The Advice Arnold Didn't Take

By Joe Matthews, Journalist and Irvine Senior at the New America Foundation
Tuesday, December 23, 2008

As I watch Gov. Schwarzenegger declare that the state has to have a real balanced budget plan -- with tax increases and spending cuts -- I can't help but think of Ed Leamer.

Leamer is the director of the UCLA Anderson Forecast. But he's important to the story of Arnold the Politician because of advice he gave back in 2003, when Schwarzenegger was running for governor.

Leamer met with Schwarzenegger during one of the policy session he held with experts early in his 2003 gubernatorial campaign. Leamer also was part of the "economic recovery team" of advisors that Schwarzenegger invited to an LAX-area hotel early in his campaign. This group, headlined by billionaire Warren Buffett and former Secretary of State George Shultz, had a private meeting on Aug. 20, 2003, that went for more than an hour.

The state faced a massive budget deficit (roughly as large as some of the estimates for the current problem). Schwarzenegger was running against taxes, so he and his advisors were pitching a convoluted argument that the shortfall could be broken into pieces, with borrowing and a spending limit bringing the budget back into balance. But Leamer didn't buy it.

In the meeting, Leamer was the only one to speak up and argue that it made sense to increase taxes then in 2003. The economy had recovered from recession, and the budget was badly out of balance. Leamer went further: the economy wouldn't stay strong, so borrowing and hoping the economy will grow would not be enough to pull the state out of its budget crisis. And, Leamer added, if the budget imbalance was pushed off into the future, the state might have to raise taxes later at a bad economic time. Leamer argued that Schwarzenegger should propose a package of tough spending cuts and temporary tax increases.

Shultz countered Leamer strongly. A tax increase, the former secretary said, "is the worst thing you could possibly do." Shultz said that if the governor raised taxes, he would lose the ability to control spending growth. The deficit, in Shultz's view, was one of the few restraints on the legislature's addiction to spending. Schwarzenegger said he agreed with Shultz, explaining: if you're training for a bodybuilding competition and you cheat even a little on your diet, you won't win.

For a book on Schwarzenegger's political rise, two of his aides described that moment as crucial. Schwarzenegger had heard both arguments, and sided with those who thought borrowing, constitutional spending limits and economic growth could solve the problem. The aides who talked with me described this as a proud moment of clarity. As it turns out, it was a moment of error. The state is still paying for it.

Once elected, Schwarzenegger followed Shultz's path. The governor convinced voters to back $15 billion in deficit borrowing with Prop 57 in March 2004. Schwarzenegger also pursued his spending limit, and secured some additional spending protections with Prop 58 and with a tougher rainy day fund earlier this year. But he never got on top of the budget problem.

Leamer, to his credit, made public his advice during the Propositions 57 and 58 campaign. Back then, I was covering the governor for the LA Times. And Professor Leamer was one of the few people in the state who would criticize the wildly popular new Gov. Schwarzenegger on the record. (Treasurer Phil Angelides and Fresno Mayor Alan Autry were the other two).

We now know that Leamer was right. Or at the very least, Schwarzenegger, by his actions, seems to think so. Schwarzenegger, who resisted taxes when economic times were good, now sees little choice but to propose tax increases even in the midst of a terrible recession. The governor now argues that fixing the state's deficit requires tax increases.

If he had heeded Ed Leamer's advice, he might have come to that conclusion five years earlier. And California and its state government might be in a better place.