�������

Most of what you read, hear and see these days about the California budget is bleak. While the road ahead looks stormy, there are some bright spots in that dark cloud.

Just ask a contrarian or two.

Economic historian Gregory Clark argues that the state’s fiscal pain is not as bad as it seems when put into a larger perspective.

“The current budget crisis facing California is actually of astonishingly small dimensions relative to the state of political paralysis and general gloom that it has produced,” said Clark, who created a stir with his 2007 book Farewell to Alms: A Brief Economic History of the World.

‘Shortfall is chicken feed’

Clark explained that California’s current shortfall of $21 billion in a state whose gross value of output is around $1.7 trillion is not much more than 1 percent of the output of the state, or $570 per state resident.

“Compared to the mammoth federal government deficit in Washington, and the deficits that previous countries have faced, the current state shortfall is chicken feed,” he said.

Clark noted, “The private market downturn is imposing much more drastic pain on the citizens of California."

As for UC employees, “We are, unfortunately, part of that chicken feed. We are in the small proportion of California employees who will bear the brunt of these cuts,” Clark said.

In the long run, it is business that drives California’s true economic engine, he said, and not the state government, no matter how talented or terrible its lawmakers are when it comes to settling budget squabbles.

“The long-term health of the state depends mainly on the efficiency and dynamism of its production enterprises. The state government plays only an indirect role in this,” said Clark, whose Farewell to Alms book controversially suggested that evolutionary change was the driving force in England’s Industrial Revolution, a startling and novel concept to many others in his field.

Whether in 18th century England or 21st century California, Clark said that economic crises typically come with an inherent “reverse side of opportunity.”

For example, California’s real estate price collapse now means that there is a very large stock of cheap housing available at historically low interest rates for people in the inland valleys of California, he said.

“For a large group of young people who are fortunate enough to have kept their jobs, and who are looking to own their first home, this is a golden period,” he said.

Still, Clark worries that California is becoming an economically polarized state, with high education, high-earning populations in expensive, coastal cities and a much poorer, less educated population with many social problems in the inland valleys.

“The wage gap between the upper 10 percent of wage earners in California and the bottom 10 percent is now much wider in California than in the rest of the U.S.,” he said.

Katheryn Niles Russ, an assistant professor of economics, says we all could benefit from some changes.

“I am optimistic that the downturn has produced some green shoots” in business innovations and possible banking and real estate reforms, she said.

“California has been progressive in many issues of social and environmental safety,” Russ said, “why not truth in lending, which disproportionately affects the poor and middle class?”

Russ, who studies international trade and finance, maintains that finance reform is imperative, and suggests that state policymakers should change and enforce state laws governing lending practices so that potential home buyers could better understand the terms of their mortgages.

“Such a campaign might also increase confidence in our lending institutions and grease the wheels of lending in the economy.”

“Confidence” is a key word, especially now, she believes, when people look at their pocketbooks and decide whether to buy something.

“The influx of federal stimulus funds seems to have contributed to hopes that help is on the way, which may increase consumer confidence and with it, consumer spending,” said Russ.

On the state budget stalemate, Russ was not surprised when voters overwhelmingly defeated five May 19 ballot initiatives to stabilize the state’s finances. The propositions failed because they didn't address the root causes of the state's never-ending budget crisis.

“The propositions, far from being a useful referendum on public priorities, were hopelessly obfuscated, becoming increasingly complex rather than increasingly clear upon examination,” Russ said.

Alan Olmstead, economics professor and the director of the Institute of Governmental Affairs, is not quite as optimistic.

“We have a political logjam that shows no sign of breaking up,” said Olmstead, portraying the fiscal meltdown in historic terms.

“During the Great Depression, several states and cities defaulted. This also happened during earlier panics. Following the Civil War all southern states defaulted. But in modern times, California is among the leaders in financial ineptitude,” he said.

Constitutional convention ahead?

“The best package that could be achieved at that time.”

That is how Floyd Feeney, a law professor and expert on the California initiative process, describes the state leadership’s strategy for holding the recent election.

Still, “it would have been better for the leadership to have gone to the people with a more fundamental program of reform — one that revised the two-thirds vote requirement, created real accountability, and began the difficult process of resolving the obvious structural deficit in the state’s spending,” he said.

Feeney noted that some credible groups have called for a constitutional convention to rewrite California’s Constitution.

“The high level of consensus that the California Constitution requires for increasing revenue and appropriating funds makes it difficult for the state to deal with ordinary fiscal problems,” he said, “much less the extraordinary problems that the state now faces.”