Last week we compared our situation in regards to states like California’s to the EU’s Greek situation, and grimly noted that the main difference seemed to be size: California is a much bigger deal to the US than Greece is to the EU.Other than that, there didn’t seem to be much of a difference: Both systems have a common currency, while states are forced to manage their own budgets.
However, this was not exactly correct, and it’s worth clarifying.
We do actually have a automatic mechanisms for bailing out the states. As George Soros noted today in a CNN interview, we do have various transfer/welfare mechanisms that are funded in part by the federal government. Unemployment benefits, for example, are coordinated at the state level, though the Federal Government replenishes these funds with loans. Federal health programs serve a similar effect. These aren’t considered “bailouts” per se, but that’s exactly what they are.
Granted, California is nowhere near “bailed out,” but without these various mechanisms, the situation wou ild obviously be much worse, and a Greek-style crisis here would be much more acute. (It could happen anyway here, we don’t know, but the point is for now we do have some curbs and limits that take some of the edge off).
Now of course, some will react that we should “let ’em fail,” which is fine so far as it goes, though holders of that view should be aware that big, liberal states like California and New York have long been net payers to the Federal Government, while more conservative “red states” have been net recipients in the tax system. This is not good or bad, it’s just what it is, and it out to be considered.