California conservatives greeted Arnold Schwarzenegger’s ascension to the governor’s office in the famous “total recall” election of 2003 with wary optimism. If anyone could make “post-partisanship” work in ever-bluer California, it would be the charismatic film superhero, immediately dubbed “the Governator.” Schwarzenegger offset his social liberalism and his dubious matrimonial connection to the Kennedy family with professions of admiration for Milton Friedman (he even proclaimed an official “Milton Friedman Day”) and encomiums to the American dream of opportunity and individual initiative that rivaled the depth and power of Ronald Reagan’s. In his prime-time speech to the Republican National Convention in New York in 2004, he went where no Republican has dared to go for the last generation: He offered enthusiastic praise for Richard Nixon. Newly arrived in the U.S. in 1968 as an aspiring bodybuilder, Schwarzenegger said, he found Nixon’s views more compelling than Hubert Humphrey’s “socialism” because Nixon “was talking about free enterprise, getting government off your back, lowering taxes, and strengthening the military. Listening to Nixon speak sounded more like a breath of fresh air.” It was Nixon, never mistaken for a girly-man, who made him a Republican.
At the time I admired Arnold’s moxie in embracing Nixon, whom most other Republicans have shoved down the same memory hole as Herbert Hoover. But perhaps we should have seen this as a portent of trouble ahead. After all, it was Nixon who proclaimed, “I am a Keynesian in economics” before slapping on wage and price controls and letting domestic social spending shoot up faster than it had under Lyndon Johnson. Like Nixon (and George W. Bush), in fiscal matters Arnold has governed more like a Keynesian than a Friedmanite; in regulatory affairs, he governs more like a German socialist than an Austrian-school liberal. Above all, on the mean plane of political maneuvering, the Governator, to mix superhero metaphors, has been unable to overcome the kryptonite of the public-employee unions and other liberal interest groups. Today he is as much of an albatross for California Republicans as George W. Bush was on the national scene.
Now California is in the grip of its worst-ever fiscal emergency, facing a budget shortfall of more than $42 billion over the next 18 months. State workers have begun involuntary unpaid furloughs, and state offices are closing two days a month. The state controller has stopped issuing income-tax refunds and is about to issue warrants — basically IOUs — to state vendors in lieu of checks. Right before Presidents Day weekend, Arnold and the leaders of both parties in the legislature reached a compromise that would raise taxes by $14.3 billion, cut spending by $15.8 billion, and borrow money to fill the remaining $12 billion hole, which the stimulus package in Washington might backfill. The plan calls for a 2.5 percent income-tax surcharge, or 5 percent if the stimulus money isn’t enough. The sales tax would go up by a full percentage point (to over 9 percent in some counties), and the gasoline tax by twelve cents a gallon. As if that weren’t enough of a hit for motorists, the vehicle-registration fee would nearly double, bringing it close to the level that helped spawn the recall effort against Arnold’s predecessor, Gray Davis. Like the stimulus in Washington, the complicated package was rushed to a vote with little time for lawmakers to read through it.
California’s constitution requires a two-thirds vote of both houses of the legislature to pass a budget and any tax increases, so the plan needed a handful of Republican votes. Budget stalemates are a perennial feature of California government, and after a protracted round of kabuki theater there is always one final Republican who can be badgered or bribed into casting the deciding vote. Nearly all Republican legislators have signed the Americans for Tax Reform “no-tax pledge,” but that’s no guarantee; after the 2006 election, Arnold said he was against tax increases too. Republican assemblyman Ted Gaines of Roseville (a firm No vote) says that Arnold “is worried about his legacy, and wants to leave the state in decent shape. He’s coming our way, but only after his first solution [which] is always to raise taxes.”
