As we predicted, it’s almost as though California’s budget crisis has faded from the news, as people slowly accept the IOU as a new currency and forget what’s going on there.
For some deep thoughts on what it all means, politically and economically, read this post from Gregor MacDonald, who correctly places California’s hell within the unique nature of this collapse.
Washington is bluffing that it will not bail out California, and every other state suffering from collapsed revenues and massive job losses. If cuts in police and schools don’t force DC off from its current position, then the maths will. Because in many states the aggregate revenue losses and looming cuts to state payrolls will largely render the intended effects of federal stimulus as moot. Frankly, unless Washington prints money and bails out every state that needs capital, including California, federal power will decline amidst this severe economic recession, and the process of a soft American devolution will begin. If you think this idea is outrageous, then you’ve still not come to terms with a core reality of our current situation: the structure of this financial crisis is wholly different than any in our post-war era. This isn’t a recession. This is collapse.
Unless Washington prints up dollars and bails out the States, of what use is Washington? Exactly what services can Washington provide, if California is let go? Left on its own, there would no doubt come an initial hooray from rubber-neckers and I-Told-You-So-ers. A newly broken relationship between Washington and the states might also quicken the pulse of anti-federalists, who feel we are long overdue for a tip in the balance of power. Perhaps it would all work out well. For the best, even? In Washington today the annual budget deficit crossed the one trillion mark. In Sacramento, there is a 26 billion dollar shotgun hole in their budget. (One hopes that CALPERS is marking to market, because if they’re not, that would be a new liability for Sacramento to deal with). Meanwhile, Autumn approaches and whole range of rather nasty choices looms over the school system. Imagine living in a prime area of California and watching your house decline by 40%, your houshold income knocked for an initial 30%, and the after-school programs and town services get cut. Now throw some fees and tax hikes on top that mess. For the coup de grace, imagine Calfornia voters sitting down each night to another wave of bailouts from Washington to financial corporations. Under those circumstances it seems quite unlikely Washington can say no, to the States.
Meanwhile, there’s a discussion, quickly summarized here by Felix Salmon, on whether California has violated the constitution with the creation of a de facto currency — which would contradict Article 1 Section 10. There’s some talk that if the state accepts its IOUs for tax purposes, then it’s illegal, though this would not be unprecedented. Others states have done this. Our guess is that California can do everything but demand state merchants accept IOUs for payment from each other.
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