(December 2, 2008) Governor Arnold Schwarzenegger yesterday declared a fiscal emergency for the state of California, allowing him to call a Proposition 58 legislative special session to deal with the crisis. In addition, the Governor called a second legislative special session to address the health of the state’s economy including consideration of stimulus proposals that will help California retain and grow jobs and foster long-term recovery.
News of the special sessions coincided with an announcement by the National Bureau of Economic Research (NBER) that the United States economy has, in fact, been in a recession since December 2007. Monday’s events came on the heels of a November 30th op-ed by Stanford Professor Michael Boskin urging the administration to protect the private sector as businesses, entrepreneurs, investors and consumers will ultimately be the ones to pull the nation out of its economic free fall.
Special Sessions
During a news conference, the Governor reiterated his call for a combination of difficult spending cuts and new revenues to solve the state’s revenue shortfall. California’s current fiscal year budget shortfall is projected to be $11.2 billion. Over the next 18 months, preliminary estimates from the Legislative Analyst’s Office show the budget deficit reaching a staggering $28 billion.
Under Proposition 58, the legislature has 45 days to pass and send a bill or bills to the Governor’s desk addressing the state’s budget crisis. If the 45 days pass and the legislature has not passed bills to address the problem, they cannot adjourn or act on other bills until the state’s fiscal emergency is addressed.
U.S. In a Recession
On Monday the National Bureau of Economic Research (NBER) declared that the United States economy has been in a recession since December 2007.
The NBER -- a private, nonprofit research organization -- said its group of academic economists who determine business cycles met and decided that the U.S. recession began last December.
By one benchmark, a recession occurs whenever the gross domestic product (GDP), the total output of goods and services, declines for two consecutive quarters. The GDP turned negative in the July-September quarter of this year, and many economists believe it is falling in the current quarter at an even sharper rate.
But the NBER's dating committee uses broader and more precise measures, including employment data. In a news release, the group said its cycle dating committee held a telephone conference call on Friday and determined when the recession began.
The NBER decision means that the economic expansion lasted from November 2001 until December 2007. Economic expansions peak and recessions begin in the same month, according to the NBER's dating methods. Founded in 1920, the NBER has more than 1,000 university professors and researchers who act as bureau associates, studying how the economy works.
Stanford Professor Offers New Administration Economic Advice
The subjects of budgetary shortfalls, recession and taxes were all highlighted in a recent op-ed by Michael Boskin featured in The New York Times on November 30, 2008. Boskin, a professor of economics at Stanford and a senior fellow at the Hoover Institution, explained that President-Elect Barack Obama’s new administration should focus on the most important issues facing the country right now including income, jobs and wealth.
“Mr. Obama needs to think about everything his administration does through the prism of how it will affect the economy in the next two years. That means postponing, scaling back or slowly phasing in proposals that impose significant costs on the economy,” Boskin said.
Boskin also recommended in the piece that the new administration needs to focus a fiscal stimulus on what works, not a Congressional wish list. Specifically he recommends permanent tax cuts for households, especially in rates, tax incentives for business investment, hiring and home purchases are also desirable.
Boskin cautions President-Elect Obama to beware of the law of unintended consequences, noting that, “history suggests that most legislation will produce less than forecast, more slowly, at greater cost” and advised the new administration to be suspicious of trying to pick economic winners and losers with subsidies, taxes and regulation. Instead, “the government should set general goals for the environment, energy and health care — and then let entrepreneurs, investors, venture capitalists and consumers decide how best to achieve them. No policy that cannot be commercially sustainable in the long run makes sense,” Boskin said.
Finally, Boskin recommends that any tax increases should be delayed until the economy has recovered. “Raising tax rates is rarely a good idea, but it is especially foolish in a deep recession. On the budget and spending, he should try pilot programs to test his ideas. If they work at sensible cost, he will get broad support to expand them. If not, he should jettison or reform them.”