, globalization, social class, race, illegal immigration, and public-sector unionism.

Fred Siegel is a contributing editor of City Journal, a senior fellow at the Manhattan Institute, and a scholar in residence at St. Francis College in Brooklyn.

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James P. writes:

Siegel writes,

“another division is likely to compete for center stage in the next two years: the split between, on one side, California and New York—two states, deeply in debt, whose wealthy are beneficiaries of the global economy—and, on the other, the solvent states of the American interior that will be asked to bail them out. This geographic division will also pit the heartland’s middle class and working class against the well-to-do of New York and California and their political allies in the public-sector unions.”

California and New York are 86 reliably Democratic electoral votes. Add in some other reliably Democratic and heavily indebted states—Massachusetts, Connecticut, Maryland, Illinois, Wisconsin, Minnesota, Washington, Oregon—and you’re at 177, or more than halfway to victory. Leaving aside a number of states that are not (yet?) heavily indebted but are reliably Democratic, there aren’t a lot of “solvent” reliably Republican states left to fight off the insatiable demands of the insolvent Democrats. The real question in my mind is how long Florida will remain a “swing” state given that it has the third-largest illegal immigrant population, and how long Texas will remain reliably Republican, given that it is now a white minority state. If Texas alone joined the “reliably Democratic” column, how would the Republicans achieve victory in any Presidential election?

Sophia A. writes:

Obviously, I’m not happy about the way things are in CA or NY State. But neither governor-elect can overturn the laws of economics, any more than they can overturn the laws of physics. They will either have to betray their allies or go uber-liberal. If the former they destroy themselves. (Yay.) If the latter they destroy their states and have to go to the solvent parts of America for a bailout, as Siegel says. Let’s see how this goes down in North Dakota.

I remember the 1970 NYC budget crisis. I was a teenager. At the time I felt bitter that the white working and middle classes of NYC were stuck with the bill from wiping up the welfare slop that had moved here from the in the 1950s.

Now my feeling is: “Stick it to us. We deserve it.” In other words, “Sophia to New York City: Drop Dead.”

Mark P. writes:

If California and New York do decide to default on their bonds and, consequently, affect the credit rating of the entire country, then the Federal governemnt should declare this an act of sedition, dissolve the governments of New York and California, and seize whatever assets it needs to cover its costs.

Use the military. Most of them are not from Cali or New York anyway.

Alexis Zarkov writes:

Fred Siegel gets it mostly right. The red wave that washed across America on November 2 couldn’t penetrate the Rockies. California stands arrogant, smug, and defiant against the rest of the country. What happened? I have my own theory, a theory I have not seen anywhere else. The voters in California simply don’t like business people. We have to go all the way back to 1932 to find the last governor, James Rolph Jr., who was clearly identified with business interests. All the governors since him have been more or less creatures of the non-productive sector. Jerry Brown provides exactly what Californians want in their politicians, an anti-business, pro-environment nutcase. Both Meg Whitman and Carly Fiorina never had a chance. As the CEOs of major American corporations, they are exactly the kind of people Californians don’t like. While the people here, for the most part, don’t want socialism, they do want government to put its big foot on the back of business. Is it any wonder that California has the most hostile business climate in the whole U.S.? Why are Californians so anti-business? A lot of the blame rests with the business community itself, which often behaves badly. In the 19th and early 20th centuries industry did ravage the land with enterprises like hydraulic mining. The merchant class from the gold rush days made fortunes selling equipment to prospectors, often overcharging them. When I first came to California in the 1970s I noticed how different merchants here are from the ones in New York City. They often behave as though they were doing the customer a favor by selling him something. Anything but customer friendly. There is a large reservoir of ill will against business here.

I have to disagree with Fred Siegel about Proposition 25. While it does away with the 2/3 majority needed to pass a budget, it still requires a 2/3 majority to raise taxes. As such Prop 25 changes virtually nothing. California faces a looming revenue crisis. The Democrats in the legislature won’t cut back on spending and the Republicans won’t raise taxes. The legislature has run out of gimmicks (like unrealistic projections of tax revenue) and will have to face the music next year. It must find additional revenues, and I can see only one source: the federal government. But I should think House Republicans would be little inclined to come to the aid of rich, profligate, and deep blue California. So the big question is: can Obama bailout CA without the cooperation of Congress? I think he can, and he will unless Congress decides California is too big to fail. The following scenario explains how Obama can circumvent Congress.

Let’s recall the Mexican peso crisis in 1994. Mexico (like CA today) could not pay its bills. Like NYC in 1975, Mexico was unable to roll over its bonds and was about to default. It also had a currency crisis. President Clinton came to their rescue with a $50 billion financial assistance package. Initially Clinton tried to get the Mexican Stabilization Act through Congress, but Congress refused, and rightly so. Why should holders of Mexican debt get bailed out at U.S. taxpayer expense? Clinton bailed out Mexico anyway using the Treasury’s Exchange Stabilization Fund. This fund was set up as a provision of the Gold Reserve Act of 1934, and intended as an emergency reserve for foreign exchange intervention. Here is the legal memo that justified using the fund to provide financial aid to Mexico.

But could Obama use the fund to bail out California? Clinton was really stretching the law to bail out a foreign country; could the fund be used for domestic purposes? Again the answer is “yes.” In September 2008 Treasury used the fund to set up a guaranty program for Money Market Funds. Here is the press announcement from Treasury. It looks like the fund provides any president with the authority to spend money as he sees fit without the approval of Congress. I don’t see why Obama can’t use the fund to bail out CA claiming an “emergency.” Obviously anything can be an emergency.

Will Obama do it? The blow back from the Republicans would be enormous as they have no love for California where Republicans are virtually extinct. It would also invite New York, New Jersey, Illinois and other liberal deadbeat states to come to Washington with their tin cup. In my judgment Obama will do it. This guy is indifferent to what Republicans think, after all they are “the enemy.” Look for this to happen soon, sometime in early 2011.

The Congressional Republicans need to change the law to limit the president’s control over this money. Congress could require the approval of the Senate in order to disperse the money. They need to do this soon.

Posted by Lawrence Auster at November 08, 2010 08:56 AM | Send