Month: August 2011

Meanwhile, in China…

by David Atkins (“thereisnospoon”)

The problem hasn’t received as much press attention as the domestic or Eurozone troubles, but China is in its own world of hurt right now, too. The Chinese economy has grown too much, too fast and is currently suffering both from a real estate bubble and from having purchased too many foreign treasuries and having allowed its currency to depreciate too far to aid its manufacturing sector. The result? Massive inflation:

In the first seven months, the CPI gained 5.5 percent from a year earlier, well above the government’s target ceiling of 4 percent for this year.

In July, CPI even jumped 6.5 percent year-on-year, reaching its highest level in 37 months, placing the government in a tough position with worsening global liquidity in sight.

The Producer Price Index, which is used to calculate inflation at the wholesale level, jumped 7.5 percent year-on-year in July.

The stubbornly high inflation rate has been driven by rising food costs, which jumped by 14.8 percent in July from a year ago.

The price of pork, a staple food in China, soared by nearly 57 percent in July.

Addressing a Forum on China’s Macroeconomic Conditions and Macro Policies in Singapore, Zhang Liqun, an economist from the Development Research Center, said he expected the inflation pressure resulting from surging food prices to start easing as supply increases.

It’s not just food. Cab drivers in China are striking nationwide despite fears of retribution from the supposedly Communist government:

Woe is the taxi driver in China.

The roads are clogged with about 40,000 new cars a day, the price of gasoline has doubled in the last five years and passenger fares have barely budged even though everything else in the country is getting more expensive.

Fed up with their shrinking profit margins, 1,500 cabbies in the eastern city of Hangzhou went on strike this month demanding higher fares.

“Ten years ago, taxi drivers belonged to the high income group. Now we have become part of the low income group,” a Hangzhou cab driver told the Oriental Daily, explaining how his pay after expenses had dropped from about $730 a month six years ago to $470 today.

It’s no wonder then that taxi drivers have become the poster children of China’s nagging inflation, which grew 6.5% in July from a year ago to reach a 37-month high.

Their struggle to make ends meet underscores the pressure on China’s broader working class population who are most vulnerable to consumer price increases. And when they strike, they remind the central government how inflation can trigger social unrest…

Guo said there have been 60 taxi strikes since 2004, including a violent demonstration by 9,000 drivers in the western city of Chongqing in 2008.

In an article published Thursday in the official Communist Party mouthpiece the People’s Daily, cab drivers in Beijing said they had to work up to 18 hours a day and give half their earnings to lease their cars.

This sort of thing cannot continue. So China may finally allow appreciation of their currency in order to curb inflation and reduce the risk incurred from owning so many foreign currency bonds. The only problem for China is that this will hurt their domestic manufacturing economy at a time when the economy is already slowing worldwide:

China’s government may be about to let the yuan-dollar exchange rate rise more rapidly in the coming months than it did during the past year. The exchange rate was frozen during the financial crisis, but has been allowed to increase since the summer of last year. In the past 12 months, the yuan strengthened by 6 per cent against the dollar, its reference currency.

A more rapid increase of the exchange rate would shrink China’s exports and increase its imports. It would also allow other Asian countries to let their currencies rise or expand their exports at the expense of Chinese producers. That might please China’s neighbours, but it would not appeal to Chinese producers. Why then might the Chinese authorities deliberately allow the yuan to rise more rapidly?

There are two fundamental reasons: reducing the portfolio risk and containing domestic inflation.

Consider first the authorities’ concern about the risks implied by its portfolio of foreign securities. China’s existing portfolio of some US$3 trillion (Dh11.01tn) worth of dollar bonds and other foreign securities exposes it to two distinct risks: inflation in the US and Europe, and a rapid devaluation of the dollar relative to the euro and other currencies.

Inflation in the US or Europe would reduce the purchasing value of the dollar bonds or euro bonds. The Chinese would still have as many dollars or euros, but those dollars and euros would buy fewer goods on the world market.

