Milton Friedman: The Last Conservative

>> Jonathan: It's Tuesday, December 19th, 2023, and you're listening to matters of policy and politics, at Hoover Institution podcast devoted to governance and balance of power here in America and around the free world. I'm Jonathan Movroydis, senior product manager at the Hoover Institution, and I'm sitting in the chair of Bill Whelan, the Virginia Hobbes Carpenter distinguished policy fellow in journalism, so that he can answer questions and provide commentary about California policy and politics, in which he is well versed.

Bill Whalen, in addition to being a Washington Post columnist, writes weekly for Hoover's California on Your Mind Web channel. Whalen is joined today by Lee Ohanian, Hoover Institution senior fellow and professor of economics and director of the Ettinger Family Program in Macroeconomic Research at the University of California, Los Angeles.

Ohanian also writes weekly about the policy environment of the Golden State for California on Your Mind. Good day, gentlemen. Let's talk about the latest developments in policy and politics in the Golden State. We'll do a year in review today since we're almost at the end of the year.

Let's start talking about Governor Newsom as we did frequently in 2023. This year marked his emergence as a possible candidate for president in waiting should President Joe Biden decide not to run again. However, his support has been, has been sliding. A November IGS poll shows that he has the lowest approval rating since he left office, 43% approve of his performance and 49% disapprove.

Bill, what do you think are the possible reasons behind the slip in poll numbers?

>> Bill: I think the two things going on, one is just obviously he's spending way too much time on national politics. If you go deeper into that Berkeley IGS poll, you'll find that 43% of the electorate in California wants him to pay more attention to California issues.

And also, I think, Lee and Jonathan, it's because there are just chronic problems in California that just smack for the governor's attention. Homelessness, inflation, middle class economy, crime, three things needs to pay more attention to. So that's part of what's going on here. It's that. But it's very interesting if you look at Newsom in contrast to other big blue state governors, and I looked up these numbers for a piece I did this week in California on Your Mind.

Kathy Hochul, the governor of New York, she is not underwater, which is a phrase in politics, meaning your disapproval is higher than your approval. Your popularity is underwater. She's slightly above water. JB Pritzker, who is the governor of Illinois. He is also treading water, a little above water, though, sensing 60% of the voters that state say he should not run for president.

In Michigan, Lee and Jonathan, Gretchen Whitmer of the democratic governor there, 48% approval versus 36% disapproval. So it's Newsom kind of the only one suffering from underwater. And it might just be because he has just gone so much out of his way to be a national presence. Remember, this begins back in March when he launches his campaign for democracy organization to go after red state governors or authoritarian leaders.

He goes on a spring trip to the deep south to basically trash southern states on civil rights. In July, he's going after Greg Abbott. September, he is hanging out at the republican debate at the Reagan Library, fighting the good fight for the Biden administration. And then in October, he goes traveling around the world, which surely looks like a presidential thing.

He goes to Israel and China. And then finally in November, Lee and Jonathan, he has the red state blue state showdown with DeSantis, which is 90 minutes of him being on Fox News and again looking very much as an alternative to Joe Biden. But, Lee, I know you've written about the November debate between DeSantis and Newsom, and my take on it was that it was kind of a lost opportunity to have a real serious conversation about the two states instead of a lot of insults and a lot of just kind of zingers back and forth between the two.

But your thoughts about that evening?

>> Lee: Yeah, Bill, frankly, I was disappointed. It was supposed to be a debate about substance. Sean Hannity and Fox tried to make a debate about substance. They put together a lot of data and infographics that were presented to both DeSantis and Newsom about issues ranging from energy costs to homelessness, to the number of people who were leaving California and moving to Florida.

So the foundation was there for a good debate. I think our governor sort of turned that upside down. I wrote in a California on Your Mind column that came out shortly after that debate that Newsom, I'll just say politely, he seems to be living in his own universe.

Everybody and their grandmother knows that California has been losing a lot of population since he became governor, that quite a few of those people were moving to Florida. There's no debate about that whatsoever. The facts are what the facts are. And Newsom tried to turn that on his head.

He claimed that in the last two years, which would have been from 2020 to 2022, he said more Floridans are going to California than Californians are going to Florida. Your claim he's saying to Hannity that people are moving from California, Florida, well, that's going to be a fun fact to check.

We've already established that more people are moving from Florida to California than the opposite. Well, nothing could be further from the truth, particularly the last two years. In 2022, California had a net loss of over 22,000 people to Florida. That was up from a net loss of 13,000 people in 2021 before Newsom became governor, about 5000, there was about a 5000 person net loss from California to Florida.

So there's just absolutely no content, there's no statistical content to his claim. I have no idea where he came up with that. And interesting enough, Bill, the morning of the debate, the Sacramento Bee, so the newspaper record in our State Capitol, they ran with a story that had the headline, Record Number of People are Fleeing California for Florida, Will DeSantis Use It Against Newsom?

