Blame Prop 13!
Earlier today, reader James wrote in to berate me for ignoring the role Proposition 13 has played in California's fiscal woes. He's right! But I see no reason to detail the situation when Harold Meyerson has already done such a good job. Go read him. I will, however, quote Harold's conclusion:
Because California is so much larger than any other state, and its unemployment rate among the nation's highest, the collapse of its capacity to spend will counteract some of the effect of the federal stimulus and retard the nation's recovery -- much as its aerospace slump retarded the recovery of the mid-1990s. The Obama administration ignores California's plight at its own -- and the nation's -- peril. The nation's banks are stuck with so much bad paper from California mortgages gone awry that a huge contraction in state spending would make their assets even more toxic. In the short term, the only way to avoid a further downturn may be a federal loan to the state.
A more permanent, homegrown solution to California's woes (and it may take a state constitutional convention to get it) would require the state to eliminate the two-thirds threshold for enacting taxes, to repeal Proposition 13's freeze on the value of commercial properties (some of which are still assessed at their 1978 levels) and to end the process of ballot-box budgeting through the initiative process, which is now more dominated by monied interests than the legislature ever was.
That first bit is important. California accounts for 13 percent of the nation's GDP and 12 percent of its population. If the state collapses, the nation won't do much better. So expect the government to step in with some sort of bridge loan rather than letting Prop 13's long-run effects shred whatever good the stimulus was meant to do. The question is whether that loan can be conditional: Can the federal government make its loan contingent on procedural reforms that make California less likely to need this sort of help down the road? And how can those procedural reform pass a Republican minority that thinks an economic collapse might benefit them in the next election?
June 2, 2009; 1:45 PM ET
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