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
#Monetary Sovereignty - Mitchell 
If the Feds are to step in and bail out California, where would you draw the line and/or encourage fiscal prudence on the state level? For instance, if California politicians want to fund beefy pension plans for public employees to ensure their re-election or if Illinois politicians want to fund thousands more no-show jobs such as the ones you have mentioned in prior posts for the same reason, wouldn’t federal bail-outs encourage this sort of behavior on a massive scale?
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Good question. It’s one that must be asked and answered for every federal initiative that involves states, counties, cities, businesses and/or individual citizens. “Where do you draw the line” on federal support for health care, poverty, roads, R&D, education, etc., etc.
There never is an easy answer, simply because there never is an answer that satisfies everyone. I have little objection to generous pension plans, because the money goes to people who have worked and were productive, and now will spend that money back into the economy. I have more objection to paying for no-show jobs, only because they are not productive, though the money does go into the economy as a stimulus.
As for California, a federal bailout would be better than a California increase in taxes or a decrease in spending, both of which would depress not only California, but the nation. The bailout would cost nothing for anyone; no one pays for federal spending.
Rodger Malcolm Mitchell
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