Even if there were no increase in inflation rates, a sharp fall in the dollar’s value relative to the euro and other foreign currencies would reduce its purchasing value in buying European and other products. The Chinese can reasonably worry about that after seeing the dollar fall 10 per cent relative to the euro in the past year – and substantially more against other currencies.

With the Eurozone in crisis and the future of the Euro itself in question, there is no telling what may befall treasuries and the U.S. dollar. In any case, China would be wise to strengthen the yuan and acquire a little more financial independence–except for the fact that the Chinese economy still depends mostly on its manufacturing sector, which can only be hurt by a stronger yuan.

The other thing a stronger yuan would mean is higher prices for Chinese goods overseas (that’s why it would hurt Chinese manufacturing.) It’s a dirty secret that one of the reasons Americans haven’t complained too badly about a lack of rising domestic wages is that there has been price deflation in cheap manufactured goods from China at the local Target or WalMart. Increase the prices of those goods, and it will have social and economic ripple effects in the American economy as well.

This is all part of why no single nation can truly control its own financial destiny. The world is now a globally interconnected system: one that is far too dependent on elite financial institutions and the rapacious greedheads who run them, and far too little interested in the general welfare of the real people who toil every day to put food on the table all across the planet.

Sooner or later, the sovereign nations of the world will need to come together in a spirit of mutual cooperation, understanding that a slowly rising tide lifts all boats, that massive income inequality is to be avoided, that bubbles need to be popped through government intervention before they grow too big, and that allowing financial institutions to control our collective destinies is a very bad idea.

.

From the “if you build it, they will use it” files

by digby

The LA Times reports:

A decade after the Sept. 11, 2001, attacks on the World Trade Center and the Pentagon, federal and state governments are spending about $75 billion a year on domestic security, setting up sophisticated radio networks, upgrading emergency medical response equipment, installing surveillance cameras and bomb-proof walls, and outfitting airport screeners to detect an ever-evolving list of mobile explosives.

[…]

One effect is certain: Homeland Security spending has been a primer-pump for local governments starved by the recession, and has dramatically improved emergency response networks across the country.

An entire industry has sprung up to sell an array of products, including high-tech motion sensors and fully outfitted emergency operations trailers. The market is expected to grow to $31 billion by 2014.

Like the military-industrial complex that became a permanent and powerful part of the American landscape during the Cold War, the vast network of Homeland Security spyware, concrete barricades and high-tech identity screening is here to stay. The Department of Homeland Security, a collection of agencies ranging from border control to airport security sewn quickly together after Sept. 11, is the third-largest Cabinet department and — with almost no lawmaker willing to render the U.S. less prepared for a terrorist attack — one of those least to fall victim to budget cuts.

I guess you can call it government stimulus. And improving emergency response is one positive result, for sure. Still, I don’t about you but I’d much rather that most of this money be spent fixing our crumbling infrastructure and teaching our young than creating a massive security state.

I’ve been worried about this since they first named this monstrous new police bureaucracy “Homeland Security.” Nothing good could possible come from that. And we had a clue when stuff like this began to appear in the newspapers:

From Anchorage it takes 90 minutes on a propeller plane to reach this fishing village on the state’s southwestern edge, a place where some people still make raincoats out of walrus intestine.

This is the Alaskan bush at its most remote. Here, tundra meets sea, and sea turns to ice for half the year. Scattered, almost hidden, in the terrain are some of the most isolated communities on American soil. People choose to live in outposts like Dillingham (pop. 2,400) for that reason: to be left alone.

So eyebrows were raised in January when the first surveillance cameras went up on Main Street. Each camera is a shiny white metallic box with two lenses like eyes. The camera’s shape and design resemble a robot’s head.

Workers on motorized lifts installed seven cameras in a 360-degree cluster on top of City Hall. They put up groups of six atop two light poles at the loading dock, and more at the fire hall and boat harbor.

By mid-February, more than 60 cameras watched over the town, and the Dillingham Police Department plans to install 20 more — all purchased through a $202,000 Homeland Security grant meant primarily to defend against a terrorist attack.

