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Let California Fail

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It is ironic that the federal government is substantially meddling in the financial affairs of other entities given the dilapidated state of Washington’s own finances. First, there were the banks, investment houses and insurance companies — the most notorious being AIG. Then, the auto companies weighed in, getting their piece of bailout funds from Uncle Sam. Now, it seems the states will be next to tap the national treasury for funds that do not exist.

There is a saying, “As California goes, so goes the rest of the nation.” How true these words have become since both are completely bankrupt. With the defeat this week by voters in the Golden State of ballot initiatives that would have drastically raised taxes to close a $24 billion budget gap, the state is on course for a complete financial collapse by July. Unlike the national government, California can’t print money to buy more time either (no pun intended). It must find a way to raise the funds, otherwise millions of Californians will not receive checks.

But, not to worry, Governor Schwarzenegger, Senator Boxer and other Golden Staters are putting the squeeze on Treasury Secretary Tim Geithner to guarantee the emergency loans California needs to meet its obligations. With the state’s credit rating in the toilet, some analysts believe federal backing is California’s only hope to secure the loans it needs. The proposal would collateralize U.S. taxpayer funds to guarantee private lenders that they would be repaid if California defaulted. The concept is to take the risk out of lending to California for banks and place it squarely — again — on the shoulders of American taxpayers.

Of course the leverage state officials are using on Geithner is that California is “too big to fail.” They claim if the state were to go belly up it would send ripples through the rest of the country and even the world. Further, if Washington allowed the collapse to take place, imagine what that would do to the confidence the rest of the world has in us to lead economically.

Clearly the feds are in a totally unenviable position. If they don’t bail Sacramento out they will look really bad, given their enormous generosity towards unscrupulous bankers and inept car makers. Since most of the money California needs to borrow will go to ordinary folks, teachers, cops, government workers, Washington can’t be seen again to favor the interests of Wall Street over Main Street. Thus, I believe there is no question that the Obama Administration will bail out California. Naturally, this is a big mistake.

In the first place, if Washington succumbs to the “too big to fail” ploy with California, then what happens if say Wyoming asks for bailout funds. Can it be denied because its economy is not nearly as important as California’s to America’s health? Is it proper to favor one group of Americans over another simply by virtue of where they live? I realize we do that now with things like highway funds, but saving one state and letting another go is a horse of a different color. What about Wyoming’s portion of the federal bailout funds for California? If Washington submits to Schwarzenegger’s request, it will open up an array of ethical and legal questions pitting states against each other.

Then there is the “moral hazard” that would result with a California bailout. Given that politicians are not very courageous when it comes to making touch choices, state bailouts by the feds would allow state officials to manage state funds even more irresponsibly. California is a perfect example. The statist politicians there have overpaid public employees, spent generously on social services, and overregulated business and the environment. Bankruptcy is the perfect solution to their reckless spending. It is what ended socialism in Eastern Europe; it should be used to end socialism in California. Without it, politicians of all stripes will believe that Uncle Sam will catch them when they fall. This will impede economic recovery and perpetrate the myth that Washington has a bottomless bank account or a bank account at all.

Which brings us to the question of where does California think the feds are going to get this money anyway? Our leaders have become oblivious to our financial condition. When you can’t pay your bills you are bankrupt. Washington has been bankrupt for a long time, but again has had the means (printing press) to put it off. And put it off the politicians have. That is why we now face the economic situation before us: a lower standard of living, mountains of debt, both personal and national, and a gigantic task of rebuilding our industrial base so that we can compete again. You see, the politicians, since at least 1971 have mortgaged our future; those bills have come due; and we don’t have the money to pay them.

So, California is not alone. “As California goes, so goes the rest of the nation.” Both entities are broke. Perhaps instead of groveling to Washington to bail them out with funds Washington doesn’t have, the politicians in Sacramento can set an example for Washington to follow: deregulate, end the welfare state, disband public unions, and live within your means as a society. Wouldn’t it be nice if California led the nation in a positive way for a change?

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About Kenn Jacobine

  • Arch Conservative

    “Perhaps instead of groveling to Washington to bail them out with funds Washington doesn’t have, the politicians in Sacramento can set an example for Washington to follow: deregulate, end the welfare state, disband public unions, and live within your means as a society. Wouldn’t it be nice if California led the nation in a positive way for a change?”

    Yes that would be nice but it’s more likely that Obama and his “don’t call us sociliasts, socilaist cronies in Congress” will put the last nail in the coffin of the American economy when they pass cap and trade legislation, much to the amusement of a couple billion laughing Indians and Chinese.

  • Bliffle

    This article is timely but misdirected.

    The problem is not ‘socialists’ in California (as if the accusation of ‘socialist’ had any sting left post-communism), but rather, that grand old institution, the US Senate. The US Senate has only 2 senators from CA with a population of 30million and so does Wyoming with a population of 600,000. Thus, every Wyoming resident has 50 times the power of a California resident.

    And it shows in the financial results: CA only gets about 70 cents of federal contracts and other givebacks for every dollar of US taxes sent to Washington, while WY gets about $2.

    The same is true of some other big states like Texas and New York: They pay way more in federal taxes than they get in contracts, etc.

    Alaska is another one of the federal welfare states sucking at the teat of easy CA (and TX and NY, etc.) money.

    The right solution is to abolish the US senate. THAT is where all the economic and political distortions find a home.

