May 20, 2009

California is the canary in the mine

Megan McArdle asks Is California Too Big to Fail?

So what about California?  A reader asks.  Ummm, that's a tough one.  No, wait, it's not:  California is completely, totally, irreparably hosed.  And not a little garden hose.  More like this.  Their outflow is bigger than their inflow.  You can blame Republicans who won't pass a budget, or Democrats who spend every single cent of tax money that comes in during the booms, borrow some more, and then act all surprised when revenues, in a totally unprecedented, inexplicable, and unforeseaable chain of events, fall during a recession.  You can blame the initiative process, and the uneducated voters who try to vote themselves rich by picking their own pockets.  Whoever is to blame, the state was bound to go broke one day, and hey, today's that day!
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I am not under the illusion that this will be fun.  For starters, the rest of you sitting smugly out there in your snug homes, preparing to enjoy the spectacle, should prepare to enjoy the higher taxes you're going to pay as a result.  Your states and municipalities will pay higher interest on their bonds if California is allowed to default.  Also, the default is going to result in a great deal of personal misery, more than a little of which is going to end up on the books of Federal unemployment insurance and other such programs.

I know many will think the federal government should bail them out, but not me.  We just have too much on our plates and the debt the U.S, in incurring is frightening and as Robert Samuelson says Risky Debt.

Let's see. From 2010 to 2019, Obama projects annual deficits totaling $7.1 trillion; that's atop the $1.8 trillion deficit for 2009. By 2019, the ratio of publicly held federal debt to gross domestic product (GDP, or the economy) would reach 70 percent, up from 41 percent in 2008. That would be the highest since 1950 (80 percent). The Congressional Budget Office, using less optimistic economic forecasts, raises these estimates. The 2010-19 deficits would total $9.3 trillion; the debt-to-GDP ratio in 2019 would be 82 percent.
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Except from crabby Republicans, these astonishing numbers have received little attention -- a tribute to Obama's Zen-like capacity to discourage serious criticism. Everyone's fixated on the present economic crisis, which explains and justifies big deficits (lost revenue, anti-recession spending) for a few years. Hardly anyone notes that huge deficits continue indefinitely.

And that's without talking about Social Security or the looming unfunded public pension crisis in just about every state. 

The plan most everyone seems to agree on is Soak the Rich.  Only problem is they leave.

We can not imagine how bad it's going to get. The future looks dim indeed and California is the canary in the mine.  There are lessons to be learned from the California debacle but will we learn them?

Victor Davis Hansen says
It is generally known that Americans want it both ways — green giddiness and plenty of oil and gas for their cars and homes; lots of government services and low taxes; a big military but spasms of isolationism. But now California is where the rubber meets the road, and we just saw the big-government side of the equation dissolve. With the highest income taxes, highest sales taxes, and biggest deficits, Californians finally said "no mas," and let the cutting begin. Of course, we have expanded government to such a degree that "radical" cuts will only get us back to about 2005-sized government, and "tax cutting" in this loopy state will mean holding firm at a 9% sales tax and 10%-plus income tax. But one must begin somewhere.

Fabulous charts at QanddO.  Here's one.

Debt-Deficits 03-580

Posted by Jill Fallon at May 20, 2009 12:43 PM | Permalink