Well, DeSantis definitely did, including the fact that Newsom's father-in-law moved from California to Florida. But Newsom simply he won't own it. And he goes as far as to create his own, create his own number and he created his own numbers for the rest of the debate. So I was very disappointed in this performance.

 

>> Bill: Sensing Lee that maybe the MVP of that debate might have been neither Gavin Newsom nor Ron DeSantis, but Mrs Newsom, Jennifer Siebel Newsom in this regard. If the reports are true, if you remember the end of that debate, Newsom and DeSantis were willing to go another half an hour if Sean had it.

He wanted to and had it, he was all up for it. They went to commercial and came back and he said, well, we got scheduling conflicts, we can't do it. And the backstory is apparently Mrs Newsom said, no, enough of this. She'd had enough of the debate after 90 minutes.

Doesn't mean necessarily she thought her guy was losing, but I'm guessing maybe Lee and Jonathan, she was thinking that it was kind of a bad look for him and that it really was just kind of ugliness back and forth between the two. So a shout out to her on that.

I think one thing about the debate that maybe got under her skin, by the way, you mentioned her parents who moved to, I think, Naples, Florida. Remember, DeSantis threw that at Newsom's face. And about four days later, Newsom's in laws, actually, his father actually spoke up and said, I didn't talk to DeSantis.

Interesting it took them four days to come around on that. But Lee, timing is everything in politics as in show business. And one break the California governor got was that it wasn't until a week after that debate that the state's legislative analyst office came out with its annual fiscal outlook.

It's something the LAO office does in December. And Lee, this was a piece of shock news. Whereas California in 2022, Lee had a $97.5 billion surplus, guess what? The state of California now has a $68 billion deficit. And Lee, this could have been deadly in that. Debate because I've looked up Florida's numbers.

Florida's running a budget surplus right now, and DeSantis wants to do a tax rebate to his citizens. With tax rebate is two words you'd never hear in Sacramento, by the way. So leave your thoughts on what's going on with this budget. Now we can have nearly a, what?

$170 billion whipsaw from surplus to deficit.

>> Lee: Yeah, it wasn't that long ago that Newsom was bragging about the state surplus which came in. I mean, it was only about a year and a half ago that we were looking at a large state surplus. And, Bill, every time the stock market turns down or every time interest rates rise which affect home sales, California's budget goes haywire.

And that's because our budget is so heavily skewed towards the highest earners paying an awful lot of taxes. I believe the top 1% pay about 25% of personal income tax revenue. I don't think there's another state that comes really close to that. And an awful lot of that revenue coming from those high earners is coming from capital gains.

So people selling stocks, businesses, people selling homes. So in the last year, the stock market has, it's recovered now, but for much of the last year, as inflation was going up, stock market was declining, interest rates went up, home sales went down. So this is a very predictable tsunami for California.

During the good times, revenue floods in. And during bad times, revenue dries up to a desert. And this has been the case for decades. At Hoover, we have tried whatever we could to convince state policymakers to reform taxes so we don't have this enormous whipsaw. But it's fallen on deaf ears, particularly with Governor Newsom and super majorities in the upper and lower state houses.

So this is a huge problem for the state. And interestingly enough, Bill, I believe the SF Chronicle. So Gavin Newsom's hometown, where he was mayor 20 years ago, came out with a left side editorial saying that Newsom owns this $68 billion deficit and he very much does so.

He wants to make very expensive promises to a lot of progressive constituents. And now he's made a lot of promises that he simply can't keep.

>> Bill: Yeah, well put, by the way, in terms of Hoover people trying to get a better tax system in California, our colleague Michael Boskin, the esteemed economist, former head of the council, economic advisors in the Bush 41 White House, he has been talking to governors going back to the 1970s and Jerry Brown about this.

He and John Kogan served on the Parsky commission, which we looked into this as well. So we've been finding a good fight for a long time. But Lee, getting back to that Lao report, there were two really startling numbers in there that I want to get your thoughts on, because I think they speak loudly what's going on in California right now.

One is home sales. It's found that home sales are down by about half over the past year. And Lee, it found that the monthly mortgage payment for a typical home in California has gone from $3,500 to $5,400. So good luck getting by on that. But the other number that startled Lee was here we are in the land of startups and futuristic ventures, and Lee and the Lao did some number crunching on a number of California companies went public, 22 and 23.

They found that that number is down by about 80% from 2021. And how does it relate to the budget? Well, IPOs and the capital gain revenue that comes from IPOs, that's been it from heaven for budget. So here you have a state in which it's harder now for people, thanks to higher interest rates, to have a mortgage in California.

But then secondly, Lee, in this, in this California, Gavin Newsom sells as cutting edge economic. No, it's just the opposite. Number of California companies going public is down remarkably over the past couple of years.

>> Lee: Yeah, Bill, you and I have been writing California in mind now for over five years, and we've often mused about a lot of trends in California are simply unsustainable.

Ranging from budget issues to housing costs and the general cost of living. And we've often tried to try to kind of look into Crystal Paul and guess, well, when is this really going to bite? I think we're seeing that now. Businesses are leaving. I did a working paper last year that documented twice as many businesses are leaving California as ever before.

So there's one big piece of the tax base that we're losing. And, Bill, when you mentioned housing and that the average monthly home payment is up to $5,400, that requires a qualifying household income of well over $200,000 to be able to get that mortgage. And not just get that mortgage, that same hypothetical household needs to have about $175,000 in net worth minimum to be able to put forward for a 20% down payment.

So California just has abjectly become unaffordable, particularly for young households, those under 40, which is prime home buying age territory for households during the process of growing families and looking for a home. When you talk about, hey, I've got to have a household income over $200,000. There's just not a lot of people in the country that satisfy that criterion.

And yet we have California policymakers, including Newsom, saying, everything's great here. Everything's sunny. This is California. It's the fifth biggest economy in the world, blah, blah, blah. Well, tell that to people who are struggling to buy a house, who are struggling to pay rent, who are struggling with just the general cost of living.

Bill, just to touch base back with that debate he had with DeSantis. Newsom was in another universe again when he talked about taxes. And he claimed that, well, Floridians pay higher taxes than Californians. Florida is ranked by the Tax Foundation, which is a nonpartisan, highly regarded research institution in DC.

There are a bunch of PhD economists and accountants who study fiscal policies at the national and state level. They rank Florida as having the fifth lowest taxes in the country, including the fact that they have no state income tax. California is ranked 48th in taxes. And yet Newsom is claiming that Floridians are taxed more heavily than Californians.

Again, it's just simply not true. So, Bill, I think we may be hitting that part where California is really going to be struggling. Is the rainy day fund, is that around 25 billion? The reason I ask is because the whole idea behind the rainy day fund, which I think came from Jerry Brown 2.0, was to be a buffer in these whipsaw revenue spending cycles.

And that 24 billion sounds like a lot is simply not going to go very far in terms of what we're looking at right now in California.

>> Bill: No, you can't use it all up in one fell swoop either. That defeats the whole purpose of it. So one of the challenges here is, It's not just policy prescription but also I think in terms of attitudinal adjustments are needed, here I'm gonna point you to two people.

One is a fellow named Dean Preston, who is a San Francisco supervisor. He was asked recently about San Francisco's problems with homelessness and opioids on the streets and so forth, and here's what he said, let me read you his quote. He said, quote the biggest driver of why folks are on the street is because they lost their jobs income, or evicted from their homes usually for not being able to pay the rent.

So you have major landlords literally causing folks to lose their homes and real estate speculation making it impossible for folks to find an affordable place to live. So, here you have basically, lawmakers have to go saying that essentially capitalists and Robert Barons are to blame for the city's social problems.

But the other culprit here is Gavin Newsom, getting back to our favorite Pinata, the governor. Here he is right now, Lee I could tell you have you worked for a governor? Early December is not fun when you have a down economy and a deficit. You spend much more time than you would like sitting behind closed doors with the Department of Finance counting beans, trying to figure out.

Where to make cuts when you have to unveil your budget proposal next year. So where was Gavin Newsom last week? He went to New York to appear on NBC's Late Night with Seth Meyers, which I just think is a rather curious use of his time, considering it was eleven minute interviews.

So he had to go back and forth across the country and, yeah he did talk about some California issues, if you will, and one of which I wanna get into, which is high speed rail. But the biggest news coming out of that was what he had to say about Ron DeSantis.

So here he is yet again kind of, playing in Asheville politics when he has got a real cleanup on aisle three when it comes to state issues. So, I just think Lee and Jonathan, lawmakers in California are just gonna have to have an honest. Come to Jesus themselves and stop paying attention to what's going on in the other 49 states and focus on this one big state.

 

>> Lee: And I hope, Bill, I hope they're looking at those poll numbers because 43% approval for Newsom. And if we look at that 43% approval a little more closely, those who strongly approve for Newsom, I believe it was around 17%. The remainder of that 43 was, lukewarm, tepid support for him, in what's arguably the bluest state in the country.

People are, I think people are fed up with the focus of state policymakers. Again, it's really Gavin who keeps talking about Texas and Florida and the red states and all the sins that they commit and, I'm sad, I'm sorry to say that there's an awful lot of sins here in California that aren't being addressed.

