There is an opinion that today's California is starting to look like austerity Europe. The jobless rate is at 10.2% level, the third highest in the country; immigration and health issues became a big concern. In addition, there is a state budget deficit, which reached a $16 billion level this May.

Dr. Bill Watkins, Associate Professor of Economics at California Lutheran University, overviews the current economic stance of California, answers whether California can be compared to austerity Europe, provides the reasons of enormous budget deficit of the state and shares his economic outlook.

Do you think the current situation in California can be compared to austerity Europe?

I do not think so. Europe is trying to deal with its issues. It knows it has difficulties, and it is mostly confronting the problems. By contrast, California is still ignoring its issues or denying that it has any.

What are the main reasons for the enormous budget deficit in the state?

California’s deficits are caused by a volatile tax base and lack of discipline by policy makers. California relies far too much on a very progressive income tax. Since high-income individuals’ incomes are more volatile than the economy, this creates volatile revenue.

The discipline problem comes in on those rare occasions that California’s volatile revenues exceed expenses. At those times, politicians of both parties create long-term commitments, even though they know the windfall is temporary.

For example, in the dot-com boom, capital gains revenues were high. Everyone knew the windfall was temporary, but the republicans supported tax cuts and democrats supported additional spending. California got both, and a big headache.

Over the past few years, California has made deep cuts in social services, education, and even released some prisoners early to save money. To your mind, are these austerity measures effective in order to close the budget gap? Or maybe they will just cause a growing dissatisfaction and unrests among citizens without bringing desired results?

The problem is that transfer payments, pensions, and government salaries are eating California’s budget. That is, they are growing faster than the economy, which is clearly unsustainable. Services will continue to be cut to fund the fast-growing components of the budget. Eventually, I suppose the electorate will say enough is enough. Although, I am not sure when. California’s voters did approve new taxes at the last election.


Eventually, I suppose the electorate will say enough is enough.

There is a view that California is a glimpse of the future for the U.S.; the rest of the country, blinded by election promises, just does not yet realize it. Do you agree with this view? Do you think that the contagion may spread further in the country?

Certainly Federal policy appears to be following the California example. However, one of the benefits of our system is that states are free (within bounds) to go their own way. This gives us a chance for experimentation and competition.

We are seeing some states create policies that are starkly different than California’s. Texas is an example. It appears that the number of such states is growing. For example, Wisconsin has abruptly changed it policies over the past three years. So, I am hopeful.