This post first appeared on Minyanville.
It's official: California is broke.
For months, the most populous US state has been in the throes of a historic budget crisis, as lawmakers have repeatedly failed to agree on how to resolve a $24 billion deficit.
What was once the country's richest state is preparing to issue IOUs to a host of creditors, according to the Financial Times. Among the dubious recipients of these IOUs: Contractors, information-technology companies, and food-service groups that cater to prisons. Funding for education and interest payments on its bonds are guaranteed by state law.
Governor Arnold Schwarzenegger is taking a hard line with legislators, accusing them of offering up a piecemeal solution to the state's woes: "I will veto any majority tax increase bill that punishes taxpayers for Sacramento's failure to live within its means. It's time for the legislature to send me a budget that solves our entire deficit without raising taxes," the Governator said yesterday.
Lawmakers appear blindsided. It's almost like the state went broke all of a sudden and they haven't had time to properly prepare a solution. Not true: The state has been in and out of financial crisis for more than a decade.
After Schwarzenegger vetoed an $18 billion budget package in January, calling it "deeply flayed [sic]," members of the California legislature pulled a literal all-nighter to try and agree on spending cuts, tax hikes, and other measures to get the state back on sound financial footing. The proposed agreement -- hailed as an eleventh-hour solution to what could have become a fiscal nightmare -- was put to a state-wide referendum in May.
Voters rejected the proposal, soundly. Of the 5 measures on the ballot, the only one that passed were new rules that cut the pay for elected officials. And for good reason.
California politicians are a woeful bunch. Despite being home to some of the most profitable and innovative companies in the world, the state is perennially short of cash. Oracle (ORCL), Google (GOOG), and Genentech (DNA) all hail from the San Francisco Bay Area, while San Diego remains a mecca for biotechnology research and is home to mobile-communications giant Qualcomm (QCOM).
The state has vast natural-resource reserves, has a booming agricultural industry, is a popular tourist destination, and has some of the most heavily trafficked ports in the world. Good weather and generally high quality of life has made California the destination for dream-seekers for more than 150 years.
Yet, despite everything it has going for it, California's political process is a complete disaster. In an attempt to allow voters to play a more direct role in governance, the state's referendum system allows citizens to collect signatures and get measures onto statewide ballots. Enough votes on election day and any Californian can see his or her whimsical dream become law.
This has created a patchwork of legislation, rules, and special interests that have hogtied what would be the seventh-largest economy, were it to be a sovereign nation.
As the calendar turns tonight on its new fiscal year, California could be the first state -- like its bailout-begging brethren on Wall Street -- to go hat in hand to Washington pleading for a rescue.
Showing posts with label DEFICIT. Show all posts
Showing posts with label DEFICIT. Show all posts
Tuesday, June 30, 2009
Wednesday, December 10, 2008
Obama's New Deal
This post first appeared on Minyanville.
Ideology, it appears, has taken a backseat to expediency.
72 hours ago, President-Elect Barack Obama announced plans to reinvigorate the American economy with the biggest public-works project since the 1950s. Criticism of what's being called the “New New Deal” has been scant, as even ardent capitalists seem willing to wax socialist if it gets the country back on track.
After all, with unemployment on the rise, the financial system crumbling around us, General Motors (GM), Chrysler and Ford (F) facing extinction and a host of other economic maladies plaguing the system, anything has to be better than the status quo.
Details of Obama’s intentions remain sketchy at best, but fixing highways and bridges, updating the rail system, new telecommunications infrastructure, modernizing health care and improving the public school system are atop the President-Elect’s holiday wish list.
Commodity Prices soared on the heels of the announcement, as investors poured money into US Steel (X), Freeport McMoRan (FCX) and others who pull stuff out of the ground that hurts when it falls on your foot, as Dennis Gartmen is now famous for saying. With all that new construction, steel, copper and the like will once again be in high demand.
If, of course, the plan even works.
Detractors cite impracticality as one of the primary flaws of the massive spending program. Many wonder if it’s realistic to expect the government to spend hundreds of billions of dollars efficiently, getting money and jobs to where they’re needed most. The $700 bailout plan, now half spent, hasn’t exactly been a model of prudent use of taxpayer funds.
