Jun. 21--THE POLITICIANS WHO ARE FASHIONING -- or not fashioning -- a new state budget often spout economic theories as the bases for their actions.

They speculate about the origins, depth and longevity of the state's severe recession while expostulating about the economic effects of cutting spending or raising taxes. And much of it is nonsense, whether uttered in ignorance, reflecting rigid ideological dogma or rationalizing politically expedient positioning.

One of the wrangle's fundamental conflicts, for instance, is whether they should do the minimum necessary to cover the current gap between income and outgo in hopes that economic conditions will improve (Democrats are prone to that approach) or take bigger, permanent bites out of spending on an assumption that more bad times lie ahead (Gov. Arnold Schwarzenegger's position).

No one knows, of course, precisely where California's battered economy is headed but the consensus of forecasters appears to be decline or stagnation for the next year or two, with unemployment, already a record 11.5 percent, jumping by another point or two next year. A report by UCLA's Anderson School last week airs that projection -- and some other economists are more pessimistic.

Even were the economy to hit bottom in the next half-year and begin a slow rebound, the state's deficits are likely to persist, in part because the tax increases enacted last February are good for only a couple of years and many of the spending "cuts" so far are merely deferrals.

All in all, Schwarzenegger is probably correct on seeking a hefty reserve, not only because Californians haven't seen the recession's bottom but because we must show bankers we're solvent so they'll buy our short-term notes. Even the top two Democratic financial figures, Treasurer Bill Lockyer and Controller John Chiang, agree on the need for truly balancing the books.

Democrats and Republicans are equally guilty, meanwhile, of emitting self-important nonsense about the impacts of their actions on the state's recession-wracked economy. While Democrats claim that cutting "safety net" programs and/or public payrolls will worsen the recession by taking money out of circulation, Republicans claim that raising taxes will retard recovery by discouraging investment and/or consumer spending.

Both practice voodoo economics. The entire deficit on which they are working, $24.3 billion including Schwarzenegger's desired reserve, is well under 2 percent of the state's economy. The lesser cuts and taxes they are debating would merely shift relatively small amounts of money from one form of spending to another, all within the state's economy, so the macro economic impact would probably be nil, no matter what they do.

The greater threat to our economic future would be a prolonged political stalemate, followed by enactment of another dysfunctional, gimmick-laden budget, thus providing more proof of our chronic inability to govern ourselves.

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Call The Bee's Dan Walters, (916) 321-1195. Back columns, www.sacbee.com/walters.

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