Thursday, July 02, 2009

California's budget crisis and the upcoming federal budget crisis

California is teetering on the budgetary cliff these days, issuing IOUs in lieu of meeting its obligations because it can't adopt a plan to close the budget gap even though it is wealthy enough to do so without serious difficulty.

The IOUs remind me of the line in Duck Soup, where Groucho asks Ambassador Trentino for a personal loan until payday and offers a 30-day note. "If it isn't paid in 30 days, you can keep the note."

Living across the country from California, and thus not myself directly facing the main consequences as this plays out, the question that occurs to me is whether this is a harbinger of future U.S. budgetary problems. I am inclined to think that it is.

Obviously, the federal and California situations are easy to distinguish. The U.S. government presides over an even bigger economy, from which exit by tax base factors is costlier. The U.S. borrows in its own currency, and thus has a one-time option to default implicitly through inflation, although this is a bit of a nuclear option given the likely macroeconomic consequences. And the federal government doesn't have Proposition 13 or the other various fiscal hamstrings adopted in California via the statewide ballot process.

But the key point in common is that California's crisis is an entirely self-inflicted wound, reflecting the political system's inability to respond adequately, even when everyone knows (in broad outline) what it has to do, since it's consumed with ideological posturing and chicken games. That is already a problem on the federal level as well, and there is no particular reason to believe that it will ease.

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