Others wishing to rain on Obama’s populist parade question the economy’s ability to absorb millions of jobseekers, few of which have been trained to lay new railroad, pour cement or install fiber optic cables. America’s labor pool has become increasingly focused on service-sector jobs, yet the new public works focus on traditional blue-collar employment. Structuring debt securities doesn’t exactly translate into structural engineering.
Finally, there’s that whole pesky issue of the national debt. Obama has repeatedly vowed to ignore near-term budget deficits in favor of getting the economy back on track. But at some point, the printing presses will seize up, and Washington’s debt experiment will run aground.
The world seems able, although not altogether thrilled, to absorb an American budget deficit now running at around $1 trillion per year. Can it handle $2 trillion? What about $3 trillion? Or $5 trillion?
At some point, trillions do in fact start to matter. If holders of US Treasuries start to get skittish and demand a higher return on their not-so-safe-haven investment, government debt will become that much more expensive, deepening the deficit and resulting in the mother of all feedback loops.
No one’s quite sure what will happen if we really do bankrupt the country trying to save it - some mildly terrifying cocktail of deflation, a dollar collapse and hyperinflation all rolled up in one. It’s an outcome no one really wants to provision for.
To be sure, it’s hard to find many who hope Obama fails, preferring instead to look back at 2009 and chuckle, remembering when the country went all in and made that straight flush on the river.
Ideology, it appears, has taken a backseat to expediency.
72 hours ago, President-Elect Barack Obama announced plans to reinvigorate the American economy with the biggest public-works project since the 1950s. Criticism of what's being called the “New New Deal” has been scant, as even ardent capitalists seem willing to wax socialist if it gets the country back on track.
After all, with unemployment on the rise, the financial system crumbling around us, General Motors (GM), Chrysler and Ford (F) facing extinction and a host of other economic maladies plaguing the system, anything has to be better than the status quo.
Details of Obama’s intentions remain sketchy at best, but fixing highways and bridges, updating the rail system, new telecommunications infrastructure, modernizing health care and improving the public school system are atop the President-Elect’s holiday wish list.
Commodity Prices soared on the heels of the announcement, as investors poured money into US Steel (X), Freeport McMoRan (FCX) and others who pull stuff out of the ground that hurts when it falls on your foot, as Dennis Gartmen is now famous for saying. With all that new construction, steel, copper and the like will once again be in high demand.
If, of course, the plan even works.
Detractors cite impracticality as one of the primary flaws of the massive spending program. Many wonder if it’s realistic to expect the government to spend hundreds of billions of dollars efficiently, getting money and jobs to where they’re needed most. The $700 bailout plan, now half spent, hasn’t exactly been a model of prudent use of taxpayer funds.
Others wishing to rain on Obama’s populist parade question the economy’s ability to absorb millions of jobseekers, few of which have been trained to lay new railroad, pour cement or install fiber optic cables. America’s labor pool has become increasingly focused on service-sector jobs, yet the new public works focus on traditional blue-collar employment. Structuring debt securities doesn’t exactly translate into structural engineering.
Finally, there’s that whole pesky issue of the national debt. Obama has repeatedly vowed to ignore near-term budget deficits in favor of getting the economy back on track. But at some point, the printing presses will seize up, and Washington’s debt experiment will run aground.
The world seems able, although not altogether thrilled, to absorb an American budget deficit now running at around $1 trillion per year. Can it handle $2 trillion? What about $3 trillion? Or $5 trillion?
At some point, trillions do in fact start to matter. If holders of US Treasuries start to get skittish and demand a higher return on their not-so-safe-haven investment, government debt will become that much more expensive, deepening the deficit and resulting in the mother of all feedback loops.
No one’s quite sure what will happen if we really do bankrupt the country trying to save it - some mildly terrifying cocktail of deflation, a dollar collapse and hyperinflation all rolled up in one. It’s an outcome no one really wants to provision for.
To be sure, it’s hard to find many who hope Obama fails, preferring instead to look back at 2009 and chuckle, remembering when the country went all in and made that straight flush on the river.
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