Should California Get a Bailout?
As a Californian, I find this argument comforting. But as a Californian, I find the need for this argument extremely troubling.
California Really Is Too Big to Fail. Ask yourself this question: If AIG and other Wall Street firms are considered by policymakers to be too big to fail, what does that say about California?
California, which like many other state and local governments is still experiencing extreme budget problems, has an economy larger than all but about 10 countries. Even without the actions that the federal government has already taken to provide corporate bailouts, there is little likelihood that Washington, D.C., could or will allow a default in the municipal bond market to occur in the current economic and financial environment. In fact, through the stimulus bill and other actions, the federal government has already taken a number of steps to make that less likely.
That’s why the rumor about a plan being prepared in Washington to deal with the financing needs of state and local governments should be taken seriously even though it could have a significant effect on the federal budget. Especially with California’s large economy (and 55 electoral votes), there really isn’t much of a choice.
That said, a lot of companies that proved too big to fail weren't too big to change. Wall Street was given compensation caps. GM had to renegotiate its labor contracts. If Washington is going to bail out the Golden State, it should make the money contingent on structural reforms that leave the state better able to balance budgets in the future. This should be like an IMF intervention (maybe Simon Johnson has some thoughts?).
California's legislature is in a strange position: It needs a two-thirds vote to raise taxes but also has to fund ballot propositions that require a simple majority of an uninterested public. The majority party in the legislature, in other words, can neither control how much money it raises nor how much money it spends. That's not a sustainable state of affairs.
(Photo credit: AP Photo/Rich Pedroncelli)
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