Krugman's California

In his latest op-ed in the NY Times, Paul Krugman is pessimistic about politics in the US. The Republican party seems determined to turn the country into a banana republic. I've put in bold the key bits:

California, it has long been claimed, is where the future happens first. But is that still true? If it is, God help America.

The recession has hit the Golden State hard. The housing bubble was bigger there than almost anywhere else, and the bust has been bigger too. California’s unemployment rate, at 11 percent, is the fifth-highest in the nation. And the state’s revenues have suffered accordingly.

What’s really alarming about California, however, is the political system’s inability to rise to the occasion.

Despite the economic slump, despite irresponsible policies that have doubled the state’s debt burden since Arnold Schwarzenegger became governor, California has immense human and financial resources. It should not be in fiscal crisis; it should not be on the verge of cutting essential public services and denying health coverage to almost a million children. But it is — and you have to wonder if California’s political paralysis foreshadows the future of the nation as a whole.

The seeds of California’s current crisis were planted more than 30 years ago, when voters overwhelmingly passed Proposition 13, a ballot measure that placed the state’s budget in a straitjacket. Property tax rates were capped, and homeowners were shielded from increases in their tax assessments even as the value of their homes rose.

The result was a tax system that is both inequitable and unstable. It’s inequitable because older homeowners often pay far less property tax than their younger neighbors. It’s unstable because limits on property taxation have forced California to rely more heavily than other states on income taxes, which fall steeply during recessions.

Even more important, however, Proposition 13 made it extremely hard to raise taxes, even in emergencies: no state tax rate may be increased without a two-thirds majority in both houses of the State Legislature. And this provision has interacted disastrously with state political trends.

For California, where the Republicans began their transformation from the party of Eisenhower to the party of Reagan, is also the place where they began their next transformation, into the party of Rush Limbaugh. As the political tide has turned against California Republicans, the party’s remaining members have become ever more extreme, ever less interested in the actual business of governing.

And while the party’s growing extremism condemns it to seemingly permanent minority status — Mr. Schwarzenegger was and is sui generis — the Republican rump retains enough seats in the Legislature to block any responsible action in the face of the fiscal crisis.

Will the same thing happen to the nation as a whole?

Last week Bill Gross of Pimco, the giant bond fund, warned that the U.S. government may lose its AAA debt rating in a few years, thanks to the trillions it’s spending to rescue the economy and the banks. Is that a real possibility?

Well, in a rational world Mr. Gross’s warning would make no sense. America’s projected deficits may sound large, yet it would take only a modest tax increase to cover the expected rise in interest payments — and right now American taxes are well below those in most other wealthy countries. The fiscal consequences of the current crisis, in other words, should be manageable.

But that presumes that we’ll be able, as a political matter, to act responsibly. The example of California shows that this is by no means guaranteed. And the political problems that have plagued California for years are now increasingly apparent at a national level.

To be blunt: recent events suggest that the Republican Party has been driven mad by lack of power. The few remaining moderates have been defeated, have fled, or are being driven out. What’s left is a party whose national committee has just passed a resolution solemnly declaring that Democrats are “dedicated to restructuring American society along socialist ideals,” and released a video comparing Speaker of the House Nancy Pelosi to Pussy Galore.

And that party still has 40 senators.

So will America follow California into ungovernability? Well, California has some special weaknesses that aren’t shared by the federal government. In particular, tax increases at the federal level don’t require a two-thirds majority, and can in some cases bypass the filibuster. So acting responsibly should be easier in Washington than in Sacramento.

But the California precedent still has me rattled. Who would have thought that America’s largest state, a state whose economy is larger than that of all but a few nations, could so easily become a banana republic?

For anyone outside the US, the politics inside the US are a kind of scary madness. Just like the Germans of the 1930s were haunted by the loss of WWI, mesmerized by the idiotic claim of a 'stab in the back', and the collapse of the German mark that destroyed the middle class, the US is haunted by a politics of fear fed by the Republicans. They sell the snakeoil of "tax cuts pay for themselves" and use the big lie technique of an America "burdened by high taxes". I sure hope the US gets through the current crisis without going off the rails like Germany in 1933.

On the one hand, history scares me. On the other hand, history shows me that the US has been caught up in crazy manias in the past and righted itself. Think of the wildfire spread of the KKK in the 1920s, the thuggery of Southern towns and the quiet red-lining of Northern cities in the great 1960s civil rights fight, the Palmer raids around 1920, the fascist rantings of Father Coughlin, the Rockerfellers flexing their anti-union arm in the Ludlow masscre, the infamous massacre by Carnegie of the striking workers at Homestead Pennsylvania, the religious mania caused by manipulators like Aimee Semple McPherson, etc. History is filled with sad stories and twisted politics and the elite manipulating things to their advantage. The good news is that life goes on. In the end, the tyrants die, the manipulators make their one big mistake, and the greedy fall because of one last over-reaching grasp. It is truly sad to see Paul Krugman disheartened. He is right to worry. But in the end, I believe the US will right itself yet again and get past this dark history.