As California leads the rest of the world follows
Posted on 25 May 2009 with no comments from readers
It is true that California is often the leader in new trends, from the hippies to dot-com millionaires. Now perhaps we see the future of global economics in the public spending cuts triggered by the special election defeat of Governor Arnold Schwarzenegger last week.
The former Terminator star is now going to have to axe health, welfare and education spending to plug a $21 billion projected budget deficit. He said public spending will be hacked back to 1999 levels.
Spending cutbacks
School class sizes will go up, 38,000 prisoners will be released early and 5,000 state workers will be fired. It is a ‘fiscal disaster’ as the charismatic governor says with not enough taxes being raised to pay for state expenditure.
Yet is not California waking up to reality just a little earlier than other countries. In the UK S&P fears that general government debt could approach 100 per cent of GDP. That is clearly unsustainable, however the government cares to dress it up.
Surely before long the UK will have to balance its books, cut public spending and live within the bounds of fiscal prudence. The debt markets will force this change by raising the cost of borrowing as government debt weighs on the currency and holders demand a higher risk premium.
This is actually the Achilles heel of the global stimulus and bank bailout packages. Nobody can ever borrow their way to prosperity. Creating wealth just does not work like that. It was, after all, excessive leverage or borrowing that got us into this economic mess.
Age of austerity
In short, California shows that a new age of austerity lies ahead. That would suggest that the current recession has another leg, beyond the stimulus packages. The analogy is having to pay the credit card bill later for having a good night out on plastic.
Rising interest rates and government spending cutbacks are therefore the future, if we look to California and the UK for indicators. Could that also be accompanied by higher oil prices? It is possible. This is how economics worked in the late 1970s and we seem to be heading into a harsher version of that phase of the recent past.
no Comments posted by readers:
As a Californian, I was very pleased to see the final outcome of the Special Election on 19 May. However, the future of this state is rather bleak, and will continue to remain so for many years. You are absolutely correct in your prognosis that debt ridden countries will be following down the same path as California.
In a nutshell, California is facing massive problems; it is a perfect example of a government entity that has placed the wellbeing of its citizens below that of non citizens, including illegal immigrants. Whenever that is allowed to happen, the tax base continues to erode.
The Problem & Its Cure:
California’s debts, as a percentage of its Gross Domestic Product (just like those of the US, or UK, or Spain, etc.), have grown to an absolutely unmanageable amount . . . similar to the US problem, where the US debt is now 50% of GDP; in the UK, the debt is 100% of GDP, which seems to be the “tipping point” for downgrading a country’s bond rating. Sadly, even under the most “optimistic” of scenarios, the US debt will reach the 100% mark before 2015. I would like to think that long before 2015, our elected officials will wake up, but I’m probably deluding myself here.
The “cure” for California is the same “cure” for any country that is deep in debt. Households, states and countries are all the same in this regard. There is no way that they can borrow their way out of debt. The solution is to drastically cut expenses and find innovative ways to “grow” their economy. Sadly, the US FED is deluding itself by thinking it can solve the economic woes via the printing press.
But How Can California Grow?:
How can a high tax state like California encourage corporations to come back to California . . . when the state has the highest tax rates in the country, and is a regulatory nightmare with huge tax/ penalty consequences? I read somewhere that the Fortune 500 companies voted California as the worst state in which to do business. The state has driven out some of its key “growth engines” (aerospace industry and oil industry come to mind here!).
Theoretically, the state can “grow its way out” of its economics woes, but the key question is HOW, when new job creation, especially for high paying jobs is next to impossible.
Peter,
There is another little bomb going off in California that people are now becoming keenly aware of… exorbitant pensions.
Here is a site lising all CALPERS pensioners receive $100K+. There are 5100 people in this category.
http://www.californiapensionreform.com/calpers/
And…
California could be broke by July
As angry as it would make people, this country needs to reassess all pensions. We need to start paying for actual production.