6 ms·

The Truth about California: It's actually saving the rest of the USA

154 points by ENOTTY 16y ago

sabat 16y ago
IANAE (I am not an economist), but here's an observation from a born-and-bred Californian: whenever the economy is bad, the state budget takes it on the chin. California is big -- bigger than a lot of people realize. I mean this in terms of geography and population. So it seems to me that national problems are magnified here in our microcosm. Once the economy picks up, the state problems ease. Tangential anecdote: I was at a JBoss conference a few years ago, talking with a guy from the company who'd never been to California before. I mentioned that I had just driven back here -- I'd been snowboarding over the weekend. He gives me a dubious look, and says, "You don't have snow in California."
- j_baker 16y ago
  Here's what strikes me as funny: California's budget crunch is $25 billion. Texas (a paragon of small government) is facing a deficit of... $25 billion. The fact that both states have similar deficits would seem to back your argument that this has more to do with the economy than budgetary policy. http://www.dallasnews.com/sharedcontent/dws/news/politics/state/stories/110410dntextxxgr.20cde75.html http://www.dallasnews.com/sharedcontent/dws/news/politics/st... http://articles.sfgate.com/2010-11-11/news/24826042_1_budget-deficit-deficit-estimate-deficit-balloons http://articles.sfgate.com/2010-11-11/news/24826042_1_budget...
  - gruseom 16y ago
    But California's economy is 50% larger than Texas', according to http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP. Since economists mostly talk about debt to GDP ratio, doesn't that make Texas considerably worse off?
    - nhebb 16y ago
      Texas has a two-year budget cycle, and the $25 billion deficit figure that's been batted around the internet is speculative since the official numbers won't be known until January.
      - motherwell 16y ago
        What is the margin of error? For example, if Texas debt is between 10 and 30 billion, then we can't comment. But if it is between 20 and 30, then I think we can reasonably say that Texas debt to GDP is worse.
      - gwern 16y ago
        Are there any reasons to think that the speculative number will be off by more than a billion or two? If the real deficit is actually 23 or 27 billion, I don't think that really affects the comparison too much. ('Oh, Texas's deficit is actually $24.23 billion and not $24.24 billion? Well, obviously that invalidates all the comparisons to California! Let's discuss something else.')
        nhebb 16y ago
        People seem to be getting a bit heated on this topic. I was just trying to point out that the number was an estimate, and that it was for a two year period. If we take a low-high range of $23 - 27B, then that is $11.5 - 13.5B/year, which is significantly different than the $25B that is being implied for a one year budget. Personally, I think all the California vs. Texas debates are a childish extension of blue state vs. red state political bickering. Nobody in the US is better off if either state has financial problems.
  - ataggart 16y ago
    The debt (read: accumulated past deficits) isn't the only, or even main, issue; rather it's the future liabilities that are killers. For example, California has unfunded pension liabilities of over $500 billion [1]. To put that number in perspective, it's almost seven times greater than all the outstanding voter-approved state general obligation bonds in California. [1] http://www.stanford.edu/group/siepr/cgi- http://www.stanford.edu/group/siepr/cgi- bin/siepr/?q=/system/files/shared/GoingforBroke_pb.pdf
    - jerf 16y ago
      This is the core of the problem. My problem with this article is that you can apply the same arguments and paint a picture where the US itself has a rosy economic future. But the problem isn't even merely today, November 29th, 2010, it's the scope of the future obligations we've taken on. It's not that the US or California has necessarily that exceptional of a debt load right this second, it's that the money we might be using to service it is already nominally allocated to other "untouchable" projects. That's the big change; entitlements (and pensions as a subset of those worth calling out specially). To do an article about how glorious the California future is and to criticize not just the arguments but the motivations of those saying there are problems, but for neither the word nor the concept of entitlements to show up is just constructing a straw man and cherry-picking the budget numbers. For that matter reading the article straight you might be mystified about why California has very recently resorted to the very legally-dubious IOU-money-but-not-quite-money scheme. If it was even half as rosy as this guy is arguing that shouldn't have been even close to necessary, but in the real world, it was.
