Author: Bill Watkins

Cross-posted at New Geography

Superficially at least, California’s problems are well known. Are they well understood? Apparently not.

About a year ago Time ran an article, "Why California is Still America’s future," touting California’s future, a future that includes gold-rush-like prosperity in an environmentally pure little piece of heaven, brought to us by "public-sector foresight."

More recently, Brett Arends’ piece at Market Watch, "The Truth About California," is more of the same. California’s governor elect, Jerry Brown, liked this piece so much that he tweeted a link to it.

The optimist’s argument about California’s future ultimately hinges on the creativity of the state’s vaunted tech sector, in large part driven by regulation promulgated by an enlightened political class and funded by a powerful venture capital sector.

No fundamentalist evangelical speaks with more conviction or faith than a California cheerleader expounding on the economic benefits of environmental purity brought about by command and control regulation.

Cross-posted at NewGeography.com.

The debate over the repeal of California’s global-warming regulation, AB32, has degenerated into a shouting match, each side claiming economic ruin if the other side wins. A couple of long-dead French economists can help us think about the debate.

The great French economist Leon Walras (1834-1910) showed that perfect markets result in an allocation of goods and services that can’t be improved on, in the sense that no one could be made better off without someone else being made worse off.

Of course, we don’t have completely unfettered markets. In fact, they have never existed. They will never exist. In particular, we economists like to talk about what we call negative externalities. These occur when I do something, but an unintended consequence is that it hurts you, and you have no recourse.

Cross-posted at NewGeography.com

Back in December I wrote a piece
where I stated that California was likely to default on its
obligations. Let’s say the state’s leaders were less than pleased.
California Treasurer Bill Lockyer’s office asserted that I knew
"nothing about California bonds, or the risk the State will default on
its payments." My assessment, they asserted, "is nothing more than
irresponsible fear-mongering with no basis in reality, only roots in
ignorance. Since it issued its first bond, California has never, not
once, defaulted on a bond payment."

This article originally appeared on NewGeography.com.

California was once the world’s leading economy. People came here even during the depression and in the recession after World War II. In bad times, California’s economy provided a safe haven, hope, more opportunity than anywhere else. In good times, California was spectacular. Its economy was vibrant and growing. Opportunity was abundant. Housing was affordable. The state’s schools, K through Ph.D., were the envy of the world. A family could thrive for generations.

Californians did big things back then. The Golden State built the world’s most productive agricultural sector. It built unprecedented highway systems. It built universities that nurtured technologies that have changed the way people interact and created entire new industries. It built a water system on a scale never before attempted. It built magnificent cities. California had the audacity to build a subway under San Francisco Bay, one of the world’s most active earthquake zones. The Golden State was a fount of opportunities.

Things are different today.

The California Legislative Analyst’s Office recently reported that the State faces a $21 billion shortfall in the current as well as the next fiscal year. That’s a problem, a really big problem. My young son would say it was a ginormous problem. In fact, it may be an insurmountable problem.

Our governor and legislature used every trick in their books when they created the most recent budget. They even resorted to mandatory interest-free loans from the taxpayers. Now, they have no idea where to go. The Democrats have declared that they will not allow budget cuts. The Republicans will not allow tax increases. They have probably run out of smoke and mirrors, although their ability to engage in budget gimmickry is enough to make an Enron accountant blush. No one is considering raising revenues by increasing economic activity.

In my opinion, California is now more likely to default than it is to not default. It is not a certainty, but it is a possibility that is increasingly likely.

Then what?