 

>> Bill: Final thought before you segue, Jonathan Lee, and there will be early tests this next year. It'll be march of the primary and the vote on proposition one which is the, so called treatment not tense initiative which is, wants to spend billions on mental health needs in California.

I think much the failed education bond that went down a couple years ago, you're gonna see the governor front and center are showcasing this initiative. And if his poll numbers aren't better, if he doesn't show a little more interest in state work, I'm not sure he's the ideal ambassador to this, but we will see.

But, Jonathan I think I've hijacked this conversation back to you.

>> Jonathan: Bill, in your column this week for California on your mind, you contend that the quintessential moment for what ails the state is the APEC summit in San Francisco that took place in November. The city cleaned up its homelessness and swept his streets furiously before, its international visitors arise, and this raises two questions.

Why did it take an international conference for the city to get serious about urban cleanup? And also, will San Francisco revert to its dingier version in the near future?

>> Bill: I think the answer to the second part of it will revert to its dingier former self, you're already seeing that.

You can already, I've already seen on the Internet before and after memes of streets that were pristine in November cleaned up for the apex summit. Now homeless encampments returned to them so, yeah the city is going back to its former ways I'm afraid. But the reason why this was done was very simple, this was the first major international conference of its sort to come to San Francisco since, gosh the UN conference back in 1945.

So both city leaders but the state, the governor was involved in this too, they realized that holy smokes, San Francisco is gonna to be really under scrutiny. And if we just don't take away the obvious eyesores then, it's gonna be hugely embarrassing. But I would contend that it created kind of an even bigger embarrassment by just showing all this effort frantically thrown out that the New York Times described as, quote.

Teenagers frantically cleaning up after a house party with their parents on the way home, That kind of summed it up, so what did you see? All this massive cleanup on the streets, and you saw homeless encampments removed and, guess what? We don't like walls on the southern border, but we put up a big elaborate chain fence around San Francisco to keep the undesirables at bay.

But the problem is just kind of the overt phoniness of it, you are cleaning up San Francisco, so the international swells can show up, and then once they're gone, you just let it atrophy again. Lee this is just kind of a sad statement about San Francisco and, my column, I pointed out one thing Lee which is, what's Los Angeles gonna do in the next four years?

Because the Olympics are coming to LA in 2028, and that gives the city Lee, four years to figure out what to do with homelessness, what to do with crime, right now in LA it's interesting. Violent crime is down, but the penny, any crime of just, getting ripped off and your car is getting in, boosted and so forth, San Francisco that's up.

So is Los Angeles going to spend four years Lee, essentially cleaning up its Act? In the summer and spring and summer of 2028, are we going to see a repeat of San Francisco? And just the powers that be in Los Angeles running around like chickens with their heads caught off, cleaning everything up magically before the Olympians arrive?

 

>> Lee: And, Bill, LA is facing a much more difficult task than San Francisco is for many reasons. One is that the Olympics is what? All told probably three weeks, whereas APEC was what, three days? So almost a factor of ten difference in the amount of time they need to manage having a functional city and having a city that looks good on television.

LA is also much more spread out than San Francisco. SF cleaned up the very pockets, the tenderloin, south of market areas where just down by the UN plaza where the homeless and drug issues are the worst. There's a lot of parts of the city that are fine, LA is much more spread out.

It ranges from downtown all the way up to Santa Monica and Hollywood, Beverly Hills, Brentwood, Venice Beach. So it's a much wider scope of problem they have to deal with, there's an awful lot more homeless people in LA than there are in San Francisco. So, and I, we haven't seen anything coming down the pipe recently that says they're gonna be able to deal with this rationally, which means starting now.

So, yeah Bill I suspect this is gonna be a, this is gonna come down to a hail Mary as we approach, the time that athletes are gonna be arriving. And Bill, when you mentioned Dean Preston a couple of minutes ago, who's one of the SF boards of board of supervisors and who belongs to the Social Democratic Party.

So essentially the US Socialist Party, and he complains that the capitalism is the reason why San Francisco has a drug problem and a homeless problem. I wish he understood that since 1950, the population of San Francisco has barely budged, meaning that the housing stock has barely budged. Meanwhile, California has grown by about a factor of four in that period.

The problem lies with San Francisco politics that have failed to build housing. For the last 70 plus years. In addition to Gavin Newsom, there's another person who's living in his own universe, and the constituents of San Francisco are the ones who are really paying the price for him being in office.

 

>> Bill: Lee, one thing about the Summer Olympics we know is that you will not be taking high speed rail from San Francisco to Los Angeles to take in the games. And that was another aspect of Governor Newsom's appearance on Seth Meyers that really kinda stuck in my craw and that Meyers actually pushed back against him a little bit on the state of California.

He said, particularly, what's the deal with high speed rail? And Newsom said, well, the problem here is the permitting process. It doesn't allow us to move along as much as like. And then he quickly said, well, we're gonna have 119 miles of track up and running by 2026, I think was the date.

He said, lee, but that's just part of the so called train to nowhere through the Central Valley, which is already moving along. Then he talked about maybe having ridership by 2030 or 32. He just glossed over the fact that even with a few billion dollars coming in last week from the Biden administration, the funding for that train is nowhere to be found.

And the whole ideal of building this thing, which was sold to the public back in 2010, I think it was. Lee, what, like a $33 billion plan or 40 billion? The numbers dance surround, and that was what they passed in 2010, was a down payment on it. No, it's now past $100 billion and keeps climbing.

Lee, you've written about high speed rail. Is there, is there really a light at the end of the tunnel? If you will excuse the deliberate play on words here, when it comes to high speed rail or is just a governor after Newsom, or the governor after a Newsom successor gonna still be dealing with this mess?

 

>> Lee: Yeah, they'll still be dealing with it. The project is indefensible, in my opinion, and I think almost everybody who's looked at it, you don't have to look at it very carefully. I'm sure Seth Meyers didn't look at it very carefully, but it's obvious it's indefensible. And Newsom, again, was living in his own universe when he claimed that, well, the permitting process is really the problem.

If that was the issue, they could do an end run around that. That's not the issue. The issue is that laws have been broken. It's hard to really conclude anything other than there's been corruption on this project. It was supposed to be completed. La to San Francisco was supposed to be completed three years ago.

It's probably never gonna be completed. The fantasyland that exists in high speed rail, in the aisles of high speed rail, are planning to have it operating by 2040. That's never going to happen because there's no path to funding. And when California taxpayers voted 53 to 47 to approve a $10 billion bond, so what that means is we're going to be paying taxes on that bond point in the future.

The law required that there be a path for funding, that you could not go forward with this project without a path for funding, and there's never been a path for funding. Biden gave California $3 billion. That's less than 10% of Bakersfield and Merced, a route that literally will have no demand.

That's a route that you can drive in about two and a half hours. Bill, I did a calculation of, of trying to figure out, okay, well, if I'm in Bakersfield and I take a high speed train to Merced, let's figure out how long that would cost, including the time I drive to the station and park my car and go wait in line to get in the, etc., etc., etc.

You save about half an hour. And not only do you save about half an hour, the schedule better be consistent with your time preferences. If you have to take a 09:00 a.m. train to, and it gets you there at eleven, and you don't need to be there until 04:00 p.m.

or you needed to be there at 08:00 a.m. forget it. You're just gonna drive. And bill, interestingly, I was asked to testify to the House of Representatives Transportation committee in DC, which I did a couple of weeks ago. So I put together some testimony and some of the stuff we're talking about right now, I include in that testimony and the chair of the committee.

After my testimony, people in Congress then asked questions of me, and there were three other witnesses who were testifying. And he asked me, has anyone gone to jail for this? It really seems like somebody should have gone to jail. I mean, laws have been broken. The people of California have been lied to.

Has anyone gone to jail? And I just smiled and he said, I'm sorry to put you on the spot. Somebody should have gone to jail. And it's hard to come away with a conclusion, anything other than that. And Bill, I'll just close with this. You'll never guess who I spoke with just a few days after that testimony.

I won't ask you to guess cuz you're never gonna guess. The CEO of the french high speed raid company, long story short, SCNF, is France high speed rail. They came over around 2010 and hoped to be part of the process of building high speed rail in California. They have enormous experience building high speed rail.

France has it all over the place. Japan has it all over the place. We don't, we don't know what we're doing. And he came away with that. And they just left. They met with the people on high speed rail at that time around 2011, 2012. And Bill, there have been, I believe, multiple changes in the board of high speed rail, including the CEO.

Since that time, it's been a revolving door. Somebody gets hired, somebody gets fired. There's a new CEO, they get fired. Deja vu all over again. And so we're talking on the phone, very nice gentleman. And he says, we left because we didn't want to be part of something that was going to be a failure.

It was obvious that the people who were trying to plan this had no idea what they were doing. And California had mistakenly turned over the management of this to a bunch of consultants who have no experience building the kind of rail that was envisioned. So, Bill, there you go.

Back in 2011, 2012, people who knew what they were doing, new California, didn't know what they were doing, and we still don't know what we're doing here and now in 2023. So it's totally indefensible. My last comment to the House of Representatives was we're spending $35 billion to build this train to nowhere, as you mentioned, for Bakersfield and Merced.

And I said, the people of California, Central Valley, yes, they love that money coming in. But I guarantee you, if you could offer them a $35 billion check or high speed rail, I guarantee you what they would pick, and I guarantee you they would not spend one dime of that $35 billion on a railroad between Bakersfield and Merced.

