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Wednesday, January 19, 2005

California's New, Improved Budget Doomsday Machine 

“Hey, Professor Tax. What’s a ‘Doomsday Machine’?”

It’s an imaginary device that the national security eggheads dreamed up back in the 1950’s. They were trying to apply game theory to real world problems, like thermonuclear war, and looking at the bright side, they realized that no one in their right mind would ever start a war if it were certain to kill everyone on earth.

In its pure game theoretic form the question is: how do I convince other players they must avoid certain moves? How do I compel an opponent to behave reasonably? The Doomsday solution is to announce that "bad” moves will blow up the game -- that you are committed to annihilating any opponent who acts "unreasonably”, even if the price of doing so is your own destruction. The mechanical element makes the threat convincing. By automating the process of destruction, so that neither you nor anyone else can stop it once it has begun, you ensure that no opponent will risk the forbidden moves in hope that you will flinch or falter at the showdown.

Given a choice between (a) acting reasonably and (b) mutual assured destruction, other players should *always* choose (a). The game continues because the players are forced to act reasonably, just as the world can carry on, protected by the possibility of its own destruction.

“Sounds great, Professor.”

Unless something goes wrong.

“What can go wrong?”

Doctor Strangelove explains: “Deterrence is the art of producing in the mind of the enemy... the fear to attack. And so, because of the automated and irrevocable decision making process which rules out human meddling, the doomsday machine is terrifying. It's simple to understand. And completely credible, and convincing…. Yes, but the whole point of the doomsday machine is lost if you keep it a secret! Why didn't you tell the world?”

Soviet Ambassador: “It was to be announced at the Party Congress on Monday. As you know, the Premier loves surprises.”

“But that’s only a goofy 1960’s movie. And it’s dull and boring, made with cheap black & white film. People aren’t really that stupid, are they?”

Professor Tax recently finished reading
John Keegan's The First World War. A most depressing story of the way the military mobilization plans of the great nations of Europe, with elaborate timetables synchronized to the efficient transport of armies by railroad, pulled unstoppably towards war. Each nation sought its own maximum advantage through precise, inflexible planning, but the plans interlinked in ways no one had foreseen. The statesmen and diplomats of the age appear to have been helpless, caught in the revolving gears of some giant mechanism they had created but could not control. Four years later a “tragic and unnecessary” conflict had left 20 million dead.

“Gosh. But what does all this snarky history have to do with ‘taxes, higher education, business frauds and California politics’? Is Professor Tax going freelance and abandoning his franchise? What’s the *local* angle?”

The new California state budget that premiered last week has a secret ingredient. The budget plan for '05-'06 is being pitched as an ugly but temporary stopgap measure. The real budget message is that the state’s prudent and parsimonious Director of Finance, Tom Campbell, thinks he has found the ultimate solution to California’s budget problems. Like any good scriptwriter (or Business School Dean), Campbell has distilled it down to a sound micro-bite: “across-the-board”. It’s not quite as good as
“I’ll be back” or “Hasta la vista, Baby,” but Governor Narcissus can remember it, can make it sound almost meaningful, and can use it to dodge difficult questions about substantive policies.

So what is this “across-the-board” stuff, really? The specifics aren’t public yet (assuming they exist), but here’s the rough outline: In the last 25 years or so the state’s voters have passed ballot initiatives containing various formulas, autopilots, earmarks and set-asides, and it’s generally believed that their cumulative effect has mangled the budget process. Now the voters will be asked to change the State constitution (an act that's very hard to alter or rescind) to add a formula to end all formulas, a super-autopilot. In essence: (a) it would place the formulas for applying state revenues to schools and highways beyond legislative control (b) it would schedule a 15 year payback for the billions the State's "general fund" has borrowed from the schools, highways and other special funds, and prohibit interfund borrowing in the future and (c) funds would automatically be appropriated at the prior year level (with adjustments) if the legislature fails to pass a budget. [Note: this is the 'power of the purse'. Without the power to control how the Peoples' money gets spent, a Legislature is only a big room filled with comfortable chairs and lots of warm air. Tax history tells us how Prussian Chancellor
Otto von Bismarck proved this back in 1862: when the legislature refused to approve the budget, the autocratic von Bismarck collected the taxes and spent the money regardless. "The great questions of the day are not decided by fine speeches or majority votes, but by blood and iron."]

Finally, (d) here's the McGuffin. Whenever the Director of Finance feels a deficit impending, the Governor and the legislature have 45 days (30 in some cases) to agree on a plan to keep the budget in balance, or:

"the State Controller will implement an across-the-board reduction in all State payments (except for debt service and other instances where doing so would violate the federal constitution)."

OK, counsel. Better dust off that "no state shall Impair the Obligation of Contracts" jurisprudence (US Constitution, Article I Sec. 10.) (fn. 1) Unless you're one of the people being stiffed by the State, you can have fun watching the Courts as they try to figure out what the hell this means. Suppose there's a 3% shortfall. Hmmm -- "reduction in *all* state payments"? So if I sell a computer to the state for $1,000, the state might only pay me $970. Looks like vendors will have to raise all their prices to compensate for the added risk. Construction contracts, too. What about leases -- are they 'debt service'? Are tax refunds 'state payments'? Are the school fund and highway fund moneys on-the-board or off-the-board? How do you feed 1,000 hungry jail inmates if you can only buy food for 970? What if there's a fire or a flood, or an epidemic?

"Wow. So that's what a budget doomsday machine looks like. The Governor, the Legislature, the Democrats, the Republicans will all *have* to behave reasonably. Lock the Statehouse doors, and don't let anyone out until they agree on a plan, because the alternative is an unbelieveable mess that will permanently soil the state's credit. What a clever idea!"

Too clever, perhaps. Professor Tax will leave the "what can go wrong" scenarios to others. Instead, a future post will try back-casting, to see what would have happened if the Campbell Doomsday Machine were in already in operation a few years ago, when the current budget turmoil started. The answer may surprise you. Until we meet again!



P.S. Please give credit to Professor Steve Sheffrin of UC Davis, who was first to publish the finding that the proposed Budget Control Plan is a Doomsday Machine, in his Jan 16th column in the Sacramento Bee.

fn. 1 See, e.g., State of Mississippi ex rel. Robinson v. Miller, 276 U.S. 174 (1928) at 179: "After services have been rendered by a public officer under a law specifying his compensation, there arises an implied contract under which he is entitled to have the amount so fixed. And the constitutional protection extends to such contracts just as it does to those specifically expressed. "





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