Recession Prophecies Good News for Trump Haters, Bad News for California

“Among 226 economists surveyed by the National Association for Business Economics,” reports Justin Doom of ABC News, “34 percent said a recession would hit the U.S. in 2021, an increase from 25 percent who believed so in February.” This might come as good news to those who believe recession prophecies hurt President Trump’s chances for reelection. Even so, the predictions should stand as a warning to vulnerable states such as California. 

The Golden State’s top one percent of earners provide about half the state’s income tax revenue, the largest source of funding for state government. This makes for high volatility during any economic downturn. “Volatility is not our friend, it’s our enemy,” proclaimed Governor-elect Gavin Newsom last November, adding, “I am not going to neglect this issue.” So far he has, and so did his predecessor. 

As Dan Walters of CALmatters explains, Gov. Jerry Brown grasped the threat of volatility but “he clearly didn’t want to take on such an immensely complex issue with a high probability of failure.” So Brown left office “with the fiscal time bomb still ticking away and likely be succeeded by someone with less ability, politically and intellectually, to do what needs to be done.”

For his part, Gov. Newsom has not only neglects volatility but supports new taxes, including a tax on drinking water. Gov. Newsom is also targeting voter-approved Proposition 13, Californians’ only meaningful measure for tax limitation. A ballot measure for 2020 will split commercial and residential properties, but Californians can have little doubt that the state’s ruling class wants the whole thing gone. 

The last governor to take on volatility was Arnold Schwarzenegger, who in 2009 set up the Commission on the 21st Century Economy to deal with the problem. The commission recommended cutting tax brackets down to two and replacing the corporation tax and state sales tax with a 4 percent tax on business activity. The legislature failed to vote on the proposals, so nothing came of it.

Meanwhile, heading into 2020, the national economy is performing at a high level, and 34 percent of 226 economists may be wrong. On the other hand, if a recession does hit in 2021, high-tax, high-volatility California is surely in for a rough ride.