Krugman’s California Dreaming

By Victor Davis Hansonon Wed, 3 Apr 2013

It is rare, even in the case of Paul Krugman, to read a column in which almost everything that is stated is either wrong or deliberately misleading. But his recent take on California’s renaissance is pure fantasy. I wish it weren’t.

Krugman starts with the premise that California conservatives, the most prominent being Ronald Reagan, helped to turn the formerly moderate Republican party into the “radical right-wing organization we see today”; California, he believes, did more than the South to spawn the Religious Right. How absurd! Reagan always governed moderately; he signed into law a liberal abortion statute and no-fault divorce; government and the state budget grew during his eight years as governor. Reagan’s record in California was about the same as that of Pat Brown, his predecessor, in actual terms of taxes, the size of government, and budget growth. Reagan’s achievement was not as a radical conservative, but as a pragmatist who for a while slowed, in Gingrich-Clinton compromise fashion, the trajectory of taxes and spending.

Conservatives have not really “declared the state doomed” but have instead pointed out that it is in dire jeopardy — and not just because “the political balance shifted.” After all, a supposed Republican, Arnold Schwarzenegger, was recently governor for eight years. The real problem is math, not politics, and it finally caught up with us in terms of massive deficits and unsustainable aggregate debt. Unfortunately for Krugman, the timing of his column roughly coincided with breaking news that the city of Stockton has just been allowed to declare bankruptcy (with many insolvent California municipalities keenly watching its precedent of shorting bondholders and contractors to meet staggering pension tabs) and with the McClatchy news report that the state auditor just declared California’s net worth to be minus $127.2 billion — mostly, again, as a result of skyrocketing bond and retirement liabilities, coupled with past sharp dips in revenues and a much higher unemployment rate than the rest of the country for the last five years.
Krugman then writes of California’s past energy crises, “But a funny thing happened on the road to collapse: it turned out that the main culprit in the electricity crisis was deregulation, which opened the door for ruthless market manipulation. When the market manipulation went away, so did the blackouts.”

Not quite so funny — given what lies ahead. Although it is difficult to rate electricity prices state by state, given all the formulas of comparative computation used, most agree that California’s electricity prices are about 40 to 60 percent higher than the national average — odd, since California still has enormous natural-gas reserves and a sophisticated though now static hydroelectric system, and since it once was one of the pioneers in nuclear-power production. Our worry for this summer is not over Krugman’s “blackouts,” but rather over “greenouts” — the present politically correct bookend to Enron’s past crony price-gouging.

No one believes that in just seven years we will meet the state mandate to produce a third of our power from “renewables,” given the emphasis on solar power, which currently produces less than 1 percent of our aggregate electricity. What will save California, if anything does, is not thousands of subsidized Solyndras or the hundreds of postmodern solar-panel projects being undertaken on premodern school campuses whose test scores put California near to dead last in the nation, but the presence of one of the largest untapped natural-gas reserves in the world: The Monterey Shale Formation offers a way to produce clean, plentiful, and cheap electricity far away from the Bay Area and in the convenient center of the state — so tempting a revenue source for redistributionist politics that even the greenest members of the California legislature will probably not resist it.

Incidentally, California’s power pricing is illiberal to the core. Mandates and regulations favored by the coastal elites have spiked costs in the hot-in-the-summer/cold-in-the-winter interior, where many of the residents are poor. Air-conditioning and heating expenses in the Central Valley vastly exceed those in the Berkeley–to–San Diego corridor, where the ocean keeps temperatures more moderate. Not turning on your air conditioning when it is well over 100 degrees outside is a relatively recent Central Valley habit. Newer homes have wonderfully efficient air conditioners, but temperatures inside remain uncomfortable in summer, since many middle-class homeowners rely more on old-style evaporative coolers or even fans to avoid the exorbitant electricity costs — an apparently politically correct and green way to curb power use.

In his encomium to our recent tax increases (California now has the highest gasoline taxes, the highest sales taxes, and the highest rates on top incomes in the nation), Krugman states, “Far from presiding over a Greek-style crisis, Gov. Jerry Brown is proclaiming a comeback.”

Note the linguistic gymnastics in “is proclaiming” — a wise hedge on Krugman’s part, because Californians are just now paying their new, higher 2012 income taxes, retroactively back to January 2012. We do not yet know the exact reaction of high earners when they discover how much their state tax bills have shot up — just as their federal tax rates are scheduled to rise for 2013. No, we don’t have millions of tax refugees leaving the state, but a few thousand are. That’s worrisome because even before the recent tax hikes, about 144,000 households (out of a population of 37 million) accounted for about 50 percent of the aggregate state-income-tax revenue — and personal income taxes usually account for about 50 to 60 percent of all state revenues. We are learning that it does not take too many businesses or wealthy households moving to Austin, Paradise Valley, or Henderson to make a big difference.

Should we laugh or cry when Krugman finally concedes: “I’m not suggesting everything in California is just fine. Unemployment — especially long-term unemployment — remains very high. California’s longer-term economic growth has slowed, too, mainly because the state’s limited supply of buildable land means high housing prices, bringing an era of rapid population growth to an end. (Did you know that metropolitan Los Angeles has a higher population density than metropolitan New York?) Last but not least, decades of political paralysis have degraded the state’s once-superb public education system. So there are plenty of problems.”