Sunday, May 24, 2009

WaPo on California Sinking: The case against a federal bailout

California Sinking. WaPo Editorial
The case against a federal bailout
WaPo, Sunday, May 24, 2009

CALIFORNIA FINDS itself in more than a bit of a bind: Facing at least a $21 billion budget deficit, the state could run out of money in a matter of weeks. Borrowing to help fill the hole will be challenging and expensive, given that California has the lowest credit rating of all 50 states. Last week's warning by Standard and Poor's to Britain about a possible debt downgrade will make risky government borrowing even more difficult. The state would like to see Uncle Sam pick up part of the tab; but as steeped in the bailout business as the feds have become, there are strong reasons for them to refuse to add California to the list of recipients.

This is a budget crisis that has been a long time coming. The requirement of a two-thirds vote in the legislature to raise taxes or pass a budget has exacerbated partisanship and made sensible budgeting impossible. The initiative process -- which too often allows politicians to turn the hard decisions over to voters who, surprise, aren't always willing to make them -- results in a crazy-quilt fiscal scheme whose ever-changing priorities leave it underfunded and inherently unstable. When they do make decisions, legislators have routinely elevated the interests of public employees unions over the broader interests of the state, producing crushing costs from high salaries and benefits. Temporary measures and gimmicks have been used to mask these problems for years.

It should come as no surprise, then, that an economic downturn could lead the state to the fiscal brink. Last week's referendum offering up a slew of budgetary fixes was a fiasco, with voters accepting only a plan to freeze the pay of their legislators in the years they run deficits. Now Gov. Arnold Schwarzenegger (R) has to decide how to proceed. He has said that the state needs to find at least $5.5 billion in spending cuts -- likely to come from education, health care and other areas. One-time measures such as selling assets are also on the table: prisons, fairgrounds, concert halls for sale -- anyone, anyone? Even if there are buyers, more action will be required.

As for federal government help in providing funds directly or through loan guarantees, there are economic arguments in favor: California's economy is larger than that of most countries, and the spending cuts and tax increases that would be required to balance the budget are precisely the opposite of the policies needed during an economic downturn. However, there are stronger arguments on the other side. The federal government already is heading dangerously deeper into the red. Getting involved could open the bailout door to 49 other eager states, which would be less likely to manage their own budgets properly if they believed the federal government would save them from their mistakes. The Obama administration seems inclined to agree. Treasury Secretary Timothy F. Geithner has said that money from the Trouble Assets Relief Program (TARP) probably cannot be used to help the states, and the Federal Reserve appears hesitant to get dragged into the mess.

Bailing out the banks was defensible because of the critical and central role they play in the economy. Bailing out the auto companies may have made sense in order to save jobs -- though now that the government is heading for long-term ownership, we are beginning to doubt the worth of that policy. Bailing out the states would be an even more perilous road to start down.

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