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The Golden State begs

California is now begging for a bailout, though they don't want to call it that:

California's political leaders, who are facing the daunting challenge of closing an estimated $20.7 billion budget deficit this year, are looking to Washington for help. Just don't call it a bailout.

Senate President Pro Tem Darrell Steinberg, D-Sacramento, said he plans to head to the nation's capital "early and often" seeking federal assistance. Gov. Arnold Schwarzenegger already has put the federal government on notice that he wants billions he says the state is owed. And outgoing Assembly Speaker Karen Bass, D-Baldwin Vista (Los Angeles County), said she would head east as soon as this month.

Although, as the administration made clear during the Wall Street phase of this crisis, one man's bailout is another man's stimulus. If California crashes, that goes into the unemployment numbers. If the largest state in the nation can't spend, that drags down demand. If its schools suffer and new graduates can't find employment, that affects productivity for a lifetime. You can't make the largest state in the union suffer for its economic and political dysfunctions and hope that the national economy will emerge unscathed. The country, after all, is just a collection of states, and California represents 13 percent of the national GDP.

By Ezra Klein  |  January 4, 2010; 3:05 PM ET
Categories:  California  
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Comments

California has a pretty much unsustainable political system which you have written about several times. I can't see the point of bailing them out unless they fix the structural issues they have, otherwise its just enabling them to still spend far more than they take in with taxes with no real reason to change. And it sure doesn't give other states more incentive to be fiscally responsible.

Posted by: spotatl | January 4, 2010 3:19 PM | Report abuse

Any bailout should be contingent on the requirement that California completely rewrite its constitution such that legislative vote requirements, representation, and spending requirements be in line with its peers. Otherwise, a bailout would be a waste of energy.

Posted by: constans | January 4, 2010 3:30 PM | Report abuse

I see what your saying Ezra, but don't forget the power of learning. If California does really crash, it does much to demonstrate to the public that government does matter. You can't just say we want to cut government to nothing so we can have no taxes on the rich, as the Republicans want, without bringing your state or country to third world status. California crashing will send a clear message that if you want good schools, good roads, police, a modern state or country, you have to pay for these high return investments that keep you from being a banana republic (at least over the long term. In a demand crunch recession you want to deficit spend, and then pay for it when the economy is strong, or overheating and at risk of high inflation).

California crashing, for perhaps just a short period, may be what's needed for the long term great good of getting rid of the supermajority for tax increases, so that perhaps the state can return to its glory days during the Pat Brown era when taxes were higher, but it paid for some of the best schools and universities in the world, tuition was almost free, and the state was considered a wondrous place.

Posted by: RichardHSerlin | January 4, 2010 3:40 PM | Report abuse

I should add that any demand decrease that comes from a tax increase, can normally be 100% countered, or more, by 1) increased government spending on schools, parks, etc., and 2) the Fed increasing the money supply and lowering interest rates. Today the Fed has cut short term rates all the way to 0 and it's not enough. Unfortunately, they are reluctant to cut long term rates much due to inflation fears, but tax cuts stoke inflation fears too, and make them raise rates, or make them higher then otherwise to counter this, taking away the demand increase from the tax cuts. I, and top economists like Nobel Prize winner Paul Krugman don't think the Fed is doing enough to increase demand and spur the economy, but the point is they can. They have tremendous power to stimulate the economy if they want to, if they are not too concerned about overheating and high inflation. For more on this I recommend Krugman's outstanding book, "Peddling Prosperity".

Posted by: RichardHSerlin | January 4, 2010 3:49 PM | Report abuse

I can't imagine helping California unless they repeal Prop. 13. I remember when California truly was "The Golden State," however by buying into the false promise of government by referendum they sealed their on doom. Californians have made the state ungovernable, they must first begin the internal reforms necessary to provide tax revenues to run the state. The recent article in the New Yorker detailing the demise of the University of California provides only one example of the depths to which the state has fallen. They truly provide a model for the rest of us.

Posted by: TedLehmann | January 4, 2010 4:29 PM | Report abuse

I'm a former, supportive fan of california, but it's state government, not so much.

