Monday, May 17, 2010

Why Meg will fail

Despite the efforts of SnapTrack billionaire Steve Poizner, it looks like this time next month Meg Whitman will be the GOP nominee for governor. Winning the general election against (ex-governor) Jerry Brown will be a dual-negative campaign of Whitman and her allies attack Brown and his allies — and vice versa.

But suppose that Whitman won, and turned her eBay/P&G experience into becoming the head government executive of the world’s 8th largest economy with 37 million people (more than 21 of the 27 EU countries)? In a state trying to rival Greece for deficit spending, Whitman promises her business experience will bring fiscal sanity and solve the intractable structural budget problems. Instead, what I think will happen is that — given hostile legislators and state employees — the bureaucracy would outwait her, if not destroy her.

Instead of real reform, we’ll get the classic “Washington Monument Syndrome,” the ability of a bureaucracy to make highly unpopular and visible cuts rather than getting rid of waste or reducing the size or scope of government.

This was brought home by two utterly transparent (and largely successful) efforts here in San Jose. The city parks managers are cutting park hours with orders from on high to make them as visible as possible — despite open skepticism about the logic of the cuts.

Meanwhile, the San Jose Unified School District is putting employees on unpaid furloughs, totaling one week next fall. The union (which reluctantly agreed to the cuts) wanted the furloughs to be held on Wednesdays — the most visible and inconvenient possible time for parents. The school board said no, but they did give parents a week of furlough/student vacation in October — rather than starting school a week later (Aug. 23 vs. Aug. 16).

San Jose is blessed with one of the most competent politicians I’ve seen in 30 years of following politics, Mayor Chuck Reed. He is largely respected by friends and foes for doing what he said he would do and showing real budget discipline. (He doesn’t appear to be running for higher office, which is always a good sign.) While not business as usual, Reed is no outsider: he lived in the city for 20 years and a council member for six years.

If Reed is unable to prevent the Washington Monument Syndrome in a city of 1 million that he knows so well, what hope does Whitman have? She has no government experience, no allies, no way of reaching down through the layers of the California bureaucracy — and, of course, a hostile media that will amplify the attacks on her reform efforts.

So while it’s nice to believe that a knight in shining armor will ride to save California, it isn’t going to happen. And if someone can get elected but not fix things, I’m not sure what other path out there is.

Update, Tuesday 9am: From the Lex column of the Financial Times, May 18:

Always eager to deflect blame for fiscal lapses, state officials have pointed the finger at a small but growing market for municipal credit default swaps. … The first and loudest protests have come from – surprise, surprise – the state with the highest CDS prices, California. Treasurer Bill Lockyer has expressed indignation that prices imply California is riskier than many developing nations. With its intractable deficit, dysfunctional politics, powerful unions, inability to devalue and taxpayers who can decamp to states with lower taxes and better services, the CDS market may be right.

Plugging chronic deficits with bonds carrying the lowest credit-rating of any state has forced California to accept yields implying a default risk mathematically equivalent to the CDS prices Mr Lockyer considers inflated. But they are, of course, two sides of the same coin.

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