 

>> Bill: They would spend it, Lee, on widening highway 99, which is so-called highway of death in the Central Valley. It's two lanes going each way, and it's just crazy to drive between individuals and truckers and so forth. But, Lee, what this all leads to is the California failing what I call the eyeball test.

Let's talk about high speed rail. For example. Here is supposed to be a vibrant train system getting closer to its construction. Instead, you go through parts of the Central Valley. Our colleague, Victor Davis Hanson, who lives on a farm just outside of Fresno, has written about this. He talked about instead of seeing a rail, you just see these giant monoliths.

And I think he had a great line for it. One time he said, I live 10 miles from Stonehenge. So that kind of fails the eyeball test with high speed rail. The city of San Francisco, which we talk about a lot in this podcast, It fails the eyeball test and again it gets back to the hypocrisy of APEC, will clean it up now we'll let it go back to its awful self as well.

La struggles, I'm always fascinated with Arnold Schwarzenegger, Lee and Jonathan and I have a dirty vice. I like to read the Daily Mail every morning to see how celebrities are selling themselves in the Daily Mail. Loves them some Arnold Schwarzenegger, and Lee and Jonathan, they love to run.

One particular photo of Arnold that's riding his large bicycle through Venice beach on the way to the gym. And more times than not, when Arnold is riding his bike, he has the ocean behind him. And what you see between Arnold and the ocean is homeless encampments and piles of garbage, and this is the eyeball test for California.

And I just, you saw this in the debate with DeSantis where at the end of the debate, Lee and Jonathan, what did DeSantis do? He reached into his pocket and he pulled out a download of the poop map of San Francisco, and Newsom's people had a fit afterwards.

They said the Santas violated the rules of the debate by bringing in a prop, actually he discovered a very clever loophole in the debate. The loophole said that you can't bring any electronic devices and so he just printed it out instead using little fashion technology. But you had here the eyeball test at work and really kind of put Newsom in the position of having to defend the indefensible.

Which is a map of the city and council of San Francisco, little poop emojis on it showing, where you're gonna step into it. If you go walking around San Francisco, and if you watch that debate, you'll notice that Newsom did not really push back against the poop Mackie.

Poop Mackie tried to change the subject so, just matter after matter after matter, the eyeball test and let's throw in California's fiscal house affairs as well. Going from surplus to deficit, the state just kind of fails what voters see with their eyes. And I think Lee, that gets back to Jonathan, gets back to your literal question about, what's going on here with the governor and the state?

I think they can hear all kinds of facts and figures about California's GDP and it's ranking in the world economy, yada, yada, yada, but it just doesn't match with what your eyes see I know. What do you think, Lee? Am I onto something here or my, no.

>> Lee: Order absolutely no, it doesn't pass the eyeball test doesn't come close to that.

And of course, the New York Post, for example the Washington Binc and conservative media outlets every day. They'll have picture of San Francisco homeless or someone passed out from fentanyl on San Francisco street. Or Venice beach in California, where there's just a ton of homeless, lots of drug trade, lots of crime.

And, the eyeball test is not getting passed, and it's not getting passed because of lack of spending. We spend profitability, we were talking a moment ago about a $68 billion deficit, which bill, I sent out a tweet about a week ago when the Laos estimate came out. I believe that $68 billion deficit is higher than, I think something like 43 or 44 state budgets, believe it or not.

And you look at California's budget and under Newsom, it's increased. It's increased by over 50%, and that's just not sustainable, that's not fiscally responsible. You can't increase the budget by 50% over four years, that's just ridiculous. So we now have a budget of well over $300 billion, which works out to over $23,000 per household.

And when you put your eyeball test up against that level of spending, it's just incomprehensible. I mean, anyone would say, well something's desperately wrong here, these are just the fundamental basic issues state and local government should be taking care of. Fundliness, public safety, making sure that our cities function just moderately successfully.

I'm not asking for the moon here, but we shouldn't have to watch why we step on city sidewalks. And we shouldn't have to worry about kids having, being exposed to the amount of drugs that you see on streets in San Francisco and Venice beach. And yet we spend, on a per capita basis, I believe, more than any state other than New York, I'll have to go check that.

We might exceed New York now, but it's just a non starter when you look at how much is spent and what taxpayers are getting for their dollars. And I'd love to hear from someone who could point to any state agency and say, yeah. Here's a state agency where things really have gotten better in the last four years because of how much more we're spending.

I would throw that out as a challenge, I'd love, as a California, I'd love to see some, some level of success. I don't think it's there, but if anybody can point me in that direction, I'd love to see it.

>> Bill: Jonathan, who else may be looking at the eyeball test for California that is Shohei Ohtani, after he signed with the Los Angeles Dodgers.