  - Semiapies 16y ago
    "paragon of small government" You must be thinking of a different Texas than I live in. :P Even if the $25B deficit pans out in the end, and aside from the other differences between the states (including the counter-intuitive one that Texas has been less hard-hit during this downturn), you still end up with a situation where states face major budgetary crises at every downturn because revenue only balances spending near the height of economic booms. That's a budgetary policy problem even when it's not unique to California. And for California, it's turning out rather badly.
    - deleted 16y ago
      [deleted]
karzeem 16y ago
Most criticisms of California target public sector backwardness, so it's not a refutation of that to point to the strength of the state's private sector. And "CA's private sector is strong, ergo it hasn't been harmed by the government" is a circular argument. This is an argument over the precise extent to which bad policies are bad. Seems more useful to discuss what genuinely good policy looks like.
- boucher 16y ago
  The argument that California's policies must be bad, regardless of the fact that they've produced the strongest private sector in the country, is equally fallacious.
  - karzeem 16y ago
    True, though for a lot of state policies, people seem to generally agree that they're bad, just not on whether they're bad enough to justify the pain of changing them. The policies, good or bad, coexist with the country's strongest private sector, but that doesn't mean they caused it.
    - Yzupnick 16y ago
      I would even say that the reverse is possible. That because of it's extremely strong private sector, the state was able to afford these bad policies. I'm pretty sure that this is not true, I'm just emphasizing your point of not reading into it that much. Pretty much any theory you want could be proved from two seemingly related pieces of data.(broad generalization I know.)
  - dhbanes 16y ago
    Maybe I am mistaken, but it seems to me that California's private sector is strong despite its backward government, not as a result of it. California is an extremely desirable place to live. This attracts business owners and highly qualified employees alike. I would be interested to hear which of California's policies you believe play a significant role in the success of its resident businesses.
ggchappell 16y ago
Interesting article. One statement struck me as odd: > Most of the states that have grown faster than California during that time are farm states, riding an incredible boom in agriculture prices. I suppose there is nothing wrong with this statement, strictly speaking. However, it suggests that CA is not a "farm state". But it certainly is. CA is the number-one agricultural producer of all the 50 states. It's a clear number one in crops, and number two (after TX) in livestock.
- aaronblohowiak 16y ago
  Agricultural products are also a big export for the US.
- j_baker 16y ago
  I would imagine that the other states' economies depend much more on agriculture than California's does though. Thus, California has a lot of farmers, but it doesn't get as much from a surge in agriculture prices like the others do.
  - waterlesscloud 16y ago
    California %2 is agriculture. Texas is 0.8.
    - j_baker 16y ago
      Really? That's actually somewhat surprising to me. Still, I don't really think of Texas as a farm state either. I'm thinking more along the lines of the Midwestern states like Kansas or Nebraska.
      - deleted 16y ago
        [deleted]
      - akgerber 16y ago
        Texas has two of America's six largest cities in addition to all of its agricultural land. North Dakota has a city of less than 100,000. So its hinterland is a little more important.
webXL 16y ago
The gist seems to be that despite numerous stories predicting its demise, California: - is wealthy and talented - has more (people, VC, etc.) than it did in 1999 - has been funding the rest of the country in federal transfers (he calls them bailouts, therefore you can't complain if CA asks for one) - has a small budget deficit relative to its budget It leaves out $138B of unfunded liabilities for state employees until the end, and ignores companies like Facebook opening datacenters out of state, a growing number of people leaving the state (I'm one of them), and its awful credit rating. Unfortunately if I owe the bank money, I can't tell them how good of an investment I was up until 2008 and expect them to give me a pass. I need to figure out a way to come up with the money. California doesn't appear to be serious about that.
