California’s budget problems just got bigger with the failure to pass outrageous legislation that came out in the special election.
Some good reads come from Yahoo!’s California One Step Closer to the Brink.
I’ll summarize the gist of the problem: We spend more than we make as a state.
There are many culprits:
1. We have a large immigrant population.
2. We have a lot of crime
3. We give a lot of entitlements to elderly and poor. (which we have a lot of)
4. The rich can sidestep many of the taxes in California, or it’s not graduated enough to capture a meaningful percentage of their earnings.
5. The Poor cheat the system and overtax it by bringin in more poor who do the same.
The failure of these ballot measures is not a surprise, though.
Prop 1A would have capped state spending, kept in place a tax hike for two years, while also establishing a so-called rainy day fund. That was the big one and it went down 65%-35%.
The one measure which did pass, comfortably: A rule limiting pay hikes for state politicians.
So now the onus is back on the legislature and the Governor to close the deficit, which stands at $21 billion. It’s going to be brutal. The only real areas to get those kind of savings are in core services like education, prisons, health. You know, the big things.
This state is screwed. Its residents already pay some of the highest total taxes of any state. Couple that with the high cost of living and you’ve got serious trouble brewing in the middle class (or what’s left of it).
But, if California defaults, other states won’t be be unscathed. Or at least that’s how most see it.
And, Felix Salmon of Reuters weighs in on the topic.
And indeed the really nasty unintended consequences of a Californian default might well be felt outside the state, with the closing down of the municipal bond market nationally. Once California defaults, it’s hard to see any other state raising private general-obligation funds at any kind of interest rate it would consider acceptable.
Which brings us back to the moral-hazard play: maybe the Feds would bail out California, not for California’s sake, but rather for the sake of the municipal bond markets as a whole. But it’s hard to see where they would get the money, or how Congress would ever approve such an appropriation.
Although, I wonder how that might work when Californians just voted to NOT raise the money needed to pay it down? In the end, it seems like voters and legislators have come to an impasse. Legislators want to continue spending, while the citizens are done paying for it. It is the epitome of what goes wrong when a liberal society votes on taxes. It will never be able to pay for its own generosity.
Which brings me back to the crisis. California cannot continue because it can’t pay its bills. California cannot raise taxes (at least in the present formula) because it will not pass (and if it did, it would drive more of the actual taxpayers out).
So, the only thing left is to start cutting services and expenses. That’s gonna be tough, and painful for some. And, counterintuitive in a recession. You see, accepted economics practice is to save some during your fat years so that in your lean years you have something to survive on and spend more to stimulate the economy with. We have squandered our wealth in the fat years, and like the prodigal son will come back to Uncle Sam to save our fat butts.
We have to either permanently slow state spending or permanently raise taxes. That’s bearish to owning real estate and living here in the long run. If you decide to buy a house here, be sure you have an exit strategy.
“There is no worse tyranny than to force a man to pay for what he does not want merely because you think it would be good for you.” – Robert A. Heinlein
I forgot to add… What California really needs is a dictator.
I prefer: “Taxes, are the dues that we pay for the privileges of membership in an organized society.” – Franklin D. Roosevelt
to that crazy hack, Heinlein. And we didn’t vote not to pay for it, we voted down those atrocious short-term-fake-fix-its. The g-d legislature better do its job; this involves both cuts and taxes. Preferably cuts in the overpopulation in our prisons for non-violent crimes, and taxes on marijuana.
Chuck,
I don’t think a California default would effect other states that aren’t as stupid with illegals, criminals and the homeless.
Michigan is probably also going to default but their destructive policies are not going to effect other states.
A lot of the tax/social policies really need to be even with other states or you get in this mess.
Michigan and Califonia might end up being an object lesson for everyone that survives.
Ahhh, but you forget. The “after” can do and does do a Kennedy.
Statements like this, from independent people or government officials, are somewhat dumb. Yes, states will not be able to borrow money at the ideal rates they want to after they start defaulting on their other borrowing, just like subprime borrowers with bad credit histories cannot borrow lots of money at low rates: that’s the whole fricken point of allowing risk-based lending rates. If you’re a risky borrower, you pay higher rates. If you want lower rates, you don’t go crying to your mommy or uncle [Sam] about how the unfair lenders won’t shovel money at your subprime gaping maw, you fix you g-d finances so you’re less of a risk. There’s no Constitutional guarantee that you can continue to borrow money at below-prime rates as you shovel it into the raging inferno of wasteful spending and corruption, and I’m sick of commentators and politicians crying like there is.
If I were the federal government, I’d be telling California (and other states) to stop crying about the inevitable consequences of their gross fiscal mismanagement, and start adjusting to the new reality: you are a subprime borrower, and if the rates are not acceptable, stop borrowing money to paper over your problems.
Legislators want to continue spending, while the citizens are done paying for it. … It will never be able to pay for its own generosity.
AMEN!
The State has over 235,000 state workers and Arnold only wants to cut 5,000 people. Orange county has laid off over 3,500 people. Cut the over bloated pensions. Get rid of the Unions especially the prisons. I am tired of paying for someone who is in jail for smoking pot or even sold it and the 19000 illegal aliens give them the boot to the feds and quit building prisons to satisfy the Unions. We as country have more people in jail than any other country in the world so i am sure there is a lot of people that have no business being housed in Hotel California. Arnold says a lot of commissions will be eliminated. Cut it all at the State level now you have bleed the counties and cities long enough!