California crisis a threat to US economic recovery

Economists worry that the budget deficit could hurt the state just as it has begun showing signs of recovery.

Max Whittaker/Reuters
California Governor Arnold Schwarzenegger speaks during a news conference at the State Capitol in Sacramento. After lawmakers failed to meet a midnight deadline Tuesday to close the $24 billion state budget gap, Gov. Schwarzenegger declared a state fiscal emergency Wednesday.

After lawmakers in Sacramento failed to meet a midnight deadline Tuesday to close the state’s $24 billion budget gap, Gov. Arnold Schwarzenegger declared a state fiscal emergency Wednesday. He hoped to prod politicians into coming to an agreement over spending cuts and keep the state’s financial crisis from deepening.

Politicians continued to wrangle over cuts Wednesday that would meet the approval of Governor Schwarzenegger, who has demanded a plan that balances the budget. Meanwhile, the state’s controller prepared to issue IOUs to creditors if the state can’t agree on a spending plan by Thursday.

California is not the only state struggling to pass a budget, but the depth of its crisis and the size of its economy raises the financial problem to a level of national concern.

“It’s easy to make fun of all those greedy, flaky Californians, but the national economy can’t recover with an anchor the size of California holding it back,” says Dan Schnur, political scientist at the University of California in Berkeley and a former Republican strategist.

Home to more than one-tenth of all Americans and an annual economy of $1.7 trillion, California is a national retail behemoth and engine for the overall economy – in real estate, auto sales, technology, construction, and agriculture.

Economists worry that the budget crisis could harm the state just when it is starting to show signs of improvement.

The trouble in California “makes everything worse” nationwide, says James Galbraith, a political scientist at the University of Texas in Austin.

Several other states began the fiscal year Wednesday without a budget. Arizona, Connecticut, Kentucky, Mississippi, North Carolina, Ohio, and Pennsylvania are all facing delays in passing spending plans, according to the National Conference of State Legislatures.

Mr. Galbraith proposes national aid to states. “One has to ask to ask why Bank of America is more important than the State of California,” he says.

Economic stimulus money is available to states, but it is not nearly enough to fix California’s financial woes, Mr. Schnur says.

The Obama administration declined Schwarzenegger’s request for financial help earlier this month, but did not close the door entirely. If Washington is worried about putting money in Sacramento’s hands, there are ways around that, said Jean Ross, executive director of the California Budget Project, a nonpartisan public policy research group.

"Washington could further increase its investment in health programs such as Medi-Cal and the Healthy Families Program, where the federal government already pays the majority of costs," she wrote recently in the San Diego Union-Tribune.

While Schwarzenegger has stressed that he's not looking for a federal bailout, the state’s treasurer has asked for some federal help. Like many other states, California wants federal guarantees that would allow it to buy short-term loans at lower interest rates.

Schwarzenegger has given lawmakers 45 days to come up with the necessary cuts to balance the state budget. Says Schnur: If lawmakers cannot find some common ground soon, this impasse “could end up leading to real fiscal and economic meltdown.”

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