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Crisis in California

PH2009060403341.jpgLooks like the Obama administration has rebuffed California's initial entreaties for a federal aid. According to David Cho, Brady Dennis and Karl Vick, the White House's economics team have held a series of meetings and decided that California can hold out a bit longer. But it's not actually clear whether they think California can hold out in the long run. Rather, if California is going to get government aid, it's going to have to really hurt.

According to the report, the administration hasn't ruled out a rescue of the Golden State. "But in that case, federal help would carry conditions to protect taxpayers and make similar requests for aid unattractive to other states." The fear is that a quick intervention would persuade states not to concern themselves with spending in good times because the federal government will step in with big bags of money in bad times. Moral hazard, the economists call it.

It's possible, however, that California is so epically damaged that it will need cash from Washington simply to survive. And the federal government isn't going to let the largest state in the union actually fail. But if federal money proves necessary, Washington is going to make sure that it's such an agonizing experience that no other state would ever voluntarily follow in California's footsteps.

That's understandable as a matter of of setting economic incentives. But it's worth being clear about what it means. Gov. Arnold Schwarzenegger is looking into eliminating welfare for 1.3 million Californian families. He's looking into dismantling the Cal Grant program, which helps low-income students afford college. He's looking into scrapping the Cal Works program, which gives medical, dental, and vision care to 90,000 Californian children. These are not the people who made the decisions that got California into this mess, but they're the folks who will endure the most pain as California tries to get itself out. In reality, the federal government means to teach California's legislature an important fiscal lesson by making sure that they have to watch these people suffer, and know that it's partly their fault. That will be, I'm sure, a sobering experience. But is it worth it?

By Ezra Klein  |  June 16, 2009; 10:05 AM ET
Categories:  California  
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How about federal grants to help people move out of California?

Posted by: Drew_Miller_Hates_IDs_That_Dont_Allow_Spaces | June 16, 2009 10:23 AM | Report abuse

california has such a diverse population, which makes it such a culturally vibrant and wonderful place to live.
it is filled with so many hard-working, bright and energetic people.
we live in perpetual sunlight, and beauty surrounds us here.
we have such an amazing network of universities, community colleges...huge agricultural production, biotechnology and research... diverse places of natural is a state that feels almost limitless in what it offers and can accomplish.
what a sorrow that this happening.

Posted by: jkaren | June 16, 2009 10:24 AM | Report abuse

California's per capita state government spending has not increased in real terms in a decade. The problem is that taxes ratchet down due freak Republican tax laws.

Didn't California get about $50 billion (!) in debt when freak Republican unfettered market theory one-jumped the wholesale price of electric power from $30/megawatt to $230/megawatt? Wasn't it possible to deny payment under some federal commission but the freak Republicans running the commission denied California's just claim of deliberate market manipulation (can no longer remember the specifics)?

Why cannot the Democratic congress force a reopening of that claim: potentially freeing up tens of billions to pay off a loan to keep the state afloat through the recession (and hopefully until a re-write of their tax setup)?

Posted by: DenisDrew | June 16, 2009 10:25 AM | Report abuse

Quick correction - CalWorks is the CA name for the TANF welfare program, which provides cash grants and welfare-to-work services. The Healthy Families health coverage program is also on the potential chopping block - that's the one that provides medical coverage to kids in a certain income range. While CalWorks provides a Medicaid linkage, it does not directly provide health coverage, and the Medicaid for kids on CalWorks is not a proposed cut.

The overall point of CA's major problems and their extreme negative effect on the poor still stands.

Posted by: abbyjean | June 16, 2009 10:34 AM | Report abuse

Ultimately, the people of California are responsible for their governance at the local level. California has some of the wealthiest citizens in the nation. If they cannot govern themselves despite the country's best geography, the world's best high tech industry, and the world's best entertainment industry, clearly California should change their ways. If things really are this dire, California should eliminate its referendum system, eliminate Prop 13, eliminate any burdensome requirement that prevents taxes from being raised, sell non-essential public lands, and redistrict. Alternatively, California can break apart so that different areas of the state can live in different political realities. Either way, it is California's choice to cut off welfare. The federal government should play no role to impinge on California's sovereignty, or to force other states' citizens to subsidize California's self indulgent, broken political system.

