Tuesday, May 19, 2009

Faulty assumptions

I was talking with some colleagues recently about California's budget issues. Perhaps, one suggested, it has something to do with an unrealistic expectation by policymakers that economic growth will bail the state out of its problems. Why else would state leaders keep coming up with short term fixes to structural budget shortfalls?

I found some potential evidence for such expectations by looking at state and national figures for GDP growth. The graph below shows the trends in GDP growth for California (green line) and the U.S. (red line):
Unfortunately, these are current dollars, not chained, so they don't account for inflation, which explains the huge bump in the late 70s. I've used a lowess smoother for both series.

Note that California enjoyed strong annual economic performance well in excess of what the U.S. as a whole was doing for much of the 1970-1990 period. I think it fair to say that this was the period when most of today's state party leaders and lead policymakers started paying attention to and getting involved in politics. So they might be of the conviction (delusion?) that no matter what the national economic scene looks like, California will do pretty well. Of course, the state really hasn't outperformed the nation since 1990.

The lesson is that California exceptionalism, to the extent it once existed, no longer does.

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