- Locke1689 16y ago
  and ignores companies like Facebook opening datacenters out of state Explain this to me. It seems obvious that companies would open datacenters outside of just California. What would be more obvious to me would be placing them close to 1) backbone hubs and 2) cheap electrical power.
  - webXL 16y ago
    Well that's fine, but don't tout that your state is an engine of economic growth when the companies you mention decide to "offshore" major chunks of their operations. Figure out a way to keep them in state, or generate some kind of equivalent growth, maybe even outside silicon valley.
    - sagarm 16y ago
      > don't tout that your state is an engine of economic growth when the companies you mention decide to "offshore" major chunks of their operations You're clearly implying here that Californian companies are placing datacenters outside California because of state policies, which is simply incorrect. While it makes sense to put one datacenter somewhere in the vicinity of California, datacenters should be geographically distributed. It's also common to place datacenters near rivers for cheap cooling, but good sites are relatively rare. Now consider competitive bidding from cities, cheap power, and wanting to locate datacenters near users. Basically, state policies have a relatively small impact.
rubypay 16y ago
Fiscal facts aren't all that matters. Investors' perceptions can also have an impact--if California is perceived to be in trouble, investors demand higher premiums on bonds, and the costs for California to borrow money increase. This can lead to a detrimental cycle of destruction, akin to what happened to Lehman Brothers.
- VladRussian 16y ago
  >akin to what happened to Lehman Brothers there is also, more probable for a state, scenario of AIG/etc... - federal government stepping in.
JSig 16y ago
The author has a serious chip on his shoulder. Lots of politicking in this article that distract from the point being made. Take a look at what the market thinks of the chances for a California default. http://www.economist.com/blogs/dailychart/2010/11/credit-default-swaps_spreads http://www.economist.com/blogs/dailychart/2010/11/credit-def... As of a week ago, "The state with the biggest budget problems, California, is seen as slightly less likely to default than Spain but slightly more so than Italy." Note that Spain is a total mess with an unemployment rate around 20%. It's hard to default when your can print your own currency. I think the California bond holders will never take a haircut. The US will just print more dollars.
- bd_at_rivenhill 16y ago
  I will not argue against the case that the US will print more dollars, because I think that will happen, but will they print enough to refloat California's obligations without specific funds being allocated by Congress for a bailout. The Republicans control enough votes to determine whether this happens or not, and it would appear that the political benefits to them could outweigh the damage in the near term.
- jonah 16y ago
  One of Spain's big impediments to getting themselves out of their economic mess is that they're on the Euro. In ways similar to the varying economic situations in US states. http://www.nytimes.com/2010/11/29/opinion/29krugman.html http://www.nytimes.com/2010/11/29/opinion/29krugman.html
- pyre 16y ago
  > Take a look at what the market thinks of the chances > for a California default. This assumes that 'the market' is a rational actor. But it's proven time and again that it isn't.
  - bjnortier_hn 16y ago
    The question around the [ir]rationality of markets is irrelevant. Markets determine the cost of borrowing. If California wants to lower the cost of debt, or maintain the current (low) cost, it must value the opinion of the markets. The calculation of the author, with state debt costing $6billion a year, assumes a constant cost of borrowing into the future! Investors have been selling municipal debt in the past two weeks, which will result in higher borrowing costs [1]. The same thing happened and is happening with the PIIGS, where those in power have been complacent about their ability to service debt because of the assumption of constant debt servicing costs. [1] http://search.ft.com/search?queryText=muni&ftsearchType=type_news http://search.ft.com/search?queryText=muni&ftsearchType=... November 25, 2010 US muni bond funds lose another $2.3bn November 18, 2010 US muni bond funds see record outflows November 16, 2010 US muni bonds see biggest drop since 2008