Posted by: Dellis2 | June 16, 2009 10:44 AM | Report abuse

California is in trouble because it refuses to raise taxes. This is not an emergency that justifies a federal bailout.

Schwarzenegger sees the solution as slashing welfare. I don't see why the more left wing elements of the California legislature are willing to go along with that.

Raise taxes, or default. Pick one.

Posted by: Spike_ | June 16, 2009 11:07 AM | Report abuse

The administration needs to be concerned about moral hazard because, although by far the worst case, CA is not alone here. The point has been made that per capita spending has not moved, but tax revenues keep ratcheting down due to Prop 13. I think the Administration is going to push CA to the limit, as painful as that may be to the wrong people of that state, and then say, "fine, you want help, you will get help, but first you repeal Prop 13 so you do not keep coming back to this well. Tax your own people, not the rest of the country"

Posted by: scott1959 | June 16, 2009 11:09 AM | Report abuse

Are you sure California kept spending inline with inflation + population growth?

Whatever. Even if they did keep it inline it just means spending was too high all along. They have both income and sales tax rates higher than most states with only one or the other. Even with prop 13 property recently went through a boom and I'd be surprised if receipts dropped in real terms.

Posted by: MrDo64 | June 16, 2009 11:51 AM | Report abuse

The San Jose Mercury News has an excellent series on California's budget problems.

Posted by: jamesfelliott | June 16, 2009 12:02 PM | Report abuse

While we are on the topic of setting bad precedents, Schwarzenegger has just this week asked CMS for a waiver so he can keep ARRA money meant to shore up the state healthcare safety net but slash Medicaid eligibility and provider rates at the same time. For the sake of the health of California's people, let's hope CMS, Congress and the Obama administration say no to this request.

Posted by: CarlaKakutaniMD | June 16, 2009 12:45 PM | Report abuse

I agree with @Spike_. Taxes pay for services, raise the *&!ing taxes. Of course in the case of CA this requires more fundamental reform because of propositions/referenda. It's a vicious cycle.

I've seen the idea of breaking California apart (and of course, fantasies of the same thing in TX) but I seriously doubt it would ever happen:

"Section 3. New states may be admitted by the Congress into this union; but no new states shall be formed or erected within the jurisdiction of any other state; nor any state be formed by the junction of two or more states, or parts of states, without the consent of the legislatures of the states concerned as well as of the Congress. "

It's those last six words that will stymie you every time.

Posted by: ajw_93 | June 16, 2009 1:10 PM | Report abuse

Here is where I got my numbers on California state government spending not increasing in real terms:,0,1859108.column

Posted by: DenisDrew | June 16, 2009 2:02 PM | Report abuse

"In reality, the federal government means to teach California's legislature an important fiscal lesson by making sure that they have to watch these people suffer, and know that it's partly their fault. That will be, I'm sure, a sobering experience. But is it worth it?"

Well, the legislature did its job by passing a budget several months ago, only to have Ah-nold veto it. So I doubt they'll learn anything.

And we already know that the only two things the Governor ever learned are (1) always buy the tapes of your steroid abuse and (2) always play the Good Guy, even if you're not.

YMMV, but it's clear that nothing would be learned in California anyway. As a preventive measure, it's got potential for when Mitch Daniels comes calling next month.

Posted by: klhoughton | June 16, 2009 2:34 PM | Report abuse

This is exactly the conservative pipe dream, to starve the beast in slow motion. Republicans should be tripping over each other to claim credit for all the cuts they've necessitated. Grover Norquist needs to be loudly and proudly associated with the results of his pet theory in action.

Posted by: Aatos | June 16, 2009 9:11 PM | Report abuse

Well, CA needs a consitutional convention. The fed should condition any aid on CA getting a new constitution. Of course, if they get a new constitution, they may not need any help. The problem isn't the CA economy and it's not the politicians. It's the rules the politicians are working with.

Posted by: mpowell1 | June 17, 2009 7:34 AM | Report abuse

These are not the people who made the decisions that got California into this mess, but they're the folks who will endure the most pain as California tries to get itself out.

Given that much of California's budget problems are mandated via referenda that the legislature can't touch, they are, to some extent, the people who made the decisions, minus obvious exceptions like children.

Posted by: Diacritic | June 18, 2009 3:24 PM | Report abuse

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