14 May 11 California's Budget Deficit - The Deeper Problem

                          California's Budget Deficit

                             The Deeper Problem

California may need either to reduce the education, health care and social services that it provides to people on limited income or find new ways to pay for those services. And the reason for this has to do with the difference between cyclical deficits and structural deficits.

California began this year with a projected budget deficit of roughly $26.6 billion. This was an estimate of the deficit from January 2011 through June 2012. In March the legislature passed budget bills that cut the deficit by roughly $12.5 billion. The legislature is now struggling to find ways to erase the rest of the deficit, roughly $13 billion. Frankly, most of that will probably be in the form of additional cuts because it is unlikely that Republican legislators will agree to significant tax increases. Unfortunately, those cuts will hit vital programs that are already reeling from the deep cuts earlier this year.

Resolving that budget deficit is the easy work. There is much harder work ahead. Does that surprise you? The reason for that has to do with the difference between a cyclical deficit and a structural deficit

Cyclical deficits result from the normal business cycles that we go through in this country. Every several years the economy slows down and businesses do poorly, creating a recession and increased unemployment. Sometimes the recessions are mild, and some times they are severe like now. All through our history these recessions have eventually gone away, businesses have done better and the have hired more people resulting in lower unemployment rates. Then business gets better and better until eventually it falls into a recession again.

During these cyclical recessions state government revenue goes down but its expenses don't That causes what can be called a cyclical state budget deficit. That is what the state is experiencing now. But underlying the cyclical deficit, there is also a structural deficit.

A structural deficit can be harder to deal with. That happens when more permanent changes occur in the economy that have the effect of permanently reducing revenues available to support state government. Sometimes these changes in the economy also increase the cost of government if it continues to do business in the same way.

Economic historians tell us that, in the 1950s, roughly 85% of adult males were employed. Many of the remaining 15% of adult males were the long term unemployed. (There were lower percentages of women in the work force, but that was because of different cultural norms, not economic factors.) By the early 1980s there were times when as few as 74% of adult males were working. The percentage of long term unemployed adult males was higher than 15%, but, even in recession, it never went above 26%. But now, just 67% of adult males are employed. That leaves 33% of adult males unemployed, many of them long term unemployed.

According to the US Department of Labor, 13.8 million workers were unemployed last month. And roughly 6 million of those have been unemployed longer than 6 months. Roughly 7 million unemployed workers will have to find jobs just to get down to what has become the "normal unemployment rate" in good times, roughly 5% to 6% unemployed. In recent months the economy has been adding only about 233,000 new jobs a month. At that rate it will take several years to achieve the 7 million new hires needed to get back to the "normal" unemployment rate.

There is one more fact to face in order to understand how all of this creates a structural deficit. Some authorities suggest that perhaps millions of unemployed workers have only a dim possibility of ever finding work ever again. Apparently many thousands, perhaps millions, of job seekers don't have the education or career training to qualify for the jobs that will open up as the economy recovers. Because of these factors we may be faced with a new "normal" unemployment rate that is above 5%-6%, perhaps well above.

Here is how all this creates a structural deficit for state and federal governments. With all these long term (perhaps permanently) unemployed people, state income tax revenues will go down while state costs will go up. Unemployed people don't pay state income taxes. But unemployed people often apply for unemployment insurance, food stamps, medi-Cal, etc. This combination of long term lower tax revenue and higher costs results in a long term structural state deficit.

Something will have to give. The state will have to raise taxes (which probably won't happen in the near future), or cut services or find some other, less expensive, way to meet the needs of the long term unemployed.

Boyce Hinman

About the Author:
The founder and manager of a civil rights and social justice organization, California Communities United Institute (CalComui), which works on California legislation relating to the following areas: HIV/AIDS Economic Justice LGBTI Issues Person of Color Issues Women's Issues