Semiapies 16y ago
"Californians are so productive that every year they send billions of dollars in surplus dollars to the rest of America. Year after year they have sent vastly more in federal taxes than they ever get back in federal spending." So many seemingly educated Americans can't tell - or artfully avoid telling - the difference between state and federal taxation and spending. Also, here's the dirty secret: people in other states don't really "get back" any of that federal money unless they work at federal facilities, including military bases, common in the states accused of getting more federal money than they give. If they're really lucky, they might get that money at a remove or two if they work in lower-end service jobs near a military base. But then, that whole thing is a strawman. Some random idiot might be saying Californians are all lazy good-fer-nuthin's, but everyone else isn't talking about Californians, but an unsustainable state government. "California’s a basket case? The state has one of the highest living standards in the country..." I'm rather horribly reminded of global warming "skeptics" who hoot every time it snows.
- lr 16y ago
  "Also, here's the dirty secret: people in other states don't really "get back" any of that federal money unless they work at federal facilities,..." People in these states don't drive on federally-funded roads, or have anything to do with anything else that receives federal dollars? Right-wingers are keen on talking about trickle-down when it comes to tax cuts, but mention nothing of the multiplier effect of the spending habits of the people who earn money which comes directly from the federal government. So yes, people in those states "get back" big from federal spending!
  - Semiapies 16y ago
    "People in these states don't drive on federally-funded roads" They don't pay federal gas taxes, either? You might do better picking something better than federal road spending when trying to defend California, incidentally. But that's the problem you face when you try to reduce distinctly different things like federal and state spending to "But California really has a surplus, honest!" "Right-wingers are keen on talking about trickle-down" So? They're also big on "starve the beast" deficit spending, but that hasn't worked in California, either. ETA: Suggestion - disengage from your partisan reflexes. Think. Remember than the Republican Party in California has been as much of a contributor to the problem as the Democratic one, at least in proportion to how much power they have had, if that helps. California's in trouble. It'll certainly survive and improve, but the spending cuts and tax hikes that they'll have to have this time (or if they sweat and bluff it through a few more years, the next time there's an economic downturn) will be far from fun.
redteddy23 16y ago
I thought it was a case of referenda being used to demand things be done but the voters not actually wanting to have to pay for them.
fleitz 16y ago
The point about the State of California heading towards bankruptcy is not affected by either its tax rate compared to other states or the amount of venture capital dollars it sucks up. The primary driver for the state going bankrupt is its expected income vs. its expected expenses. Venture funding in California has little affect on its tax base as most profitable startups are incorporated in Delaware or have their revenue generators incorporated offshore. Yes, they'll be good revenues from the employees but no windfall should be expected. (i.e. the state should not expect abnormal returns because of in state venture capital investment) My point is that when you take look at expected income vs. expected expenditures you can expect to see the state go further and further into debt. It's anyone guess as to whether that will lead to filing for bankruptcy or not, but the direction the state's fiscal health is heading is clear. Regarding the state's fiscal picture this article largely addresses a straw man. No one is arguing that the state will go bankrupt because it's tax rate is wildly out of whack, or because it is not getting enough venture capital funding. People are arguing that the state will go bankrupt because the state already has a fair amount of debt relative to GDP, it runs large current accounts deficits relative to GDP, and has large unfunded pension mandates. This article addresses none of these points.

