Doubts About a California Bailout

The Obama administration is skeptical of a California bailout, the Washington Post notes this morning in a front-page story: The Obama administration has turned back ...
by | June 16, 2009
 

The Obama administration is skeptical of a California bailout, the Washington Post notes this morning in a front-page story:

The Obama administration has turned back pleas for emergency aid from one of the biggest remaining threats to the economy -- the state of California.

Top state officials have gone hat in hand to the administration, armed with dire warnings of a fast-approaching "fiscal meltdown" caused by a budget shortfall. Concern has grown inside the White House in recent weeks as California's fiscal condition has worsened, leading to high-level administration meetings. But federal officials are worried that a bailout of California would set off a cascade of demands from other states.

With an economy larger than Canada's or Brazil's, the state is too big to fail, California officials urge.

Why would the federal government be reluctant to bail out the Golden State, even as it has offered financial assistance to private companies?

I can think of several reasons. Here are three:

1) California is one of the nation's wealthiest states, with a median household income that is $9,000 more than the national average. Should poorer taxpayers in other states really be subsidizing more wealthy Californians?

2) It's only a moderate exagerration to say that, in the face of this crisis, California has tried nothing and nothing has worked. At the polls earlier this year, the state's voters rejected the extension of tax increases, rejected spending cuts and rejected the leasing of government assets. As a result of that vote, the state's income tax rates will drop at the end of 2010 and the state's sales tax rates will drop in 2011. Should poorer taxpayers in other states really be subsidizing more wealthy Californians while those Californians are enjoying tax cuts?

3) The practical effects of California being unable to pay its bills aren't clear. While California is sometimes described as being on the brink of bankruptcy, states aren't actually eligible for bankruptcy under U.S. law. California could default on its loans or it could approve large, painful cuts in government services. But, unlike a private company, there's no chance that a state government will have to liquidate. So, while California may be too big to fail, no one is talking about California failing in the same way that a business would.

Still, there's real concern that the budget cuts California is discussing could hinder the national economic recovery. If those concerns become great enough, the federal government may step in -- albeit with terms that would give other states pause before following California's lead.

The rationale that the federal government used for bailing out banks and automakers, after all, wasn't that those companies deserved the help. Rather, the American people didn't deserve to live with the consequences of those failures.

Josh Goodman
Josh Goodman  |  Former Staff Writer
mailbox@governing.com

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