Buster Posey, who was a retired San Francisco Giants, he's probably head for the hall of Fame. He was an all star catcher for the Giants, he was asked why the Giants failed to get Ohtani. In the past couple years they've made big pitches to other, high dollar free agents and struck out each time.

And post he said, well the problem is the wretched state, state of the city that, baseball free agents come and they look around San Francisco and their wives. And their entourage look around, and they don't like what they see so, I don't know. Maybe there's a problem here beyond just finances and infrastructure and crime and so forth that goes in a great state of baseball.

 

>> Jonathan: He seems he's okay with Los Angeles and taking off the Red Angels cap in Orange county driving up, 30 miles up the freeway to Don Dodger Blue. But it's interesting, his deal is $700 million deal record contract, the kicker is that he'll be deferring the bulk of it until the end of the contract.

And he might be able to avoid income taxes in California by moving to Florida, Japan, or somewhere else when he moves on, from the Dodgers before receiving that deferred income. Lee can you, maybe describe what the possible tax implications of Ohani's record deal is?

>> Lee: Yeah Jonathan so California has, I believe the highest state income tax rate for high earners in the country.

It has been 13.3%, and Bill, I believe vests rising to what, 14.4% in 2024?

>> Bill: January 1, happy new year, 14.4%.

>> Lee: Happy new year, so 14.4% state income tax, and you get to that. For someone like Ohtani, an awful lot of your income, in principle, would be taxed at that 14.4% rate.

So, you look at, he's, what is it averages out to be about 70 million a year, was it ten years, 77?

>> Bill: 10 years, $70 million, and what he has asked for the judges to do is give him $2 million each year that he is an active player with the Dodgers.

And then once he, the contract expires, he will get the bulk of it over ten years, so $68 million for each of the ten years after he's retired and no interest on that. By the way, while he's playing so, the Dodgers make out on that but, the question is gonna be Lee, what happens when he starts getting that money?

And what Jonathan alluded to, let's say he gets out of dodge, let's say he goes back to Japan. Let's say he goes to Florida, which is what professional athletes historically have done lately to avoid state taxes. He's in for a showdown with the California franchise tax board Lee over, his money because, Tony's lawyers are gonna to claim.

And the IRS may back them up, that you can't get taxed by a state on money that came to you while you're not in the state. But what the franchise tax board will say, well wait a second Buddy, you were paid this money based upon services you did in California so, bring on the tax lawyers.

 

>> Lee: Bring on the tax lawyers, I'm guessing that Otani hired some exceptionally. Gifted enthalpy tax lawyers in terms of putting that contract together, the bill, the dollars involved here are unimaginable. If you think about Ohtani in California versus Ohtani in Texas or Florida, you're looking at potentially $70 to $80 million.

That could be. That could be coming into Sacramento, possibly even more than that. So, yes, the principle would seem to be, this is a tax dodge. You were getting paid even though you got paid $2 million a year, you were really getting paid a lot more than that.

You just have it coming to you down the road so you can avoid taxes. So, yeah, I think we're gonna have a lot of tax accountants and tax attorneys benefiting from this when the time comes. And Bill, I wonder that if he goes back to Japan, how successful.

I have no idea how successful California would be in trying to get dollars from him were he living in another country.

>> Bill: That's well put. Japan, by the way, I think Lee, Jonathan has a 45% tax rate as well. So if he moved to Japan, he would be looking at more in terms of federal taxes, if you will.

But the media coverage is really interesting, Lee and Jonathan, in that the first splashy headline is, my goodness, a $700 million contract. I think Lionel Messi, the great stalker player, had the previous record at 673. So immediately eyeballs popped at $700 million and then people started saying, well, how can the Dodgers possibly afford it?

And then the news came out that it's only $2 million a year while he plays. And then suddenly the reporting was, what a great teammate, because now he's leaving all that money free so the dodgers can hire other players. And that took about 48 hours for me to say, hey, wait a second.

What a clever way to get around taxes. So again if that's what his people are after two things I'd like to say. Number one is good job on that and secondly, speaking for everybody, this podcast, I think we'd all like to this problem.

>> Lee: He's got some good PR people in his corner.

 

>> Jonathan: He'll certainly be fine if he stays in California. But the state is a costly place to live for most Californians. According to a recent survey, 40% of Californians are contemplating a move from the state, and nearly half said that they struggle to save money. It's still a great state, gentlemen, if you can afford it, don't you think?

 

>> Bill: It is but that's the question if you can afford it. And just maybe I should come down to LA and take Lee to a Dodgers game this summer. We could do the economics and how much it cost to buy a ticket and get a Dodger dog and all that.

And by the way, there's also great infrastructure related to the Dodgers. Lee and Jonathan, they're trying to build a gondola to take passengers, I think from the train station over to Dodgers Stadium. It sounds like a great idea, but I think it started out as like $150 million project and now it's at $500 million in climbing.