154 points by ENOTTY 16y ago

sabat 16y ago

IANAE (I am not an economist), but here's an observation from a born-and-bred Californian: whenever the economy is bad, the state budget takes it on the chin. California is big -- bigger than a lot of people realize. I mean this in terms of geography and population. So it seems to me that national problems are magnified here in our microcosm. Once the economy picks up, the state problems ease. Tangential anecdote: I was at a JBoss conference a few years ago, talking with a guy from the company who'd never been to California before. I mentioned that I had just driven back here -- I'd been snowboarding over the weekend. He gives me a dubious look, and says, "You don't have snow in California."

j_baker 16y ago
Here's what strikes me as funny: California's budget crunch is $25 billion. Texas (a paragon of small government) is facing a deficit of... $25 billion. The fact that both states have similar deficits would seem to back your argument that this has more to do with the economy than budgetary policy. http://www.dallasnews.com/sharedcontent/dws/news/politics/state/stories/110410dntextxxgr.20cde75.html http://www.dallasnews.com/sharedcontent/dws/news/politics/st... http://articles.sfgate.com/2010-11-11/news/24826042_1_budget-deficit-deficit-estimate-deficit-balloons http://articles.sfgate.com/2010-11-11/news/24826042_1_budget...
- gruseom 16y ago
  But California's economy is 50% larger than Texas', according to http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP. Since economists mostly talk about debt to GDP ratio, doesn't that make Texas considerably worse off?
  - nhebb 16y ago
    Texas has a two-year budget cycle, and the $25 billion deficit figure that's been batted around the internet is speculative since the official numbers won't be known until January.
    - motherwell 16y ago
      What is the margin of error? For example, if Texas debt is between 10 and 30 billion, then we can't comment. But if it is between 20 and 30, then I think we can reasonably say that Texas debt to GDP is worse.
    - gwern 16y ago
      Are there any reasons to think that the speculative number will be off by more than a billion or two? If the real deficit is actually 23 or 27 billion, I don't think that really affects the comparison too much. ('Oh, Texas's deficit is actually $24.23 billion and not $24.24 billion? Well, obviously that invalidates all the comparisons to California! Let's discuss something else.')
      - nhebb 16y ago
        People seem to be getting a bit heated on this topic. I was just trying to point out that the number was an estimate, and that it was for a two year period. If we take a low-high range of $23 - 27B, then that is $11.5 - 13.5B/year, which is significantly different than the $25B that is being implied for a one year budget. Personally, I think all the California vs. Texas debates are a childish extension of blue state vs. red state political bickering. Nobody in the US is better off if either state has financial problems.
- ataggart 16y ago
  The debt (read: accumulated past deficits) isn't the only, or even main, issue; rather it's the future liabilities that are killers. For example, California has unfunded pension liabilities of over $500 billion [1]. To put that number in perspective, it's almost seven times greater than all the outstanding voter-approved state general obligation bonds in California. [1] http://www.stanford.edu/group/siepr/cgi- http://www.stanford.edu/group/siepr/cgi- bin/siepr/?q=/system/files/shared/GoingforBroke_pb.pdf
  - jerf 16y ago
    This is the core of the problem. My problem with this article is that you can apply the same arguments and paint a picture where the US itself has a rosy economic future. But the problem isn't even merely today, November 29th, 2010, it's the scope of the future obligations we've taken on. It's not that the US or California has necessarily that exceptional of a debt load right this second, it's that the money we might be using to service it is already nominally allocated to other "untouchable" projects. That's the big change; entitlements (and pensions as a subset of those worth calling out specially). To do an article about how glorious the California future is and to criticize not just the arguments but the motivations of those saying there are problems, but for neither the word nor the concept of entitlements to show up is just constructing a straw man and cherry-picking the budget numbers. For that matter reading the article straight you might be mystified about why California has very recently resorted to the very legally-dubious IOU-money-but-not-quite-money scheme. If it was even half as rosy as this guy is arguing that shouldn't have been even close to necessary, but in the real world, it was.
- Semiapies 16y ago
  "paragon of small government" You must be thinking of a different Texas than I live in. :P Even if the $25B deficit pans out in the end, and aside from the other differences between the states (including the counter-intuitive one that Texas has been less hard-hit during this downturn), you still end up with a situation where states face major budgetary crises at every downturn because revenue only balances spending near the height of economic booms. That's a budgetary policy problem even when it's not unique to California. And for California, it's turning out rather badly.
  - deleted 16y ago
    [deleted]

karzeem 16y ago

Most criticisms of California target public sector backwardness, so it's not a refutation of that to point to the strength of the state's private sector. And "CA's private sector is strong, ergo it hasn't been harmed by the government" is a circular argument. This is an argument over the precise extent to which bad policies are bad. Seems more useful to discuss what genuinely good policy looks like.

boucher 16y ago
The argument that California's policies must be bad, regardless of the fact that they've produced the strongest private sector in the country, is equally fallacious.
- karzeem 16y ago
  True, though for a lot of state policies, people seem to generally agree that they're bad, just not on whether they're bad enough to justify the pain of changing them. The policies, good or bad, coexist with the country's strongest private sector, but that doesn't mean they caused it.
  - Yzupnick 16y ago
    I would even say that the reverse is possible. That because of it's extremely strong private sector, the state was able to afford these bad policies. I'm pretty sure that this is not true, I'm just emphasizing your point of not reading into it that much. Pretty much any theory you want could be proved from two seemingly related pieces of data.(broad generalization I know.)
- dhbanes 16y ago
  Maybe I am mistaken, but it seems to me that California's private sector is strong despite its backward government, not as a result of it. California is an extremely desirable place to live. This attracts business owners and highly qualified employees alike. I would be interested to hear which of California's policies you believe play a significant role in the success of its resident businesses.

ggchappell 16y ago

Interesting article. One statement struck me as odd: > Most of the states that have grown faster than California during that time are farm states, riding an incredible boom in agriculture prices. I suppose there is nothing wrong with this statement, strictly speaking. However, it suggests that CA is not a "farm state". But it certainly is. CA is the number-one agricultural producer of all the 50 states. It's a clear number one in crops, and number two (after TX) in livestock.