As remarked above, NO BAILOUT of CA should be provided by the feds until CA fixes its legal structural problems. That may take a while, so I'd settle for a joint resolution of CA House and Senate passed by 70% or more pledging on a strict timetable to fix the numerous problems:
- property tax increase limits in place with prop 13
- 2/3 requirement to increase taxes
- abuse of initiative and constitutional revision process
- strict plan to bring spending and taxes/income into balance.
- stop selling bonds to pay operating expenses.

If this can't be done by Dems and Repubs in the legislature, then bankruptcy should be ahead, not a DC bailout that would lead to other states fixing their money problems via DC.

Tough love is the best love.

Posted by: JimPortlandOR | January 4, 2010 4:34 PM | Report abuse

I agree with comments here - the question is what conditions Congress and White House impose on California to change.

Where is Simon Johnson? As IMF chief economist, he knows this business of 'bailing out' states by putting conditions.

Alas, these are not just economic adjustments which DC must impose on CA. Those conditions need to include rewriting of the constitution as well. How will that work when largest contingent of House Dems come from CA, with the House Speaker and both Senators from Bay Area all are Dems? Will those ladies help here 'to teach' something what CA people are missing?

Otherwise it is going to be like Wall Street - you get your bailout and you get your bonuses too which in case of CA, back to dysfunctional system / high labor cost.

Posted by: umesh409 | January 4, 2010 4:40 PM | Report abuse

Let's not forget that California, in the federal taxes it pays, remains a huge donor state. Perhaps those funds could just be returned to (left in) California for a period of time. Alaska and Nebraska and other states subsidized through Californian's federal tax remittances can grow some potholes while we dig out of our fiscal problems.

Posted by: Calgal | January 4, 2010 4:41 PM | Report abuse

Please, those of you posting here remember that we Californians supply the Federal government with 12% of its funding. As an individual state, we get one of the lowest returns on this "investment" (0.78, placing us in 43rd position).

If you really want to help us out, stop with the buck passing and the un- and underfunded Federal mandates. This would include the pending expansion of Medicaid in the new health care proposals, for which we will not only have to pay our state's share, but also that of the Cornhuskers. This is anticipated to add billions to our state's deficit.

Nobody has mentioned the fact that some of the systemic problems which our state suffers from are heavily gerrymandered congressional districts (drawn by the party in power) and that for years less than half of our households pay state income taxes. Those of us who do pay these income taxes, pay heavily.

While I'm not a fan of bailouts, what message is sent when our Federal government spends billions on Wall Street and Detroit, but won't help out it's most productive state?

Posted by: Beagle1 | January 4, 2010 4:47 PM | Report abuse

Really, the example of GM is an appropriate one. California needs a bailout, and the country needs it to be bailed out, but not without a reorganization. With its current structure, California just isn't "competitive in the market," ie the state will just require another bailout once the next recession hits. The Feds might as well be open about it. There's $20 billion in TARP and the stimulus that's authorized for state aid, making that contingent on structural reform is common sense.

Posted by: etdean1 | January 4, 2010 5:22 PM | Report abuse

Dear California, please send us all your extra liberals and hippies. No need to send Teabaggers - we have plenty.

Regards, Texas

Posted by: DubiousAdvocate | January 4, 2010 6:35 PM | Report abuse

Ezra,

Consider this scenario:

With no bailout the state falls apart, and people realize you have to pay for a first world state: The supermajority for tax increases gets rescinded.

With a bailout, the disintegration is averted, and the pressure to rescind the supermajority requirement for tax increases is not enough for recession.

If this is the case, the short run harm from the state crashing is far outweighed by the long run good of ending the supermajority tax increase requirement so that California can rebuild itself to at least some semblance of its former greatness.

Posted by: RichardHSerlin | January 4, 2010 8:31 PM | Report abuse

Go ahead and bail them out, but attach strings like elimination of the ridiculous 2/3 requirement in their state legislature to raise taxes.

As for anyone complaining about federal money going to fill one state's hole, there are similarities here with Ben Nelson demanding a fully funded federal expansion of Medicaid in Nebraska. That is we should do it everywhere.

Posted by: bcbulger | January 5, 2010 12:34 PM | Report abuse

The solution is simple. The California Congressional delegation should tell Pelosi and Reid that they will vote against the health care bill unless Congress gives the state everything it wants.

Posted by: Chippewa | January 5, 2010 1:09 PM | Report abuse

The comments to this entry are closed.

 
 
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