The LA Times piece is worth reading as it puts into perspective the real risks out there in comparison to cost. It’s substantial and it should be part of any discussions we have going forward about budgets. (Not that we will — anything in a uniform is sacrosanct in our free society nowadays.) But for me, the primary concern is that the US had built a monolithic federal, state and local police apparatus that must constantly seek to justify its existence. And I think we know where that sort of thing ends up don’t we?

.

The Thomas Friedman Problem

by David Atkins (“thereisnospoon”)

Dean Baker has a fantastic smackdown today of Thomas Friedman’s latest offensive bowel movement:

Okay, let’s get to specifics. We leave out the Arab world, skip China for a moment, and jump to the European Union. Friedman tells us:

“Farther north, it was a nice idea, this European Union and euro-zone: Let’s have a monetary union and a common currency but let everyone run their own fiscal policy, as long as they swear to work and save like Germans. Alas, it was too good to be true. Large government welfare programs in some European countries, without the revenue to finance them from local production, eventually led to a piling up of sovereign debt — mostly owed to European banks — and then a lender revolt. The producer-savers in northern Europe are now drawing up a new deal with the overspenders — the PIIGS: Portugal, Italy, Ireland, Greece and Spain.”

There is lots of good stuff here. First, the European Union and the euro-zone are not the same thing. There are countries with names like the United Kingdom, Denmark, and Sweden that have been longstanding members of the European Union that are not members of the euro-zone. While there have been some suggestions that heavily indebted countries consider leaving the euro, one would be hard-pressed to find anyone suggesting they leave the European Union.

This is not the only complete invention in Friedman’s story. The story of the heavily indebted countries as serious overspenders spits in the face of reality. Spain and Ireland were actually running budget surpluses in the years preceding the recession. Italy and Portugal had relatively modest deficits. Only Greece had a clearly unsustainable budget path.

The story of the debt crisis of these countries is primarily the story of the inept monetary and financial policy run by the European Central Bank (ECB) in the years leading up to the crisis. They opted to ignore the imbalances created by housing bubbles across much of the euro zone and the rest of the world. Rather than taking steps to rein in these bubbles, they patted themselves on the back for hitting their 2.0 percent inflation targets. Remarkably, none of these central bankers lost their jobs and the 2.0 percent cult still reins at the ECB.

If there is a crisis in the euro zone it is that a dogmatic cult has seized control of the euro zone monetary and financial policy to the enormous detriment of its economy and its people. And, there is no obvious mechanism through which they can be dislodged. Friedman might have devoted his column to this problem, but it requires far more knowledge of the economy than he seems to possess.

Baker also takes the time to correct the record of Friedman’s willful ignorance when it comes to China and the U.S. as well. It’s well worth reading the whole thing.

Thomas Friedman and his friends are wrong. Dreadfully wrong. And they’re proven to be wrong time and time again. But that doesn’t stop them from dictating conventional wisdom that makes it way into Washington Consensus “centrist” policy, no matter how wrong it is.

This is why so many Americans become extremist in their politics, or descend into apathy. Tea Party crazies and progressives–i.e., the real people in the real economy who spend the most time obsessing over and paying attention to politics, as opposed to those encased in the D.C. or Manhattan bubbles–know that Thomas Friedman and friends are horribly out of touch. Tea Partiers and progressives have radically different theories of politics and governance, and radically different explanations for why Friedman and friends are wrong, but each camp definitely agrees that the demise of this sort of sophomoric neoliberal commentary would be a great thing for democracy. Both Tea Partiers and progressives can see the economic destruction of the American way of life, and agree that it’s being destroyed on behalf of elites. The two camps differ greatly in who they believe those elites to be, but both camps know this: Thomas Friedman and friends lie to serve the interests of the elites, not of ordinary working people.

The op-ed pages of the New York Times and Wall Street Journal are supposed to be the places where the greatest writers and intellectuals on each side of the aisle hash out ideas based on a common set of facts. When the facts are consistently wrong and the ideas are gibberish, who can blame politically interested citizens for retreating into ideological silos that at least have some sort of explanatory power?