So, Lee, we just can't build anything on the cheap in California.

>> Lee: No, we can't build anything on the cheap in California. It depends a little bit what you mean by cheap. We can certainly build low quality, it'll cost an awful lot if we do. I really hope California voters, California taxpayers, they start asking some questions about where the money is going because whether it's high speed rail, where again, it's $35 billion.

$35 billion to go from Bakersfield to Mercedes is pick your favorite public investment project within California. There's just an awful lot, in principle, we could be able to do with $35 billion. When you look at the state where people are always in Sacramento, people complain about why is there more affordable housing?

Well, the reason is because we spend as much as a million dollars per apartment unit to build affordable housing, that's not affordable. That's Saturday Night live shtick. How can it cost $1 million to build a one-unit apartment? That's just silly but that's the facts. That's how much we are spending right now in San Francisco, in Los Angeles, we're spending close to $900,000 to build.

Again, I'm talking about a one bedroom apartment that's roughly 400 square feet. This cost, I hate to say it, but the construction cost far exceeds what Prince Harry and Meghan Markle spent on their home in Montecito, California. Which is one of the most expensive places to live in the country.

It just doesn't add up. And there needs to be pressure on people in Sacramento to run audits and to be forthcoming and transdivid about why we can't build and why it costs so much when we can build. Another point I made to the house when I testified in DC is that California US construction costs for high speed rail are two to three times as high as in Europe.

We've never thought we weren't more efficient than Europe, France, Spain, Germany, but we are. We're about a third of the efficiency as Europe in terms of building, building railroads. And I suggested to the house, don't subsidize any more of this stuff until we figure out why this is the case.

And Transportation Secretary Buttigieg was pushed on this three years ago about why it costs so much to build in the United States. And he hummed it on. He said, well, I don't know. I don't know why it costs so much to build here, but we just have to build, and maybe we'll study this issue further.

Well, three years down the road, we still don't know why it costs so much to build in the United States. I think a lot of people have ideas, and yet again, we're kind of throwing good money after bad when it comes to building stuff in California, particularly high speed rail.

But it's really time for voters and taxpayers to start asking the people they elect. You need to tell me why it's taken so long to get stuff done and why it costs so much. And until you give me an answer, I'm gonna be withholding my vote.

>> Bill: Well, this is where the 2024 election in California, in theory, might be interesting.

Yes, most legislative races in California have done deals. They're drawn in such a way that benefits one party or the other. There just aren't that many swing districts but I am curiously, and Jonathan, to see you have an electorate that clearly thinks California is on the wrong track.

You have a governor underwater. President Biden's underwater in California, too, by the way, so voters are not in a good mood. So I'd be curious to see if there's such a thing as a pound of flesh extracted by lawmakers in California in 2020 if they once again managed to slip the noose, if you will.

But that's part of the frustration here, that you see things being run wrongly poorly in California, but there is really kind of no retribution for it, if you will. I think, by the way, one of the great unanswered what ifs in California politics would have been if our colleague Lanny Chen had been elected state comptroller in 2022.

Because the state comptroller is essentially the COO of state government, that controller has the authority to audit government. And I've always joked about if I had the job, I would have basically something like wheel of fortune in my office, and I would spin it every day. And whatever letter that landed on, that corresponding agency or bureau would get audited.

And boy, it would be fair to see, Lee and Jonathan, to see what you produce if you just audited California's government top to bottom.

>> Lee: Absolutely right. It's hard as, it's like pushing a brick wall to get anything audited here to give you just one example, state homeless spending.

We've spent somewhere around $24 billion on homeless spending across a wide variety of areas and projects in about the last four years, 24 billion. Homelessness has increased in that time from about 150,000 to 180,000. And that 180,000 counts probably an undercount because most homeless in California do not live in shelters.

And there's a point in time count and there's, it's not obvious they're finding everybody. So it's very hard to overcount. It's very easy to undercount. Again, you say $24 billion, the problem's gotten worse. Something's just not adding up here. Let's run an audit. We finally, the state lawmakers finally approved an audit.

This wasn't until just a few months ago, but an audit should have been done long, long time ago because homelessness policies in California have been failing for an awful long time. And Bill, you're absolutely right. I think Chen would have been a terrific controller, and that could have been a nice gateway to having more functional state government, but the political powers just did not allow that to happen.

 

>> Jonathan: As always, gentlemen, this has been an hour of interesting and timely analysis. Thank you for your time. Happy holidays and happy new year.

>> Lee: Happy holidays, fellows.

>> Bill: Safe travels if you guys are headed anywhere and I will see you guys in 2024.

>> Jonathan: You've been listening to matters of policy and politics, the Hoover Institution podcast devoted to governance and balance of power here in America and around the free world.

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