Crisis in California
Looks 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?
June 16, 2009; 10:05 AM ET
Save & Share: Previous: Your World in Charts: Current Account Balances Galore Edition
Next: Should We Worry About The Chinese?
Posted by: Drew_Miller_Hates_IDs_That_Dont_Allow_Spaces | June 16, 2009 10:23 AM | Report abuse
Posted by: jkaren | June 16, 2009 10:24 AM | Report abuse
Posted by: DenisDrew | June 16, 2009 10:25 AM | Report abuse
Posted by: abbyjean | June 16, 2009 10:34 AM | Report abuse
Posted by: Dellis2 | June 16, 2009 10:44 AM | Report abuse
Posted by: Spike_ | June 16, 2009 11:07 AM | Report abuse
Posted by: scott1959 | June 16, 2009 11:09 AM | Report abuse
Posted by: MrDo64 | June 16, 2009 11:51 AM | Report abuse
Posted by: jamesfelliott | June 16, 2009 12:02 PM | Report abuse
Posted by: CarlaKakutaniMD | June 16, 2009 12:45 PM | Report abuse
Posted by: ajw_93 | June 16, 2009 1:10 PM | Report abuse
Posted by: DenisDrew | June 16, 2009 2:02 PM | Report abuse
Posted by: klhoughton | June 16, 2009 2:34 PM | Report abuse
Posted by: Aatos | June 16, 2009 9:11 PM | Report abuse
Posted by: mpowell1 | June 17, 2009 7:34 AM | Report abuse
Posted by: Diacritic | June 18, 2009 3:24 PM | Report abuse
The comments to this entry are closed.