An alternative to popular faith

California is broke and billions in debt. It’s unlikely California can pay its debts with tax increases and/or spending cuts, either of which could destroy the state’s economy. Tax increases and spending cuts always cause national recessions; the same would likely happen to California.

The best solution for California, and for all the other states in financial trouble, is to have the federal government step in with the necessary billions, which it easily could do. The government merely would credit California’s checking account at the Federal Reserve Bank, and debit its own balance sheet — a step it can take as easily, as repeatedly and as endlessly as the Rose Bowl scoreboard changing a score.

However, that won’t happen under current circumstances. The debt hawk belief that federal deficits are a problem, makes such support politically toxic. There are, however, two events which could force the federal government’s hand: Bankruptcy or disaster.

If California were to announce it planned to declare bankruptcy, businesses world wide would be threatened with ruin. Remember, California is one of the largest “nations” in the world — reputedly the 8th largest ( CALIFORNIA ) ahead of Russia and Spain. The federal government could not ignore such a threat, and would have to pay some or all of the bills, by a direct infusion of money.

Or, it could delay the inevitable, by lending California money ala Greece. (Loans to GM and Chrysler et al do not provide a model, because California cannot lop off large sections of its business and turn away from its citizens as companies can. So such loans, or even loan guarantees, just would put California deeper in debt.)

The other “solution” for California, though having terrible human consequences, would be to undergo a sufficiently large disaster, the most likely being a huge Los Angeles, earthquake, perhaps in the 8.0+ range. The government would declare LA County, perhaps even Southern California, a disaster area, and step in with the billions necessary to rebuild. Many of those billions would spread around the state, allowing the economy to recover.

Yes, FEMA didn’t rebuild New Orleans as it should have, but Louisiana doesn’t have California’s political clout, with only 9 electoral college votes compared to California’s 55.

I don’t know whether Governor Schwarzenegger has begged hard enough for federal support. Perhaps he is waiting for “the Big One.”

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity