Let’s assume that your rich Uncle Harry died and when his will was read, he had left you $50,000.
The unexpected inheritance gives you three choices. You could put the money into a savings account or investment and have it available should you need it in the future. You could use it for a one-time purchase such as a new car, college tuition or a down payment on a house. Or you could ramp up your lifestyle by $50K a year and hope that Harry’s brother George dies and leaves you enough money to continue the party.
Something like that is occurring now as Uncle Joe (Biden) sends out nearly $2 trillion in “stimulus” payments both to low- and moderate-income families and state and local government entities to offset losses of income during the COVID-19 pandemic and, it’s assumed, kick-start the pandemic-ravaged economy.
California will be a case study in how the massive transfer of money that the federal government is borrowing from buyers of its bonds and treasury notes plays out.
California is expected to receive the nation’s largest single share of the pot, at least $150 billion. Nearly half will be in the form of cash payments to families ($40 billion) and supplemental payments to the roughly 800,000 unemployed workers now drawing unemployment insurance benefits ($30 billion). Most of that money, it’s assumed, will go directly into the consumer economy, plus another $3.8 billion for direct assistance on rent, food and other necessities.
The remainder of the $150 billion will mostly go to state and local agencies as both unrestricted revenue and money for specific purposes, such as $15.9 billion to help schools reopen, $5 billion for colleges, $4 billion for mass transit services, and $3.9 billion for child care.
Throughout California, officials in the specific government agencies that will benefit from Uncle Joe’s largesse are busily deciding how to spend it — and they face the same three choices as Uncle Harry’s beneficiaries would.
The political pressure to spend it on new commitments will be immense. Advocates of specific programs, such as those seeking universal pre-kindergarten education and child care, will want to expand their reach. Public employee unions will seek increases in salaries and benefits.
Elected political figures don’t like to say “no” to demands for immediate gratification and few have the courage to insist that one-time windfalls should be carefully husbanded rather than spent.
There’s already a mini-version of the syndrome underway in California. The state has perhaps $15 billion in unexpected revenues because the pandemic-induced recession had little, if any, impact on high-income taxpayers and Gov. Gavin Newsom is under pressure to spend the windfall on program expansions, even though the state faces projected budget deficits in following years.
The problem, of course, is spending windfall money on new commitments, such as salaries, benefits and program expansions, backfires when the money is gone. Those commitments morph into entitlements and their beneficiaries then demand that politicians generate new income streams to pay for them.
There’s already a debate underway in Washington over how much of the stimulus spending will become permanent and whether the federal government should continue borrowing to pay for it, or raise taxes.
Left-leaning Democrats in both Washington and Sacramento are floating new tax proposals, such as a “wealth tax” on those sitting atop the economic ladder.
Newsom simultaneously embraces, in principle, big expansions of entitlements, such as universal pre-kindergarten and single-payer health care, while warning that he won’t embrace new taxes, apparently fearing they would chase away the high-income taxpayers who supply a huge portion of the state’s revenues.
CalMatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more stories by Dan Walters, go to calmatters.org/commentary
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