It’s either boom, bailout, or bust.
John Chiang, the State Controller for California, told Gov. Schwarzenegger that the state has 50 days to figure out how to avoid financial failure. From 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 percent, 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.
There are a few options for California’s next steps: a federal government bailout, a (miraculous) boom or bubble of some sort, or bankruptcy. Of the three, the first is the likeliest and the last is unthinkable. Letting the 8th largest economy in the world collapse would not only destroy any recovery the United States has made so far this year, but it would be akin to the EU letting Germany fall without intervening.
Further cuts in the state budget would be beyond austerity–it would just be bad policy. From The Economist’s Free Exchange blog:
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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