To entice the necessary handful of Republicans, the budget deal includes a ballot initiative by which voters can impose a spending limit. Details are scarce at the moment, but it appears the limit will be based on an average of previous revenue levels rather than on the ability of the state’s economy to pay, and in any case it won’t restrain the many elements of the budget, such as education spending, that are on automatic pilot. Arnold threatened to lay off up to 20,000 state employees — about 7 percent of the government’s total full-time workforce — if a budget deal wasn’t reached, a prospect that might elicit from conservatives the sentiment best expressed by another Hollywood actor-turned-politician, Clint Eastwood: Go ahead, make my day. (Over 17,000 state employees are paid six-figure salaries, by the way.) Despite locking the entire legislature inside the capitol over Presidents Day weekend, Arnold was still one vote short at press time, though if past budget crises are any guide, eventually he will get enough Republican votes to pass a budget close to this outline.
#page# California’s current fiscal crisis has been a long time in the making and stems from two major factors. The first is the state’s byzantine budget structure; the second is the changing composition of California’s economy, to which the government’s fiscal and regulatory structure is increasingly unsuited. Over the years, conservatives have won some significant victories through the initiative process, most notably Proposition 13 in 1978, which sharply limited property taxes and helped launch the national tax revolt. But the Left has won its own share of victories at the ballot box, especially Proposition 98 in 1988, which gutted a spending limit that had actually produced taxpayer rebates in 1987 and that essentially earmarks half the state budget for public schools, whether they need it or not and regardless of performance. The Left has also beaten back several conservative ballot initiatives that would have imposed meaningful spending limits and curbed the power of public-employee unions and trial lawyers.
The result is a political scene resembling the trench warfare of World War I: Both sides lie bleeding and exhausted from expending huge resources (California initiative campaigns now routinely cost tens of millions of dollars) with little ground gained. But modern government being what it is, this stalemate leaves liberal interests in a better position to expand government continuously. Nominal state spending has grown by $30 billion since Arnold was first elected; on a per capita, inflation-adjusted basis, that represents a 20 percent increase.
The continued growth in spending comes on top of a burst of new spending that began in 1999, when Gray Davis succeeded Republican governor Pete Wilson and ignored Wilson’s warnings about the state’s fiscal vulnerabilities. Similarly to Arnold, Wilson had come to office in 1991 facing a then-unimaginable $14 billion budget deficit that accompanied the recession of 1991–92. Wilson’s finance team recognized that California’s economy was changing rapidly because of the end of the Cold War and California’s increasingly harsh regulatory climate, which was driving business out of state. The once-thriving manufacturing sector was rapidly declining, replaced by a service sector that generated less tax revenue. The aerospace industry, which had boomed with space technology during the Apollo program as well as with civilian and military aviation, had largely folded up and left the state by the early 1990s. The last Big Three auto-manufacturing plant, a GM truck facility in Van Nuys, closed in 1992, eliminating 2,700 jobs.
Governor Wilson swallowed hard in 1991, raising taxes by $7 billion and cutting spending by an equal amount. Above all, he began warning that California’s spending structure was out of balance and would be chronically in the red unless something was done to reduce the cost of government. Liberals scoffed and said the state would be fine once the economy recovered. But even as the nation’s economy recovered, California’s budget continued to hemorrhage red ink, despite continued cuts: In the last three years of Wilson’s first term, the state budget actually declined in nominal terms.
Then something happened that no one had expected, and that seemed to vindicate the liberal big spenders: the dotcom boom. Between the bull market and the instant Internet IPO billionaires of Silicon Valley, record revenues from the income and capital-gains taxes began pouring into Sacramento. Governor Wilson was able to cut taxes and accumulate a budget surplus by 1997. It was a strange revenue bonanza, though; the state’s revenue-forecasting models no longer worked, as a growing share of income-tax revenues depended on the exercise of stock options and realized capital gains, both matters of individual discretion and market conditions. Wilson’s finance director, Craig Brown, drew the proper conclusion and issued a stark warning: If the bull market ended, or if Silicon Valley went into a slump, California’s budget would go immediately back into the red.
