No sooner has California narrowly survived one fiscal disaster - a short term funding crisis in early October that threatened state default - is it onto its next.
Now, more than three dozen new legislators are being sworn in today, as you know, and I wasted no time in calling a fiscal emergency special session today. Under Proposition 58, the legislature now has 45 days to send me bills addressing this crisis. If the 45 days pass and they still haven’t addressed the problem, they cannot adjourn or consider anything else until they do. And I’m urging the people of California to call their legislators, to send them emails, send them postcards and put the pressure on them, to let them know not to waste any more time.
Without immediate action our state is headed for a fiscal disaster where everyone will be hurt. Over the next 18 months, our preliminary estimate shows that the budget deficit will reach a staggering 28 billion dollars and with the national
economy still in decline, I know it will only get worse.
The gist of this is that California may run out of money to meet its debts as early as February.
Even assuming lawmakers can break the stalemate - which given the ideological stakes involved is not at all certain - the situation for the Californian economy isn’t great. Normally we’d apply that old Kissingerian adage about student politics - that the fights are so vicious precisely because the stakes are so small - but given that California is the ninth largest economy in the world, that clearly isn’t the case.
And even if the unpopular Schwarzenegger-backed plan goes through, it’s still no cakewalk. Schwarzenegger’s preferred plan involves hiking taxes and reducing spending: measures which will avert state government default, but which will be extremely damaging to the Californian economy.
Tax raises and spending cuts. Not a fiscal stimulus but a fiscal tranquilizer.
California, of course, isn’t the only state in trouble. Here’s Mish Shedlock earlier this month on New Jersey:
The state of New Jersey is insolvent. Bankrupt might be a better word. New Jersey is $60 billion in the hole on pension funding and the Governor is planning on skipping payments in a “pension payment holiday” until 2012 so as to not increase property taxes. To top it off, the ongoing plan assumptions are 8.25%. Sorry NJ, that simply is not going to happen.
Time for a list of failed (or failing) states? Suggestions?
Anyway, briefly, back to Arnie on the situation for California:
Now, I compare the situation that we are in right now to finding an accident victim on the side of the road that is bleeding to death. We wouldn’t spend hours debating over which ambulance we should use, or which hospital we would use, or which treatment the patient needs. No, we would first stop the bleeding and that’s exactly the same thing we have to do here.
… and Arnie in Predator:
If it bleeds, we can kill it.
Related links:
Hasta la vista, baby - FT Alphaville