This, ultimately, is one of the biggest reasons why the Obama Administration’s approach to public policy and communications cannot and will not work: the Administration is attempting match its policies to a conventional wisdom that is clearly and demonstrably wrong, and to bring together partisans on both sides who know good and well that it’s wrong. Any policy maker who attempts to set their policy and communication compass by the sorts of ideas espoused by Thomas Friedman and the late David Broder is doomed to fail. The task Obama has set himself to “renew our politics” is not only misguided; it’s simply impossible.

The national partisan divide will only be healed by throwing the Thomas Friedman acolytes overboard, and concentrating on pursuing a politics that respects the opinions of those who are consistently proven correct in their prognostications, and establishes a baseline set of facts that each ideological faction has to grapple with in an adult way. Most of those facts will have a liberal bias, and that’s just too bad. That’s why progressives are right and teabaggers are wrong, and why Krugman is the most accurate pundit and Cal Thomas is the least accurate. But some facts may have a conservative bias, too, and that’s fine. But they should be judged on their merits, rather than on their post-partisan acceptability to the conventional wisdom of the D.C. and Manhattan bubbles.

.

Bugging Panchito

by digby

Boy blogging has really gone downhill lately. Evidently the new breed doesn’t understand the rule about drinking and posting (or smoking and posting.) At the very least don’t hit “publish” until you’ve slept it off:

DID insects hire a new publicist for the summer of 2011? Or have I scrambled the question, and should I be asking if they lost the publicist who had shielded them until now?

Either way, seemingly everywhere I turned, I was being told to eat them. An article in the New Yorker floated the notion, framed as easy on the budget and good for the overstressed environment. So did a piece in the newspaper you’re reading now. Before this odd, disquieting season, cicada banana bread wasn’t in my vocabulary. Time magazine put it there with a story dated, fittingly, the very first day of summer.

I begin with bugs partly because some levity is in order, given the gloom to come. But more than that, mealworm pilaf as an answer to our dwindling resources strikes me as a reasonably apt metaphor for these last few months. It suggests a decline in our lots, a reckoning with our limits, a grasping for solutions and a humility in the absence of truly palatable ones. And that’s what the summer of 2011 has been all about.

Bugs and mealworms as a metaphor for our times. Wow.

You do realize that this is the new New York Times op-ed columnist, right?

Eric Alterman had a good time with this fellow a while back:

Bush knew a good thing when he saw it. As a candidate, he put his arms around Bruni, whom he nicknamed “Panchito” Bruni, and cooed, “You know we love you.” Later, Bush looked across a crowded room at Bruni and mouthed, “I love you, man.” Bruni did not mention whether he told Bush that he loved him back, but in relationships as in literature, it is always better to show than to tell. Either way, Bush sure knew his man. Bruni went over to the Gore camp one day and found out, to his apparent horror, that Al Gore not only did not love him; he did not even bother to come up with a nonsensical nickname for the writer.

Gore, Bruni complained, “made no effort. His energies were channeled into his campaign trail remarks, so dense with knowledge, so showy with digressions. He sweated the big stuff and muffed the small stuff.” To Bruni this was unforgiveable—the idea that a potential president thought it worthwhile to focus on issues rather than declaring his love for reporters—and Bruni more than made him pay for it.

Once the U.S. Supreme Court decided to hand the election to Bush, “Panchito” Bruni continued to treat the presidency as a sitcom he happened to enjoy, like “Friends” or “The Cosby Show.” On a presidential trip to Mexico, for instance, Bruni professed to spy Bush’s boots “peek[ing] out mischievously” from beneath his trousers. How do boots “peek” and why would such peeking imply mischievousness? Bruni did not bother to explain. But he sure liked the word. Upon meeting Tony Blair, Bush, Bruni wrote, “indulged a mischievous impulse” when he shouted out “Hello, Landslide!” to the British prime minister. Despite the fact that Blair had actually won his election in a landslide, Bruni explained Bush’s comment as “an irreverent, towel-snapping one at that-to Mr. Blair’s recent re-election, and it recalled the playful dynamic … when he cracked during a news conference that he and Mr. Blair liked the same brand of toothpaste.”

It was a low point. Which they are, apparently, working hard to beat.

.