aaronblohowiak 16y ago
Agricultural products are also a big export for the US.
j_baker 16y ago
I would imagine that the other states' economies depend much more on agriculture than California's does though. Thus, California has a lot of farmers, but it doesn't get as much from a surge in agriculture prices like the others do.
- waterlesscloud 16y ago
  California %2 is agriculture. Texas is 0.8.
  - j_baker 16y ago
    Really? That's actually somewhat surprising to me. Still, I don't really think of Texas as a farm state either. I'm thinking more along the lines of the Midwestern states like Kansas or Nebraska.
    - deleted 16y ago
      [deleted]
    - akgerber 16y ago
      Texas has two of America's six largest cities in addition to all of its agricultural land. North Dakota has a city of less than 100,000. So its hinterland is a little more important.

webXL 16y ago

The gist seems to be that despite numerous stories predicting its demise, California: - is wealthy and talented - has more (people, VC, etc.) than it did in 1999 - has been funding the rest of the country in federal transfers (he calls them bailouts, therefore you can't complain if CA asks for one) - has a small budget deficit relative to its budget It leaves out $138B of unfunded liabilities for state employees until the end, and ignores companies like Facebook opening datacenters out of state, a growing number of people leaving the state (I'm one of them), and its awful credit rating. Unfortunately if I owe the bank money, I can't tell them how good of an investment I was up until 2008 and expect them to give me a pass. I need to figure out a way to come up with the money. California doesn't appear to be serious about that.

Locke1689 16y ago
and ignores companies like Facebook opening datacenters out of state Explain this to me. It seems obvious that companies would open datacenters outside of just California. What would be more obvious to me would be placing them close to 1) backbone hubs and 2) cheap electrical power.
- webXL 16y ago
  Well that's fine, but don't tout that your state is an engine of economic growth when the companies you mention decide to "offshore" major chunks of their operations. Figure out a way to keep them in state, or generate some kind of equivalent growth, maybe even outside silicon valley.
  - sagarm 16y ago
    > don't tout that your state is an engine of economic growth when the companies you mention decide to "offshore" major chunks of their operations You're clearly implying here that Californian companies are placing datacenters outside California because of state policies, which is simply incorrect. While it makes sense to put one datacenter somewhere in the vicinity of California, datacenters should be geographically distributed. It's also common to place datacenters near rivers for cheap cooling, but good sites are relatively rare. Now consider competitive bidding from cities, cheap power, and wanting to locate datacenters near users. Basically, state policies have a relatively small impact.

rubypay 16y ago

Fiscal facts aren't all that matters. Investors' perceptions can also have an impact--if California is perceived to be in trouble, investors demand higher premiums on bonds, and the costs for California to borrow money increase. This can lead to a detrimental cycle of destruction, akin to what happened to Lehman Brothers.

VladRussian 16y ago
>akin to what happened to Lehman Brothers there is also, more probable for a state, scenario of AIG/etc... - federal government stepping in.

JSig 16y ago

The author has a serious chip on his shoulder. Lots of politicking in this article that distract from the point being made. Take a look at what the market thinks of the chances for a California default. http://www.economist.com/blogs/dailychart/2010/11/credit-default-swaps_spreads http://www.economist.com/blogs/dailychart/2010/11/credit-def... As of a week ago, "The state with the biggest budget problems, California, is seen as slightly less likely to default than Spain but slightly more so than Italy." Note that Spain is a total mess with an unemployment rate around 20%. It's hard to default when your can print your own currency. I think the California bond holders will never take a haircut. The US will just print more dollars.

