In the final days of Governor Gray Davis’ tenure, it seemed like the sun had set on California once and for all. After his 2002 reelection, Davis had announced that California was confronted with a deficit of $35 billion — caused in large part by a gargantuan spending increase of 36% during his years in office, and an explosion of hiring in the public sector, whose unions were among Davis’ most reliable supporters. Among the people of California, there was an increasing sense that perhaps the state’s problems were insurmountable and that the state itself, controlled by Davis and a wildly left-wing Legislature, had become simply ungovernable.
Given the widespread malaise, Arnold Schwarzenegger’s overwhelming victory in the recall election was welcome news to California Republicans of all stripes — even many conservatives, who had noted Schwarzenegger’s well-publicized admiration for Milton Friedman and Adam Smith, and had made a pragmatic choice to support him despite his well-known moderation on social issues.
And now it appears that the confidence many conservatives placed in the Governor’s economic instincts has been borne out. Just last Friday, Moody’s upgraded California’s bond rating for the first time in nearly four years, citing an “established trend of recovery.” It is the first truly objective confirmation that the Governor’s economic policies are working — and notably, every bold political move that produced it bears a conservative stamp.
First, on the day he was inaugurated last November, Governor Schwarzenegger fulfilled a vital campaign pledge, reversing the tripling of California’s hated “car tax” — a desperate move by Gray Davis to try to add $4 billion to the state coffers. Upon downgrading California’s bonds a month later, Moody’s actually cited Schwarzenegger roll-back of the car tax as a contributing factor. But in the bigger picture, the reduction was essential — offering California’s citizens the confidence that Arnold Schwarzenegger would keep his word, respect their hard-earned money, and govern as a friend to the taxpayer.
Second, the Governor has held firm to his commitment not to raise Californians’ taxes. Repeatedly and steadfastly, Governor Schwarzenegger has resisted the siren call from Democrats and predictable left-wing voices like the Los Angeles Times to increase taxes in order to close the state’s deficit, even in the face of polls purporting to “show” that California voters were willing to pay higher taxes. Outlining his initial budget last January, he proposed significant program cuts, plus sliding fees for the non-poor accessing free state services, including health care. And although the Governor has had to negotiate with a legislature dominated by Democrats, he has been able to obtain current spending cuts in exchange for promises of future support; as a result, it appears that the state is on track to pass a budget on time for the first time since 2000. That budget will contain no tax increases.
Third, through two initiatives in a statewide referendum held last March, Governor Schwarzenegger was able to convince Californians to approve measures to cap spending and sell $15 billion in bonds to refinance the state’s past budget deficit. Although some conservative legislators had called for across the board spending cuts of roughly 13%, Governor Schwarzenegger realized that with a left-wing legislature and a population unused to supporting tough choices, this more direct policy would not have been successful.
Instead, he chose an approach with the potential to produce a decisive political victory — and it did. Despite having lagged in the polls even a month before the election, the measures ultimately passed by a 2 to 1 margin — demonstrating Schwarzenegger’s enormous political muscle. As significant as the substance of the policy itself, the victory offered him momentum.
The Governor then used the political capital earned in the referendum to end years of paralysis in the state legislature. He turned his attention to California’s disgraceful worker’s compensation system, which is in large part responsible for the state’s abysmal business climate. Indeed, in recent years, premiums have increased by 50% for some employers; in 2002, workers’ comp attorneys had collected $226 million, $31 million more than they had in 2001 — all as California was losing as many as 10,000 manufacturing jobs each month.
When the legislature balked at the prospect of reform, the Governor threatened to seek another referendum. Mindful of the Governor’s success in promoting the March initiatives, the lawmakers caved, and passed worker’s compensation reforms. While the legislation is far from perfect, it does prohibit “doctor shopping”, and mandates that disability reports rely on objective American Medical Association guidelines to evaluate the severity of an injury.
Much remains to be done, but Governor Schwarzenegger shows few signs of abandoning the conservative economic principles that have served him so well. He has hired efficiency experts to conduct state performance reviews, in order to identify structural reforms that will assist efforts to control spending. Squarely in the crosshairs are the California laws that prohibit outsourcing of state services, even when such contracting could save the state $9 billion, according to a study by the Reason Foundation. And emboldened by Arnold Schwarzenegger’s success, some Democratic legislators are actually supporting Republican calls to renegotiate the obscenely expensive contracts that Davis and the Democratic legislature gave the prison guards’ union — long one of Sacramento’s premier “special interests.”
In his campaign for governor, Arnold Schwarzenegger presented himself as a fiscal conservative and a social moderate. Perhaps none of us should be surprised that his most significant achievements so far have been those realized through conservative policies. The Governor’s political and policy successes, coupled with his enormous personal popularity, have actually inspired other legislators to confront the forces of left-wing reaction and greed. And so, perhaps, it could even be said that it’s not only economics that “trickles down.”