Incoming governor Gray Davis ignored Brown’s warnings. For liberal interest groups frustrated by the relatively parsimonious preceding 16 years under two Republican governors, free-spending happy days were here again. Davis handed out huge wage and pension increases to public employees and large increases in funding for public schools and other favorite causes of the interest groups that had backed his campaign, and he signed expensive new mandates on California business. During Wilson’s eight years, state spending had increased by only $18 billion. Davis increased spending by $20 billion in just his first two years. By his third year, the dotcom bubble had burst, and the state began its experiment with rolling blackouts, yet Davis still increased spending by another $4 billion, even as the budget careened deeply into the red. He concealed the exploding deficit during his 2002 reelection campaign, which he won in a fairly close race over Republican newcomer Bill Simon. When the full magnitude of the budget deficit, and the resulting tax hikes, were revealed after the election, Californians were outraged, and the recall effort took flight.
#page# Enter Arnold, stage right, in the fall of 2003. Being wholly new to Sacramento, Arnold brought in a number of Wilson’s best people, who had done a competent job of running the state in the 1990s, though not always to the satisfaction of conservatives. Still, the de facto Wilson restoration represented a huge improvement over Davis. Arnold effectively attacked the special-interest hammerlock on Sacramento and stared down Democrats and trial lawyers — calling them the “girly-men of Sacramento” — in winning a reform of the state’s workers’-compensation system. His budget fix involved $15 billion in borrowed money and only $2.5 billion in spending cuts, which merely pushed the problem down the road and stored up the whirlwind of trouble that has hit with full force now. The balanced-budget requirement of the bond measures passed in 2004 was toothless and riddled with loopholes.
Still, patching the budget and cutting Gray Davis’s hated car tax by two-thirds was enough to restore California’s bond rating, put a fright into Democrats, and earn him an “A” grade on the Cato Institute’s 2004 rankings of the fiscal performance of the 50 state governors. There were many missed opportunities, though. He declared education spending (roughly half the state’s general fund) to be untouchable, and he declined to take on necessary targets such as excessive regulation, choosing only to set up a “California Performance Review” to study and make recommendations for regulatory reform, from which there has been little follow-up. Instead of tackling these problems, he talked about creating California’s “hydrogen economy,” a chimera worthy of Jerry Brown.
As Arnold looked ahead toward reelection to a full term in 2006, there was reason to think he would step up his game. He had shown in his first year that he could raise substantial amounts of money and deploy his personal popularity in pursuit of political goals: In the 2004 election cycle he helped defeat a ballot initiative that would have weakened California’s tough three-strikes criminal-sentencing law. But he miscalculated. Arnold decided to roll the dice by calling for a special election in 2005, which he called the Year of Reform, on an ambitious suite of ballot initiatives that included a spending limit, redistricting reform to eliminate partisan gerrymandering, tightening the tenure process for public-school teachers, and a “paycheck protection” measure to clip the political activity of labor unions.
With the state budget still in a deep fiscal hole, the Left skillfully turned the tables on Arnold, calling him a “spendthrift” and attacking the special election as an “irresponsible fiscal boondoggle” whose $50 million cost the state couldn’t afford. Off-year special elections are always low-turnout affairs, tailor-made for union get-out-the-vote machines. All four initiatives lost badly. Union leaders were gleeful. “I’m very grateful to Arnold Schwarzenegger for really working people up,” said Deborah Burger, president of the California Nurses Association. There was giddy talk of “terminating the Terminator” in the general election in 2006, but the Democrats nominated a weak candidate, state treasurer Phil Angelides. Arnold coasted to an easy reelection.