Situational Keynesianism Redux

by digby

Here’s one of California’s worst ever contributions to the congress (and considering our history, that’s saying something) telling his constituents that you can’t possibly raise taxes in an economic downturn:

Now, it’s fair to say this if you subscribe to Keynesian economics. It’s usually considered contractionary to raise taxes in a downturn. On the other hand, if you are simply proposing to tax a bunch of rich people at the high end who are sitting on huge piles of cash so that you can use it to stimulate the economy, then probably not so much. (And you could also say that using this same money that’s just sitting around anyway to pay down the deficit is no harm no foul on the current economy. It doesn’t make a lot of sense, but nothing much makes sense right now). But no matter how you slice it, if you subscribe to the belief that you can never raise taxes during a recession because it will be contractionary, you can’t also say that government spending in a downturn is counterproductive. Both of those ideas are operating on the same principle. But then, conservatives like Dan Lundgren don’t believe in raising taxes no matter what the circumstances and are using this latest justification in the most hypocritical way possible. That’s just how they roll.

Update: Speaking of tax cuts, Dave Weigel has an entertaining piece on why Democrats are so keen to extend the payroll tax over GOP objections. (Hint: it’s so they can use the word “hypocrite” over and over again even though it should be clear by now that the GOP has retired the concept and nobody gives a damn.)

But I think this quote by Nancy Altman really nails it:

“It’s completely hapless negotiating!” says Nancy Altman, the co-director of the defend-the-New-Deal-at-all-costs group Social Security Works. “You’re taking something the other side wants and then begging them to take it. I’d expect that Republicans would eventually take it, but in exchange for some other concession. What a perfect position to be in, when you’re begging me and offering me more if only I’ll vote for something I want already.”

Oy vey. As Weigel points out, there’s a much better plan out there, one that used to be considered a totally mainstream Democratic position, that has been completely abandoned by everyone but Bernie Sanders.

As he says:

It’s not really a fringe idea. Sanders’s proposal is actually more popular than the one the Democratic establishment has tattooed on its forehead. Last week a Reuters poll asked voters to assess a few different stimulus proposals. Forty-six percent of them liked “raising taxes on wealthy individuals.” Only 20 percent liked “extending the payroll tax cut.” That’s what happens when Democrats get Norquist on the brain: They become obsessed with making Republicans uncomfortable instead of with something that voters like. Or with something that’s easier to campaign on. Or with something that works.

Of course, if we could the projected deficit off the brain for five minutes, we could do some serious stimulus to get everyone working again and see what the numbers are once that’s accomplished. First things should be first, but … whatever.

.

“Who are you the slave of?”

by digby

Tough questions from constituents:

I’m sure these people were put on watch lists immediately.

.

The big choice

by David Atkins (“thereisnospoon”)

This triple crisis post Digby referenced yesterday may be the most important thing anyone interested in politics and economics may read for a long time. There are too many important points in the article to summarize in a neat block, so I won’t even try. Interested readers need to consume the whole thing several times. Those who aren’t already knowledgeable about such things might require a brief primer on CDOs (collateralized debt obligations) and CDS (credit default swaps) to really understand it, but it’s worth it.

The key upshot is this: European central banks took on increasing amounts of leveraged debt–partly from the same fiscal insanity that plagued the Anglosphere, and partly by buying up bonds from less stable economies such as Greece and Iceland. Pretty much every European nation except Iceland made the decision to socialize the financial industry’s losses and turn the banks’ private debt into public debt. The only problem is that there’s far more banking debt out there due to leverage, than the collective economies of the Eurozone nations have to bail them out with. The Eurozone problems are not a result of overly generous social welfare systems, but rather of the combination of those systems with an attempt to take on debts of their banking institutions. Fairly soon, none of the Eurozone nations will be able to stand up under the weight of those needlessly undertaken obligations, in part because the inflexible structure of the Euro has made it such that the entire Eurozone sinks or swims together.

The nations of the Eurozone have two choices here: either let their big banks fail under the weight of their leverage, or radically restructure their societies and social compacts at the expense of their people, in order to protect their banks. So far, most Eurozone nations are choosing the latter.

