California to Feds: Drop Dead

Joe Mathews
Connecting California Columnist and Editor, Zócalo Public Square, Fellow at the Center for Social Cohesion at Arizona State University and co-author of California Crackup: How Reform Broke the Golden State and How We Can Fix It (UC Press, 2010)

This article originally appeared in Sunday’s Washington Post

Sure, California’s economy has seen better days, our budget is a mess, and we’ve been wondering whether the federal government might help us out with our cash flow. But the barbs sent our way by politicians and commentators in Washington are getting to be a bit much.

Democrats suggest that we’re all selfish folks who refuse to tax ourselves enough to support our spending. (They should talk.) Republicans say the entire state is addicted to over-spending. (They should talk, too — see the rising deficits of the Bush era.) Such commentary has been offered with heaping plates of schadenfreude, as if our devotion to surf, sunshine, personal fitness and Kobe Bryant meant that we deserve damnation. Writers at the Atlantic have admitted to enjoying California’s troubles and urged us to declare bankruptcy even though, as a legal matter, states can’t seek bankruptcy protection.

Worst of all, President Obama and senior aides have served up a side dish of condescension as they advise California to “make some very difficult choices.” When you consider the source — an administration that has deferred its own very difficult budget choices — such advice merits immediate induction into the Chutzpah Hall of Fame.

If you want to bash California, we’re going to bash back. California would be better off without the federal government. Now, I don’t mean to go all Rick Perry on you. But imagine — as a thought experiment — what would change if California left the union and became its own country.

Before you denounce our state for fiscal irresponsibility, consult a mirror — and Commerce Department data. You’ll find that, for all California’s troubles, our state government is better off than the federal government in almost every measurable way.

California has one-eighth of the country’s population and represents one-seventh of the economy. But our debt is less than one-hundredth of the federal debt. And we’ve been far more responsible in managing our budget. As a columnist for Bloomberg News recently noted, if California had the same deficit relative to its GDP as the federal government, we would have a shortfall of about $230 billion. The state’s current (and massive) deficit is $24 billion.

As an independent country, California’s low debt-to-GDP ratio — about 4 percent — would make it one of the most fiscally responsible major industrialized countries in the world. It would also put to shame our American neighbors, who have a debt-to-GDP ratio that tops 50 percent. California’s credit rating, now inexplicably ranked at the bottom of the 50 states by the same rating agency geniuses who gave investment grades to mortgage-backed securities, would almost certainly be AAA. With those fiscal bona fides, the European Union might recruit us a member. Heck, it might even pony up for our defense.

And where would the federal government be without California? In big trouble. For one thing, the United States would lose the substantial subsidy from our state’s taxpayers. That’s right, we subsidize you. California gets back about 80 cents for every dollar we pay in federal taxes. And, while we’re on the subject, don’t forget the damage that California, as an independent country, could do to the U.S. dollar if we started printing our own currency. The Chinese would be wise to sell their U.S. dollars and instead invest in debt issued by our new republic, which would be a better risk. Perhaps California could provide the new alternative global currency standard that Chinese President Hu and Russian Prime Minister Putin are talking about.

Fantasy? Sure, though it may be Gov. Arnold Schwarzenegger’s fantasy. He has made a habit of lamenting that he can’t print money and run up big, Washington-style deficits to stimulate the economy.

So, you ask, if California would be better off without the federal government, why is the state seeking a bailout from the government?

Californians understand that the budget crisis is our responsibility. But our problem isn’t a lack of wealth — it’s our terrible state constitution, which requires a two-thirds vote to pass a budget or raise taxes. In a state of such size and diversity, that’s a recipe for gridlock and dysfunction. It’s next to impossible to get two-thirds of Californians to agree on anything, especially the unpalatable cuts or tax increases needed to balance our budget. People from across the political spectrum are working on reform. There’s even an effort to call a constitutional convention. But major reform takes time — the soonest we can make changes is next year. And we have a serious crisis right now.

But what we’re seeking can’t be fairly called a bailout. Our request for federal assistance is for a different though related problem: state cash flow.

Because of our budget stalemate and a deep, unexpected decline in tax revenue from the recession, California doesn’t have the cash to pay its bills this summer. In normal times, the state handles cash shortages through short-term borrowing in the credit markets. But the amount of cash needed — and the weakness of those credit markets — promises to make it prohibitively expensive, and perhaps impossible, for the state to raise enough.

The feds could help California with a letter of credit guaranteeing the state’s bonds. This would be a good thing — for California and for the country. At the risk of sounding like a car salesman, such a deal would carry very little risk: California has never defaulted on its bonds because when money runs short, the state constitution makes repayment to bondholders a top priority. And the federal government wouldn’t have to put up any cash. In fact, Washington could make money on the deal by charging California a fee for the guarantee. As extra insurance, the feds could attach strings, making the guarantees conditional on California taking steps to balance its budget. Either way, this would be a win-win for U.S. and California taxpayers.

So stop taking shots at California. And send us a nice letter of credit guaranteeing our short-term loans. You might include a note thanking our state for deigning to remain part of your country.

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