California Economy Confronts Fiscal Armageddon

"Our wallet is empty, our bank is closed, and our credit is dried up."

Arnold Schwarzenegger, Governor of California

When he unseated the Democratic Governor of America's most populous state six years ago in a recall election, Republican challenger Schwarzenegger lambasted incumbent Gray Davis as a typical "tax and spend" liberal. In his thick Austrian accent, Arnold Schwarzenegger promised a new dawn of uninhibited free enterprise growth, facilitated by fiscal responsibility on the part of state government combined with a low rate of taxation. Well, another political promise bites the dust. However, Governor Schwarzenegger demonstrated uncharacteristic candor when he addressed a joint session of the California legislature and accurately outlined the brutal reality underlying California's dire fiscal crisis.

California is financially bankrupt. The state coffers are bone dry, confronting a $24.3 billion budgetary deficit. This appalling number is likely to grow worse, as the state's official unemployment rate, currently at 11.5%, is projected to exceed 12% by the end of the year. Already, California is experiencing its worst unemployment rate since the Great Depression. Factoring in discouraged and underemployed workers, the actual unemployment rate in California exceeds 20%. Amid this melancholy economic stew, the state's legislature is mired in partisan political paralysis. With state government a triumph of ineptitude over responsibility, it appears that desperation is the only remaining option for America's largest state. In this case, desperation means asking the U.S. taxpayers for a Federal bailout.

For the present, the Obama administration has been resistant to being the banker of last resort for the state of California. The reasoning is cogent in the extreme; if the U.S. government bails out California's state government, a precedent will be created whereby every deficit-ridden state, county and municipal governmental authority in the U.S. will come crawling to Washington D.C. with hat in hand. However, political realities often override sound economic calculations. California's powerful congressional delegation will undoubtedly impose severe pressure on President Barack Obama, forcing him to ignore the danger of precedent and add California to the already long list of corporate wards of the U.S. ship of state.

If California were an independent country, its $1.8 trillion GDP would rank as the sixth largest in the world. It is the leading center of high technology and manufacturing in the United Sates, and it is no exaggeration to state that California's economic fortunes are interlinked with the remainder of the United States. Unfortunately, all the indicators for California's economy are pointing south with abandon. The University of California at Santa Barbara recently released its highly regarded state economic forecast. According to the director of the center that publishes the UCSB forecast, economist Bill Watkins, "California's economy continues its descent into the depth of its most serious recession since World War II...It is possible that when this is over this recession will meet the technical definition of a depression in California."

If California is headed towards a devastating economic depression, how can America avoid a similar destination? In the meantime, political incompetence continues to reign in Sacramento, while the rating agencies brace for a major downgrade in California bonds.

With the financial and corporate sector having been proven wanting in responding to the Global Economic Crisis, it has been left to the politicians to rescue the global economy from a second Great Depression. What is now occurring in the political corridors of power in California reveals the entrenched limitations of what elected officials are capable of doing amid the unfolding economic disaster. In the final analysis, it may be that California will face the inevitability of defaulting on its debt, or as with the U.S. government bailout of the auto industry, some form of structured bankruptcy.

Could this be what the United States as a whole is in store for, once its wallet and credit are as dried up as in the forlorn state of California?

Follow Sheldon Filger on Twitter: www.twitter.com/EconomicCrisis

Comments

[Philip Combs]

One more time....

"California has one-eighth of the country's population and represents one-seventh of the economy. But our debt is less than one-hundredth of the federal debt. And we've been far more responsible in managing our budget. As a columnist for Bloomberg News recently noted, if California had the same deficit relative to its GDP as the federal government, we would have a shortfall of about $230 billion. The state's current (and massive) deficit is $24 billion.

As an independent country, California's low debt-to-GDP ratio -- about 4 percent -- would make it one of the most fiscally responsible major industrialized countries in the world. It would also put to shame our American neighbors, who have a debt-to-GDP ratio that tops 50 percent. California's credit rating, now inexplicably ranked at the bottom of the 50 states by the same rating agency geniuses who gave investment grades to mortgage-backed securities, would almost certainly be AAA. With those fiscal bona fides, the European Union might recruit us a member. Heck, it might even pony up for our defense. "

[Henry]

Sheldon,
Are you invested to take advantage of the bk for the state of CA? The public is getting a bit curious about the game that is played by the big boys. Financially bankrupt you say. How is that different than, say... bankrupt? Any financial play on your part or for those who you may represent?

[bannorhill]

America's most socialistic state. See what we have to look forward to.

[capitaldysfunction]

It's a given that a Republican President and his conservitive deregulators put this economy in the tank, and a Republican California state legislature, using impossible to meet sixty percent-plus voting requirements, stymied the state into inaction on the state budget. Now the public is beset with the bellowing know-nothings of the right shouting their empty socialism slogans while an Obama Presidency continues the Bush inspired wealth transfer to the rich. Third world or not, its not a country anymore. Nothing left to believe in or fight for. Just the torture of tortured logic like yours.