bd_at_rivenhill 16y ago
I will not argue against the case that the US will print more dollars, because I think that will happen, but will they print enough to refloat California's obligations without specific funds being allocated by Congress for a bailout. The Republicans control enough votes to determine whether this happens or not, and it would appear that the political benefits to them could outweigh the damage in the near term.
jonah 16y ago
One of Spain's big impediments to getting themselves out of their economic mess is that they're on the Euro. In ways similar to the varying economic situations in US states. http://www.nytimes.com/2010/11/29/opinion/29krugman.html http://www.nytimes.com/2010/11/29/opinion/29krugman.html
pyre 16y ago
> Take a look at what the market thinks of the chances > for a California default. This assumes that 'the market' is a rational actor. But it's proven time and again that it isn't.
- bjnortier_hn 16y ago
  The question around the [ir]rationality of markets is irrelevant. Markets determine the cost of borrowing. If California wants to lower the cost of debt, or maintain the current (low) cost, it must value the opinion of the markets. The calculation of the author, with state debt costing $6billion a year, assumes a constant cost of borrowing into the future! Investors have been selling municipal debt in the past two weeks, which will result in higher borrowing costs [1]. The same thing happened and is happening with the PIIGS, where those in power have been complacent about their ability to service debt because of the assumption of constant debt servicing costs. [1] http://search.ft.com/search?queryText=muni&ftsearchType=type_news http://search.ft.com/search?queryText=muni&ftsearchType=... November 25, 2010 US muni bond funds lose another $2.3bn November 18, 2010 US muni bond funds see record outflows November 16, 2010 US muni bonds see biggest drop since 2008

Semiapies 16y ago

"Californians are so productive that every year they send billions of dollars in surplus dollars to the rest of America. Year after year they have sent vastly more in federal taxes than they ever get back in federal spending." So many seemingly educated Americans can't tell - or artfully avoid telling - the difference between state and federal taxation and spending. Also, here's the dirty secret: people in other states don't really "get back" any of that federal money unless they work at federal facilities, including military bases, common in the states accused of getting more federal money than they give. If they're really lucky, they might get that money at a remove or two if they work in lower-end service jobs near a military base. But then, that whole thing is a strawman. Some random idiot might be saying Californians are all lazy good-fer-nuthin's, but everyone else isn't talking about Californians, but an unsustainable state government. "California’s a basket case? The state has one of the highest living standards in the country..." I'm rather horribly reminded of global warming "skeptics" who hoot every time it snows.

lr 16y ago
"Also, here's the dirty secret: people in other states don't really "get back" any of that federal money unless they work at federal facilities,..." People in these states don't drive on federally-funded roads, or have anything to do with anything else that receives federal dollars? Right-wingers are keen on talking about trickle-down when it comes to tax cuts, but mention nothing of the multiplier effect of the spending habits of the people who earn money which comes directly from the federal government. So yes, people in those states "get back" big from federal spending!
- Semiapies 16y ago
  "People in these states don't drive on federally-funded roads" They don't pay federal gas taxes, either? You might do better picking something better than federal road spending when trying to defend California, incidentally. But that's the problem you face when you try to reduce distinctly different things like federal and state spending to "But California really has a surplus, honest!" "Right-wingers are keen on talking about trickle-down" So? They're also big on "starve the beast" deficit spending, but that hasn't worked in California, either. ETA: Suggestion - disengage from your partisan reflexes. Think. Remember than the Republican Party in California has been as much of a contributor to the problem as the Democratic one, at least in proportion to how much power they have had, if that helps. California's in trouble. It'll certainly survive and improve, but the spending cuts and tax hikes that they'll have to have this time (or if they sweat and bluff it through a few more years, the next time there's an economic downturn) will be far from fun.

redteddy23 16y ago

I thought it was a case of referenda being used to demand things be done but the voters not actually wanting to have to pay for them.

fleitz 16y ago

The point about the State of California heading towards bankruptcy is not affected by either its tax rate compared to other states or the amount of venture capital dollars it sucks up. The primary driver for the state going bankrupt is its expected income vs. its expected expenses. Venture funding in California has little affect on its tax base as most profitable startups are incorporated in Delaware or have their revenue generators incorporated offshore. Yes, they'll be good revenues from the employees but no windfall should be expected. (i.e. the state should not expect abnormal returns because of in state venture capital investment) My point is that when you take look at expected income vs. expected expenditures you can expect to see the state go further and further into debt. It's anyone guess as to whether that will lead to filing for bankruptcy or not, but the direction the state's fiscal health is heading is clear. Regarding the state's fiscal picture this article largely addresses a straw man. No one is arguing that the state will go bankrupt because it's tax rate is wildly out of whack, or because it is not getting enough venture capital funding. People are arguing that the state will go bankrupt because the state already has a fair amount of debt relative to GDP, it runs large current accounts deficits relative to GDP, and has large unfunded pension mandates. This article addresses none of these points.