The case of Iceland is particularly interesting here. Icelanders decided not to bail out their banks, but rather to let them fail, leave the bondholders who risked investment in the nation’s banks out to dry. Icelanders have decided start over while taking care of their people first, and foreign bondholders last. That reasonable and moral approach has been met with outrage by most of the world’s financial elites; Britain is now suing for remuneration on behalf of British investors in Icelandic banks.

The idea that investors in corporate or sovereign securities are owed a return on their investments has always struck me as amusing: part of the reason investors “earn” interest on invested money is because there is risk entailed, even in assets considered safe “AAA” material. The upside of “earning” money through investment is that the investor doesn’t have to work to “earn” the money; the money does the work for the investor. The downside is the risk that the investor might lose money on the investment. If investors are guaranteed risk-free return, then they’re essentially a special class of citizen who get to use their wealth to make more guaranteed wealth just by having it, as opposed to the dumb schlubs who actually have to do a day’s work for their sustenance. Guaranteeing risk-free interest on invested income creates a de facto economic system of Morlocks and Eloi where the people who actually work for a living get thrown into the gaping jaws of the lucky “investors” who don’t. So it’s deeply satisfying on a certain level that Iceland is telling bondholders to stuff it, because the nation is more interested in protecting its people than in paying off foreign investors: that’s risk for you. If you can’t handle it as an investor, get out of the bond market.

But the problem is that that approach can work for Iceland because of the relatively small size of its economy. If a nation like France or Germany took that approach, it might crash the entire world’s financial system, since the big banks and related financial institutions themselves are usually the biggest bondholders.

After all, the big banks provide liquidity. The big banks lend money to small business, corporations, communities large and small, and sovereign nations. If the world’s banking system fails, it’s like the heart ceasing to pump blood through the body. Liquidity dries up. Small business owners will fail to get loans to make payroll; their employees won’t get paychecks. The system seizes in shock, the blood supply to the brain fails, and disaster ensues.

It’s not just the Eurozone facing this problem, of course. America faced the same vexing question in 2008, which led to the decision to institute the bank bailout. Even most progressive economists tend to believe that the TARP bailout was necessary, even if it should have come with many more regulatory strings attached.

But as the financial sector continues to careen further and further out of control worldwide, the challenge faced by sovereigns worldwide is this: either become subservient entities to the global financial institutions that truly govern the fates of the world’s citizens, or reassert their authority and independence while allowing reckless banking institutions to fail.

Most nations are choosing the former, both because they lack the courage to do the latter, and because they lack the vision to imagine what kind of system might need to be created in a post-too-big-to-fail world. The world’s economies are now massively interdependent, with most of those interdependencies lubricated by liquidity provided by the big banks.

It’s high time that economists worldwide begin to envision a different way forward: a way for sovereigns to bypass reckless financial institutions and survive in the interdependent global economy without their help. A way, in other words, to truly allow banks that are too big to fail, to fail. A way to allow nations to tell investors that they will have to accept the consequences of their having taken the risk that comes with making money off interest with no labor involved. If not, the moral hazard of an increasingly powerful and unaccountable global investor elite will continue destroy sovereign nations socially, economically and spiritually. It’s only going to get worse from here.

.

Japed crusader: Griff the Invisible

Paper Man

Subprime Europe

by digby

If you are having trouble unraveling the Eurozone crisis read this. It puts it into a perspective we here in the US can easily understand:

The Eurozone today resembles a 2008 vintage subprime CDO. The Greek, Irish and Portuguese periphery is the riskiest junior tranche, the Italians and the Spanish are, appropriately, the mezzanine tranche, with France and Germany forming the senior tranche. And just like 2007-8, all the liquidity is drying up, as seen in the need for the banks from these sates to keep going to the ECB’s discount window.

So all you need is a part of the junior tranche to default and the losses will rip through the junior into the mezzanine and will end up destroying the senior tranche as each bondholder dumps good to cover bad before the other guy does. Once again the CDO, despite its designer’s intent, stands or falls together, this time through contagion rather than correlation, but the principle is the same.

