Bailing out California, Again

If many of the nation’s governors have their way, the next agenda item for the spendthrift federal government could be a bailout of state budgets. According to a report issued on December 10 by the Center on Budget and Policy Priorities, 37 states face mid-year 2009 budget deficits, totaling $31.7 billion. As would be expected from its size, California leads the pack at $8.4 billion. However, California’s shortage is well above its share, at more than one-quarter of the total which is double its share of the population.

Yet it gets worse. Later, California Governor Arnold Schwarzenegger announced that the budget deficit had risen to $14.8 billion, which would take its share of the deficits to more than three times its share of the population. All of this is after a long and drawn out legislative process that was to have closed a previous $22 billion deficit earlier in the year.

For years, California boasted a strong economy, with the world’s leading technology, entertainment and agricultural industries. The state’s Legislative Analyst claims that California would be the 7th largest economy in the world if it were a nation. California is rich not only in the aggregate, but at the ground level. Only eight of the 50 states have a higher gross state product per capita. This means that California is per capita the richest large economy in the world. Thus, any bailout would be disproportionately financed by parts of the country that are often far less affluent.

How can it be that California stands in such tatters seeking a handout? Why are people from other states, at least 30 of which wouldn’t even rank in the top 50 economies of the world, being asked to prop up this dynamo?

The problem starts in Sacramento. California has been pitifully served by its state government. After missing the June 30 statutory deadline for balancing the 2009 budget, the legislature and governor spent the better part of the next three months doing everything they could to finish the job. In the final analysis they pretended to balance the budget with math that virtually no-one believed. That’s probably why there has been so little outrage at the new $15 billion deficit that has developed so quickly.

But the buck doesn’t stop with lawmakers. After all, California’s electorate has repeatedly sent the elected representatives to Sacramento that have produced this mess. In California the voters themselves seem oblivious to the financial status of the state.

This is likely to get worse before getting better. In the past voters could be counted on to vote down expensive new projects in hard times. But not anymore. In November they approved more than $30 billion in additional bonded indebtedness when they should have been asking for either a draconian spending cut or the tax increases. Californians will not be stopped from living beyond their means.

So how can this continue? One way is for the world’s richest largest economy to be bailed out by people in states that are generally poorer and have been more frugal than California. The state’s powerful congressional delegation, with such heavyweights as Speaker Nancy Pelosi and Henry Waxman, the new boss of the House Energy and Commerce Committee, are likely to see to it that the national interest is sacrificed on behalf of California.

The final irony here is the nation and indeed the world is already paying a heavy price for another exercise in Californian excess. The state is ground zero for the mortgage meltdown. It was here that house prices exploded. State and local land use policies provided the fuel for much of the increase, so that when demand increased in response to the profligate lending, the housing supply market could not adequately respond (unlike other higher demand parts of the country).

With the most bloated housing bubble in the nation, mortgage losses understandably were concentrated in California. California, which accounts for 12 percent of the national population has accounted for more than one-half of the aggregate loss in housing value. California house prices dropped at least 10 times as much as the national average since the peak of the bubble. When the people could not pay their mortgages, unprecedented losses occurred and house values plummeted from 25 percent to 50 percent in some areas. Enough people who had virtually no financial stake in their houses walked away.

California’s ability to spend every dollar the nation can print on its behalf should not be underestimated. Boatloads of federal money for California are likely to postpone any genuine efforts to improve California’s long run financial picture. The often used line about fighting a fire with gasoline has few better applications. A state that has thrown financial caution to the wind is not likely to adopt the necessary frugality with a new, national source of revenue. The special interests that have driven California’s spending into the stratosphere will not be more inclined to moderate their demands or to spend less lobbying money in Sacramento’s corridors. California’s taxpayers, perhaps the most anti-tax in the nation, are not likely to accept higher taxes if Washington can be counted on to pay instead.

There could be no worse signal to California’s dysfunctional governor and legislature than to bail them out. With the situation deteriorating daily, bailing out California could become a continuing national obligation – sort of like Iraq, but without the prospect of an exit date.

Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”