But a major change had taken place after the stinging defeat of 2005. In the words of Sacramento attorney Charles Bell, who had been on the inside of the machinations over the reform package, “Arnold went into a funk.” Worse than a funk, he veered sharply left and seemingly threw in the towel to Democrats. His most head-scratching move was to appoint as his new chief of staff Susan Kennedy. Kennedy isn’t just any Democrat; she has a far-left pedigree in California politics that began with Tom Hayden and Jane Fonda; she has also worked for Sen. Dianne Feinstein and as executive director of the California Democratic party. And before Arnold’s election, Kennedy served as deputy chief of staff to none other than Gray Davis. She told Marin magazine last year that “I hated [Arnold] as much as any Democrat.” She says she loves him now, but Assemblyman Gaines sees it differently: “Susan Kennedy destroyed Davis’s governorship, and now she’s destroying Arnold’s.”
Kennedy represents a virtual restoration of the Davis regime. Most of the Wilson-era staff are gone; most of Arnold’s senior regulators, especially in the environmental agencies, come from the far left. “Arnold sheds advisers and staff like an actor sheds costumes between scenes,” one former insider says. Arnold has signed on to the green agenda on global warming and alternative energy, even though California has among the highest energy prices in the nation and may face electricity shortages again in the near future. Adjusted for population growth and inflation, state spending has grown faster under Arnold than it did under Davis.
#page# California has what economists call “exploitable amenity asymmetries,” which in plain English means that people and businesses will pay a premium to live near the coast. But the costs have become too high, and the state’s economic dynamism is clearly on the wane. Like Michigan after the waning of the Big Three automakers, California never really recovered from the recession of 2000–02. As recently as the 1980s, Joel Kotkin points out, median household income growth in California was above the national average; now it lags behind the national average.
Outmigration of skilled middle-class households is on the rise. The unemployment rate has zoomed to 9.3 percent, fourth-highest in the nation, up from 5.9 percent as recently as December 2007. The Tax Foundation ranks California 48th out of the 50 states for its business tax climate, ahead of only New Jersey and New York. Neighboring states are again running advertising campaigns to lure California companies to relocate where business costs are lower. No one expects another dotcom boom, or an alternative-energy boom, out of Silicon Valley. In fact, the Silicon Valley energy companies are lining up in Washington, D.C., demanding subsidies and stimulus money to keep them in business. On top of all this, a panel of federal judges, led by the Ninth Circuit’s tireless busybody Stephen Reinhardt, has just ruled that California must soon begin releasing thousands of criminals from its overcrowded prisons. Meanwhile Arnold babbles on about hydrogen and hybrid cars.
The most popular explanation for Arnold’s collapse is that he values his Hollywood popularity above his principles. Perhaps, but there is probably a more serious explanation. For all his professions of Friedmanite free-marketeering, if you listen closely, it appears that Arnold really doesn’t have a clear or deep grasp of conservative principles. His first foray into California politics, a bond measure for after-school programs in 2002, was hardly something to set conservative hearts aflutter. During his 2003 recall campaign, he said he wanted to improve California’s business climate in order to “bring businesses back to pay the taxes so that we can provide everything for the people.” Upon assuming office in 2003, Arnold immediately began petitioning the Bush administration for stepped-up federal assistance rather than insisting that California live within its means. He has backed expensive bond measures for wasteful projects such as high-speed rail and a state-sponsored stem-cell research program. Conservatives were cheap dates and missed the subtle signals that Arnold lacked the fierce spirit of liberty that characterized Reagan’s approach to governance. “He was never really a small-government guy,” wrote Sacramento Bee columnist Daniel Weintraub. Or as one disillusioned former senior aide told me, “Arnold became Maria.”
In the early days of Arnoldmania, back in 2003, there was loose talk of trying to amend the U.S. Constitution so the foreign-born Schwarzenegger could run for president. Now that he has fallen back to earth, the speculation is that Arnold might take on Sen. Barbara Boxer in 2010. But not even that prospect will suffice to revive any conservative enthusiasm for the Governator. For conservatives, he won’t be back.
– Mr. Hayward is a resident scholar at the American Enterprise Institute and a senior fellow at the Pacific Research Institute in San Francisco. A native Californian, he divides his time between Washington, D.C., and Cambria, Calif.