What will cause the CDO to implode? Exactly the austerity policies Germany demands of everyone else, which as we now see, has slowed growth in Germany’s main markets and Germany itself, to a standstill. Such sustained slow or negative growth will make bondholders still more nervous. And yet the German response will be the same – more austerity – more rules – more councils of the same people who have kicked the can down the road for a year and a half, and more declarations of ‘unshakable commitments’ to the Euro that no one believes anymore.

Europe has reached a point where its collective bank exposures are bigger than its collective bailout capacity. Like the CDO of legend, the income streams are running dry and correlation is rising to one. You can blame the state all you like, but its banking crisis at its core. The cover that the banks got from their bait and switch on the public is a one-time deal, and it is about to be rudely exposed.

Read the whole thing. It’s not long. This old world’s in trouble, boys and girls.

.

Democracy and money

by David Atkins (“thereisnospoon”)

Democrats in California are making efforts to revamp California’s famed initiative process:

Democrats in the Legislature are trying to make it harder for Californians to pass their own laws at the ballot box, saying the state’s century-old initiative process has been hijacked by the special interests it was created to fight and has perpetuated Sacramento’s financial woes.

n the waning weeks of this year’s lawmaking session, legislators will push bills to raise filing fees, place new restrictions on signature gatherers and compel greater public disclosure of campaign contributors.

One measure would allow the Legislature to propose changes that would appear on the ballot alongside an initiative even if its sponsor rejected them. Another would give the Legislature the right to amend or repeal initiatives that pass, after four years have gone by….

Republicans and their supporters are crying foul, saying Democrats just want to maintain the status quo.

“The long-term agenda is to neuter direct democracy in California under the guise of reforming the system,” said Jon Coupal, president of the Howard Jarvis Taxpayers Assn., sponsor of Proposition 13, the landmark property-tax initiative.

DeSaulnier said most voters don’t realize how constrained lawmakers are by the initiative system. In recent decades, Californians have approved costly new laws and government programs but have also made it more difficult for lawmakers to raise taxes to pay for those that pass without funding attached.

The Legislature has cut deeply into some of California’s most prized assets — its higher education system, for example — as it has struggled to balance the books without being able to touch money earmarked by voters. California, lawmakers note, is the only state that doesn’t allow its Legislature to amend or repeal statutes created by voters.

California is exhibit A in what happens when too much money is allowed to pour into a purely democratic (small-d) electoral system. Voters want clean air, good schools, safe drinking water, and all the other benefits of living in a progressive society, so they are more than willing to pass bond measures borrowing to make those things happen. But voters also don’t want to pay taxes for those things. This is what has been called the the Two Santa Claus theory in California.

And while it is true that California Democrats could be doing much more to try to educate the public about the issues involved, it’s also a fact that this sort of educational approach bores voters, and pales in comparison with a multi-million dollar initiative ad campaign that touches on more emotional heartstrings.

The ability to make tough, potentially unpopular choices that have a long-term focus is what representative democracy is supposed to be about. Direct democracy has its benefits, but it gets abused when it is being manipulated by massive sums of money designed to confuse voters about the true nature of an initiative (case in point, the deceptive anti-union initiative currently underway.)

Calfornia’s legislature has almost no ability to solve problems. Most of the budget is tied up in guaranteed initiative bonds. It takes 2/3 of the legislature to pass revenue increases. Until very recently, it took 2/3 of the legislature to pass a budget as well. The legislature essentially has no power, and the lack of effective political media in California means that very little information about the problems filters down to the voters.

So when problems get worse, the legislature becomes even more unpopular, which in turn leads voters to take more power away from state legislators, in a self-reinforcing cycle.

The answers to the problem are clear, but difficult to make happen: curtail the ability of big money to buy ballot initiatives, and give more power to the legislature to solve problems. but, of course, both of those ideas are unpopular with most Californians, who tend to be fairly progressive overall.

The lesson for the rest of America? If big money is allowed to buy the system and permanently discredit the institutions of representative democracy, the way back to sanity, prudence and commonsense progressive policy is hard to find.

.