As I noted previously, a default by California would have serious repercussions for the larger national and even global economy. Extreme budget cuts in California to avoid such a default could also have serious effects on the larger economy, given California is such a big part of the U.S. economy.
Given this conundrum, the one obvious way out of the problem would be for the federal government to loan California the money it needs to balance it budget without radical program cuts. But I have previously noted that the Administration has political reasons to avoid getting further entangled in "bailouts," particularly when doing so will aid a Republican governor who is likely to have little ability to "call off" the members of his party in Congress.
Thus, it is perhaps unsurprising that the Washington Post reports that the Administration has denied California's request for federal aid. But this bears watching, as I suspect — baring a truly marvelous economic recovery — the Administration will be forced to revisit this issue again.
California is, after all, facing a $24 billion budget shortfall. It is going to be very hard for the State to close this gap without some serious effects on the broader economy. For example, the Governor has proposed ending the State's welfare program, all financial aid for college students, and its program that provides medical insurance to children of low-income parents. I'm sure my personal-bankruptcy savvy co-bloggers can anticipate what effects that might have on consumer spending, and bankruptcy rates, in California.
Yet another reason not to pack up the stimulus program just yet.
Comments
2 responses to “California and Default”
Stephen,
I think it is pretty clear that the People of the State of California have spoken. They voted down tax increases, and voted down the tools that the State would need to continue on it’s multi-decade spending binge.
It appears to me, that the People of California have finally caught a dose of economic reality. California has experienced the highs of a debt driven economy and is now experiencing the lows.
The voters in the state CLEARLY said NO. We will not finance this any more. You MUST cut spending, you MUST balance the budget and you MUST get our fiscal house in order.
How is going crying to the Obama administration getting the fiscal house in order? This is simply delaying the inevitable and paying out more money than is coming in for a longer period of time. Further saddling the State with more debt that is CANNOT afford.
Other than with massive inflation, I simply do not see how what you are proposing makes any rational sense at all. To call a loan from the federal government the obvious way out of the problem assumes that cutting is not acceptable.
Exactly why is cutting programs that the People of the State do not wish to support unacceptable? The last time that I checked, local government was responsible for local support programs. If the People of California chose not to fund the programs because they already live under an oppressive taxation regime, why should the Feds try to save the day?
While I agree that the State of California is in dire shape, and its default would have potentially enormous ripple effects on the overall economy, the problem with a bailout or stimulus to that state would open a real pandora’s box. Nearly every state (certainly my home state of Massachusetts) is suffering financially right now. If California is bailed out, what about the other states? Why should taxpayers in those states that have managed their finances prudently fund deficits in other states? The argument for the bank bailouts is that it’s part of a national financial problem, but that argument gets awfully strained if you try to extend it to bailouts of individual states.