California Has 50 Days To Live

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California officially has a drop-dead date now. State Controller John Chiang told Arnold Schwarzenegger last night that the state has 50 days before it hits a financial meltdown. So in that time, it either needs a bailout, massive budget cuts, or a brand new bubble (green tech, Internet, real estate, something like that).

The tax revenue numbers are not at all good for the green shoots crowd:

Reuters: Underscoring the severity of California’s cash crisis, Controller John Chiang, who has previously warned the state’s government risks running out of cash without a budget deal, said revenues in May fell by $1.14 billon, or 17.7 per cent, from a year earlier.


Additionally, the revenues of the government of the most populous U.S. state fell short of estimates in Schwarzenegger’s budget plan by $827 million, Chiang said.

Of all three outcomes, we’d say the federal bailout is the most likely, since surely a California collapse would kill any recovery.

Yesterday, the Economist’s Free Exchange blog argued that, indeed, California is too big to fail. And though we’re deeply uncomfortable with the concept, under the general notion of that idea, we’d say they’re probably right:

California is the world’s eighth largest economy, and it contributes roughly an eighth of total American output (and drives much of the output in surrounding states). It’s very difficult to imagine the European Union standing by and allowing a budget crisis to ravage the German economy, or the IMF doing nothing at all to assist a Russia or a Brazil as they melted down. 

Were California forced to make significant cuts to its spending, the ramifications could be quite serious. School systems and universities would be endangered (which would threaten the state’s long-term economic prospects). Increases in crime, homelessness, and serious poverty would encourage residents to leave. Service cuts could threaten key industries. In short, the recession could grow far more serious in the state than it already is. That would threaten recovery across the nation.

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