    And this is plain nonsense:

    “Perhaps instead of groveling to Washington to bail them out with funds Washington doesn’t have, the politicians in Sacramento can set an example for Washington to follow: deregulate, end the welfare state, disband public unions,…”

    Jeez. Haven’t you heard? The deregulators are in bad odor because their negligence has led the Whole World to the brink of utter economic collapse.

    And the ‘welfare state’ is tiny, except for that every-increasing corporate welfare state, which everyone seems willing to throw dollars by the trillions at. But real welfare to real people is down to a few 10s of billions a year, pocket change for our corporate masters who have a pipeline to the US treasury.

    “.. and live within your means as a society.”

    Tell it to Halliburton and GM and Chrysler, and the other symbols of corporate piracy.

    ” Wouldn’t it be nice if California led the nation in a positive way for a change?”

    CA has led the nation in economic growth and business innovation for decades. Have you been sleeping under a bushel basket or something? That’s why all your children and cousins and uncles and brothers and sisters moved there: JOBS.

    If CA withdrew from the union

  • Bliffle

    As I was saying…

    If CA withdrew from the union they could easily balance the budget but the other 49 states would lose all that gold from federal taxes. They’d also lose the biggest pool of soldiers to fight their dang wars, including any war against the new California.

  • “The right solution is to abolish the US senate.”

    Or, to endow the House with greater powers than the Senate.

  • California is probably the only state that could effectively secede from the Union. It used to be the seventh largest economy in the world – equaling if not surpassing that of France.

  • The problem isn’t the Senate or how many federal dollars California gets, it’s mismanagement of their resources by their own government.

    They have the economy and population to support all of their needs, but they are inefficient. Texas manages to provide all necessary services with a far lower per-person tax burden than California and not much more in the way of federal funds.

    I’d have to go over their budget in detail to figure out exactly what they’re doing wrong — though I’m sure someone has already done it — but based solely on demographics there’s no justification for them being in the mess they are in.


  • Bliffle

    Right now there are two major phenomena (as well as several smaller things) that are frustrating CA:

    1-we passed a wacky proposition that requires a 2/3 legislature vote to pass a budget, thus empowering recalcitrant minorities,

    2-Grover Norquist has twisted the arms of ALL republicans to vote against all taxes.

    Then of course we have things like the old Prop 13 mess.

    What I’d like to see is split up CA into several new states (two states is an old hope, but 50 would produce a better balance in the US senate) and then a person could live where he felt a better political alliance.

  • Bliffle

    CA is just too big and diverse to be operated by a single state government. It would be improved by division.

    The federal government has a similar problem. What has spared the USA in the past is the federal system that allocates administrative power better among the states. But the national system suffers from a sclerosis that prevents correction of distortions such as the US senate, corporate personhood, etc.

  • Baronius

    We can probably all agree on this: direct democracy is part of California’s problem. They let the people vote on increased spending (Yes!) and increased taxes (No!).
    We BC’ers differ a lot on how big we’d like to see our government be, but we all recognize that a complete divorce of income and outlay can’t be sustained.

  • Bliffle

    Certainly in recent years the CA habit of referenda and propositions has proven the wisdom of The Founders in choosing a republic over a democracy.

    Aside from the conflicting demands of spending and taxing, it has let the legislators off the hook. And it has allowed for demagogery from all sides. Anonymous voters cannot be held responsible, but publicly voting legislators can, so we shouldn’t let them get away with anything.

    The best is to divide Califonia into, say, 4 new states. Perhaps they are named Jefferson, Madison, Franklin and Paine. The greater Los Angeles, San Diego Salton Sea is one, Central Valley and Sierras from Sacto to Bishop and points north and south is another, Santa Barbara to Fort Bragg and Willets another, and all the northern counties and the Siskiyous etc., are another.

  • STM

    Bliff: “Certainly in recent years the CA habit of referenda and propositions has proven the wisdom of The Founders in choosing a republic over a democracy.”

    Since we have the same kind of lunacy of California transplanted down here in the south-pacific paradise of New South Wales but a whole lot less problems with things like referenda, perhaps they’d have been better off ultimately leaving it as a constitutional monarchy 🙂

    You guys should never have cut the apron strings. You don’t get real and fair representation with your system.

    The only problem with NSW, though, is that elections are by legislation now fixed term, unlike everywhere else in Australia where an election can be called any time by a government if needs be, so we can’t get rid of the current State government administration until the 2011 state election.

    I hope they add a referenda on to that dispensing with fixed-term elections.

    And of course, as is well known, the only trouble with elections is that you always get a government.

    I can sympathise with Californians, though … this state also runs on the same kind of madness, and at the same level of debt.

  • Jonathan Scanlan

    Concerning ballot initiatives, I’ve heard it said that people keep voting for both programs and tax cuts. Hence a few people have said that the whole idea of these things is flawed, but I’m not so sure.

    Might it be possible to simply require that all future initiatives have costing and tax measures attached to every proposal? That way, the people are more responsible with what they vote for.

  • I find the initiative system more troubling because it bypasses the rule of law and lets the majority impose anything it wants on the state and the people without any protection for the rights of minority groups.


  • Bliffle

    The initiative system worked very well for California when it was full of politically active people, as it was for many years of the 20th century. But poorly educated citizens not very interested in politics and remote from each other are easily lead by demagogues.